Importance of the Decision

On July 2, 2013, the D.C. Circuit issued a decision in The Conference Group v. FCC that rejected a challenge to the agency's decision to use adjudication, rather than a rulemaking, to establish an industrywide rule. The D.C. Circuit has long held that federal agencies have wide discretion whether to act by rulemaking or adjudication, a precedent that the Court cited in deciding this case. However, industry participants felt the FCC had stepped outside the bounds in this case and were generally surprised by the Court's decision. Companies regulated by federal agencies need to be aware of just how far the Court has gone in giving agencies latitude to, in effect,make rules by adjudicating cases instead of conducting rulemakings.  

Background  

The FCC decided that InterCall, Inc. (InterCall), a teleconferencing company, was required to contribute directly to the FCC's universal service fund (USF). In its decision the FCC ordered the Universal Service Fund Administrative Company (USAC), which collects the USF fees on behalf of the FCC, to apply its decision to all similarly situated companies. In effect, the FCC adopted an industry-wide rule in an adjudication involving one party. Although the FCC claimed it wasmerely interpreting existing law, not creating a new rule, the FCC only applied its decision prospectively, in effect admitting that no such rule had existed earlier.  

Implications

Several aspects of the FCC action and the Court's decision to uphold the FCC should be on the radar of a general counsel of a company regulated by a federal agency.  

First, the decision allows federal agencies tomake new rules in cases that the agency decides to bring against one particular company in an industry. That companymay ormay not have the wherewithal tomount an effective defense. If it loses, the precedent becomes a new rule that is applied to all the other companies in the industry, unless they can prove they are not similarly situated. If the agency picks its target correctly, it will be difficult for other companies to prove they are not similar. 

A second aspect of the case that raises concern is the growing trend among federal agencies (and particularly the FCC ) tomake new rules in cases in which the agency itself is, in effect, both a party and the judge. The InterCall case was about whether InterCall owedmoney (USF fees) to the FCC. The case was, in effect, the FCC versus InterCall. At the same time, the FCC was the adjudicator deciding which party should prevail. Not surprisingly the FCC found that the FCC and not InterCall should win. By contrast, a rulemaking proceeding would have evened the odds by allowing other companies and perhaps their trade association to participate.

Third, the decision allowed the FCC to use a hybrid proceeding that was not strictly an adjudication or a rulemaking as it was perceived by the industry, and the decisionmay surprise companies who participate similar hybrid proceedings. Specifically, before the FCC decided the InterCall case, it issued a public notice and invited comments and replies from"interested parties." Several companies in the telecommunications industry filed comments and replies. This certainly looked like a rulemaking and those who participated likely assumed they would have the right to appeal the decision, as they would in a rulemaking proceeding.  

The Court held that The Conference Group had standing to challenge the FCC's decision whether to act by rulemaking or adjudication. But it rejected The Conferences Group's challenge to the FCC's decision to use adjudication and not conduct a rulemaking (based on the agency's broad discretion as discussed above). After characterizing what the FCC did as an adjudication (despite the invitation for public comment), the Court then held that The Conference Group lacked standing to challenge themerits of the FCC decision, because the FCC acted by adjudication and a non-party cannot challenge an adjudicatory decision.  

Conclusions  

From the decision we draw a couple of conclusions. First, company counsel need to track carefully not only agency rulemakings but also agency adjudications thatmay function like "submarine" rulemakings. Second, where agencies invite public comment on pending cases, company counsel need to be aware that even where they participate, they do not gain standing to appeal an adverse result. This decision requires that companies in regulated or quasi-regulated industries exercise increased vigilance with regard to agency action. Third, failure to exercise increased vigilance risks companies being check-mated by a federal agency desirous of surreptitiously adopting new rules or regulations that would otherwise not withstand public scrutiny.