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First Judicial Review of Reg Neg a Disappointment

by Philip J. Harter 1

Negotiated rulemaking, or "reg-neg" for short (based on an earlier name that did not last), has been around for at least fifteen years. The Administrative Conference recommended its use in 1982, and almost immediately agencies began using it to address some of their most intractable problems. Congress codified the procedures in the Negotiated Rulemaking Act of 1990 (5 U.S.C. §§ 581-90); it was used to implement a number of major, complex environmental issues in the Reagan and Bush administrations; and the Clinton administration has supported its use through Executive Orders and direct encouragement to agencies. Given this history, it has been rather remarkable that until this spring not a single court discussed the process in the review of a rule developed by reg-neg. The first case to do so came in an opinion by Judge Richard Posner in USA Group Loan Services, Inc. v. Riley, 82 F.3d 708 (7th Cir. 1996). While the court reaches what is probably the right conclusion, it displays a remarkable ignorance of the process and provides only a superficial analysis.

Although negotiated rulemaking is fully legal and feasible without specific legislation, Congress enacted the Negotiated Rulemaking Act in part to provide explicit general authorization to use the process so that Congress itself would be less tempted to write in directives to use it to develop rules when enacting substantive requirements. That goal notwithstanding, the 1992 Amendments to the Higher Education Act requires the Department of Education to hold a series of regional meetings to obtain public involvement in the development of the proposed regulations and, before publishing proposed regulations in the Federal Register, to "submit such regulations to a negotiated rulemaking process." 20 U.S.C. § 1098a. Although one section of the statute calls for selecting a committee that reflects the "diversity in the industry," another calls for the participation of the full range of interests, including students, schools, financial institutions, guarantors, lenders, and secondary markets. The committees that were established reflected the broader scope.

The Department then held a whole series of reg-negs to develop the rules under the Act. As called for by the Act, the agency held public meetings at which the issues were discussed, then empaneled a number of reg neg committees to address the individual rules. One of them focused on rules for the "servicers" of student loans. They are the middlemen among the students, banks, and the guarantors of the student loans. The issue in contention centered on the Department's rule that imposed strict liability on the servicers for violation of a statute, regulation, or contract -- that is, liability would accrue for an innocent mistake in the processing of a loan if the Department is unable to collect from the student or bank. The court readily found that regulation well within the statute, and indeed largely an expression of existing common law liability.

The servicers also challenged the rule on the procedural ground that the Department violated its procedural duties to use reg neg by negotiating in bad faith. They contended that the Department repudiated an agreement that was reached in the negotiations as to the nature of the servicers' liability and, moreover, removed a cap on that liability that was under discussion. The servicers contended there was an agreement as to the latter issue, but the Department disagreed.

The court begins its procedural analysis by characterizing negotiated rulemaking as "a novelty in the administrative process." While that might be an invitation for an authoritative opinion of first impression, the court did not accept it; as a result, the phrase seems more designed to trivialize the process than any sort of historical description. Instead of examining the history of reg neg, the ACUS recommendations (which are mentioned in the legislation, not the Negotiated Rulemaking Act), or the Negotiated Rulemaking Act itself to understand how the process generally works, Judge Posner characterized reg neg as a process that authorizes the agency to submit draft regulations "to the industry or other groups that are likely to be significantly affected by the regulations." While a scant reading of the Higher Education Act itself could lead to that narrow conclusion, he ignores the much broader practice, and the one that in fact was followed in this case, in which a concerted outreach is made to identify the interests that would be affected and to put together a committee reflecting the breadth of those interests. A reg neg committee is not just "the industry" or any one side of the issue. The process is designed to ensure that the full range of concerns, facts, and issues will be raised while developing the rule -- not simply commenting on a draft prepared by the agency. Typically, a reg neg committee is able to identify those issues and potential solutions in far greater depth than if the agency left to its own. The court's narrow, erroneous perspective colored the rest of the analysis.

The court finds that neither the 1992 Amendments to the Higher Education Act nor the Reg-Neg Act specify a remedy for bargaining in bad faith, and it muses that the latter "strongly implies there is none." But, the court thought that observation moot since even if there were one, the challenger would lose. Thus, that important issue is left for another day and another court.

The challengers asserted that an official of the Department of Education agreed during the negotiations that the Department would abide by any agreement unless there were compelling reasons to depart, and that they negotiated in bad faith because they did not follow the agreement. The court's response is a curt: "[This] sounds like an abdication of regulatory authority to the regulated, the full burgeoning of the interest-group state, and the final confirmation of the 'capture' theory of administrative regulation." The court later observes, "We have doubts about the propriety of the official's promise to abide by a consensus of the regulated industry, but we have no doubt that the Negotiated Rulemaking Act did not make the promise enforceable." Given the diversity of the membership of the committee, the issue is far more complex and difficult that this flippant assertion.

When a reg neg committee reaches agreement, the agency itself concurs in the result. Presumably, this means that the agency official responsible for issuing the rule has agreed to its proposal and, as reflected in the typical groundrules, agrees to publish it as the basis of a notice of proposed rulemaking. Indeed, the Negotiated Rulemaking Act explicitly requires the agency to consider whether it is prepared to do so "to the maximum extent possible consistent with the legal obligations of the agency." 5 U.S.C. § 583(a)(7). Thus, it is not the committee that is imposing its will on an involuntary agency, but rather the decision of the officer of the United States to adopt the proposal. The proposal, however, is crafted by the full diversity of interests and generally raises issues beyond those available to the agency if left to its own. The pejorative "consensus of the regulated industry" is both erroneous and only confuses the more difficult constitutional issue that needs addressing -- the extent to which an officer of the United States can commit or bind an agency to a particular policy.

The court was troubled, as well it ought, by the notion that a commitment to adhere to the original agreement without modification would render any subsequent notice and comment a nullity. The typical practice in reg neg, however, is to make it clear that the agency will be required to change the proposal in response to meritorious comments received on the NPRM. The question presented here is not that but rather whether the agency can have a change of heart and mind so that it simply repudiates the agreement. General principles of administrative law require the agency to explain the reasons for a significant deviation from its earlier proposal in varying levels of detail depending on the circumstances. It would be interesting to know just how much explanation the agency should give when it is abandoning an agreement reached in a reg neg independent of any comments received. Alas, a missed opportunity and a superficial approach by the court. The procedure aside, there seems little doubt that the official can indeed change his or her mind as to the policy to be followed and is not legally bound by the agreement. The enforcement is political, not legal. If the agency repudiates agreements too often, then -- as in any other situation -- its word will not be worth much, and folks will not likely reach agreements with it in the future.

As to the disagreement concerning whether or not there was a consensus reached on certain issues, two points should be made. The first is that the court is clearly right in dismissing any challenge to a rule for failure to implement offers that were made during the negotiations. Second, the parties need to make quite clear just what is and what is not part of an agreement.

While the end results are likely right, the court's mischaracterization of the negotiated rulemaking process and labeling it as simply a "an administrative novelty" that provides a "consultative process in advance of the more formal arms' length procedure of notice and comment rulemaking" are unfortunate. If that is the case, much of the power of reg neg would be lost, since it is precisely the ability to reach closure on critical issues that separates it from a mere advisory committee or other consultative process. Several issues with respect to the judicial review of negotiated rules need resolving in an informed, authoritative manner. Not only was this case a missed opportunity to start on that process, the court's lack of understanding only confuses the ultimate issues and makes the ultimate task more difficult.

1 Last Retiring Chair of Section. Mr. Harter is in private practice in Washington, D.C., specializing in mediation of complicated policy disputes and a sometime facilitator of negotiated rulemaking.

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