Feb 8, 2018

Regulation by Guidance and Due Process: A Response by the Department of Justice

Brian Knight Director of the Program on Financial Regulation

A recent memo introduced by the Department of Justice (DOJ) is changing the way the agency uses guidance documents in regulatory enforcement actions, limiting the ability of the DOJ to use any agency’s guidance documents as evidence of a regulatory violation. This change will require DOJ to prove violation of actual rules and regulations, which are promulgated with notice and comment, and limit end runs around due process. This memo could also serve as a signal to heads of other agencies that limiting the use of guidance documents in regulatory enforcement actions is, at the very least, good policy.

Background of Regulation by Guidance

Due process requires that people know the rules they must follow before the government can punish them for violating those rules. As a general rule, if an agency is going to provide rights or impose binding obligations on a private party through regulation, the agency is supposed to undergo the process prescribed by the Administrative Procedure Act. This process generally includes providing notice to the public of a rulemaking, allowing the public to comment on the proposed rule, and taking due consideration of the proposed comments while finalizing the rule.

Instead, all too often agencies rely on guidance documents—which do not need to go through notice and comment—to bind regulated parties. However, recent memos from the DOJ may show a path to reducing the threat of regulation by guidance documents by limiting the use of such documents in enforcement litigation.

The Associate Attorney General (AAG) at the DOJ promulgated a memo limiting the ability of DOJ attorneys to use guidance documents published by federal agencies in affirmative civil enforcement cases (cases brought to address fraud against the government, address other misconduct, or enforce “Federal health, safety, civil rights or environmental laws”) .

The AAG memo follows an earlier memo written in 2017 by the Attorney General (AG). The AG memo prohibits the DOJ from using DOJ-issued guidance documents to create rights for or impose requirements on private parties (i.e., nongovernmental agencies and individuals). The memo defines guidance documents to include “any Department [DOJ] statements of general applicability and future effect . . . designed to advise parties outside the Executive Branch about legal rights and obligations falling within the Department’s regulatory or enforcement authority.” The AG also directed the AAG to identify existing guidance documents that need to be “repealed, replaced, or modified.”

Regulation by Guidance and Due Process

The 2018 memo is a response to concerns that the DOJ has used guidance documents as an end run around appropriate due process.

Guidance documents do not require the same process that regulations require because they are not supposed to be binding. Instead, they are supposed to provide information to regulated parties about what regulations mean and how parties can comply. There is concern that agencies have been using guidance documents to impose new requirements on regulated entities beyond what was allowed under the existing statutes and rules, or that agencies are using noncompliance with the proposals of the guidance document as evidence that the regulated entity was not complying with the underlying law or regulation.

This problem is not new. A 1992 Administrative Conference of the United States (ACUS) report expressed concern that agencies were using policy statements and guidance with the intention that those statements bind the public. The 1992 ACUS recommendation points out (p. 30103) that notice-and-comment rulemaking provides transparency, accountability, and an opportunity for the public to provide input on the regulations that will bind them. Skipping this step prevents the regulated public from exercising these opportunities before they face the risk of punishment.

While this bad-faith use of guidance by agencies is clearly unacceptable, it is not the only problem. As a more recent ACUS recommendation points out, even if the agency does not intend to bind with guidance documents in contravention of due process, the regulated entity may feel that it is effectively bound. As the recommendation and the underlying report mention, there are several reasons why regulated entities may consider guidance de facto binding, even if it isn’t legally so:

  1. The regulated party may require preapproval from an agency to get “essential permissions or benefits” and may feel that it must follow guidance to ensure approval.
  2. The regulated party may be under repeated or constant agency evaluation in a situation where total compliance is almost impossible. In this case, the regulated party has an incentive to get on the agency’s good side by complying with the agency’s nonbinding guidance.
  3. The regulated entity may face prohibitively expensive or punishing enforcement actions, regardless of whether the regulated entity prevails. Therefore, the entity would want to avoid the risk of having to fight over whether the guidance is binding.    

Effects of the 2018 AAG Memo within the DOJ

What does this have to do with the 2018 AAG memo? The AG and AAG want to make certain that guidance documents are not effectively taking on the force of law because regulated entities are scared of being sued if they fail to comply with the guidance. To mitigate this possibility the AAG has directed DOJ civil litigators not to use affirmative civil enforcement litigation to enforce agency guidance documents or use guidance documents as evidence of violation of the law. The DOJ will also refrain from using an entity’s failure to comply with an agency guidance document to establish that an entity violated the law.

Going forward, the DOJ will need to make its case on the basis of the underlying law and regulations promulgated through the appropriate process. Importantly, the AAG memo goes beyond the AG memo because it prohibits DOJ attorneys from using any agency’s guidance documents, not just those from the DOJ. The direct impact of the memo is not to prevent agencies from viewing guidance as binding or from allowing regulated parties to believe it is, but to take guidance documents out of the litigation toolkit DOJ can use as direct evidence of a violation.

This doesn’t mean that the DOJ cannot use guidance documents at all. If a guidance document simply restates a party’s obligation under the relevant law and regulations (rather than adding to it), the guidance can be used as evidence that the regulated party was aware of its obligations under the law. Also, while the memo is binding on future litigation it only applies to pending matters “where practicable.” It is also unclear whether this memo might affect any appeals brought by a regulated entity where the DOJ originally relied on guidance documents.

Potential Effects of the 2018 AAG Memo beyond the DOJ

On its face this memo reflects a policy determination by the leadership of the DOJ to limit the use of guidance documents by DOJ attorneys in affirmative civil enforcement litigation. While this covers a significant portion of potential regulatory enforcement litigation, it is by no means the entire universe of such litigation. Many executive branch and independent agencies, including but not limited to the Environmental Protection Agency, the Department of Labor, the Securities and Exchange Commission, and the Bureau of Consumer Financial Protection, have their own litigation authority and do not rely on the DOJ to bring civil cases. As such, this memo does not limit what lawyers for those agencies can do.

However, this memo may not be the end of the story. First, the heads of those other agencies could direct their enforcement attorneys to adopt a similar policy. Doing so would limit those agencies’ use of guidance documents until such time as the order was withdrawn, either by the current head of the agency or, more likely, under a new administration.  

Another possibility is that the administration, if it believes that limiting the use of guidance documents is not only good policy but also required by law, could request an opinion from the DOJ’s Office of Legal Counsel (OLC) to that effect. The OLC provides “controlling advice to Executive Branch officials on questions of law.” An OLC opinion stating that the limits placed on the use of guidance documents in the AAG’s memo reflect not only a policy judgement but a legal imperative would bind executive agencies until the OLC opinion is withdrawn, superseded, or overturned in court. This would provide a stronger (though not permanent) restraint on executive agencies even if a new administration takes over. This OLC opinion would not bind independent agencies, but the heads of those agencies could request, and agree to be bound by, their own OLC opinions.

Conclusion

The AG and AAG memos are part of a broader pushback against rulemaking by guidance. Elsewhere, the US Government Accountability Office (GAO) recently opined that the Bureau of Consumer Financial Protection’s auto lending guidance and the leveraged lending guidance issued by the federal bank regulators were “rules” for the purposes of the Congressional Review Act, meaning that they needed to be presented to Congress and the GAO to be effective and that they were subject to congressional invalidation via the Act. How far the pushback goes, and how much it changes the day-to-day reality of regulation, remain to be seen. But it appears likely that tools are available to the administration to further restrict the force of guidance documents in regulation, and therefore the role of “regulation by guidance” and the total impact of regulation, if the administration chooses to fully embrace these tools.

The author is very grateful to Betty Jo Christian for her insight in contributing to this article.

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