Regulatory failure? Blame the D.C. Circuit.

By Steven Pearlstein
Friday, April 9, 2010

There's a lot of talk these days about how Washington has become dysfunctional. While most of the focus has been on Congress, the inability to perform even basic functions also extends to the agencies that are charged with protecting workers, consumers and investors. Unfortunately, it often takes a global financial crisis or a deadly coal mine explosion to remind us of the serious consequences of regulatory failure.

Much of the blame belongs with regulators who have been captured by the industries they are meant to oversee or have been swept up in the general political drift toward deregulation. But, as we were reminded by a case this week involving the Federal Communications Commission, another big culprit is the U.S. Court of Appeals for the District of Columbia Circuit, which over the past decade has intimidated, undermined and demoralized the regulatory apparatus.

Many of the D.C. Circuit judges have long since stopped pretending to defer to the factual determinations and policy judgments of duly appointed regulators, as the law requires. Deference has now given way to skepticism, hostility and contempt that can easily be read between the lines of overly legalistic opinions that routinely ignore the plain language of statute and the clear intent of Congress. It's gotten so bad that top regulators told me privately this week that they routinely put aside consideration of needed new initiatives because they assume they will be foiled by the hostile appeals court.

Driving the court's regulatory bias are judges such as Brett Kavanaugh, Laurence Silberman and Stephen Williams, Republican appointees who bring to the bench an abiding skepticism about the value of bureaucratic rulemaking. Their cramped view is that regulators can take only those actions specifically and explicitly authorized by statutes, ignoring the fact that many laws are so old that they never could have anticipated the dramatic changes in technology and the economy.

Even the court's more liberal members betray an attitude that regulators are a well-meaning but overzealous bunch who, like teenagers, need constant adult supervision from judges who are smarter and wiser. Their decisions frequently scold agencies for failing to dot their i's and cross their t's in justifying new regulations, sending the regulators back to try again and again.

It was one of those liberal members, David Tatel, who wrote this week's opinion finding that the FCC has no business regulating Internet providers. The case was brought by Comcast, which had been slapped on the wrist by the FCC for managing its Internet service in a way that slowed bandwidth-hogging activities such as file-sharing when its network became congested. Comcast appealed, knowing that the agency's action was but the first step toward a policy of "net neutrality" that could prevent broadband providers from one day favoring their own content over that of their competitors.

A long line of Supreme Court cases essentially made it possible for the FCC to broaden the scope of its activity as communication technology evolved from radios and copper-wire telephones. These cases often relied on the commission's broad mandate to "expand service" at "reasonable charges" with "fair and efficient networks." More recently, the Telecommunications Act of 1996 declared Congress's desire "to promote the continued development of the Internet" and "encourage the development of technologies which maximize user control over what information is received."

But this did not impress Tatel, who simply dismissed it as mere "congressional statements of policy" and criticized the agency for failing to find specific statutory authorization for interfering in this way in Comcast's business. The irony of his decision is that it has now undermined the FCC's "light touch" approach to Internet regulation, begun under the Bush administration, and will probably force the agency to declare broadband providers to be "common carriers," triggering far more intrusive rulemaking. That, in turn, will surely lead to a another decade-long legal war as the industry challenges each rule at the court of appeals.

That is just what happened in the 1990s, when the FCC -- on the instruction of Congress -- moved to force the old local Bell telephone monopolies to share their lines with upstart competitors. Time and again, the FCC formulated rules to govern how that access would be provided and how much the upstarts would pay for the "unbundled elements," and time and again, the D.C. Circuit struck down the ruling. The fight went on so long that, by the time the court was finally satisfied, virtually all the upstart carriers had been driven out of business, the technology had moved on, and the whole issue was moot.

But it's not just the FCC.

Last month, the court of appeals gave its trademark treatment to the Food and Drug Administration, which had the temerity to try to meet Congress's clearly stated desire to speed the introduction of generic drugs into the market once the original patents expire.

And last year, Judge Williams went through 24 pages of hair-splitting logic to explain why the Federal Trade Commission was out of bounds when it tried to discipline a tech company for enhancing its monopoly in a certain chipmaking process by deceiving an industry standard-setting body. According to Williams, the fact that its deceit "merely" enabled a monopolist to charge higher prices doesn't constitute illegal anti-competitive behavior.

Surely no decisions were more ludicrous, or did more to undercut sensible regulation, than a pair of rulings in 2005 and 2006 in which the D.C. Circuit overturned a rule promulgated by the Securities and Exchange Commission requiring that 75 percent of the directors of a mutual fund be independent of the company chosen to manage the fund's investments. It's hard to imagine that Congress didn't mean to protect small investors from self-dealing by mutual fund companies when it wrote the Investment Company Act of 1940. But Judge Judith Rogers overturned the rule anyway after finding flaws in the agency's estimate of how much the rule would cost each mutual fund to implement -- by any estimate, a trifling sum compared with the tens of millions of dollars managed by even the smallest mutual funds.

None of these is the sort of case that makes big headlines or causes the public to rise up in outrage, but they are the means by which a new breed of judicial activist is quietly undermining the reach and the effectiveness of government. It's all well and good for Congress to go through the process of hammering out new laws on financial regulation or mine safety. But thanks to the U.S. Court of Appeals for the District of Columbia Circuit, there's a good chance they'll never be implemented.

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