Over the past several decades, scholars and practitioners have documented how regulatory agencies have increasingly relied on guidance, best-practice documents, policy statements, and other informal pronouncements to achieve regulatory ends. (1) Agencies often do so to avoid executive regulatory review and other accountability measures that ostensibly slow the regulatory process. (2) Much of the debate surrounding the use of informal regulatory mechanisms has focused on the extent to which such mechanisms improperly create new law outside the processes set forth in the Administrative Procedure Act. (3) What the literature on informal methods of rulemaking has ignored until recently, however, is policymaking through the issuance of completely unenforceable threats.
In a 2011 Duke Law Journal essay entitled Agency Threats, Professor Tim Wu sets forth a defense of bald-faced threats by agencies meant to achieve regulatory ends. As he put it:
[T]he scholarly presumption is that rulemaking or formal adjudication is an intrinsically superior process for most agency action. The use of threats is considered an abuse of power, a means of avoiding judicial review, or perhaps just good old-fashioned laziness. The point of this Essay is to challenge that general presumption. Rule by threats, I argue, is, under certain circumstances, a superior means of regulatory oversight. (4) Given the boldness of this claim and the eminence of its proponent, (5) the "agency threats" thesis deserves a response. Providing one is the aim of this short article. I conclude that not only is Wu's thesis wrong, but it is also dangerous. Part I of this article reviews Wu's essay, defining what constitutes an agency threat and when it is justified according to Wu. Part II critiques Wu's thesis by showing, among other things, that it is based on a false dilemma; that it assumes an unwarranted level of knowledge on the part of regulators; that it assumes--contrary to evidence--that regulators are good proxies for the public interest; and that it ignores the costs of eschewing the regulatory process. Part III concludes by concretely illustrating the real-world consequences of agency threats. It does so by presenting a case study of a toy manufacturer driven out of business by threats from the Consumer Product Safety Commission.
I. AGENCY THREATS AND THEIR USE
In defending the use of threats, Wu has a very specific type of agency action in mind, so it is important to define what exactly constitutes an "agency threat" according to him. Wu explains that by "regulatory threats" he means those statements that are "similar but not identical to the statutory category of 'interpretative rules,'" (6) and he specifically includes in his definition of agency threats "warning letters, official speeches, interpretations, and private meetings with regulated parties." (7) Wu further narrows what he means by agency threats by noting that "it is essential that the action not simply express opinions or report on an issue. Rather, the action must give at least some warning of agency action related to either ongoing or planned behavior. That distinction leaves out mere policy guidelines, studies, reports, and similar materials...." (8) The reason he leaves out "mere" guidelines and reports, Wu says, is that, to him, threats are much more akin to rules and adjudications because they "share the direct goal of specifying desired behavior." (9) In other words, threats are meant to compel specific behavior.
Wu explains that there are two types of agency threats: public and private. (10) Private threats are issued in warning letters or private meetings. (11) He gives the example of a "secret letter" that the Federal Trade Commission (FTC) sent to retailers of new "bamboo clothing," which the agency believed was not made from organic materials as claimed, but from artificial rayon. (12) Public threats, on the other hand, are official speeches or statements that threaten regulation or enforcement. (13) Wu cites as an example a 2004 speech by then Federal Communications Commission (FCC) Chairman Michael Powell in which, according to Wu, "Powell instructed the industry to respect four 'Internet Freedoms' of every Internet user, including the right to reach applications of their choice...." (14) This was followed by an enforcement action against a small telephone company that allegedly was blocking voice-over-internet applications. (15)
The examples that Wu presents as paradigms of salutary threats are rather remarkable. In the case of the FTC's bamboo clothing letters, it is not clear that the agency had any evidence that the warning letter's recipients were engaging in any illegal activity. (16) Yet this does not seem to matter to Wu, who writes that private threats are especially useful when the issuing agency "does not know the facts that bear on the enforcement decision" precisely because a warning letter can "simply put a stop to the activity in question." (17)
In the case of the FCC's "Internet Freedoms" threat, the agency enforced against a company what was essentially an edict that Chairman Powell issued on his own authority, without any rulemaking whatsoever. (18) After Powell (as Wu puts it) "instructed" the industry to behave in a certain way, the FCC's Enforcement Bureau opened an investigation into Madison River Communications, a small telephone company that was allegedly acting in contravention of Powell's instructions. (19) The FCC quickly extracted a consent decree and a "voluntary" $15,000 payment from the company in return for terminating the investigation. (20) Madison River never admitted any wrongdoing or even that the FCC had any authority in the matter, (21) and subsequent court rulings have repeatedly found that the FCC does not have the statutory authority to issue the types of Internet regulations that the Powell edict encompassed. (22)
It is striking that Wu would support such seemingly unaccountable agency actions. Therefore, it is only "under certain circumstances" that he argues that threats are "a superior means of regulatory oversight." (23) Indeed, the point of Wu's essay is to identify those circumstances. Wu writes that the question he seeks to answer is not the one usually posed about guidance and interpretations (i.e. can they be enforced?). (24) Instead, the question he is interested in is, "[I]f informational threats are assumed to be unenforceable, when should agencies nonetheless use such threats instead of legally binding rules?" (25)
Wu's answer is that "in rapidly developing industries in which rulemaking is impracticable, highly informal methods are justified." (26) He explains:
The use of threats instead of law can be a useful choice--not simply a procedural end run. My argument is that the merits of any regulative modality cannot be determined without reference to the state of the industry being regulated. Threat regimes, I suggest, are important and are best justified when the industry is undergoing rapid change--under conditions of "high uncertainty." Highly informal regimes are most useful, that is, when the agency faces a problem in an environment in which facts are highly unclear and evolving. Examples include periods surrounding a newly invented technology or business model, or a practice about which little is known. Conversely, in mature, settled industries, use of informal procedures is much harder to justify. (27) Without access to threats, Wu writes, a climate of "high uncertainty" would leave an agency with only two choices: "to make law--through a rulemaking or adjudication--or to ignore the area altogether." (28) Rulemaking is not a satisfying option, Wu says, because it "forces the agencies to make law likely to last a long time based on poorly developed facts, and it invites long periods of uncertainty created by the judicial review process." (29) On the other hand, completely ignoring the area "surrenders any public oversight or input during what may be a critical period of industry development." (30)
Therefore, Wu purports to present threats as a nimble and reasonable third alternative between onerous regulation and doing nothing. In this way, he justifies issuing behavior-altering commands without conforming to the traditional regulatory process.
II. The Problems with Agency Threats
This part addresses the many problems with Wu's thesis. At the outset, however, it must be noted that his thesis rests on a false dilemma: confronted with a potential regulatory question about a dynamic industry, a regulator can only regulate or do nothing at all. Of course, an agency faced with "poorly developed facts" could engage in an investigation to determine the necessary facts. Agencies do so routinely through notices of inquiry, staff investigations, workshops, and other methods. An agency can even begin, and later halt, a rulemaking proceeding if it ultimately determines that regulation is unnecessary. Indeed, without well-developed facts, how can an agency ever know if any intervention is warranted?
The very "Internet Freedoms" case that Wu presents as an example of a successful agency threat demonstrates that agencies have ample investigatory powers that allow them to establish facts. Three years after Chairman Powell's speech, the FCC issued a notice of inquiry on whether the Commission could enforce Powell's "Freedoms" when faced with market failures, (31) and ultimately it promulgated a rule on the matter. (32) If "poorly developed facts" made immediate regulation problematic, then the FCC could have issued its notice of inquiry earlier in lieu of Powell's edict. If agencies choose to employ threats, it is not because they lack fact-finding capabilities.
Wu also suggests that in "rapidly developing industries" rulemaking can be "impracticable," thus justifying "highly informal methods." (33) But it is not clear that rulemaking is ever "impracticable," especially given that the...