Judicial review and the Small Business Regulatory Enforcement Fairness Act: an early examination of when and where judges are federal regulatory agencies.

• Author: Polich, Jeffrey J.

The battle between government regulators and big business is a clash of titans. Well-funded federal agencies are staffed with intricate networks of bureaucrats working to fulfill their legislative mandates and keep American businesses in line with public policy, whether the issue is pollution, workplace safety, taxation or the like.(1) Big business is ready and able to combat their nemeses with big budgets for lobbying, legal work, and compliance with the immense quantity of complex regulations enumerated in the Code of Federal Regulations.(2) All too often small businesses are found floundering in the middle of this fray. Their business practices inevitably leave them exposed to federal regulations aimed at curbing the excessive practices of big business.(3) Their budgets, however, leave them without adequate resources either to comply with or to fight intrusive federal regulators. In 1996, Congress gave small businesses a weapon of their own in their fight against this regulatory morass.(4) The Small Business Regulatory Enforcement Fairness Act of 1996(5) (SBREFA) contained a judicial review provision giving individuals or entities the power to challenge federal agencies in court if the agencies do not adequately take into account the disparate impact their proposed regulations will have on small businesses.(6) It remains to be seen whether this new weapon will be effective in assisting small businesses to survive in the current regulatory predicament.

This Note addresses the problems small businesses face in fighting or complying with federal regulations aimed primarily at the activities of big businesses, and Congress's legislative response to these problems. The primary focus is the initial response to the judicial review provision contained in SBREFA. A review of existing case law demonstrates that small entities have prevailed using SBREFA in cases in which there was a gross violation of federal rulemaking procedures by an agency, but failed when using SBREFA in cases in which the agency made some effort to comply with those requirements.

The first section of this Note examines the importance of small businesses and their plight in complying with federal regulations.(7) This section analyzes data from a variety of sources to show that compliance with federal regulations is often a matter of fixed costs.(8) The interests of large businesses in federal policymaking are better represented thanks to their ability to hire lobbyists.(9) Additionally, large businesses have entire departments that deal with regulatory compliance.(10) Small businesses often face the same regulatory requirements of these larger businesses, but lack the resources with which to fight or comply.(11) Data indicates that the amount expended on compliance with federal regulations is much higher proportionately for small businesses.(12)

The second section describes Congress's attempts at remedying this plight through the Regulatory Flexibility Act of 1980(13) (RFA) and SBREFA's amendments to the RFA.(14) The RFA attempted to alleviate some of the disproportionate strain placed on small businesses by requiring federal agencies, as part of their regulatory promulgation process, to take into account any disparate impacts that small entities might face.(15) An analysis of the legislation's effects shows that the RFA had little effect on the federal rulemaking process, in part, because it allowed agencies to certify with very little supporting data that their regulation would not have a disparate impact on small entities and, therefore, that a cost-benefit analysis was not required.(16) Further, small businesses had no remedy when the agencies' conclusions were wrong.(17) Congress, in an attempt to address this problem, passed SBREFA, which included, among other things, a judicial review provision allowing individuals or entities to challenge federal agency violations of the RFA in court.(18)

The third section looks at some of the early court cases that have arisen as a result of the new power given to small businesses by SBREFA.(19) In two instances, federal district court judges have found federal agency violations of the RFA's requirements sufficiently egregious to warrant a remand of the regulation to the agency for further research into its disparate impact of the regulation on small entities.(20) Four other cases involved regulations that were deemed valid by federal circuit and district court judges in spite of the objections to the manner in which the agencies complied with the requirements of the RFA.(21)

Finally, the fourth section analyzes this case law and predicts how courts will decide similar cases in the future.(22) In the two cases in which regulations were remanded, the agency had obviously promulgated its regulation with little regard for the requirements of the RFA, or had conducted its study of the proposed regulation's effects in a disingenuous manner.(23) In the four cases in which the regulation was upheld, it was unclear whether the analysis required by the RFA had been thoroughly conducted, but it was clear to the judge that a good faith effort had been made.(24) This analysis leads to the conclusion that small entities can expect to receive some protection from the RFA and SBREFA, but that this legislation is not a shield from every disparate impact resulting from federal regulation.(25) Additionally, agencies should be on notice that Congress and the courts are serious about the procedures involved in the rulemaking process and that an utter disregard or contempt for these rulemaking procedures will only stand in the way of their rulemaking agenda.(26)

SMALL BUSINESSES AND FEDERAL GOVERNMENT REGULATION

Importance of Small Businesses

Small businesses are important in several respects. First, in terms of contribution to the gross national product, a healthy small business sector is vital to the success of the economy.(27) Of all private firms in the United States, 99.7% are considered small businesses.(28) These firms contribute roughly half of the country's private nonfarm gross product.(29) In 1997, income generated by sole proprietors and partners rose 4.3% to $503.8 billion.(30) The success of the American economy, particularly in the last few years, can be attributed to "fostering and promoting entrepreneurial activity."(31) In fact, "[t]he emerging conventional wisdom seems to suggest that small firms and entrepreneurship are both necessary for macroeconomic prosperity."(32) The Small Business Administration's Office of Advocacy explains small business' contribution to the economy in terms of "efficiency and dynamics."(33) The efficiency contribution stems from the fact that "there are certain things small firms do better than large firms."(34) One example is that small firms are often better innovators.(35) Another example is that, in certain situations, it is cheaper for a large firm to contract out services to or buy supplies from smaller firms.(36) The dynamic contribution of small firms stems from the fact that the small business sector of the economy is better equipped to change and adapt to a given market than are its larger competitors.(37)

Second, one should care about small businesses because a healthy small business sector is necessary for job creation. Small firms employ over half of the nation's workforce.(38) Additionally, there are 10,507,000 self-employed workers in the United States.(39) From 1992 to 1996, firms with fewer than 500 employees created all of the new jobs in the United States.(40) As larger firms continue to streamline and downsize, small businesses will be relied upon to keep Americans working.(41) Not only do small businesses employ over half of all Americans, they employ those Americans who often cannot find work anywhere else. Very small firms hire part-time employees "at a rate almost twice that of very large firms.... Overall, 20.5% (11.5 million) of small firm workers were part-time employees in 1996, compared to the 17.4% (7.5 million) of large firm workers."(42) Thus, parents and others who wish to work, but cannot do so full-time, have a better opportunity of finding an employment situation that fits their needs at a small firm. Small firms also employ a "higher ratio of employees with lower educational levels."(43) The small firm workforce employs about thirty million workers with a high school degree or less, compared with the nineteen million employed by larger firms.(44) In addition, small firms hire more employees receiving public and financial assistance than do larger firms.(45) Thus, not only do small businesses contribute greatly to the overall employment of America, but they hire more individuals who otherwise would remain unemployed.

Third, small businesses, particularly the newer, start-up firms, "play a crucial role in experimentation and innovation, which leads to technological change and productivity growth."(46) Small firms are prolific innovators because "[i]nnovations arise only when property rights are properly aligned."(47) This occurs more in small firms because "small firms can hold clear property rights."(48) In other words, there is no reason for an entrepreneur to take her innovation to a larger firm where the proceeds of that innovation will have to be shared when she can start her own small business and keep all the profits for herself.

Finally, small firms are an avenue through which women, minorities, immigrants, and others who find themselves unable to find conventional economic success can gain access to the mainstream economy.(49) Over the last twenty to thirty years, female small business ownership has increased from 5% to 38%.(50) This is important not only for its economic empowerment of women, but also because "raising children and self-employment seem to go together, and home-based firms have the capacity for both."(51) In a similar fashion, small business ownership by minorities increased between 1987 and 1992 from...