Read Part I here.

Arbitrary bureaucratic power is at its highest when agencies determine the scope of their own jurisdiction, but jurisdiction protects the special interests influencing the bureaucracy. 

A brief illustration of real-world issues demonstrates what I mean by agency “jurisdiction.”

Example 1

Medical testing laboratory LabMD helped physicians diagnose prostate cancer. An employee at the lab installed Limewire, a peer-to-peer file-sharing network, on her computer. The allegation by the Federal Trade Commission was that patient health information on the employee’s computer was obtained through a hack of the medical testing laboratory. The FTC concluded this was a data breach and, therefore, a violation of its organic statute as an unfair practice that created consumer harm. Put aside the merits of the case or the now-exposed inappropriate manner in which the FTC obtained information about the testing lab. The question is, what authority does the FTC have to investigate data security breaches, particularly those involving patient health information? Is that not the job of some entity at the Department of Health and Human Services (“HHS”) or the Department of Defense? Doesn’t HHS, and not the FTC, enforce the Health Insurance Portability and Accountability Act (“HIPAA”)? The question is not: why is a rogue employee’s downloading of Limewire, in violation of company policy, an unfair or deceptive act or practice that harms consumers? The jurisdictional question is why the FTC has consumer protection authority over a medical testing lab when it comes to patient data or cybersecurity. The only basis for such jurisdiction exists through a staff request for commission approval of subpoenas against the testing laboratory with an explanation as to why the subpoena comes within the agency’s jurisdiction. That jurisdictional statement is not subject to notice or comment and is not made public. When LabMD originally filed a motion to quash the FTC’s subpoena on grounds that it lacked jurisdiction, the company lost. The court gave deference to the agency’s jurisdictional determination. LabMD ultimately prevailed in the Eleventh Circuit – but only after years of litigation and only on the basis that the FTC must prove actual harm to proceed with its injunctive authority. The question of jurisdiction was assumed to be appropriate. 

The federal courts universally defer to agency statements of jurisdiction due to a longstanding precedent from a case that held that agencies are given deference in investigating to determine whether they have jurisdiction. That principle gets it backward, yet the idea that organic statutes must specify an agency’s regulatory authority has never been the law of the land.  

Example 2

Consider the pest reduction company that produced a novel idea: sterilize male mosquitos and introduce them into wild populations to force female mosquitos to breed with duds instead of studs and decrease the mosquito population as a result. When the company consulted expert lawyers in Washington, including former Environmental Protection Agency (“EPA”) officials, they told the business that its use of sterile insect technique (“SIT”), “genetically modified” the mosquitos and therefore was a biopesticide requiring approval from the EPA. In short, the EPA had jurisdiction over SIT mosquitos even though the relevant authorizing statute regulated pesticides, which have a public meaning that contemplates a chemical process for exterminating pests. It took the Centers for Disease Control (“CDC”) writing a public statement on the issue to end the EPA’s position that SIT involved genetic modification.

These examples also highlight how the entrepreneur often finds herself subject to agency investigations and adjudications, not rulemaking. The regulator does not have the policy expertise to set rules that cover innovative action. Rules are slow and public; investigations are quick and non-public. And the agency gets judicial deference to its assertions of jurisdiction over a market newcomer. To make that jurisdictional statement public is game over to the would-be regulator. So, the regulator kills newcomers privately and attacks the innovator in the name of protecting the public interest, which is nothing more than the interest of the winning coalition threatened by innovation.

It is not the rule or the order that destroys the innovator. It is the agency’s assertion of jurisdiction. Once the innovator has conceded jurisdiction (think of the EPA asserting that the innovator using sterilized male mosquitoes to reduce pest populations is now applying pesticides, or the company mining bitcoin via tokens is now engaged in the trade of securities), the game is over.

Washington lawyers have every incentive to advise the startup that it will be subject to regulatory jurisdiction, for this advice protects the incumbents who keep the lawyer in business. Nearly a century of precedent protects that assertion of jurisdiction, which is nothing more than the protection of the bargain between the incumbent industry and the regulator. Once that bargain is broken, both the agency and the incumbent lose their jurisdictional claim to power. 

Regulations are simply the contract language memorializing the deal that took place among special interests. The rules of the game are constrained by an agreement between the parties over agency jurisdiction. The public interest side and the private interest side both agree on the agency’s jurisdictional scope. Thus, to break the administrative state, one must disrupt that jurisdictional claim. 

Daniel Epstein is an Assistant Professor of Law at St. Thomas University Benjamin L. Crump College of Law.