One visible response by regulators to what they view as persistent—or particularly fast-moving—market challenges has been a sharp turn towards litigation to introduce or test out novel legal theories and frameworks that could have been the product or subject of legislative or administrative rulemaking. This approach, popularly termed “regulation by enforcement,” prompted fierce critiques from commentators and the marketplace, often from the standpoint of fairness—and based on an implicit assumption that such regulatory conduct might be illegal, or at the very least, politically motivated. In response, defenders of agency action have called the criticisms “bogus” and “misguided,” and have lambasted politicians, market participants and even academics, for uttering the phrase.
We observe that regulation by enforcement can enable regulators to achieve a range of positive outcomes. It gives agencies teeth to promote their institutional mandates and to generate confidence among the public that the agency is doing the job it is tasked to do. Regulation by enforcement can thus create efficiencies in agency administration where it produces sought-after policy results (e.g., improved investor protections, more competitive markets) at relatively lower bureaucratic costs (e.g., with speed and encompassing fewer procedural steps). On the other hand, the strategy also come with notable shortcomings. Where enforcement attempts to circumvent longstanding norms of procedural fairness, informed rulemaking, and deliberative analysis, the quality of policymaking can be diminished, with lower informational content, shallower expertise, and limited public engagement underlying decisionmaking.
Regulatory effects may be scattershot, where high-profile actions target certain actors while leaving others alone. These procedural and outcomes-driven effects mean that regulation by enforcement can suffer from a perception of limited legitimacy—increasing the reputational risks to agencies and raising the critique that agency action may be excessively political and not grounded in the rule of law. Regulatory agencies thus risk being viewed as less technocratic and more driven by selfish, rather than public, interests. In such cases, concerns can filter into the judicial review mechanism. Ambitious attempts to engage in regulation by enforcement can run aground where courts rule against the government’s position—or even more dramatically, roll back the general authority being asserted by the litigating agency, especially given recent Supreme Court decisions on separation-of-powers jurisprudence that have privileged settled expectations as a check on regulatory innovation.
Although regulators do not typically spend much time justifying their choice of policymaking tools, courts have previously identified why making policy on a case-by-case basis may be useful. The traditional view is that adjudication creates a common law regime where precedents produced by a series of enforcement actions can give regulated industry direction about the concerns of regulators, while giving regulators the flexibility to take a different approach in the next enforcement action.
The case most famously associated with this proposition is Chenery v. SEC, 332 U.S. 194 (1947). That case involved the breakup of a utility company holding company scheme that allowed insiders to control the utility despite having a tiny amount of equity in the enterprise by a pyramid corporate structure. The Supreme Court considered the case twice. In its first decision, the Court invited the SEC to promulgate a rule setting forth limits on minority control through the holding company structure. After the agency declined to do so, the Court reviewed the case a second time. Rather than insist on agency rulemaking, the Court held that “the choice made between proceeding by general rule or by individual, ad hoc litigation … lies primarily in the informed discretion of the administrative agency.” Id. at 203.
Now, 80 years later, regulation by enforcement has manifested in ways that Chenery did not anticipate. Some government officials overtly and unapologetically leverage enforcement authority to advance novel legal theories to change the law. Others have leveraged enforcement proceedings to make policy after abandoning a failed notice-and-comment process. Still others send strong signals to the market, seemingly prioritizing innocuous but “high profile” cases—such as those with media personalities—to drive home their policy points and underscore their authority in contested fields.
Additionally, adjudication need not be as costly as typical rulemaking processes. As Jim Cox has observed, “when the SEC brings enforcement actions, it does not have to do cost-benefit analysis.” James D. Cox, Headwinds Confronting the SEC, 18 N.C. Banking Inst. 105, 107 (2013).
Moreover, courts tend to think their hands are tied. In Heckler v. Chaney, 470 U.S. 821 (1985), the Court held that an agency’s decision to refrain from taking enforcement action should be assumed to be insulated from judicial review under the Administrative Procedure Act (APA). In other words, the FDA’s determination to avoid intervening was perfectly legitimate.
On the other hand, the Court has recently emphasized that an agency, when it breaks new policymaking ground, must “be cognizant that longstanding policies may have engendered serious reliance interests that must be taken into account.” Dep’t of Homeland Sec. v. Regents of the Univ. of California, 140 S. Ct. 1891, 1913 (2020).
