Ruling Boosts SMB Clout Over Federal Red Tape

One of the nation's most influential courts on federal regulatory matters has sent a clear message to government agencies: seriously weigh the effects on small businesses before churning out new rules and regulations.

The U.S. Court of Appeals for the District of Columbia made the determination in a little noticed ruling in July. The court faulted the Federal Aviation Administration for failing to follow the federal Regulatory Flexibility Act (RFA) when it considered revisions to drug and alcohol testing programs for companies that maintain commercial aircraft. The 27-year-old law requires federal agencies to consider the impact on small businesses before adopting new regulations.

Small business advocates say federal bureaucrats often give the law short shrift and hailed the ruling. "I think it is huge for small business," said Giovanni Coratolo, executive director of the U.S. Chamber of Commerce's Council on Small Business. "It sends a signal to agencies that they have to abide by the law. They can not just ignore their small business duties in forming regulations."

Coratolo said the case is significant because they history of judicial review has been spotty. "We've had a few cases go our way. One or two didn't. This is one that has clearly forged new ground in the sense that it said, 'Yes, they are going to have to take seriously their duties under the RFA,'" he explained.

Indeed, the law has been treated like and unwanted step-child in the regulatory review process since its inception. Congress toughened the Act once in 1996 by authorizing judicial review of agency actions. Even President Bush signed an executive order two years ago to help improve compliance. But a Government Accountability Office (GAO) report still concluded last year that the Act was failing to live up to its potential.

Under the RFA, an agency must prepare a "regulatory flexibility analysis" at the time a proposed rule is issued, if it determines that the proposed rule would have a "significant economic impact upon a substantial number of small entities." Agencies are also required to consider alternatives that minimize impacts and ensure that small firms participate in the rulemaking process.

In practice, however, Coratolo and others say the outcome is often far different. "In many cases, [agencies] are just wholeheartedly ignoring portions of the law that say straight out they have to reach out to small businesses," he said.

The federal rule in question is a case in point. In 2002, the FAA announced that it was conducting a routine review of its drug and alcohol testing regulation. The controversy arose when the agency determined that subcontractors, no matter how far removed from the main contractor, also had to have federally certified testing programs.

The Aeronautical Repair Station Association (ARSA), which represents independent maintenance companies, claimed the proposal was too sweeping and would have broad impact on the industry's myriad small businesses. The ARSA and the Small Business Administration's Office of Advocacy both called for an RFA analysis.

At first, the FAA held that the rule would not have a "significant economic impact" on small businesses. But when the ARSA provided evidence that as many as 22,000 businesses would be affected, 80 percent of which are small, the agency switched course, said ARSA Executive Director Sarah McLeod.

It claimed contractors (including subcontractors) were not the "targets" of the proposed regulation. Instead, it said, they were "indirectly regulated entities." As such, it said, the RFA did not apply. But the court found otherwise, ironically, citing the FAA's own regulation. "The 2006 Final Rule imposes responsibilities directly on the contractors and subcontractors and they are, therefore, parties affected by and regulated by it," the court wrote in the 2-1 decision. The court ordered a full RFA analysis, and the ARSA hopes it will consider alternatives to the current rule.

As for the Act itself, it still remains an open question whether federal agencies will ever fully embrace it. The SBA's Office of Advocacy, which monitors compliance, issues a generally upbeat report every year. But as Senate small business committee Chairman, John Kerry, D-Mass., noted during one congressional hearing, the agency always chooses to "accentuate the positive."

The GAO examined 12 years of Advocacy reports and concluded that compliance was "mixed," at best. While the reasons varied from agency to agency, the report said that the Act's application and effectiveness were limited by "uncertainties about the RFA's requirements and key terms, and varying interpretations by federal agencies."

Under President Bush's executive order, the Office of Advocacy was empowered to conduct training sessions at federal agencies to ensure better compliance. A bill idling in the House Small Business Committee would also further strengthen the Act.

The Office of Advocacy maintains an online training Web site, but said in its most recent report to Congress that the largest share of its public comment letters to agencies (30 percent) address inadequate analyses of small business impacts. That's where small business advocates hope the recent court ruling will come in.

"The court is going to have a mistrust of federal agencies that give the kiss and brush off to an RFA analysis," said MacLeod. "If the FAA tries to slip out of this in any way shape or form, we'll be right back before the court again."