The Lichfield Group

This article was published on December 4, 2006.

The AT&T-BellSouth merger was announced last March. It has been approved by the U.S. Department of Justice, 18 state commissions, and three foreign countries. Each of the vetting authorities found that the merger would bring major public benefits and would not impair competition, and the latest of these regulatory approvals was issued more than a month ago. The last step to completing the merger is a decision by the Federal Communications Commission (F.C.C.). Its staff has compiled a meticulous record and reviewed the merger. Yet the F.C.C. has not addressed the matter for a prolonged period.

It has been widely reported in the press that the inaction has been caused by a 2-2 deadlock among agency commissioners voting along party lines. The fifth commissioner apparently made a preliminary determination not to participate based on his prior employment as an attorney with a party opposed to the AT&T-BellSouth merger until the agency's designated ethics officer concludes that governing ethics rules are no obstacle. That ethics ruling has now been requested by F.C.C. Chairman Kevin Martin.

As I elaborate below, applicable ethics rules, settled law on agency recusals, and first principles of accountability, all informed by the public interest, converge to favor the commissioner's immediate participation to end the protracted 2-2 stalemate. Indeed, the public interest in the commissioner’s participation to break the deadlock is not in tension with any legitimate concern to avoid employee involvement in circumstances that could cast a shadow over the agency's integrity.

I. Background

Independent agencies have been a staple of the federal regulatory landscape since the Interstate Commerce Commission was born in 1887. Congress has generally created independent agencies with an odd number of commissioners to avert chronic tie votes that would paralyze their policymaking responsibilities and thereby thwart the public interest. Agency charters typically limit the number of commissioners from the same political party to a bare majority, and on significant policy questions, agencies often divide 3-2 or 2-1 along a Republican-Democrat fault line. When Congress desired independent agency sclerosis, it created a commission equally split between Republicans and Democrats, i.e., the Federal Election Commission (FEC). That agency is routinely stymied by 3-3 deadlocks.

Congress understood that agency appointees would regularly be chosen from the industry that they would be regulating. That practice could regularly raise actual or apparent conflicts of interest issues leading to recusals that could freeze agency policymaking. Thus, Congress fashioned a federal ethics code administered by the Office of Government Ethics (OGE) to provide uniform standards to govern recusals by federal officials that balance an "above suspicion standard" demanded of Caesar’s wife with the public interest harms that would be caused by prolonged or perpetual agency indecision.

II. Federal Ethics Rules

A lion's share of ethical rules is promulgated by OGE under which all federal agency employees operate. They govern the recurring "industry recruitment" recusal issue which is raised when an agency commissioner is scheduled to act on a matter involving a party with whom he was associated as an attorney or otherwise within the prior year.

Agencies like the F.C.C. are entrusted with authority over industries that are keys to the nation's economic development and competitiveness. It would be extremely damaging to the public interest if these agencies were repeatedly deadlocked--like the FEC--in executing their public interest responsibilities. Governing ethics rules are designed to avoid that harm by giving proper weight to both the need to decide and the need to avoid direct financial conflicts of interest. They recognize that recruitment from regulated industries will be frequent, but that fact, in isolation, should not lead to recurring recusals and agency immobility.

The governing OGE regulation concerning apparent conflicts provides:

"Where an employee…knows that a person with whom he has a covered relationship is or represents a party to such matter, and where the employee determines that the circumstances would cause a reasonable person with knowledge of the relevant facts to question his impartiality in the matter, the employee should not participate in the matter unless he has informed the agency designee of the appearance problem and received authorization from the agency designee in accordance with paragraph (d) of this section."

A "covered relationship" is defined to include "[a]ny person for whom the employee has, within the last year, served as officer, director, trustee, general partner, agent, attorney, consultant, contractor or employee." Each agency is required to appoint a "designated agency ethics official" entrusted with deciding recusal questions. The agency general counsel is characteristically the agency designee, as is the case at the F.C.C.

The regulations establish duel paths by which a recusal matter can be decided by the designee. The employee with a covered relationship may seek a determination; or, the agency designee may at any time decide "the propriety of employee recusal on his own initiative or when requested by the employee's supervisor or any other person responsible for the employee's assignment."

Once the recusal issue is before the agency designee, a two-tiered legal analysis is undertaken. The general counsel makes an independent appraisal of whether a reasonable person with knowledge of the circumstances would be likely to question the impartiality of the employee in the matter. A negative conclusion makes the employee's participation proper. An affirmative conclusion leads to a further step. The designee assesses whether the employee should be obligated to participate despite the appearance of bias "based on a determination, made in light of all relevant circumstances, that the interest of the Government in the employee's participation outweighs the concern that a reasonable person may question the integrity of the agency's programs and operations." A major factor in the recusal equation is the "difficulty of reassigning the matter to another employee."

An agency designee's determination that participation would be proper is conclusive on the commissioner or employee. Thereafter, playing spectator at the agency is not an option.

III. The F.C.C.'s Deadlock Over the AT&T-BellSouth Merger

A recusal matter has presented itself to the F.C.C. in the AT&T-BellSouth merger proceeding. As amplified above, the Commission's approval would mark the final step in the regulatory vetting process. The "public interest" is to guide its review.

The five-member F.C.C. features three Republicans and two Democrats. For long months, the AT&T-BellSouth merger has yielded a 2-2 deadlock between two Republicans and two Democrats, with the third Republican commissioner, Robert McDowell sitting on the sidelines. Chairman Martin has requested the general counsel to determine whether Commissioner McDowell confronts a disqualifying conflict of interest.

McDowell was confirmed by the United States Senate in June 2006. Prior to his confirmation, he had served as Associate General Counsel of CompTel, a trade association of telecommunications carriers.

CompTel has filed comments opposing the AT&T-BellSouth merger without conditions. Commissioner McDowell was not involved in that advocacy. Indeed, his nomination to the FCC was announced in February 2006, and he then ceased working on any matter that might come before the Commission. The AT&T-BellSouth merger was not announced until March 2006. Thus, CompTel could not have undertaken even ground work for its opposition when Commissioner McDowell was active with the organization. CompTel filed its opposition in June 2006, several months post-dating McDowell’s inactive status.

Based on published reports, the Commissioner has determined that he should decline to participate in the AT&T-BellSouth merger proceeding absent specific authorization by the general counsel. The latter is now charged by Chairman Martin with deciding the matter. The case for Commissioner McDowell’s participation is overwhelming.

The AT&T-BellSouth merger was not announced until after the Commissioner had ceased working for CompTel. He had undertaken no advocacy on the issue at the time he was confirmed by the Senate. Thus, any appearance of bias regarding the merger would be contrived. Further, any appearance problem would be an apparent bias in favor of CompTel, which opposes the merger. AT&T, the party who would be most prejudiced but McDowell's putative bias, has voiced no objection to his participation. AT&T's position completely discredits the idea that McDowell's participation might shake public confidence in the integrity of the F.C.C.'s merger ruling. There also has been no allegation that McDowell would gain or lose monetarily depending on the fate of the AT&T-BellSouth merger. In sum, the alleged apparent conflict of interest that would be raised by McDowell's participation is an illusion.

And even assuming there an appearance problem were genuine because of the Commissioner's prior employment with CompTel, the dispositive OGE recusal test is whether the interest of the government in his participation in light of the F.C.C.'s elongated deadlock and the salience of the merger to the nation's telecommunications industry outweigh the concern that a reasonable person might question the integrity of the FCC's programs and operations. That test clearly mandates McDowell’s participation.

He cannot assign his vote to another. The merger carries major public interest benefits for the telecommunications industry, consumers, and government alike which the deadlock is blocking. And FCC precedents speak volumes in favor of McDowell's participation.

Earlier in 2006, a forbearance petition was filed by a CompTel member with the agency. McDowell initially recused himself. It was reported that the FCC deadlocked 2-2 and that the FCC's general counsel then determined that McDowell's participation was in the public interest (the petition was withdrawn before a vote). McDowell also participated and voted in a universal services proceeding in which CompTel participated. Neither CompTel nor any other party raised any objection to his participation in that proceeding.

In 2000, the FCC had continually deadlocked over the FCC's Personal Attack and Political Editorial Rule Proceeding because Chairman Willian Kennard had recused himself. His non-participation stemmed from prior employment with the National Association of Broadcasters (a party to the rulemaking). After the prolonged stalemate on an issue of public importance, the FCC's general counsel advised the Chairman that "the difficulty of reassigning the matter is now of controlling importance." Chairman Kennard thus reversed course and participated.

IV. State Ethics Rules and Federal Preemption

There has been speculation that Commissioner McDowell's participation might violate the state bar rules in Virginia where he is a licensed attorney. But the state rules have no application to the Commissioner's circumstances; and, even if they did, they would be preempted by federal law.

Virginia's Rules of Professional Conduct address conflicts of interest for government officials. Rule 1.11(d) declares: "Except as law may otherwise expressly permit, a lawyer serving as a public officer shall not: (1) participate in a matter in which the lawyer participated personally and substantially while in private practice or nongovernmental employment, unless under applicable law no one is, or by delegation may be, authorized to act in the lawyer’s stead in the matter."

McDowell, however, had no participation whatsoever with CompTel over the AT&T-BellSouth merger. It had not even been announced when he had ceased active involvement in CompTel matters.

In addition, McDowell cannot delegate his vote on the merger to another, which also removes this matter from the scope of Rule 11.1(d).

Finally, if the F.C.C.'s general counsel determines that McDowell's participation is both authorized and mandated by federal ethics rules, the Rule is undisturbed. It makes no effort to override either federal or state laws that expressly permit the lawyer's participation.

In any event, federal law is the exclusive source of authority for determining the terms and conditions under which federal employees execute federal laws. The Supremacy Clause of Article VI of the Constitution and the federal ethics code preempt any state law that would conflict with the code and its administration by the OGE and agency designees. The decision by the United States Supreme Court in Sperry v. Florida, 373 U.S. 379 (1963) is authoritative on the preemption question.

In that case, the Commissioner of the Patent Office was empowered to determine eligibility to practice before the Office. A regulation authorized non-lawyers to represent patent applicants. The Florida Bar sought to close a non-lawyer's patent office in the state as the unauthorized practice of law. The Supreme Court held that Florida was powerless to confound the execution of a federal function, for example, making patent decisions. The Court reasoned (at 385): "The statute thus expressly permits the Commissioner to authorize practice before the Patent Office by non-lawyers, and the Commissioner has explicitly granted such authority. If the authorization is unqualified, then by virtue of the Supremacy Clause, Florida may not deny to those failing to meet its own qualifications the right to perform the functions within the scope of the federal authority. A state may not enforce licensing requirements which, though valid in the absence of federal regulation, give the State’s licensing board a virtual power of review over the federal determination that a person or agency is qualified and entitled to perform certain functions, or which impose upon the performance of activity sanctioned by federal license additional conditions not contemplated by Congress. No State law can hinder or obstruct the free use of a license granted under an act of Congress."

Pursuant to an act of Congress, the OGE has promulgated uniform standards of ethical conduct for executive officers or employees of the federal government. Its regulations specifically authorize designated agency ethics officials to determine whether activities prior to assuming federal office require recusal in a particular matter. Thus, if a federal agency designee finds that a commissioner is obligated to participate in a proceeding because the public interest in moving forward with agency policy outweighs the potential loss of public confidence raised by an appearance of bias, any state rule that would punish or override that federal determination would be preempted. Accordingly, if the FCC's general counsel were to conclude that McDowell was obliged to participate in the AT&T-BellSouth merger proceeding, no state law could impose any disadvantage on the Commissioner for adhering to that federal ethics ruling.

V. Agency Recusal and Due Process

In addition to being fully consistent with applicable ethics rules, McDowell's participation is fully consistent with the requirements of due process, as applied by the courts. The due process clause of the Fifth Amendment requires the recusal of a commissioner in an administrative adjudicatory proceeding if a disinterested observer could conclude that the agency has in some measure adjudged the facts as well as the law of a particular case in advance of hearing it. Cinderella Career & Finishing Schools, Inc. v. FTC, 425 F. 2d 583, 591 (D.C. Cir. 1970). In the case of Commissioner McDowell, he has neither said nor done anything to suggest prejudgment of the AT&T-BellSouth merger. In Mississippi Industries v. FERC, 808 F. 2d. 1525, 1567 (D.C.Cir. 1987), the court rejected the notion that due process requires recusal merely because the agency decisionmaker’s former employer is a party to the proceeding. Accordingly, the due process clause would not frown on McDowell's participation in the AT&T-BellSouth merger proceeding. That conclusion is reinforced by the Commission’s ruling in In the Matter of Commercial Realty, St. Pete, Inc. etc., 15 FCC Rcd 7057 (Aug. 18, 1999). There petitioner CRSPI sought reopening of a Settlement Agreement on the ground that former Commission Chairman Reed Hundt had confronted a conflict of interest in various adjudicatory proceedings that were decided adversely to it. The alleged conflict rested on the Chairman's prior representation of Eon Corporation as an attorney and lobbyist, which was a party to the proceedings. CRSPI argued that the Chairman's representation, simpliciter, required his recusal in any matter implicating Eon.

The FCC, relying on Cinderella, rejected the argument. It underscored that the petitioner "provides no factual instances of Chairman Hundt's predisposition towards Eon or against CRSPI" and that "CRSPI’s speculative allegations do not rise to the level of specific statements ‘clearly showing prejudgment’ required by the applicable law of recusal."

McDowell's case is far easier than Hundt's because any presumed prejudice would work against AT&T, and that company has not objected to his participation in the merger proceeding.

VI. Conclusion

Every relevant ethics consideration uniformly guided by the public interest militates in favor of a conclusion by the F.C.C.'s general counsel directing Commissioner McDowell's participation in the AT&T-BellSouth merger proceeding. A contrary finding would threaten paralysis of the FCC and other agencies in discharging their public interest responsibilities.

Bruce Fein was general counsel of the Federal Communications Commission under President Ronald Regan. He is a consultant with AT&T, and constitutional lawyer and international consultant with Bruce Fein & Associates and The Lichfield Group.