Clashes and agreements between regulatory agencies and courts: The influence on regulatory governance

Regulatory governance: the importance of the institutional context

Most North-American legal scholars who research the relationship between regulatory agencies and courts acknowledge that courts control agencies through judicial review and, frequently, judges have different intellectual priorities than regulators (López-Murcia, 2013). Regulators and courts also have different remits, mandates, and powers. Courts have formal-legal authority, and judges may exercise considerable control of the regulatory activity, thereby reducing the discretion of the regulators. The American literature may not be applicable to other contexts, as the judges in the US are relatively distant from making fundamental policy changes in the regulatory sphere (Ginsburg, 2009). Part of the literature also calls for research in developing nations, particularly those located in the southern hemisphere (Dubash and Morgan, 2012; Pagnou, 2013; Pavón Mediano and González, 2022).

The literature shows that a highly functionalist account of the regulatory state obscures an understanding of the complexity of regulatory governance in developing countries, which have systemic issues in their local administrative and political contexts, and which are different from those of more mature economies (Minogue and Cariño, 2008). In Latin America, for example, some particular features of regulatory governance have been identified: the need to combine pro-competition measures with redistributive and developmental goals (Pavón Mediano and González, 2022); the use of the constitutions to define social and economic rights, allied with activist judicial enforcement, particularly in Brazil, Colombia, Chile, and Peru (López-Murcia, 2013); and strategic behavior by private actors who resort to the courts to obtain what regulatory agencies deny (Urueña, 2015).

Despite sharing some characteristics, Latin American frameworks of the regulatory state exhibit specific institution-building processes. Brazil is a case worthy of attention. Brazilian regulatory agencies, although still far from independent, have struggled for their legitimation in the regulatory arena, mainly on the grounds of their growing specialized knowledge and capacities (Peci, 2017). The lack of expertise and technical skills frequently associated with regulatory state developing contexts (Minogue and Cariño, 2008), does not apply in the Brazilian case.

Brazilian regulatory structure: a brief overview

Since 1995, dozens of regulatory entities at the federal, state, and municipal levels have been created in Brazil, based on a model of independent regulatory agencies. According to the rationale of the regulatory state, starting 1995–1998, federal regulatory agencies of the “first generation” aimed to oversee private-sector operations of former legal monopolies in the energy, telecommunications, and oil and gas sectors (Carvalho et al., 2020). A second wave of regulatory reform in 1999 encompassed social areas, such as health and sanitary surveillance. Between 2001 and 2005 other new agencies were created to oversee the operation of the logistics and transportation infrastructure.

The regulatory agencies were then granted independence, self-determination, and enforcement powers related to new institutional competences. This created additional uncertainty about the legal grounds, leading to the extension of judicial review in agency rule-making. Particularly in the utility field, Brazilian civil law tradition involves a dogmatic and rigid system of administrative laws that combine aspects of consumer law, antitrust issues, and constitutional rights (Carvalho et al., 2020).

It is not possible to appeal the regulatory decisions to another Brazilian regulator or to a central agency in charge of reviewing executive branch regulations. Although there is the legal possibility of appealing against administrative decisions in the body that issues them, the Federal Constitution and the Brazilian General Administrative Law (Law no. 9784/1999) allow immediate appeal to the judiciary by all firms and individuals who are dissatisfied with regulatory decisions. The competence to judge lawsuits challenging the decisions of federal regulatory agencies falls in the first instance to federal judges, who can immediately declare the suspension of a regulator's decision, pending a final court ruling. First instance, legal judgments may be reassessed, on appeal, by the Regional Federal Court of the region in which they are filed.

Until 2022, the legal and institutional apparatus did not provide standards for the review for agency rules. The recent Brazilian Regulatory Bodies Act (Law no. 13,848/2019) was intended to overcome some omissions in the legislation, but it remains unclear whether a substantive judicial review would apply to regulatory agency decisions.

Problems of clashes of rationales and regulatory overlap

Most officials interviewed defended the rigor and quality of decisions made in the technical sphere of the regulatory body, and argued that judicial scrutiny, when it goes beyond procedural-legal considerations, often disrupts regulatory frameworks, and damages long-term public policies. According to Mantzari and Vantaggiato (2020), while principal–agent theory is traditionally used to explain the act of delegation, it overlooks post-delegation relationships and third institutional actors (e.g., courts) that continue to exert an influence on regulatory agencies and establish institutional constraints that limit the discretion of regulatory agencies. Some officials from different agencies (National Agency for Land Transportation, National Electricity Agency, National Civil Aviation Agency, and National Agency for Petroleum, Natural Gas and Biofuels) pointed out that it is hard for the judiciary to understand the broader objectives and impact of regulatory policies and, based on these misunderstandings, the judiciary often make wrong decisions that constrain the authority of agencies.

Some officials consider that legal values are somewhat abstract and unnecessary, despite the shadow of judicial control over their tasks. One expert on tariffs from the National Electricity Agency, a regulator whose decisions usually have a direct impact on end consumers, stated,

You make a technical rule to solve a problem and you have to be impartial between government, agents and consumers. The judiciary thinks about fairness. But we have another thought, because we must solve an issue in the best possible way, cheaper, simpler and with lower transaction costs (O5).

All officials interviewed agreed with the above point of view, possibly because Brazilian regulators have been able to claim expertise and strengthen technical arguments in order to secure independence from political interference in spite of an adverse institutional context (Peci, 2017). One official from the National Sanitary Surveillance Agency, which has established a solid reputation of expertise-based regulation (Aith, 2016; Peci et al., 2020), stated that regulatory agencies sometimes need to go beyond open-ended legislative norms, and a delicate balance between legal and technical aspects must be found.

Analysis of the responses confirmed an intricate relationship among the different players in the regulatory space, characterized by boundary issues, where systems overlap and must adapt to each other (Vibert, 2014). Weaker regulatory governance structures in the developing world have led to overlaps, confusion, and conflicts, especially about ex-post monitoring by legislative oversight and judicial review (Minogue and Cariño, 2008). Most judges and officials interviewed resented the absence of clear lines in the assessment of litigation in the regulatory field.

The regulators’ perceptions of their role and mission in the eyes of government are affected in multiple ways by the interplay between agencies and courts. As two officials (O3 and O7) pointed out, judicial review encourages agencies to constantly revise their workflows, to improve their assessments and analysis of evidence, as well as providing opportunities to clarify the role and authority of agencies in certain fields. On the other hand, regulatory litigation sometimes exposes the weaknesses of agencies to the central government and other players, for example highlighting the need for more personnel and resources.

On the side of judicial control, the individual definitions of the criteria of self-restraint and judicial intervention were assessed by one judge as “painful”:

In injunction procedures the judge has very short time limits for deciding and there is a lot of information asymmetry regarding very complex regulatory policies. I think we would need to understand a little more what the agencies do, improve our decision-making mechanisms, so that they are less invasive and have a little more confidence in the administration's work. [But] We don't have that. We end up being a little too interventionist […] but the judiciary has been part of improving our democratic culture and I think our participation is important (J2).

Four of the six judges interviewed justified court interventions on the grounds that there is a risk that regulators may be captured by private interests or that consumer issues come to the judiciary because they were previously handled poorly by regulatory agencies. At least two seasoned judges (J3 and J4), with more than 20 years on the bench, seemed to be more sympathetic to a stricter formal-legal approach to regulation. The constitutional social rights associated with the implementation of the Latin American Regulatory State (López-Murcia, 2013), combined with the Brazilian civil law tradition of consumer law (Carvalho et al., 2020), create the conditions for a more interventionist role for the courts. Such an approach seems to drive the behavior of Judge J3, who argues that regulatory bodies often fail to provide a strong defense of consumers.

Agreements and benefits in regulatory overlap

When asked about the positive aspects of the courts’ decisions, most officials acknowledged that courts promote more transparency in the agencies’ procedures and have provided important inputs that improve accountability. By focusing on procedural rationality, for example, judicial review provides an important balance, with the courts occupying a middle ground between arbitrary government intervention and consumer protection, without the courts assuming the role of regulators (De Somer et al., 2022). Accountability guides a great deal of the work of the courts in relation to regulation, but this finding must be considered in the context of regulatory overlap that identifies benefits such as adaptability and increased participation in regulatory policies, as well as the creation of alternative choices and shared knowledge (Robb et al., 2023).

Judges J2 and J5 are young first-degree judges who presented themselves as quite open to broadening the range of legal regulatory scope, giving agencies greater flexibility to meet certain public needs. Similarly, Judges J1 and J6, with extensive court experience, were firmly committed to greater judicial self-restraint toward regulatory agencies. They thought that greater discretion posed a potential threat to the consistency of regulatory rulings, and they act in accordance with a legal paradigm that seeks to control discretion by means of legal instruments (Mascini, 2020).

When asked about the more interventionist approach espoused by other judges, Judge J2 stated that the legal culture of most judges relates to an “old” administrative law that does not meet the challenges of today's regulation, and that judges would benefit from being trained and informed about modern regulatory practices. According to Jordão (2019), in countries with a civil law tradition, such as Brazil, the protection of citizens’ rights is often presented as the sole purpose of administrative law. In fact, a more holistic and comprehensive approach to regulation is frequently overlooked by scholars of administrative law, despite the fact that the modern administrative state deviates considerably from the assumptions underlying traditional legal frameworks (Osorio and O’Leary, 2017). The interviews confirmed that a purely legalistic approach is slowly being replaced by a pragmatic approach that is more open to weighing evidence-based knowledge that is not subject to strictly legal arguments.

The role of agency attorneys in handling regulatory litigation

The attorneys interviewed offered important reflections about regulatory litigation and governance. They seemed to be in a privileged position to do so, because they needed to “translate” regulatory decisions into legal language, and reconcile technical choices with laws. Regulatory litigation fosters an outward look in relation to the agencies’ internal technical routines, and may equip attorneys with a more reflective perspective on the agencies’ strengths and weaknesses.

Some of the attorneys stressed the institutional maturity, or lack of maturity, of the regulatory body to which they were linked, and emphasized its impact on judicial litigation. Attorneys from the National Sanitary Surveillance and the National Telecommunications agencies highlighted what they considered to be a higher level of judicial deference to their organizations, which they attributed in part to the close dialogue between the attorneys and the technical teams within their agencies.

Very little research has reflected the role that lawyers play in regulatory litigation and politics (Hume, 2009; Magill and Vermeule, 2011; Schmidt, 2004). This research revealed the important role of regulatory agency attorneys in the relationship between regulators and courts. Several interviewees highlighted the challenges for these professionals in bridging the gap between the regulators’ technical areas and the handling of disputes before the courts, as well as in maintaining an effective dialogue with the courts.

In analyzing the tensions between legal and technical expertise, it is important to focus on the internal composition of regulatory bodies. The more power the courts have to overrule agency decisions on legal grounds, the greater the role of agency lawyers (Magill and Vermeule, 2011). Agency attorneys are the team that is impacted by court decisions first, and they must negotiate changes in policies and procedures with the agency's leadership and technical departments, to ensure compliance with court rulings.

The attorney from the Economic Competition Council reported that the reactions from the agency's technical departments are sometimes affected less by the substance of judicial ruling and more by the inconvenience of implementing the decisions:

The regulatory activity is very specific, it involves circumstances and consequences that are not achieved by judicial control. If I have to modulate a regulatory public policy in court, I cannot predict what the practical effects will be. That is, good intent can backfire, and it usually happens (A7).

When agency attorneys fail to provide the best reading of regulatory norms and open-ended statutes, regulatory policies can be undermined (Sunkin, 2004). The key role of attorneys in handling litigation is critical to the process by which regulatory meaning is given to the courts (Hume, 2009; Schmidt, 2005).

The attorneys of Brazilian agencies consider themselves to be knowledgeable, and able to present persuasive defenses (in close coordination with technical regulatory departments). They believe that in this way they can mitigate concerns about information asymmetry in the regulator–regulated relationship (Minogue and Cariño, 2008).

Influences on the behavior of private actors and agency enforcement

Some agency officials and attorneys acknowledged that the context of dysfunctional litigation frequently allows enterprises to obtain a reinterpretation of the regulatory rules to suit their own interests. As in other Latin American countries, the unpredictability of court responses may encourage firms to pursue opportunistic litigation (Urueña, 2015). Regulated agents seek to escape or postpone monetary sanctions by obtaining legal injunctions that dilute the regulators’ power of enforcement.

In accordance with the institutional design adopted in other countries, in addition to making rules, Brazilian regulatory agencies are also responsible for enforcement: to prevent, or respond to, the violation of regulatory norms issued by regulators. Enforcement is key for promoting the implementation of regulatory policies, ensuring compliance and attaining agencies’ core mission goals (Scholten, 2022).

Fines are a usual regulatory sanction and their judicialization can be interpreted as a clear judicial intervention in an important pillar of agencies’ enforcement. Regulated players may initiate legal action against regulators if they perceive a decision to be damaging to their interests (Mantzari and Vantaggiato, 2020). Despite a recent move toward modern regulatory techniques, such as responsive regulation, some interviewees from regulatory bodies acknowledged that their organizations depend on fines for effective compliance.

The respondents from the National Agency for Telecommunication expressed the most dissatisfaction about the over-judicialization of regulatory infraction procedures. Their concern is in line with recent research that found that regulators’ powers of sanction are frequent targets of judicial review and account for approximately 28% of decisions in Brazilian regulatory litigation before federal courts (Silva and Guimaraes, 2021). Empirical research in Belgium showed that different players and levels of authority in regulatory governance provide regulated agents with the opportunity to soften regulation or slow down regulatory deliberations (Mathieu and Aubin, 2014).

According to some officials interviewed, small regulated agents are compliant with the majority of low-value fines, and even if they do resort to the courts, they rarely succeed. It is a different case with larger enterprises, which often successfully avoid or postpone large monetary penalties. Economically powerful regulated agents can benefit from unclear boundaries between regulatory governance state actors and use their resources to seek the reinterpretation of regulatory rules in their favor.

Attorneys A4, A5, and Official O4 highlighted that large regulated companies take advantage of their robust legal departments (or prestigious law firms) to avoid complying with monetary penalties, and this behavior weakens the pedagogical aspect of regulation. Attorney A4, from the National Telecommunications Agency, considered that judges often defer to his agency on technical issues, but courts often associate fines with the legal principles of tax law and feel more comfortable about intervening:

There is a lot of litigation related to fines. However much we try to create alternatives to regulate other than fines, mechanisms of deterrence and advice, the fine is always the last resort available […] If there is a high value fine against a large economic agent, the interest in judicialization is clearly greater than if it were in a case where the other party had fewer economic resources (A4).

Judge J6 had another interpretation of the same subject:

[Agencies] should give incentives in cases when regulated agents act within the policies that they want to encourage. I think it is better than these fines, which are often very heavy depending on the economic field that is being regulated. So, I think that in a situation like this, you really have to exercise judicial control, bring [fines] to a more reasonable level of sanction, by applying the principles of reasonableness and proportionality (J6).

The courts apply some legal principles that, according to the regulatory agencies, are inappropriate. Regulatory interactions, especially in cases of enforcement and compliance, are mediated through the legal practices of interpretation, because the legal principles and rules do not provide a unique solution (Picciotto, 2017). According to Attorneys A1 and A7, the judicial branch intervenes on a strictly legal basis, even though regulatory authorities work very differently, in a pragmatic, operational and tactical manner, to induce behaviors in the market and society.