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Courts should require agencies to use rule-making procedures when the agency retroactively adopts new laws or where the parties have relied on the precedents. Agencies can proceed by adjudication to enforce discrete violations of existing laws where the effective scope of the rule's impact is relatively small; but an agency must proceed by rule-making if it seeks to change the law and establish rules of widespread application.
Petitioner Francis Ford, Inc. was an automobile dealer who participated in an industry-wide practice in connection with the repossession of automobiles after debtors defaulted. Petitioner would credit debtor with the wholesale value of the car, less direct and indirect expenses, then he would sell the car at retail and keep the surplus. The Federal Trade Commission ("FTC") did not approve of the described practice; and in order to attack petitioner’s practice, the FTC began an adjudicatory action against petitioner, alleging that the latter had violated § 5 of the Federal Trade Commission Act by failing to give defaulting customers more than wholesale value for their repossessed cars, and by improperly charging them with indirect expenses such as overhead and lost profits. The administrative law judge held that the petitioner’s practices had violated § 5 of the F.T.C. Act, but that the commission had failed to establish that petitioner’s acts were substantially injurious to its customers. Both petitioner and complaint counsel for the F.T.C. appealed to the full commission. The commission directed petitioner to cease its present credit practices, and to adopt the F.T.C.'s view of proper credit practices under ORS 79.5040. Petitioner sought review of the FTC’s order.
In issuing the order directing the petitioner to cease its present credit practices, did the FTC exceed its authority?
In Patel v. Immigration & Naturalization Serv., 638 F.2d 1199 (9th Cir. 1980), the Court held that agencies can proceed by adjudication to enforce discrete violations of existing laws where the effective scope of the rule's impact will be relatively small; but an agency must proceed by rule-making if it was seeking to change the law and establish rules of widespread application. In the present case, the Court found that the FTC, by its order, has established a rule that would require a secured creditor to credit the debtor with the "best possible" value of the repossessed vehicle, and forbid the creditor from charging the debtor with overhead and lost profits. The Court noted that the current FTC order was the first agency action against a dealer for violating ORS 79.5040, and will have a general application. Following the doctrine held in Patel, the Court held that the FTC exceeded its authority by creating new law by adjudication rather than by rule-making since the rule of the case represented a change in the law and would have general application. Accordingly, the Court vacated the FTC’s order.