FDA’s distillery fiasco illustrates why arbitrary regulation is a problem

“No good deed goes unpunished,” as the old saying goes. Distillery owners, who acted quickly last year to relieve the national shortage of hand sanitizer in response to the COVID-19 pandemic, learned that lesson the hard way.

As COVID-19 lockdowns accelerated and supplies of paper towels, sanitizer and other key products dwindled, some American entrepreneurs stepped up. Distilleries, themselves suffering because of the closures of bars and restaurants, repurposed their equipment to manufacture hand sanitizers. Many Americans cheered the distilleries for their resourcefulness, and grateful consumers welcomed the new supply of hand sanitizer in the middle of a public health crisis.

But one federal agency was notably ungrateful for the distilleries’ quick pivot: The federal Food and Drug Administration (FDA), which rewarded these small businesses by charging many of them almost $24,000 in punitive “fees” for stepping outside their designated regulatory box.

Luckily for the distilleries, the Department of Health and Human Services (HHS), which oversees the FDA, reversed the fees. But this episode highlights the arbitrariness of modern government regulation, which threatens the entrepreneurial risk-taking required for innovation and production.

First, some background: In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which included provisions to relax sales restrictions on certain non-prescription products, called over-the-counter (OTC) monograph drugs. The FDA reviews these products by category — such as antacids, acne treatments, antiperspirants, sunscreen and hand sanitizers — and publishes a “monograph” of each approved category.

Before the CARES Act, approval required, in the FDA’s words, a “cumbersome three-phase public rulemaking process” that prevented quick policy changes. Thanks to the CARES Act, the FDA can now grant approvals through a faster administrative-order process. Not bad for government work.

But the CARES Act also allowed the FDA, beginning in fiscal year 2021, to impose “facility fees” on the makers of these OTC products. And at the very end of 2020, the FDA issued a notice announcing its fee rates for the year and giving these manufacturing facilities 45 days to pay.

The distilleries who revamped their facilities to manufacture hand sanitizers to meet the urgent and unexpected need were, effective October 2020, suddenly subject to the fees, which ranged from $9,000 to more than $14,000. After a public outcry, HHS announced that it directed FDA to stop enforcing the fees. HHS explained that FDA had failed to go through the proper regulatory channels to assess fees. Perhaps that is correct, and it’s refreshing to see a mammoth federal agency such as HHS take responsibility for the actions of one of its subsidiary agencies.

Further, this relief was welcome news to the distilleries and to consumers who depend on a robust free market, through which entrepreneurs are rewarded for risking their own capital to produce needed products.

But in the long run, the arbitrariness of the government’s actions here, in addition to the imposition of fees, represents a serious threat to entrepreneurship and threatens the rule of law. The latter requires 1) general, broadly applicable rules enacted by the legislature, 2) uniform and fair execution of those rules, and 3) protection against arbitrary application and unlawful conduct.

In other words, we need a government of separate powers, which are themselves subject to the Constitution. Faithful adherence to this system will promote stability, encourage risk-taking and protect individuals’ equal rights.

The example discussed above shows how things shouldn’t work. For example, the decision to impose fees — which are taxes, for all practical purposes — and the establishment of broad policies are the responsibilities of Congress, not administrative agencies. Too often, however, Congress writes broadly worded legislative goals and leaves it up to executive agencies to fill in the details. Power is thus concentrated in these agencies, which — as this episode reveals, and however well-meaning they may be — act arbitrarily.

In announcing the cancellation of the fees, HHS Chief of Staff Brian Harrison admitted the FDA had made a mistake and lauded the distilleries for their efforts to help out in a time of emergency.

“Many of these are rather small business, craft distilleries, and their business and livelihoods were damaged when restaurants closed down,” Harris said. “But they jumped into the fray and joined the fight against COVID. It was nothing short of heroic. They are American heroes.”

Harrison sounded the right rhetorical notes, and we should be pleased that in this case, the FDA backed off. But for the future, Congress needs to reclaim its lawmaking powers to ensure that future entrepreneurs don’t face similar regulatory abuse from overzealous regulators.

Oliver Dunford is an attorney at Pacific Legal Foundation, which litigates nationwide to achieve court victories enforcing the Constitution’s guarantee of individual liberty. Follow him on Twitter @ojdunford.