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Ropes & Gray attorneys provide timely analysis on legal developments, court decisions and changes in legislation and regulations.
Doug Hallward-Driemeier: Hello, and welcome to this Ropes & Gray podcast. I’m Doug Hallward-Driemeier, a litigation partner in our Washington, D.C. office and head of the firm’s Supreme Court and appellate practice, and a frequent practitioner in administrative litigation. Today, I am joined by my colleague Jeremiah Williams, also a litigation & enforcement partner in D.C. Jeremiah’s practice focuses on securities enforcement as well as transactional securities litigation. Hello, Jeremiah.
Jeremiah Williams: Hi, Doug.
Doug Hallward-Driemeier: Last month, we had a discussion in advance of some—what we anticipated—would be blockbuster decisions in administrative law. I think it’s fair to say that the Supreme Court did not disappoint us in terms of issuing some pretty major decisions. Today, we’ll have a chance to talk about what those decisions held, and also as importantly, what it means going ahead and what our clients need to be thinking about in terms of their engagement with the government and opportunities to challenge what they believe to be government overreach. So, Jeremiah, why don’t we talk first about the decision that came down earlier, that is the Jarkesy decision, and what it means for the future of civil penalties in administrative proceedings and the SEC’s enforcement activities more generally.
Jarkesy & the Future of Civil Penalties in Administrative Proceedings
The Decision
Jeremiah Williams: Thanks, Doug. As expected in Jarkesy, the Court voted six to three along ideological lines to strip the SEC of its authority to initiate adjudicatory proceedings when it seeks to enforce civil penalties for monetary fraud. The Court reasoned that the SEC’s enforcement action against Jarkesy bore a close relationship to a suit for fraud at common-law, even while acknowledging some differences between federal securities fraud and common-law fraud. The two actions, in the Court’s view, were sufficiently similar that the Seventh Amendment’s jury trial protections apply. As a result, the SEC can no longer seek civil penalties for violations of the federal securities laws’ anti-fraud provisions in its internal proceedings overseen by ALJs. In the process of analyzing the case, the Court rejected the SEC’s argument that the enforcement proceeding fell within the public rights exception to mandatory Article III jurisdiction. The Court held that the fact that the government was pursuing the enforcement action did not matter and suggested that the public rights exception might be very limited to the types of disputes that can only arise between the government and a private party, such as immigration, taxes, or public benefits.
Impact of Jarkesy
So, what’s the impact of Jarkesy? Jarkesy is not likely to have a great impact on the SEC itself because the SEC has already been moving toward utilizing federal courts, and part of this is because of prior constitutional challenges against the SEC’s administrative proceedings. When it comes to fraud, in particular, the SEC has already been much more likely to bring fraud cases in federal court than through an administrative process. Consequently, Jarkesy is not likely to lead to a fundamental change in the SEC’s own enforcement approach. But Doug, what does this opinion mean for other agencies, besides the SEC?
Doug Hallward-Driemeier: I think this decision is going to have a very significant impact. To pick up first on one of the comments that you made, I don’t think that the decision is limited to the jury trial under the Seventh Amendment—I think that it is broader in terms of what actions need to be brought in Article III courts. That may be something that the government still wants to fight about, but I think it’s pretty clear from the analysis that the Court gives there that they really believe that the public rights doctrine is something that allows Congress to assign its resolution of those disputes to non-Article III courts, which necessarily means also you don’t have a jury trial. I don’t think that it’s only where money damages are at stake—it may be where other types of enforcement actions are being brought. So, that’s the first way in which I think the decision’s going to have broader impact.
While I am typically pretty reluctant to read a dissent to decide how broad a decision will be effective, I think in this case, Justice Sotomayor’s dissent is actually pretty instructive because she notes that there are some 200 statutes that authorize agencies to proceed through their own administrative courts. She also notes that in many of those instances, those agencies are not expressly authorized to proceed in court directly, so there may be some real challenges there for those agencies in terms of how they will enforce. They may have to rely on the Department of Justice to bring enforcement actions for them where that’s appropriate, or they may need curative legislation.
I think that, to your point, whereas the SEC may well have already been proceeding in many instances through actions brought in district courts, other agencies have shown a much greater desire to proceed through their own administrative agencies. And I’m thinking, in particular, about the FTC, which loves to proceed through their own ALJs and has, in fact, taken steps to make sure that the Commission has even greater control over the ALJs and what they decide. I think that that really does present some serious due process issues, which also were flagged by Justice Gorsuch in his concurring opinion that it’s not just a question of Article I adjudicators versus Article III—it’s that Article III actually provides very important due process protections, the protection of an independent adjudicator and all of the procedural protections that don’t necessarily apply in terms of evidence and evidence gathering. And so, I think that the decision is going to be a big one for regulated entities—and we’ll be talking about this again later when we discuss Loper Bright—I think that it will give entities a more level playing field when the agencies are bringing enforcement actions against them.
Jeremiah Williams: Doug, we’ve been focusing on the Seventh Amendment issue because obviously that’s what the Court focused on, but as you know, there were two other questions presented to the Court when they took up the case: the for-cause removal and non-delegation questions. Those were not addressed by the Court, but I think it’s maybe worth mentioning and talking about those a little bit because they’re still very much live issues that will probably come up in the future. So, just as a brief recap here, the for-cause removal deals with the fact that there are removal protections for ALJs—ALJs have to be removed for cause. The Fifth Circuit held that that provision was unconstitutional on its own. And for a delegation, the issue there is that if Congress is giving authority to an agency and that agency has discretion to make their choice—such in this case, a choice of where to proceed, whether it’s in-house or federal court—there has to be an intelligible principle that’s determined to make that decision. The Fifth Circuit again decided that there was not such a principle with respect to the SEC. Those findings that those two provisions made the ALJ process unconstitutional, separate and apart from the Seventh Amendment issue, are still very much at issue obviously in the Fifth Circuit, but also will probably come into play in later cases as well.
Doug Hallward-Driemeier: My understanding is that the Fifth Circuit will continue to regard those decisions by the panel as binding in future litigations, so at least in the Fifth Circuit, those are very strong arguments to make. But those may well be other shoes or boots that are ready to drop in future terms with the Supreme Court.
Loper Bright & The Demise of the Chevron Doctrine
The Decision
We have one other very large shoe that did drop in the last week of decisions, and that is the Loper Bright decision that overturned the Chevron doctrine. To recap a little bit, there were two cases: Loper Bright and Relentless. The second case was added because Justice Jackson was recused from one of those because of her prior service on the D.C. Circuit. In those two cases, the Court broke down along ideological lines to overrule the longstanding doctrine under Chevron v. NRDC, which had held that where a statute was ambiguous and Congress had given its administration enforcement to an agency, that the agency was entitled to deference in its construction and a resolution of that ambiguity as long as it was a permissible one—one that was not precluded by the statute and was a reasonable interpretation of it.
These cases arose in an unlikely context, I think it’s fair to say, that concerned the construction given by the National Marine Fisheries Service to the Magnuson-Stevens Fishery Conservation and Management Act. I doubt that the authors of the act ever thought that it would have quite so momentous an impact as it has in the end. That statute authorized the fishery service to require fishing vessels to carry federal monitors, and the regulation in place was one that was adopted by the service in light of declining budgets to require the vessels to pay for or to subsidize the cost of those federal observers who were meant to ensure that there was not over-fishing and other compliance with the service’s regulations. So, these two fishing enterprises brought challenges to that regulation as not authorized by the statute, and it came up to the Supreme Court posed both as one of whether the agency’s construction of the statute was a permissible one, but the lead argument was that the Chevron doctrine should be overturned.
The D.C. Circuit had upheld the agency’s rule as a reasonable interpretation of ambiguity and the statute under Chevron, and the Supreme Court, in its 6-3 decision, disagreed. The Chief Justice wrote the opinion, and he starts from first principles, I guess you could say—he’s citing Marbury v. Madison in its famous statement that, “It is the province and duty of the judicial department to say what the law is.” I think it’s really that principle that the Chief Justice and others have most chafed under. They feel that it is the Court’s job to construe the laws that Congress has adopted, and that it was a mistake for the Court ever to say that the courts should take a back seat in that project to what the agencies were saying, especially when you’re thinking about the agency getting deference in deciding what the scope of the agency’s authority is. Some of us will remember the decision in Brand X where the Supreme Court held that the logic of Chevron compelled the conclusion that the agency could be right both in saying that an ambiguous statute meant X, and also later in changing their mind in saying that it meant not X. If the statute could mean both X and not X, then it’s not clear that Congress has enacted anything—that the agency is really making the law up. The Court relied on the language of the APA (Administrative Procedure Act) in saying that the reviewing court is to decide all questions of law in saying that Chevron was actually inconsistent with the APA all along.
Impact of Overruling Chevron
It is interesting, I think, to ask the question—and some did before the decision came down—how significant this formal overruling of Chevron would be. As we’ve commented on some other podcasts—and I think we did just last month—the Supreme Court itself at least has shown itself willing to disregard the Chevron two-step framework of first deciding whether the statute is ambiguous and then deciding whether the agency’s construction is a permissible one. They’ve often just gone to the statutory text and traditional canons of statutory construction to resolve the question without many times even referencing Chevron, even when Chevron might have been the basis of the decision in the court of appeals. But I do think that it’s fair to say that this is pretty seismic in the sense that now all of the lower courts know what the game is as well, although some courts of appeals had started to apply more the approach that the Supreme Court seemed to be taking. Pretty established precedent says that as long as the Supreme Court has not overruled one of its precedents, it’s binding on the lower courts. A lot of lower courts continued to follow very faithfully the Chevron framework, and so, now, all of those courts will have to apply these questions of statutory construction de novo. They will be obviously interested in what the agency says, but they’re not going to be bound by it in the way that they had been under Chevron. I don’t know, Jeremiah, if you have a sense what that’s likely to mean in terms of what account the courts should be taking of what the agencies do say.
Jeremiah Williams: The opinion talked about this a bit, and it seems, absent Chevron, there’s going to be more of a focus on Skidmore deference. Skidmore deference refers to the principle that agency interpretations are entitled to respect as a body of experience and informed judgment. And so, that is still a club that agency has in their bag, but certainly not as good of a club as Chevron deference was, and certainly much more limited than Chevron deference. Even with Skidmore deference, there’s still going to be much more of a level playing field between agencies and those challenging agency interpretations.
Doug Hallward-Driemeier: Yes, I think that’s right. We’ll see what Skidmore deference means really now that Chevron is gone, and it probably will depend, to some extent, on just how technical and scientific maybe the particular issue is that the Court is confronted with in terms of how persuasive it thinks the agency’s rationale is. But at the end of the day, I think what’s important is that this is the Court’s own decision, and in that sense, it’s a much more even playing field for litigants that have felt that the agency has been over-reaching its authority up to now. I think that in many instances, even on the science, the parties will feel that they can make an argument that sometimes the science seems to have become politicized in the agency, and they’re really asking the Court to follow the science where it leads rather than where people want it to go, or ideological reasons. So, that will be, I think, all very interesting to follow.
The Interplay of Loper Bright & the Overruling of Chevron on Corner Post
The Decision
There’s another fascinating issue just in terms of the interplay of Loper Bright and the overruling of Chevron with other doctrines that are going on. It didn’t take long to see that because Loper Bright comes down on Friday, and then on Monday, another decision comes down, Corner Post, that I think was kind of a sleeper in this year’s case load. Corner Post raised the question of what the statute of limitations is for an action brought under the APA. The APA is subject to the general federal statute of limitations of six years from when the cause of action arose, and many courts—in fact, courts of appeals—had held that for a facial challenge to a regulation the cause of action arises when the agency action is final, for example, when a regulation is adopted and published. And so, if you didn’t bring your facial challenge to the regulation within six years of its adoption, you couldn’t do that. Although, those courts seem to recognize that you could bring an as-applied challenge in the circumstances in which the issue arose if, for example, an enforcement action was brought against you. But that was as-applied—it wasn’t facial in those courts.
The Supreme Court, again by a 6-3 decision, ruled in Corner Post that a cause of action arises when the party bringing the action has a claim, and that can only mean when the party bringing the action has some injury to complain about. In this instance, Corner Post, which is a small commercial establishment in North Dakota, had not existed when the regulation in question was adopted or when it was previously litigated by a business group. This is a rule addressing the charges—the caps put on bank card transactions. Corner Post, which had just been created after that earlier litigation challenging the regulation concluded, said, “We never had a chance to bring it. We couldn’t have. We didn’t exist. It didn’t apply to us. We weren’t injured.” And the Supreme Court agreed.
Impact of Corner Post in Conjunction with Loper Bright
The impact of that in conjunction with Loper Bright is pretty huge. Again, you don’t have to just speculate on that because the dissenters here, I think quite accurately—and Justice Jackson calls out the interplay of those two—are saying that what parties can do is if you’ve got a change in the law like Loper Bright that now makes an argument available that was not available last year or six years ago—if you have a new entrant into the industry—that new entrant can now bring a challenge and faces greater prospects than existed previously. The Chief Justice in Loper Bright said, “We don’t know that this is going to be so seismic because we expect that if decisions were already made, they’re not going to be revisited.” Well, if you’ve got new challengers, and of course there are new entrants to every industry all the time, they’re not bound by those earlier decisions and the courts are going to have to consider those issues anew. So, I think that the combination of those two is going to be pretty amazing in terms of just the shift of the likelihood of success, who can bring those actions, what old rules that people have been chafing under for a while are now open to challenge again. I think you, when we were talking earlier, had some similar thoughts about the interplay between Loper Bright and the major questions doctrine.
The Road Ahead
Major Questions Doctrine
Jeremiah Williams: The major questions doctrine is interesting because it originated as an exception to Chevron. And so, there’s a question of, “What happens to the major questions doctrine post-Chevron?” I think there’s every reason to believe that this is still going to be an important doctrine, an important principle, even after Chevron. I think that it seems the way the Court has hit it here is that it could operate as a thumb on the scale, if you will, where when courts are looking at these sorts of agency interpretations and thinking about this, if it’s an issue that is arguably of significant economic consequence or public policy consequence, that that’s going to be taken into account, and that will still continue to be important even though the doctrine originated within Chevron. There’s every reason to believe it’s going to survive Chevron and still be something that comes into play.
Doug Hallward-Driemeier: I think that’s probably right. I think that those who have employed the doctrine probably look at it as one of those canons of statutory construction. Before concluding that a statute was ambiguous, you had to apply all of the canons of construction, and that was one that might lead you to say, “It’s not even ambiguous as to whether the agency has the authority that they’re claiming.” Well, that canon still applies, and perhaps it arguably will be invoked even more forcibly because there’s not the deference on the other side of the equation. I’ve been talking about a more even playing field. I think that the dissenters would argue that the playing field maybe is not even—it’s actually skewed in favor of those who were challenging at least novel agency regulations and constructions of statutes. So, all of this will be very interesting to watch and, frankly, to be a part of, because, of course, we have some pending litigation and other clients that are already thinking about suits that they may be interested to bring.
Appropriations Clause
I do think, before we close, that it’s important to underscore that it was not a total loss for all of the agencies who were at the Supreme Court this year in the Appropriations Clause case, which was a challenge brought to the CFPB’s (Consumer Financial Protection Bureau’s) funding source, that they were paid out of receipts by the Federal Reserve. I think that that was a big agency win, where the Supreme Court was willing to say, “Congress does not need to appropriate a specific dollar from general tax revenues every year. It can designate the source of funding for an agency, and that is sufficient under the Appropriations Clause.” So, it seems that there are some cliffs to which the Supreme Court might be willing to walk up but not go over, and that was one. The Federal Reserve, the FDIC, Office of the Comptroller of the Currency, there were a lot of agencies whose funding structures would have been called into question—and the list goes on—if the Supreme Court had ruled against the CFPB in that case. In any event, it was quite the term, and I think it opens up a lot of important work to be done going forward.
Jeremiah Williams: Yes, absolutely.
Doug Hallward-Driemeier: Thank you all for listening and we hope that you will reach out to Jeremiah or me, or to your regular Ropes & Gray advisor with specific questions that you have about those agency regulations that have been annoying you perhaps for years, whether it might be now a new opportunity to take a fresh look at those. So, until we speak again, thanks for listening.
Jeremiah Williams: Thanks, everyone.