In West Virginia v. EPA, the Supreme Court expanded the reach of the major questions doctrine (MQD) by reframing it as a substantive canon and clear-statement rule rooted in both the Constitution’s separation of powers and “a practical understanding of legislative intent.” The literature has missed two unanswered questions that will determine the extent of the doctrine’s domain. First, will the Court apply the doctrine to a range of different regulatory schemes, such as agencies’ attempts to enforce the law case-by-case in federal court? Second, may the MQD oust or limit existing judicial precedents? These problems will arise when agencies or courts reach “major” results by applying flexible judicial standards.

In a new article, we examine these questions in the context of the Securities and Exchange Commission’s lawsuits involving crypto assets. For years, the SEC has brought suit on the premise that the crypto assets at issue are “securities,” continuing the agency’s pattern of refusing to define “investment contract” – one type of asset that statutes deem securities – through rulemaking. For decades, the agency and the judiciary have decided whether contracts are investment contracts based on the Supreme Court’s Howey test. Nevertheless, critics of the SEC’s decision to pursue enforcement actions – including Coinbase, which relies in part on this argument – have argued that it violates the MQD.

To help define the boundaries of the MQD, we show that calls for the courts to apply it against the SEC are ill-conceived.

Background

In the securities laws, Congress defined “security” broadly, including with catch-all terms like “investment contract” that necessitated judicial interpretation. In the 1946 case SEC v. W.J. Howey Co., the Supreme Court obliged. Because the term “investment contract” “was common in many state ‘blue sky’ laws in existence prior to the adoption of the federal statute,” the Court reasoned that Congress adopted a meaning that “had been crystallized by . . . prior judicial interpretation.” Relying on state court decisions, the Court held that an investment contract is “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” The Court has stuck to this test, known as the Howey test, even as new forms of securities have come and gone, calling it “[t]he touchstone” of whether something is a security.

Like Howey, the MQD is also applied by a multi-part test. The MQD is implicated when an agency action is both major (it implicates a “question of deep economic and political significance”) and exceptional (it is “unheralded” or “transformative”). Once the doctrine’s triggers are pulled, an agency’s legal interpretation will fail unless it can point to “clear” statutory authorization. What the Court means by clear is contested (compare Brunstein & Donaldson with Deacon & Litman), though most scholars have concluded that the MQD requires clarity beyond plain meaning (see, e.g., Walters, Baumann, and Chafetz). The MQD is animated by a fiction about legislative intent positing that Congress does not speak on major questions with underdetermined language – that is, Congress speaks clearly when addressing major questions. From this insight, we can determine that the MQD should not apply where lawmakers use clear statutory language with a definite meaning. The Court further described the MQD as serving “separation of powers principles.” This likely means preserving the core of each branch’s power: legislative, executive, and judicial power.

Before proceeding, one more point deserves emphasis: the distinction between “legislative” agency actions that bind the public and non-legislative actions. The classic example of a legislative action is a rule that results from notice-and-comment rulemaking. Importantly, the SEC has long refused to issue a legislative rule that might fix a new regulatory scheme for the crypto industry, proceeding instead through case-by-case enforcement actions in federal court. To use a metaphor, the SEC has opted to act like a prosecutor, asking courts to apply existing law. The legislative/non-legislative distinction is critical because, as we demonstrate in our article, the MQD has never been applied to a non-legislative agency action like the SEC’s enforcement actions.

The MQD Is Inapplicable to the SEC’s Judicial Enforcement Actions

Examining the motivations behind the MQD and the Howey test’s history helps us determine that the doctrine should not be applied to the SEC’s crypto-related enforcement actions.

These enforcement actions do not implicate the MQD’s doctrinal triggers. Judicial enforcement actions are less “major” than the kinds of legislative rules that have triggered the MQD in the past. Rather than issuing a legislative rule sweeping the entire crypto industry under its regulatory umbrella, the SEC is proceeding case-by-case under existing precedent. There is also nothing exceptional about SEC judicial enforcement actions. The SEC has a storied history of proceeding through such actions to test the ambit of its authority under the Howey standard. A legal finding by a court that the sale of certain crypto assets are investment contracts would merely result in those sales having to comply with existing securities laws, even if the decision is precedential.

Exempting the SEC’s judicial enforcement actions from the MQD is also supported by the doctrine’s purposes. The doctrine’s footing in the separation of powers punishes agencies that opportunistically seize on legislative authority to expand their reach. Here, however, is an executive agency performing a law-enforcement function, which does not implicate the MQD’s separation-of-powers rationale. As for the MQD’s claim about how Congress speaks in statutes, this fiction has always been cabined to “major” and “transformative” agency actions that would lay claim to entire industries. Here, the SEC is applying the existing law, bit-by-bit, against collections of individual firms. As a result, the MQD’s fiction about legislative intent loses its relevance.

The MQD Cannot Displace or Limit Howey

In arguing that the MQD should apply to SEC enforcement actions based on the Howey test, proponents are asking courts to displace or otherwise limit Howey. But a straightforward and triggers-based application of the MQD, which requires an action to be both “major” and “extraordinary,” places Howey beyond its reach.

Assume that an SEC enforcement action is economically “major.” Is it also “extraordinary” for the SEC to ask courts to apply Howey, one of the standards that has existed for almost a century? The answer is clearly “no.” If the SEC is acting extraordinarily by stretching the meaning of securities laws beyond what they can maintain, then Howeywould lead to a dismissal of SEC complaints on its own. And if Howey, properly applied, vindicates the SEC’s approach in a given case, the agency’s decision to bring that lawsuit cannot be considered extraordinary.

There are also good reasons to think that preexisting judicial precedent should be outside the MQD’s domain based on its purposes. The MQD’s fiction about how Congress speaks in statutes elevates a focus on Congress. Here, Congress has operated with Howey in the background for nearly eight decades, never enacting new legislation to displace it. This decision to acquiesce to Howey’s open-endedness provides a reason for not applying the MQD. As the Supreme Court recently remarked in Slack Technologies v. Pirani, although “Congress remains free to revise the securities laws at any time, [the judiciary’s] only function lies in discerning and applying the law as we find it.” Congress has acquiesced to Howey by not overturning it through new statutes.

Applying the MQD Leads to Absurd Results When the SEC and Private Litigants Share Litigation Authority

Investors who have faced losses by purchasing unregistered securities may sue to recover those losses and, accordingly, several class action lawsuits have been filed on the grounds that purchased crypto assets are unregistered securities. As a prerequisite, litigants must first convince courts that the assets purchased are securities, which they do through the Howey test.

In these cases, it would be nonsensical to apply the MQD – which presupposes an evaluation of the “history and the breadth of the authority that [the agency] has asserted” – as the SEC is not a party. There is no agency “claim of ‘unheralded’ regulatory power” or effort “to make a ‘radical or fundamental change’ to a statutory scheme” because there is no agency claim at all. Howey’s application is all that should matter.

At the same time, if courts were to apply the MQD to cases brought by the SEC against those same crypto issuers and conclude that the securities laws do not apply notwithstanding Howey, opinions governing the SEC’s and private litigants’ actions would collide. The principle that an issue decided on the merits need not be re-litigated in future cases would be impossible to apply.

Conclusion

Judicial enforcement actions operating without accompanying legislative agency actions should exist outside the MQD’s domain. Although the Supreme Court could, of course, modify the Howey test or determine that it is not the appropriate way to determine what is an investment contract, the doctrine does not apply to the SEC’s crypto-related enforcement actions.

This post comes to us from Todd Phillips, assistant professor at Georgia State University’s Robinson College of Business, and Beau Baumann, a PhD student at Yale Law School. It is based on their  article, “The Major Questions Doctrine’s Domain,” forthcoming in the Brooklyn Law Review and available here.