Ropes & Gray Discusses Fifth Circuit Stay of SEC Climate Rules

On March 15, the U.S. Court of Appeals for the Fifth Circuit granted an administrative stay of the SEC’s climate disclosure rules, which were adopted on March 6.  The rules are discussed in our earlier post here.

The 20-word order was in response to requests for injunctive relief filed with the Court by seven companies and trade associations and three states (Louisiana, Mississippi and Texas).

The stay is interim relief pending further judicial review, granted in response to the plaintiffs’ assertion that being required to comply with the rules would result in irreparable harm.

In a no-risk prediction, we have been saying for two+ years that no matter what the final rules provided for, they would be challenged in court. Several lawsuits relating to the rules have been filed in multiple federal courts.

Challenges have come from both the right and the left. On the right, the challenges include assertions that the SEC does not have authority in this area, that the rulemaking did not follow the procedural requirements of the Administrative Procedure Act and that the rules are compelled speech in violation of the First Amendment. On the left, the challenge is essentially that the rules do not go far enough. The assertion here is that, in not adopting more stringent rules, the SEC did not follow the Administrative Procedure Act.

The next step is a lottery to determine at random which of the federal Appeals Courts where petitions were filed will hear the challenges to the rules on a consolidated basis. This is required by statute – the Multicircuit Petition Statute – when agency rulemakings are challenged in multiple federal courts. Challenges in multiple courts are part of the playbook when challenging federal agency rules. Challenges on the right are filed in more conservative-leaning jurisdictions, while challenges from the left are filed in the jurisdictions that lean the other way. The strategy on each side behind all the different suits is to maximize the chances of drawing a three judge appellate panel that is likely to be more sympathetic to that side’s position.

What does the stay mean for companies subject to the rules?  At this point, likely not much.  For starters, if the consolidated challenges are heard in an Appeals Court other than the Fifth Circuit, that court may revoke or modify the stay order entered by the Fifth Circuit last week.

And even if the stay remains in place, the first disclosures are not required to be made until 2026 (and some companies will phase in later), so there isn’t a reporting obligation for almost two years. However, irrespective of the stay, companies will have to do work in preparation for compliance, so during the pendency of the challenge they will need to decide whether and when to start that work and, even before that, they will need to decide at which point in the litigation to make that decision. The election also will factor into companies’ decisions. If there is a Republican administration next year, expect additional efforts to scrap or scale back the rules.

It’s about now that we expect some legal and financial professionals of a certain age won’t be able to get a certain Stealers Wheel song out of their head.

Stepping back, as we noted in our post when the SEC’s climate rules came out, the outcome of the lawsuit may not matter that much from a workflow perspective for many larger public companies, given the climate disclosures these companies already voluntarily publish or that will be required pursuant to other requirements.

This post comes to us from Ropes & Gray LLP. It is based on the firm’s memorandum, “Court stays SEC climate rules – does this change anything for SEC filers?” dated March 18, 2024, and available here.