Tag: West Virginia v. EPA

Categories
Finance & Economics

How the Major Questions Doctrine Could Reshape Banking Law

In early February, several state and national banking trade associations filed suit in U.S. district court in Texas challenging the federal banking agencies’ first comprehensive updates to the regulations implementing the Community Reinvestment Act (CRA) in nearly three decades. Among other claims, the complaint argues that the CRA rule violates the U.S. Supreme Court’s newly formulated “major questions doctrine” because it addresses an issue of political or economic significance. This was not the first time that financial institutions have used the major questions doctrine to challenge a regulator’s authority. Business groups have used the doctrine to challenge the Consumer Financial Protection Bureau’s (CFPB) fair lending lending policies and the private fund industry has challenged a Securities and Exchange Commission (SEC) rule that applies to such funds.

Leaving aside the merits of the banks’ claim against the CRA – like other laws discussed below, the CRA delegates broad authority to the banking agencies – it is a noteworthy escalation by powerful banking trade associations using a novel legal theory to challenge one of the banking agencies’ core regulatory functions. Today, the CRA could be weakened, but foundational laws like safety and soundness authorities or the National Bank Act’s “bank powers clause” could be next.  In a recent article, I argue that the banking industry and other major questions doctrine proponents should be careful what they wish for when pursuing these claims, because they might not like some of the results that they get.

The Supreme Court explicitly adopted the major questions doctrine in West Virginia v. EPA, which overturned the EPA’s Clean Power Plan rule. While the role and contours of the doctrine are the subject of debate, the basic idea is that Congress must speak clearly and expressly when delegating authority to agencies regarding matters of either political or economic significance or where the issue arguably lies outside the agency’s core expertise. The major questions doctrine is of a piece with a broader effort to curtail administrative authority, including the pending Supreme Court cases CFPB v. Community Financial Services Association seeking to declare the CFPB’s structure unconstitutional and Loper Bright Enterprises v. Raimondo seeking to overturn the standard for agency deference established in Chevron v. NRDC.

While the doctrine presents obstacles for many areas of regulation, it is a particular problem for financial regulation. Congress has delegated broad powers to banking and consumer protection agencies to determine such basic issues as when financial activities are considered “unsafe and unsound” or “unfair and deceptive,” threaten “financial stability,” or are encompassed in the “business of banking.” Courts have traditionally deferred to banking regulators’ reasonable interpretations of the meaning of these terms based upon their specialized expertise – even well before Chevrondeference came into being.

There are good reasons for Congress and the courts to want expert agencies to take the lead in financial regulation. Banking is a highly technical area. National banks are instrumentalities of the government – publicly chartered entities that act as fiscal agents and intermediaries of money and credit between the central bank and the public. Fractional reserve banking is also inherently unstable, requiring close regulation and supervision to safeguard the public’s trust in the banking system and prevent banking panics. Unlike judges, agency leadership is well positioned to make difficult policy decisions because they are accountable to the political branches for their actions.

The major questions doctrine’s sweeping test conflicts with the nature of the banks and bank regulation. It’s difficult to envision a policy decision that wouldn’t be considered “politically or economically significant” for an agency dealing with multi-billion or trillion-dollar financial institutions – especially ones identified as “systemically important – or a banking sector that is “indispensable to a healthy national economy” as an essential “source of money and credit.”Coherently delineating what constitutes a financial agency’s core expertise when its supervised entities touch almost every corner of the economy poses similar challenges because banks, and by extension their supervisors, have to understand all of their customers’ businesses. Finally, the major questions doctrine casts doubt on novel or evolving interpretations and uses of statutory provisions, but the scope of bank activities is constantly evolving, requiring regulators to anticipate novel sources of financial risk. The major questions doctrine makes regulation harder by allowing courts to narrow the scope of statutes that agencies administer and by chilling agencies from acting out of fear of litigation risk.

The mismatch between the doctrine and the nature of banking and consumer protection regulation could harm the public and regulated firms alike. Hampering banking agencies’ ability to prevent or respond to crises, like the Global Financial Crisis of 2007-09 or the 2023 failures of Silicon Valley Bank (SVB) and other regional banks, would make such crises both more frequent and more severe. Indeed, the banking industry and sympathetic members of Congress are already employing the major questions doctrine to challenge post-SVB banking reforms. The doctrine would also introduce uncertainty and inconsistency in the meaning of regulations, guidance, and interpretive letters that could make engaging in the banking business more difficult. It would call into question industry-favored interpretations like the banking agencies’ expansion of banks’ powers and effectively delegate the authority to interpret the banking laws to hundreds of federal judges who lack financial expertise and often possess idiosyncratic beliefs.

To be sure, our structure of bank regulation, congressional delegation, and judicial review is not perfect. But it exists in its current form because Congress and the courts have recognized the wisdom of allowing agencies to take the lead in establishing financial policy. That is why some other regulated industries are beginning to advocate for the preservation of  some of the regulatory system.

The implications of imposing the major questions doctrine on are complicated and rife with unintended consequences. We do not yet know whether financial institutions are prepared to throw the baby of the trust, stability, and certainty provided by our banking laws out with the bathwater of specific banking regulations that they find inconvenient or overly burdensome. Likewise, courts contemplating extending the major questions doctrine to banking regulation must consider whether they really want to be responsible for potentially facilitating the next financial crisis.

This post comes to us from Graham Steele, the former Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury and a fellow at the Roosevelt Institute. It is based on his recent article, “Major Questions’ Quiet Crisis,” available here.

Categories
Securities Regulation

Why the SEC’s SPAC Solution Makes Sense

On March 30, 2022, the SEC proposed much-anticipated regulations governing Special Purpose Acquisition Companies (“SPACs”), which provide an alternative route for a company to be traded on a national exchange without undertaking the cumbersome process of an initial public offering (“IPO”). The proposal would in many ways make creating SPACs similar to launching IPOs. The over-300-page proposal includes regulations such as expanding disclosure requirements and clarifying the applicability of a safe harbor for forward-looking projections.

There is one issue in the proposal, however, that stands out – underwriter or “matchmaker” liability. The proposed Securities Act Rule 140a (“Rule 140a”) imposes underwriter liability in the de-SPAC stage, , which has prompted debate over the commission’s authority to impose such liability. In a new article, we weigh in on that debate and conclude that the SEC does, in fact, have the necessary authority.

Under current SPAC rules, underwriters involved in the initial SPAC IPO have avoided liability in the de-SPAC stage. This means that underwriters can take a SPAC public and then bow out of the remainder of the SPAC process, thereby avoiding any liability exposure to the merger and de-SPAC process. Practically, this means that underwriters can do minimal due diligence on the merger target. Rule 140a, changes that.

Rule 140a attaches liability to the initial SPAC underwriters for the merger stage, meaning that banks that help SPACs find initial shareholders must facilitate the transition of the SPAC target going public via the merger. The SEC’s hope is that the proposed rule “should better motivate SPAC underwriters to exercise the care necessary to ensure the accuracy of the disclosure in these transactions by affirming that they are subject to Section 11 liability for that information.” The proposed rule will likely dissuade underwriters that assist a SPAC to go public from ignoring the rest of the process by reinforcing “that the liability protections in de-SPAC transactions involving registered offerings have the same effect as those in underwritten initial public offerings.”

In our article, we argue that the commission’s proposal is likely to withstand scrutiny under the Supreme Court’s recent decision in West Virginia v. EPA because the SEC has congressional authority under the Securities Act of 1933 and the Securities Exchange Act of 1934 to protect investors, facilitate capital formation, and maintain fair and orderly markets; regulation of market participants, including SPACs, falls squarely within that congressional mandate.

The majority opinion in that case, written by Chief Justice Roberts and addressing  EPA  regulations of carbon-dioxide emissions, holds essentially that agencies can regulate their respective sectors pursuant to  clear congressional authorization. The holding has direct application to a variety of agencies and can be used to determine the SEC’s authority to promulgate the proposed SPAC rules, specifically Securities Act Rule 140a.

We argue that the proposed rules, if adopted, will have important practical implications for companies, banks, law firms, and other participants in the securities industry. In providing for greater liability of SPAC sponsors and underwriters, the rules strengthen investor protection, which should make investors more confident when putting their money into SPACs.

The proposed regulations are also an important step toward reining in the “Wild West” mentality surrounding SPACs of late. While some critics may say the regulation will kill the appeal of SPACs as shortcuts to going public, it is possible that, to the contrary, the additional protections will invigorate the SPAC market. At the end of the day, regulators like the SEC are responsible for striking a balance between safeguarding retail investors and allowing for innovative start-up companies to enter the public market. The SEC’s proposed rule on SPACs strikes that balance.

This post comes to us from Professor Karen E. Woody at Washington and Lee University Law School and Lidia Kurganova, an associate at Weil, Gotshal & Manges LLP. It is based on their recent article, “The SEC’s SPAC Solution,” available here.

Categories
Litigation

The Two-Front War on the Administrative State: How Far Will the Supreme Court Go?

The hostility of at least a plurality of the Supreme Court to the Administrative State has become increasingly evident. This faction has been pursuing a two-front war: First, it has significantly curbed (or seems about to curb) the enforcement powers of administrative agencies. Initially, it did this by finding that administrative law judges (“ALJs”) must be appointed by someone under presidential control[1]; more recently, it granted certiorari on the issue of whether ALJs must also be subject to a corresponding presidential removal power.[2] Second, it seems intent on overruling a longstanding “implied preclusion” doctrine under which defendants in an administrative proceeding cannot challenge the constitutionality of (or other defects in) the agency’s action in federal court, but instead must wait until the issue is resolved on the merits before bringing such a challenge.[3]

Overshadowing even these developments on this first front is the possibility that administrative enforcement actions for civil damages, although dating back over a century, are unconstitutional because they violate the accused’s right to a jury trial. Eventually, the Fifth Circuit’s decision this year in Jarkesy v. SEC[4] seems destined to reach the Supreme Court, at which point the Court will also have to consider not only Jarkesy’s requirement of a jury trial, but also its second holding: that the SEC’s authority to bring enforcement actions, either in federal court or administratively, is an unconstitutional delegation of legislative power, because the Dodd-Frank Act gave the SEC no guidance on when to bring administrative versus judicial actions. Viewing that decision as legislative in character, the Fifth Circuit found that the grant of this authority violated Article I of the Constitution, which mandates that “all legislative powers” are vested in Congress, not in administrative agencies.[5] Obviously, if the Court were to accept either claim, administrative agencies would lose much of their enforcement powers, surviving as largely neutered bodies. Yes, the agency could still sue in federal court, but the higher costs of litigation in court and on the road plus the hostility of forums in “red” jurisdictions imply that fewer actions would be brought or won.

Jarkesy’s focus on Article I underlines the connection between the first and the second fronts in this war. The second front is doctrinal, not procedural: When will a legislative delegation of authority to an agency be respected? This term, the Court has limited not only agencies and the Executive branch, but also Congress – thereby allocating the real authority to decide to itself. Later, I will suggest that, next term, the Court may go even further and use the dormant Commerce Clause to limit the authority of the states where state legislation has some extraterritorial impact.[6]

First, however, a very brief tour of constitutional history is needed. When a like-minded faction of the Supreme Court wished to restrict FDR’s New Deal, that faction developed a counter-principle that broad delegations of legislative power were invalid. This attack culminated in the famous “Sick Chicken” case – A.L.A. Schechter Poultry Corp v. United States.[7] The Court, however, quickly backed down from its anti-delegation rule in Schechter, possibly because of FDR’s court-packing plan. Although the Schechter decision was seldom relied upon, it has lived on in the attic of antique constitutional rulings, experiencing only rare citations.[8] Following the New Deal, the pendulum swung in the opposite direction for the next half century, with courts ceding power to agencies. In this heyday of the Administrative State, the Court’s famous Chevron decision held that ambiguities in a statute governing an administrative agency should generally be interpreted, and any gaps filled, not by courts, but by the agency itself.[9]

As the Supreme Court has become more conservative over the past several decades, however, it has backed away from Chevron as well (again without formally overruling it). Although many have expected that Chevron would be overturned by now, and others have predicted the return of an anti-delegation rule, neither has happened – so far anyway. Instead, the major news of recent years has been the emergence of a new theory by which to curb the Administrative State: the “Major Questions” doctrine. As it originally emerged, the doctrine appeared to be only a rule of statutory construction that carved out an exception from the Chevron doctrine.[10] In Justice Scalia’s colorful words, Congress explains its major policy choices and “does not … hide elephants in mouseholes.”[11] So stated, this approach simply announced a rule of statutory construction that did not seem particularly frightening.

But this term, the doctrine has gone through a metamorphosis to resemble a disguised and slightly diluted substitute for Schechter’s anti-delegation rule. Two examples within the last year, both striking down agency actions, stand out: In Alabama Ass’n of Realtors v. United States HHS,[12] the Court overturned an eviction moratorium issued by the Centers for Disease Control and Prevention (“CDC”), and in Nat’l Fed’n of Ind. Bus. v. OSHA,[13] it invalidated a vaccine mandate-or-test order from OSHA and the Secretary of Labor applicable to large employers. In so doing, the Court went well beyond Chevron and simple gap-filling to claim broad discretionary power to reject delegations of authority to administrative agencies. Effectively, the Court was clawing back power. Previously, the Court had only used the Major Questions doctrine so that it did not need to defer to agency interpretations of ambiguous statutory provisions in major cases, but now it was proclaiming that courts (and ultimately it) held the discretionary power to determine when delegations of authority to administrative agencies were valid. Put simply, under the euphemism of “major questions,” it was reasserting power last truly claimed in Schechter, taking it back from both Congress and administrative agencies. Arguably, this was anti-democratic, and certainly it seemed standardless. No longer a modest exception to Chevron, the doctrine was becoming a source of authority by which the Court could tell the other two branches that important delegations of power to administrative agencies were up to it to decide.

West Virginia v. EPA

All this set the stage for West Virginia v. EPA.[14] Although journalists (with their usual tunnel vision) view this case as simply challenging the EPA’s authority to regulate fossil-fueled power plants, the actual facts are more complex and involve the replacement of an Obama proposal with a weaker rule adopted by the Trump Administration. The D.C. Circuit vacated this weaker rule in 2021, which the Biden Administration declined to defend. The Biden Administration indicated it was working on a revised, tougher rule, but the Supreme Court surprised many by granting certiorari to the D.C. Circuit’s decision.[15] But what exactly was the issue before the Court? The D.C. Circuit refused to grant Chevrondeference to the EPA rule adopted by the Trump Administration and rejected the EPA’s argument that the Major Questions doctrine required it to adopt a narrower reading of the statute.[16] But Chevron was not an issue that the parties discussed on appeal. Rather, West Virginia, the appellant, framed the question before the court as centered on the Major Questions doctrine. The issue, it said, was whether:

“Congress constitutionally authorize[d] the Environmental Protection Agency to issue significant rulings – including those capable of reshaping the nation’s electricity grids and unilaterally decarbonizing virtually any sector of the economy – without any limits on what the agency can require so long as it considers cost, nonair impacts, and energy requirements.”[17]

This is language asking the Court to interpret the Major Questions doctrine very broadly and in a manner that would limit Congress’ power as well as that of an agency.

The Court’s majority took this offered language like a bull by the horns and found the Major Questions doctrine applicable, rejecting the government’s claim that the case was not justiciable. Concluding that the EPA had claimed to discover “an unheralded power” to effect a “nationwide transition away from the use of coal to generate electricity,” it ruled in a 6-3 decision, authored by the Chief Justice, that:

“[I]t is not plausible that Congress gave the EPA the authority to adopt on its own such a regulatory scheme in Section 111(d)” of the Clean Air Act.[18]

Chief Justice Roberts’ decision, while greatly disappointing to environmentalists, can be read as primarily a matter of statutory interpretation. But the concurring opinion of justices Gorsuch and Alito clearly rests on a foundation supplied by the Separation of Powers clause and federalism.[19] They make clear that if the Major Questions doctrine was once an “ambiguity canon,” it is no longer simply that, but instead has become in their view the major protection against intrusion by agencies into the constitutional spheres given to Congress and the states.

In dissent, Justice Kagan, writing for herself, Justice Breyer, and Justice Sotomayor, expresses shock at the decision:

“[T]he Court today prevents congressionally authorized agency action to curb power plants’ carbon dioxide emissions. The Court appoints itself – instead of Congress or the expert agency – the decision-maker on climate policy. I cannot think of many things more frightening.”[20]

The Likely Next Step: National Pork Producers Council v. Ross and the Risk of Radical Subjectivity

Frightening as the West Virginia decision may indeed seem, things could get markedly worse very soon in terms of the judicial arrogation of power. Next year, in National Pork Producers Council v. Ross,[21] the Court will consider an attempt by the pork industry and a number of states to invalidate California legislation regulating the sale of pork products within California. In 2018, California voters passed Proposition 12, which bars the sale of most pork products in California (no matter where produced) if the sows are confined in a manner inconsistent with California standards (which basically require a minimum space for the sow of 25 square feet). The pork industry sued based on the dormant Commerce Clause. Usually, such a suit alleges discrimination against out-of-state interests, but there was no such discrimination under the California plan, which applied to all producers. However, a much less used strand of the Dormant Commerce Clause prohibits a state, even when pursuing a legitimate local interest, from imposing a burden on interstate commerce that “is clearly excessive in relation to the putative local benefits”[22] The Ninth Circuit predictably dismissed this claim, recognizing that it would invite courts to determine on an ongoing basis whether the benefits of legislation in a given state justified the costs imposed on out-of-state interests.[23]

Given that certiorari has been granted, it appears that at least four justices are sympathetic to this claim (or at least want to see its implications spelled out). But the result of such a test is to make the Court (or at least the majority of its justices) the ultimate authority on when state legislation produces benefits that outweigh its out-of-state costs. If Californians want to feel that they are treating animals humanely (a very Californian attitude), what right to object should the hard-nosed, crueler citizens of Indiana, Arkansas, or Alaska (or any of the other states that filed briefs supporting the plaintiffs) have? In principle, the California legislation governs only behavior in California, and the hogs can be segregated (both in raising and distributing the pork) so that only California citizens bear the additional cost.

More importantly, any contrary ruling under Pike v. Bruce Church threatens federalism. Although federalism is a principle that the conservative majority of the Court respects and protects, it can survive only if each state has some breathing room to pursue its own policies. Justice Brandeis famously described federalism as enabling the states to become “laboratories” of democratic experimentation, meaning that states could innovate, pursuing new and different policies.[24] Yet, if the appellants in National Pork Producers Council can convince the Court that it is entitled to balance the intangible benefits to California against the tangible costs elsewhere, these “laboratories” may over time be shut down, as out-of-state interests will predictably claim they are bearing additional costs. Even if some place a low value on being humane to animals (not me, by the way), we must recognize that the Court would be stepping onto a very slippery slope. No criteria exist for making these cost/benefit comparisons, which involve highly subjective judgments. Intangible benefits (including the benefits of non-discrimination and equality) risk being subordinated to the more easily measured financial costs to out-of-state interests.

Where then are we headed? Standing alone, West Virginia v. EPA could result in a strong status quo bias. New risks would become less easy to regulate because they require new remedies that Congress would have to specifically delegate to the agency and constantly update. Interestingly, the Court’s recent doubts about vaccination mandates as a remedy seem particularly ironic, given that vaccination dates back at least to smallpox epidemics a century or more ago. The FDA is currently seeking to eliminate (or at least greatly reduce) the nicotine content in cigarettes, but the Major Questions doctrine seems likely to represent an even greater road block, as it would affect a large industry without express congressional legislation.

Now, add to this status quo bias (and the likely slower pace of remedy implementation) the inevitable subjectivity of balancing the benefits to the citizens of one state against the costs to the citizens of other states. At this point, judges are claiming powers to review the merits of legislation that they last exercised in cases such as Lochner v. New York.[25]In that event, states can expect constant litigation. Worse yet, unelected judges are permitted to make critical value judgments overturning democratic majorities in the absence of any recognized criteria or formula, and there is no appeal (other than to amend the Constitution). This is hardly an agenda that conservatives would normally want to impose, and some might describe it as judicial tyranny. Bottom Line: the fate of the Administrative State may be linked to the future of democracy.

ENDNOTES

[1] Lucia v. SEC, 138 S. Ct. 2044 (2018).

[2] See Cochran v. SEC, 20 F.4th 194 (5th Cir 2021). Technically, Cochran only requires the Court to decide the “implied preclusion” issue discussed in the next sentence of the text, but doing only this would just leave the Court with an issue that it must inevitably face.

[3] See Axon Enter., Inc. v. FTC, 2022 U.S. LEXIS 599 (Jan. 24, 2022) (granting cert). For the facts of this case, see Axon Enter., Inc. v. FTC, 986 F.3d 1173 (9th Cir 2020); see also Cochran v. SEC, supra note 2.

[4] 34 F.4th 446 (5th Cir 2022).

[5] U.S. Const. art. I, § 1.

[6] See Nat’l Pork Producing Council v. Ross, 6 F.4th 1021 (9th Cir. 2021), certiorari granted, 2022 U.S. LEXIS 1742 (March 28, 2022).

[7] A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935).

[8] See Gundy v. United States, 139 S. Ct. 2116, 2131 (2019) (Gorsuch J., dissenting) (suggesting a new test for the nondelegation doctrine).

[9] Chevron U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837 (1984).

[10] See e.g., FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 159-160 (2000).

[11] Whitman v. American Trucking Ass’ns, 531 U.S. 457, 468 (2001).

[12] 141 S. Ct. 2485 (2021).

[13] 142 S. Ct. 661 (2022).

[14] West Virginia v. EPA, 2022 U.S. LEXIS 3268 (June 30, 2022).

[15] West Virginia v. EPA, 142 S. Ct. 420 (2021).

[16] See Amer. Lung Ass’n v. EPA, 985 F.3d 914, 958-68 (D.C. Cir 2021).

[17] See Petition for Writ of Certiorari at i, West Virginia v. EPA, No. 20-1530 (April 29, 2021), 2021 WL 9439135.

[18] Majority Opinion at page 31.

[19] Concurring Opinion of Justice Gorsuch, slip opinion at page 8, note 3.

[20] Dissenting Opinion of Justice Kagan, slip opinion at page 33.

[21] 6 F.4th 1021 (9th Cir 2022), certiorari granted 2022 U.S. LEXIS 1742 (March 28, 2022).

[22] Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).

[23] Appellants argued strenuously that there was no way they could pass on the added costs of the California legislation simply to products sold in California. This seems dubious, but the Ninth Circuit accepted it because it believed that, even in that event, no cause of action was stated.

[24] See New State Ice Co. v. Liebman, 285 U.S. 262, 311 (1932). In this dissenting opinion, Justice Brandeis (joined by Justice Stone) observed that a “single courageous State may…serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

[25] 198 U.S. 45 (1905) (holding unconstitutional a New York state statute limiting bakers to a 10 hour day because it interfered with the contractual rights of individuals).

This post comes to us from John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia University Law School and Director of its Center on Corporate Governance.

Categories
Uncategorized

The Most Dangerous Branch: Is the Supreme Court Dismantling the Administrative State?

At first glance, the question posed above may sound slightly paranoid. Still, sometimes a measure of paranoia may be justified. In any event, this column is less a prediction of the future than a review of what is actually happening, particularly over the last month. Consider the following three cases:

Case 1: The press is now focusing on West Virginia v. EPA,[1] which was argued before the Supreme Court last week. West Virginia and the coal industry have appealed a lower court decision that upheld the EPA’s authority under the Clean Air Act to regulate greenhouse gasses (“GHG”). Appellants assert that, under the “major questions doctrine,” a federal agency does not have the authority to adopt regulations that significantly extend the reach of its regulatory scheme without express congressional approval. This doctrine is the new darling of the Court’s intellectual nursery, and it may nullify the Biden administration’s efforts to adopt new rules for reducing GHG emissions from power plants.[2]  For the future, it could mean that administrative agencies can only address smaller issues, unless they have express authority to tackle larger issues. What is “small” and what is “large”? That is today in the eye of the beholder.

Case 2: On January 13, 2022, in Nat’l Fed’n of Indep. Bus. v. DOL, OSHA,[3] the Court issued a preliminary ruling finding that the Secretary of Labor probably lacked statutory authority to impose a COVID-19 vaccine mandate. Why? Because OSHA’s authority is limited, the Court said, to regulatory hazards that employees face at work, while the risk of contracting COVID-19 was not a work-related danger, but the “kind of universal risk…that all face….”[4] In a concurring opinion, Justice Gorsuch, writing for himself and justices Thomas and Alito, warned that giving a federal agency broader power would turn it into “little more than a roving commission to inquire into evils and upon discovery correct them.”[5]

Case 3: On January 24, 2022, in Axon Enter., Inc. v. FTC,[6] the Court granted certiorari in a case challenging the constitutionality of the FTC’s administrative review system. Specifically, the issue here involves the long-standing doctrine of “implied preclusion” under which a defendant in an administrative proceeding may not sue in federal district court to challenge the agency’s structure or its existence, but instead can only raise these issues on appeal of the agency’s ultimate decision. This doctrine applies not just to the FTC, but to the SEC as well (which largely copied its administrative review system from its older sibling, the FTC). In Axon Enter., Inc., a divided Ninth Circuit panel upheld the implied preclusion doctrine, largely because of a triad of Supreme Court decisions that had earlier announced and affirmed the doctrine.[7] Even the notably liberal Ninth Circuit did not find the doctrine appealing on its own merits, but considered stare decisis to be an insurmountable obstacle to any reconsideration of the doctrine.

What will the Court do on appeal? It seems highly unlikely that the Court would grant certiorari just to affirm settled precedent one more time. Denying certiorari would also have had that effect. Thus, some limitation of the doctrine seems likely. What would this mean? If the implied preclusion doctrine were discarded, the impact on the SEC would be extremely adverse. Defendants sued in an administrative proceeding could rush into federal district court to raise a constitutional challenge and likely seek to stay the administrative proceeding until that challenge was finally resolved. Often, this might take years. Equally important, in a decision in December 2021 (only three months ago), an en banc Fifth Circuit in Cochran v. United States[8] reversed a lower court’s dismissal of a constitutional challenge to the SEC’s administrative law judges on the grounds that they were not sufficiently removable to withstand constitutional scrutiny. Specifically, the defendant, an accountant whom the SEC had fined and barred from practice for five years, contended that because the SEC’s ALJs enjoyed multiple layers of “for cause” removal protection, they were unconstitutionally insulated from the president’s Article II removal power. The Fifth Circuit did not resolve this removal power issue, but did reverse the district court’s dismissal of that claim. Nonetheless, the tenor of the decision shows great sympathy with the argument.

Other circuits have disagreed with the Fifth Circuit’s Cochran decision, but if Axon Enter., Inc. reverses the implied preclusion doctrine, a defendant sued in an administrative proceeding may be able to go to federal district court to raise the same or a similar claim. Predictably, these defendants will also allege that the SEC (or the FTC or a host of other federal agencies that have a similar administrative procedure) has unconstitutionally permitted the agency to play both prosecutor, judge, jury, and appeal board. While it is still premature to predict whether this much-broader theory will attract the new conservative wing on the Court, it has to terrify the SEC and other federal agencies.

Recently, the SEC has begun to rely more on federal courts to litigate enforcement proceedings and less on in-house administrative proceedings. Because in-house proceedings are far less costly for the SEC and far quicker to resolve, this reversal suggests that the SEC is concerned about these likely constitutional attacks, which seem certain to increase if Axon Enter., Inc. ends or substantially limits the implied preclusion doctrine (as I suspect it will).

On the merits, are administrative law judges systematically biased against defendants? Critics point out that the SEC wins 60 percent of the cases that it brings administratively. But is that proof of bias? Or, does it better reflect cautious prosecutorial discretion under which the SEC tends to limit itself to strong cases? Both positions are arguable. Unfortunately, the facts are more extreme in the case of the FTC, which has not lost an administrative case in the last 25 years.[9] Thus, the FTC context is particularly vulnerable, and it is the case before the Supreme Court.

The basic point of this brief column is that the Court’s newly ascendant conservative wing appears to be moving at a rapid pace to dismantle much of the Administrative State. This process began in earnest in 2018 when the Court decided Lucia v. SEC,[10] which found that ALJs appointed by the SEC staff flunked the constitutional standard that requires an appointment be made by the president or a limited number of persons subject to the president’s removal power. In December, 2021, Cochran seems to have expressed support for the flipside of this coin: Unless ALJs can be removed in a similar fashion, they will again be found in violation of the president’s Article II authority. Between now and the end of June, we will likely see decisions in both West Virginia v. EPA and Axon Enter., Inc. v. FTC, which will tell us whether the Court’s hardcore conservatives can bring a majority of the Court with them. Note, however, that just in the month of January, the Court has taken three significant steps towards the effective dismantling of the  administrative state; that is a fast pace.

Once, Alexander Bickel defended the Supreme Court as the “least dangerous branch” and stressed its tendency to use the “passive virtues” to avoid confrontations with the other branches of government. This January does not show the Court still relying on the passive virtues. Nor does the Court’s skepticism of the Administrative State stand alone. As everyone is well aware, the Court may soon reverse or curtail Roe v. Wade and could sharply constrain affirmative action. Much depends on the potentially swing-vote status of Chief Justice Roberts and justices Kavanaugh and Barrett, but whether they are truly swing votes is still unresolved.

To sum up, the president is politically challenged and vulnerable; Congress is dysfunctional; and administrative agencies may soon have very confined discretion that does not allow them to address “major questions.” As a result, the most significant issues of the day — climate change, the pandemic, and the economy — are likely to remain unresolved, and a virtually paralyzed government may persist. Yes, things may not turn out this way, but even an optimist should be apprehensive.

ENDNOTES

[1] For a discussion of the oral argument in this case, see Adam Liptak, “Justices Dispute E.P.A. Power to Curb Emissions,” New York Times, March 1, 2022 at page A-1.

[2] See King v. Burwell, 576 U.S. 473, 485-86 (2015); Util. Air Reg. Grp. v. EPA, 573 U.S. 302, 324 (2014) (If an agency’s regulatory action “brings about an enormous and transformative expansion in [the agency’s] regulatory authority,” there must be “clear Congressional authorization.”).

[3] 142 S. Ct. 661 (January 24, 2022), 2022 U.S. LEXIS 633.

[4] Id. at 665. Although it may be true that one can contact COVID-19 anywhere (thus making it a “universal risk”), it remains undeniable that the unvaccinated can infect others at work, thus increasing the danger of the workplace, which is OSHA’s concern.

[5] Id. at 669. Symptomatically, this quotation was borrowed from Schechter Poultry Corp. v. United States, 295 U.S. 495, 551 (1935), the infamous “sick chickens” case in which the conservative justices of 1935 struck down President Franklin Roosevelt’s NRA. We may be back to a similar point.

[6] 2022 U.S. LEXIS 599 (January 24, 2022). For the lower court decision, see Axon Enter., Inc. v. FTC, 986 F.3d 1173 (9th Cir. 2020).

[7] See Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1996); Free Enter. Fund v. Pub. Co. Acct. Oversight Board, 561 U.S. 477 (2010); Elgin v. Dep’t of Treasury, 567 U.S. 1 (2012).

[8] 2021 U.S. App. LEXIS 36687 (5th Cir. 2021).

[9] See Axon Enter., Inc. v. FTC, 986 F.3d 1173, at 1187 (9th Cir. 2020).

[10] 138 S. Ct. 2044 (2018).

This post come to us from John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia University Law School and Director of its Center on Corporate Governance.