(Last updated at 11:54 a.m. Monday, July 1.)
In rulings released on consecutive days, the U.S. Supreme Court overturned the long-standing federal regulatory framework established by 1984’s Chevron v. Natural Resources Defense Council and struck down as unconstitutional the SEC’s use of in-house tribunals to hear securities fraud cases. Both cases fell 6-3 on ideological lines.
Friday’s decision sets aside the so-called Chevron deference, which federal agencies have used to defend their rulemaking actions when challenged in court, often by businesses and property owners. Writing for the majority, Chief Justice John Roberts said, “Agencies have no special competence in resolving statutory ambiguities. Courts do.”
In a ruling the day before, a 6-3 majority said the SEC’s use of administrative law judges to bring enforcement actions violates the U.S. Constitution’s guarantee of a right to a jury trial.
Even before last week’s seismic decisions, the conservative-dominated Roberts court has been “hammering away at federal regulatory power,” the Wall Street Journal reported, citing opinions that tossed out Biden Administration policies on public-health measures and student loan debt, among others.
Friday’s decision has created a “jolt to the legal system,” wrote Justice Elena Kagan in a dissent, and many observers expect a degree of uncertainty to result from the court having overturned the Chevron deference. For one, regulators may be loath to impose sweeping regulations, said Alex MacDonald, a labor lawyer at Littler.
“Agencies will have to look for new ways to advance their policy positions,” MacDonald said. “They will have to regulate more modestly and litigate more often.”
Chevron has been cited in thousands of judicial opinions — 15,000, according to a Columbia Law School analysis — making it one of the most influential rulings in U.S. history, influencing nearly every part of federal law, MacDonald wrote in an article published in January, as the court was preparing to hear oral arguments in the case.
Business groups hailed Friday’s ruling overturning the Chevron deference, with U.S. Chamber of Commerce president and CEO Suzanne P. Clark calling it, “an important course correction.” And many corporate compliance and governance professionals are likely to see the ruling as positive, said Allison Kernisky, a member of Holland & Knight’s securities enforcement defense team.
“Many burdensome regulations are likely to be challenged and may be invalidated or interpreted by courts in new ways that may favor business, potentially easing the enforcement of existing regulations and calming the number of new regulations,” Kernisky said. “While the Supreme Court’s ruling will not immediately change anything, over time it could change everything, including the ability of federal agencies to perform their basic functions, such as enforcing their own regulations. The large shift that has occurred over the last several years towards the federal government mandating compliance in every arena, be it ESG, DEI or otherwise could be over or at least significantly curtailed.”
Thursday’s ruling similarly injects a degree of uncertainty, since the SEC is not the only federal agency that uses administrative law judges, though the financial regulator had already scaled back its use of in-house courts due to a 2018 Supreme Court decision that the agency’s administrative law judges (ALJs) had not been properly appointed in accordance with the constitution’s appointments clause. Since that ruling, the agency had avoided filling litigated cases in administrative proceedings, but Thursday’s ruling still represents a blow to the SEC’s enforcement tools and could have sweeping implications for other agencies that use ALJs.
In a dissent joined by Kagan and Justice Ketanji Brown Jackson, Justice Sonia Sotomayor warned of the potential for broad implications as a result of the court’s ruling in SEC v. Jarkesy.
“The constitutionality of hundreds of statutes may now be in peril, and dozens of agencies could be stripped of their power to enforce laws enacted by Congress,” Sotomayor wrote. “Rather than acknowledge the earthshattering nature of its holding, the majority has tried to disguise it.”
Indeed, many observers expect broad ramifications — and not just for the SEC.
“This is a big loss for the SEC because it forces the SEC to have trials with juries, which may be more skeptical of the more aggressive theories,” said former SEC counsel Brad Bondi, now global co-chair of the investigations and white collar defense practice at law firm Paul Hastings. “This is a landmark decision that has broad ramifications across other government agencies that use administrative proceedings.”
Thursday’s ruling involved a civil enforcement action against hedge fund manager George Jarkesy before an ALJ employed by the SEC. That judge ruled against Jarkesy and after an appeal, the SEC eventually levied $300,000 in civil penalties and ordered him to disgorge $685,000 of what the agency said were illicit gains.
