Supreme Court Significantly Limits Agency Regulatory Authority

The Supreme Court eliminated federal court deference to certain agency interpretations, in a decision that could significantly reduce agencies’ ability to issue broad regulations, a day after the Court also drastically cut back the SEC’s adjudication power. 

Background: The case, Loper Bright v. Raimondo, challenged the validity of Chevron deference. Chevron deference, established by the Supreme Court forty years ago in the case Chevron v Natural Resources Defense Council, requires judges to defer to agency interpretations and expertise when evaluating agency authority, including the legality of agency regulations. The doctrine essentially limited a judge’s ability to overturn agency actions unless the action at issue was “clearly and unmistakably” beyond the agency’s authority. 

The Court’s decision: In a 6-3 decision split along ideological lines, a Court majority overturned Chevron and established that judges must “exercise their independent judgment in deciding whether an agency has acted within its statutory authority...and may not defer to an agency interpretation of the law simply because a statute is ambiguous.” 

The end of agency overreach? The Court’s decision essentially gives judges free rein to invalidate agency rules and regulations should they feel the rules exceed the agency’s statutory authority. In theory, that means that existing and new rules are much more likely than before to be challenged and overturned in court, particularly given the conservative majority on the Supreme Court. 

A more limited approach to private sector regulation: The absence of Chevron deference and the corresponding increased risk of having rules overturned in court may push agencies towards more limited and narrow-scope rulemaking. Agencies will be pressed to provide clear evidence of their statutory authority to issue a rule, meaning broad, large-impact regulations such as the FTC’s non-compete ban and the SEC’s climate rule may be a thing of the past. Of course, where agencies are clearly authorized to regulate, they will continue to do so. 

Also…SEC adjudication authority limited: Meanwhile, in a separate case, SEC v. Jarkesy, the Court ruled that where financial penalties are at stake, defendants accused of SEC violations are entitled to a trial in federal court, rather than adjudication within the SEC by an administrative law judge. The SEC wins 90% of cases heard by its own administrative law judges, as opposed to less than 70% in federal court. The decision significantly curbs the SEC’s adjudicative authority, as well as any other agency that uses administrative law judges and has the authority to issue financial penalties, such as OSHA (but not, notably, the NLRB, which cannot impose fines). The Court declined to rule on whether ALJs are unconstitutional in general (as many thought they might), which would have had a much broader and bigger impact on agency authority. 

More to come: The Court’s decisions in Loper and Jarkesy dealt major blows to agency regulatory power, but are only part of the wider, growing legal war against the administrative state. Constitutional challenges launched by SpaceX and Starbucks against the NLRB could fully dismantle the agency and others – those cases are likely to make their way up to the Supreme Court sometime next year or the year after. 

What you should be thinking about: While reduced federal agency regulatory authority might be welcome news to the employer community, it raises the question of what might fill the void: will the legislative branch finally get back to passing laws (perhaps by removing the Senate filibuster)? Will employers be better off in federal court rather than before an agency? The answers may be coming sooner than you think.