Q3 | Torys QuarterlySummer 2024

Scaling it back: U.S. Supreme Court continues to curtail the U.S. government’s ability to regulate and enforce

Years after former President Trump’s campaign promise to limit the power of the U.S. federal government’s bureaucracy, the U.S. Supreme Court, a third of whom were appointed by Trump, is now accomplishing the task. The Court’s recent decisions to circumscribe the authority of federal agencies ironically shift power from the President to the nation’s unelected life-appointed judges. This year’s election is likely to determine whether the impact of these decisions on the U.S. government’s ability to regulate will be felt far beyond the present.

Agency enforcement authority dealt a significant blow: SEC v. Jarkesy, 603 U.S. ___ (2024) (No. 22-859)

In a 6-3 decision along ideological lines, the Supreme Court held in SEC v. Jarkesy1 that when the Securities and Exchange Commission (SEC) seeks civil penalties against a defendant for securities fraud, the U.S. Constitution’s Seventh Amendment entitles that defendant to a jury trial in federal court, not an SEC administrative law judge.

Congress created the SEC in 1934 to enforce a series of acts aimed at combating securities fraud: The Securities Act of 1933, the Securities and Exchange Act of 1934, and the Investment Advisers Act of 1940. The SEC’s enforcement mechanism provided it the option to bring enforcement actions either in federal court or through its own administrative proceedings before administrative law judges. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which expanded the SEC’s enforcement authority by authorizing it to, among other things, seek civil monetary penalties for violations of its antifraud laws through in-house proceedings too.

Here, the SEC initiated an enforcement action seeking civil penalties against George Jarkesy, Jr. and his investment firm for violations of the SEC antifraud statutes. The SEC elected to adjudicate the matter in-house and ultimately ordered Jarkesy to pay a civil penalty of $300,000, among other things. Jarkesy sought judicial review by the U.S. Court of Appeals for the Fifth Circuit, which covers Texas, Louisiana and Mississippi. The Fifth Circuit vacated the order on grounds that the in-house adjudication violated Jarkesy’s Seventh Amendment right to a jury trial. In affirming the Fifth Circuit’s decision, the majority reasoned that because the SEC’s antifraud provisions are akin to common law fraud, and civil money penalties (which are “legal” in nature) were sought, the Seventh Amendment applies.

The dissent from the Court’s liberal wing explained that Supreme Court precedent historically upheld the SEC’s (and other U.S. agencies) in-house enforcement authority as falling within well-established exceptions to the U.S. Constitution because agency enforcement actions implicate “public rights”—i.e., statutory rights that vest with the U.S. government or, put differently, claims brought by or against the United States.

Key takeaways

The decision impacts all agencies’ authority to assess civil penalties in administrative proceedings. For agencies where Congress provided only an administrative enforcement mechanism, they now lack all enforcement power until Congress legislates anew. For agencies with dual enforcement mechanisms like the SEC, Consumer Financial Protection Bureau, and Environmental Protection Agency, they must now bring all actions in the district courts. District court proceedings tend to be more transparent, even if lengthier and more expensive for litigants.

Judicial deference to agency regulations is gone: Loper Bright Enterprises v. Raimondo, 603 U.S. ___ (2024) (No. 22-451)

In Loper Bright Enterprises v. Raimondo2, the Supreme Court granted review to decide whether its 1984 decision in Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984), should be overruled or clarified. The holding and reasoning in Chevron, later referred to as the “Chevron Doctrine”,  required courts reviewing statutes under the administration of U.S. federal agencies, and the regulations promulgated by those agencies, to defer to “permissible” or “reasonable” agency interpretations of the statute where Congress had not directly addressed the precise question at issue. In such instances where a statute is ambiguous, U.S. courts for the past 40 years have accepted federal agencies’ reasonable regulations, often developed with the assistance of industry experts, scientists, economists, and the like, even if the reviewing court did not agree with agency’s interpretation.

Here, the Court considered two consolidated cases, each of which was decided by the lower courts (the D.C. and First Circuit Courts of Appeals) by strict adherence to the Chevron framework and so resolved in the U.S. government’s favour. Upon review, in another 6-3 decision, the Supreme Court expressly overruled Chevron, and vacated and remanded the decisions to the district courts. Instead of deferring to the agencies’ interpretation of the relevant statutes, the Court reserved for itself the role of interpreting those statutes because “agencies have no special competence in resolving statutory ambiguities. The courts do”3.

In doing so, the Court relied on precedent and the framers of the Constitution for the general proposition that the judiciary’s role is the adjudication of cases and controversies and assessing statutory ambiguities. The Court further reasoned that the deference afforded to agencies after Chevron is antithetical to the Administrative Procedures Act of 1946 (APA), which distinguishes between issues of fact/policymaking and law, giving the former agency deference while the latter remains within judicial judgment (for more on the impact of the overturning of Chevron on securities regulation in the U.S., read our article “U.S. capital markets: 2024 and beyond”).

To support its departure from settled law, the Court explained it is not bound by the legal doctrine of stare decisis, which provides for judicial adherence to precedent, because Chevron’s reasoning was misguided. Specifically, Chevron failed to address the APA, was unworkable insofar as the definition of statutory “ambiguity” itself is malleable, and it had not garnered meaningful reliance because the Court tweaked its application over the years and has not applied it since 2016. The Court clarified that attention to agencies can still be given during judicial review, but courts are no longer bound to defer automatically. The Court also noted that its decision will not impact cases already decided under Chevron.

The dissent in Loper Bright condemns the majority for failing to abide by stare decisis, ignoring 40 years of precedent, and undoing the “crux of administrative governance” in favor of “a bald assertion of judicial authority”4.

Key takeaways
  • Ambiguity in agency-administered statutes is no longer presumed Congressional delegation to agencies. Rather, the Court has reclaimed for itself, and the judiciary more broadly, the authority to interpret both questions of fact and law in respect of these statutes.
  • Instead of deferring to reasonable agency interpretations of ambiguous statutes, courts are now free to fill the gaps with their own interpretations and without considering agency subject-matter expertise.
  • Congress remains free to delegate regulatory authority within constitutional limits, but any such delegation will need to be expressly made and provide an “intelligible principle”5 for the agency to follow.
  • Business leaders in certain regulated industries may applaud the Loper Bright decision as a rollback of U.S. agency regulatory authority, although it is unclear how effectively U.S. legislators will be able to manage an increased burden of implementing policy demands in specialized areas.

  1. SEC v. Jarkesy, 603 U.S. _____ (2024) (No. 22-859).
  2. Loper v. Raimondo, 603 U.S. ___ (2024) (No. 22-451).
  3. Id. at 5.
  4. Id., Dissent at 4.
  5. See Loving v. United States, 517 U.S. 748, 771 (1996).

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2024 by Torys LLP.

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