August 1, 2022 - The Supreme Court recently issued an opinion in West Virginia v. EPA that could have important ramifications for the regulation of financial markets. The LSTA recently hosted an informative webinar on this and another Supreme Court case on administrative law (American Hospital Association v. Becerra), focusing on what they say, what they mean and how they might impact likely challenges to some of the Securities and Exchange Commission’s recent proposed rules.  The panel included Jennie Clark, Josh Fougere and Ryan Morris of Sidley’s Supreme Court and Appellate Group and was moderated by LSTA GC Elliot Ganz.  A replay of the webinar and its associated materials are available here.

The panel opened with a brief explanation of the principles of administrative law.  First and foremost, it is settled law that a federal regulatory agency has no power to act unless Congress confers power upon it.  Under the “Chevron deference doctrine, once that power is conferred, agencies have significant discretion to decide how much power Congress has conferred.  That deference is qualified by a “common sense” instinct: Congress would not “delegate a policy decision of [sweeping] economic and political magnitude” through vague or cryptic language.

West Virginia v. EPA.  The facts of West Virginia v. EPA are complex (and described in the attached materials) but the case seemingly hinged on whether the Environmental Protection Agency had the appropriate authority under Section 111 of the Clean Air Act to impose rules on a system-wide basis.  The Court ruled that while the EPA’s action was within the range of “definitional possibilities” available under Section 111, their regulatory plan was unlawful under the application of the “major questions doctrine” which the court formalized for the first time.

The Major Questions Doctrine. 

The court noted that the “history and the breadth of the authority that the agency has asserted, and the economic and political significance of that assertion, provide a reason to hesitate before concluding that Congress meant to confer such authority.”  Further, the agency’s assertion of a “colorable textual basis” is not enough to support its exercise of power.  “Extraordinary grants of regulatory authority are rarely accomplished through modest words, vague terms, or subtle devices… We presume that Congress intends to make major policy decisions itself, not leave those decisions to agencies.”  Finally, “Something more than a merely plausible textual basis for the agency action is necessary.  The agency instead must point to clear congressional authorization for the power it claims.”

The Decision

The Clean Power Plan presents a “major questions case” for at least three reasons.  First, EPA discovered new “transformative” authority in a “long-extant statute.” Second, EPA relied on “vague language” in a provision that had been treated as an “ancillary” or “gap filler” aspect of the Clean Air Act. Third, EPA’s “discovery allowed it to adopt a regulatory program that Congress had conspicuously and repeatedly declined to enact itself.”  Interestingly, the majority opinion does not explicitly discuss the Chevron deference standard or the relationship between Chevron and “major questions.”

The Concurrence and Dissent.  Justice Gorsuch issued a concurring opinion that identified three non-exclusive factors that lower courts should use to determine whether an agency’s action involves a major question.  First, the courts should consider whether the agency action is of “great political significance.” Second, the courts should consider whether the agency seeks to regulate a “significant portion of the American economy” or impose “billions of dollars in spending” by regulated parties.  Finally, lower courts should consider whether an agency is seeking to regulate in an area traditionally subject to “the particular domain of state law.”  (Notably, none of the other Justices joined the concurrence).  Justice Kagan issued a dissenting opinion criticizing the majority’s departure from precedent which did “normal statutory interpretation” and still struck down agency actions for “operating far outside its traditional lane” or when the agency’s action “would have conflicted with, or even wreaked havoc on, Congress’s broader design.”

American Hospital Association v. Becerra.  This case arises out of a dispute regarding Medicare reimbursement rates for hospitals which are set by the Department of Health and Human Services (HHS).  The Medicare statute provides that HHS rates may vary for various kinds of hospital groups “as determined by the Secretary taking into account acquisition cost survey data…”.  If that data is not available, the statute is silent as to whether the reimbursement costs may vary for different kinds of hospital groups. In 2018 and 2019, the HHS did not conduct a survey but reduced the reimbursement rates for “Section 340B hospitals” that serve low-income or rural communities.  HHS argued that it was authorized to vary the reimbursement rate for Section 340B hospitals under option 2 of the statute which allows it to “adjust” the price “as necessary for the purpose of this paragraph”.

The Decision.  The Court unanimously rejected the HHS’s interpretation of the statute ruling that the case was straightforward.  “Because HHS did not conduct a survey….HHS acted unlawfully by reducing the reimbursement rates for 340B hospitals.”  The court held that straightforward text controlled.  Interestingly, they did not even mention Chevron deference even though the DC Circuit majority based its decision on Chevron and the briefs and oral argument discussed Chevron extensively. So, the decision raises the question whether the decision represents a silent chipping away at the Chevron doctrine.

What does this mean for the SEC’s ongoing rulemaking efforts?  The panel next turned to the SEC’s recent climate-related disclosure proposals.  As we’ve reported, on March 21, 2022, the SEC issued proposed rules that would impose extensive disclosure obligations relating to climate change on both domestic and foreign companies (and, in June, we submitted a comment letter).  SEC Commissioner Hester Peirce objected, arguing that the SEC was exceeding its statutory authority in adopting this proposal and invoking the “major questions” doctrine in explaining why.  She noted that the SEC does “not have a clear directive from Congress, and we ought not to wade blithely into decisions of such vast economic and political significance as those touched” by the climate proposal.  The panel observed that there has been an increasing focus on ESG reporting both by the SEC and investors.  Indeed, one 2020 study found that a large majority of US public companies publish sustainability reports addressing environmental and other ESG-related topics.  they noted, however, that the SEC’s proposed rule would be a sea-change by replacing the largely voluntary disclosures made outside the SEC’s reporting framework with a highly prescriptive reporting regime of mandatory disclosures. 

Coming Litigation.  The panel ended by predicting that the scope of the SEC’s authority will likely be challenged in the coming years by additional litigation and Supreme Court rulings.  In fact, the American Investment Council, a trade association representing the interests of private equity firms, has already submitted a letter to the SEC arguing that its recent private funds disclosure rule (with respect to which the LSTA filed a comment letter) represents a major question and runs afoul of the Supreme Court’s decision in West Virginia v. EPA and should be abandoned.  The LSTA will continue to closely follow these important developments.

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