SCOTUS and the Future of the Administrative State

With potentially major changes in administrative law coming from the Supreme Court in the next couple of weeks, join litigation & enforcement partners Doug Hallward-Driemeier and Jeremiah Williams for a conversation about the potential demise of the Chevron doctrine, newly invigorated major questions doctrine, and likely outcome and implications of SEC v. Jarkesy. Doug and Jeremiah bring unique insight to the topic: Doug is head of Ropes & Gray’s appellate and Supreme Court practice; he has argued 19 cases before the Supreme Court and filed more than 200 briefs there. Jeremiah is a former SEC enforcement attorney who represents clients in government investigations and other regulatory matters.

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Transcript:

Doug Hallward-Driemeier: Hello, and welcome to this Ropes & Gray podcast. I’m Doug Hallward-Driemeier, a litigation & enforcement partner in our Washington, D.C. office, and head of the firm’s appellate and Supreme Court practice. Today, I’m joined by my colleague Jeremiah Williams, a litigation & enforcement partner also in D.C., whose practice focuses on securities enforcement as well as transactional securities litigation. Hello, Jeremiah.

Jeremiah Williams: Hello, Doug. Hello, everyone.

Doug Hallward-Driemeier: Before we dive in, I suppose maybe it’s helpful to give our audience a sense of how our experience helps us illuminate today’s podcast and topic, which is the Supreme Court’s upcoming decisions about administrative law, and the so-called “administrative state.” For me, I spent 11 years at DOJ, both in the Civil Division’s appellate staff, and then in the Office of the Solicitor General representing the United States in precisely this type of litigation about the scope of deference to administrative agencies. And so, I’m happy to be able to share my thoughts about some pretty momentous decisions that we may have waiting for us this month. Jeremiah?

Jeremiah Williams: Thanks, Doug. I spent four years with the SEC, where I was involved in the entire enforcement process, was involved in the SEC’s administrative proceedings, and I’m very familiar with how the SEC does cases as a federal agency.

Doug Hallward-Driemeier: We have quite a number of pretty significant administrative law cases that are stacked up for a decision over the next few weeks by the Supreme Court. I want to be able to hit at least the high points of those, but maybe we should start with the broadest ones, in terms of their impact on how courts and administrative agencies interact, and those would be two decisions that are teed up for the Court to revisit the Chevron doctrine. I’m sure most of our audience knows it well, but just as a primer, Chevron was decided 40 years ago in 1984, and it established a well-known two-part framework for courts when they are reviewing an agency’s interpretation of a statute. The first question the courts ask is whether Congress has directly spoken to the precise question at issue. If so, that’s the end of the matter. But if Congress has not directly addressed the precise question at issue, then the statute is deemed ambiguous on that point, and the question becomes whether the agency’s interpretation of the statute is based on a permissible construction of the statute. Most Chevron fights have historically happened at step two, but, I think, more recently, we’ve seen a lot of cases decided at step one, where the Court is considering whether Congress hasn’t fairly been said to have addressed the issue itself, based on the normal canons of statutory construction.

I think in order to tee up where we are today, it’s important to bring in another case that perhaps marked the high-water mark of the Chevron doctrine, and that was the National Cable & Telecommunications Association v. Brand X Internet Services—that was decided about halfway in that 40-year period, in 2005. That was a case in which the Court applied Chevron to uphold the FCC’s classification of broadband internet service providers as exempt from common carrier requirements. And the Court did so even though in earlier litigation, the Ninth Circuit had upheld under Chevron the exact opposite construction, that internet service providers were properly treated as common carriers. Perhaps ironically, it was Justice Thomas who wrote for the majority in Brand X, and he explained that inconsistency of those positions was at most a reason for looking carefully at, and perhaps holding an interpretation to be arbitrary and capricious as an application of the Administrative Procedure Act. Otherwise, it was not a reason that the agency’s interpretation was not subject to the typical Chevron two-step analysis.

As I said, I think that in some ways, Brand X was the high-water mark of the Chevron doctrine. I also think it probably sowed the seeds of the doctrine’s ultimate demise, because it highlights that in most situations, there really is no law, unless and until the agency has said how it’s going to construe an ambiguous statute—and even then, the law is subject to being changed 180 degrees, without Congress doing anything. And so, it really encapsulates that it is the agencies that are doing this, not Congress that’s making the law. It also highlights a concern about retroactive law making, because the agency is somehow saying what the law is and was when Congress enacted it, but it also doesn’t really mean that until the agency says what it is, and the agency can change its mind. Then when it does, those decisions are supposed to be given deference, even to conduct that occurred previously. And so, it really does raise some significant concerns about retroactive lawmaking, that we typically regard as raising significant due process concerns.

Those of you who have been following administrative law and administrative litigation for a while know that over the last several years, several Justices have raised questions about Chevron’s continued vitality. In many cases, what we’ve seen is that the Justices would narrow Chevron, or even decide a case that seems to present a Chevron issue, but without even referencing Chevron. A couple years ago, the American Hospital Association (“AHA”) v. Becerra case in 2022 is a perfect example of that. At the D.C. Circuit, the case was all about Chevron. D.C. Circuit relied on Chevron to uphold HHS’ construction of a Medicare drug reimbursement rate. When it got to the Supreme Court, the briefs were largely about Chevron, and the Supreme Court reversed without even mentioning Chevron. It thought that the statute was clear, applying traditional tools of statutory interpretation. I think many commentators thought that the AHA decision reflected that Chevron was riding off into irrelevance.

That brings us to two cases that the Court is considering this year, where those two cases directly present this question of Chevron’s continued vitality. Jeremiah, maybe you could share with us a little bit what’s going on in these cases?

Jeremiah Williams: The two cases are Loper and Relentless. They involve a rule under the Magnuson-Stevens Act—that statute governs fisheries management in federal waters. The National Marine Fisheries Services promulgated this rule that required commercial fishermen to bear the costs of a monitoring program that was intended to ensure compliance with federal regulations. For these two cases—one went through the D.C. Circuit, and one went through the First Circuit—both circuits upheld the rule. The Supreme Court granted cert to address the question of whether the Court should overrule Chevron, or at least clarify that the statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency. So, Doug, what happened during oral argument?

Doug Hallward-Driemeier: Perhaps not surprisingly, there were disparate views about this. Justices Kagan, Sotomayor, and Jackson seemed to express continued support for Chevron. Notably in those comments, I think they were focusing on areas where the agency has real scientific or technical expertise, and where they would be better to fill in the interstices or resolve ambiguities than courts. But I’m not sure that this case actually is a great one for them to make that point, because I’m not sure that just as you teed up the question, Jeremiah, that it’s necessarily one that requires deference to any special scientific or technical expertise—it’s just, “What did Congress mean with this language?” And that’s what courts do. It was interesting that the Chief Justice actually raised the question whether overruling Chevron would have much impact, because he noted what I did earlier, that in so many cases recently, the Court has resolved questions that might historically have been handled under the Chevron framework without really applying it or even citing it. So, I don’t know whether you think that’s correct in terms of the Chief Justice’s observation, Jeremiah?

Jeremiah Williams: I think the Chief Justice has a point, but it does seem like it could have an impact in at least two ways. One is that lower courts have continued to apply Chevron—it certainly is still relevant in the lower courts. And the second is that with Chevron, if it goes away, or is severely limited, then I do think that regulated firms will be more emboldened to challenge agency rules, and that could have an effect where there are more active challenges. So, I think it could have an effect notwithstanding the Chief Justice’s point.

Doug Hallward-Driemeier: Sounds to me like good news for litigators in the administrative litigation space. I tend to agree with you, Jeremiah, that the impact would be bigger than the Chief Justice question suggested, because my own experience is that, I think, the lower courts have not got the message that the Supreme Court was sending—they continue to apply Chevron. The D.C. Circuit’s decision in the AHA case is a case in point—they had just decided it under a traditional Chevron framework. They don’t know when not to apply it, although the Supreme Court seems to be quite willing to set it aside. In that respect, it really does tilt the playing field decidedly in the lower courts in favor of the government. Oftentimes, I’m telling clients, “If we get to the Supreme Court, we’ve got a really strong argument. But in the lower courts, where the agency’s going to get more deference, it’s going to be more of an uphill climb.” So that, I think, would be a significant impact. To be honest, it’s not just about straight up APA-type administrative litigation. We see the effects of Chevron, or at least the mentality that it brings, in other areas, such as the False Claims Act, where whether a particular claim was “false” depends on: What does the statute mean? And the courts are often deferring to the agency. So, to be able to get a more level playing field in that litigation, I think, would be welcome for many of our clients.

All of this talk about Chevron and deference to agencies calls to mind another doctrine that the Court has been developing at the same time that Chevron is going down. There’s another doctrine that seems to be gaining an ascendancy, and that’s the major questions doctrine. Under that doctrine, the Court has said, and it’s, again, been cited more frequently in recent years, that if the agency is adopting a regulation that seems to implicate a major question that Congress has not spoken clearly to in the statute, then the courts may invoke the major questions doctrine to decide that, “That’s something we would expect Congress to have spoken to, if it had wanted to give the agency that authority.” And so, it will use it as a default rule, or rule of construction, to determine that Congress had not done so given the absence of a clear statement, and that, in a sense, puts it back to Congress—although we know that Congress is not particularly well-functioning these days—in order to decide those issues when they come back to it. But we see it used more frequently. For example, the West Virginia v. EPA case of a couple years ago may have been one of the first to really give this label to the doctrine. But then, we’ve seen it come up more frequently lately. Among the factors the Court seems to be looking at is the history and the breadth of authority that the agency is asserting, whether it seems to be coming out of the blue rather than something that has a lot of historical support for it; the significance to the nation’s economy; the separation of powers between federal and state governments of the authority that the agency is asserting; or whether the statute’s been around for a long time, but this is the first time the agency has ever purported to find this power in the statute. So, those are some of the factors that we’ve seen the Court invoke. Jeremiah, I don’t know what you think about where it’s come, and where do you think it’s going?

Jeremiah Williams: There are two lower court cases that really demonstrate what you’ve been saying about the major questions doctrine. The SEC private funds rule was considered by the Fifth Circuit—recently, the Fifth Circuit entered an opinion vacating that rule. The opinion did not mention the major questions doctrine specifically, but if you look at the way that they interpreted the statutes, they did seem to question whether Congress would have made such a fundamental shift in the way private funds are regulated, and that really is what the major questions doctrine is all about.

I think another example is the recent challenge to the FTC non-compete rule. This is another case where non-compete clauses have been around for a long time and they’re something that existed in a lot of different places. There were state regulations with non-compete clauses. But for the first time, the FTC actually has a federal rule that really severely limits the use of non-competes. And like the SEC rule, there’s an argument that this is a very large change, that really affects the economy. It’s not something that Congress would’ve done without expressly mentioning it. So, Doug, I think those two cases are good examples of what you were talking about.

Doug Hallward-Driemeier: It seems to me, and the cases that you’re referencing, I think, exemplify this, that where Chevron was all about courts deferring to agencies, and agencies in the ascendancy, the major questions doctrine is really quite the opposite. It’s about courts being skeptical of agencies’ assertion of authority, especially when it’s a new, broad, sweeping exercise of authority, maybe because the agency is frustrated that Congress is not enacting new legislation. You mentioned a couple of cases that are pending in the Fifth Circuit, which we’re all watching very carefully. There are some cases that are up before the Court this year, in which the major questions doctrine has been invoked, even outside of maybe where we expect to see it, one of which was the Purdue Pharma bankruptcy case, where the United States solicitor general who has brought this case to the Supreme Court is arguing that bankruptcy courts do not have the authority to grant third-party releases under a catchall provision of the bankruptcy code. It was interesting that the Chief Justice put the question to the deputy solicitor general at oral argument, why the United States had not cited the major questions doctrine, since really their argument in some ways that this is a pretty significant authority, that we would expect Congress to have granted more explicitly, falls neatly under that doctrine. It perhaps wasn’t that surprising that the deputy solicitor general demurred, because of course the doctrine is usually used against the federal government. The deputy solicitor general said that he thought regular principles of statutory construction were sufficient, without invoking the doctrine in this case.

All of this is at a high level of generality about how courts and agencies are interacting, but there are also some specific issues that are coming up with respect to specific agencies, but that might well have broader implications. I know that one of the leading cases is one that’s right in your sweet spot, Jeremiah, and that’s the Jarkesy case involving questions about the SEC’s authority. So, why don’t you tell us a little bit about what’s going on there?

Jeremiah Williams: Jarkesy had established two small hedge funds, and the SEC charged him with fraud—specifically, the SEC alleged that he made misrepresentations to investors. The SEC also said that he overvalued the funds’ assets to increase the amount of fees that he would earn. The SEC elected to bring the case against him in an administrative proceeding, so this is the SEC’s in-house adjudicatory function. Doug, maybe you can just speak a little bit about the difference between in-house agency administrative proceedings versus federal court proceedings?

Doug Hallward-Driemeier: Maybe I’ll just say the difference between night and day. Article III judges are special precisely because they’re independent, they have life tenure, Congress does not control their salaries—which are guaranteed by the Constitution—and they’re only reviewed by other judges who have similar independence. None of that applies to the agencies. Also, in the vast majority of cases, especially where money is at issue, the courts sit with a jury of citizens to review the issues. Agency proceedings go forward without a jury. The ALJs are appointed by their supervisors, who also control their salaries and reappointment or continuation in office, and can feel free to reverse what the ALJs do. So, all of that in addition to different kinds of rules of evidence that apply, the admissibility of material—they really are starkly different proceedings. I think for many regulated parties, they think that going before an ALJ that is subject to the review of a commission is a little bit like being put into a system where the other side is the judge, jury, and executioner, and so, they have not surprisingly tried to challenge that. That’s certainly what we see in the Jarkesy case, and the Fifth Circuit seemed to agree.

Jeremiah Williams: Yes. And so, the Fifth Circuit found that the SEC’s administrative proceedings were unconstitutional on three separate bases. First, they found that Jarkesy was entitled to a jury trial under the Seventh Amendment. They found that the administrative process at the SEC violated the nondelegation doctrine—this is a doctrine based upon Article I of the Constitution, which says that Congress has the legislative power. And while Congress can delegate that power, it can’t do a delegation unless there’s a guiding intelligible principle—and here the principle is: How does the agency decide where it’s going to bring a case, whether it brings the case in administrative proceeding, or in federal court? The Fifth Circuit found that the delegation here was such that it wasn’t clear, and the SEC could do what it wanted, without any genuine principle. The third basis for the Fifth Circuit’s ruling was with removal—this deals with Article II, the “Take Care clause,” saying that it’s the executive, the president who takes care that laws are faithfully executed. As part of that, that president should exercise control over executive officers. The removal restriction for administrative judges impairs the president from exercising control. So, the Fifth Circuit is interesting—they found the administrative proceedings unconstitutional on all three of those bases, and the Supreme Court granted cert on all three. But what’s interesting about that is that if you looked at the oral argument, the Supreme Court was really almost exclusively focused on the Seventh Amendment question. And so, Doug, one question for you is: What does that mean? Is the Supreme Court obligated to address all three, because all three were in the issues presented to the Court?

Doug Hallward-Driemeier: No is the short answer there. When the Court grants on multiple questions, it really is providing itself a lot of optionality, that it could dispose of the case on any of the three, and it can decide not to address any of the questions that it has granted on, if it decides it doesn’t want to. That said, I know a number of people found the Court’s exclusive focus on the jury right at oral argument to be perhaps a signal that the other issues were not as important, or maybe they were just going to decide it, and strike down this administrative procedure on that basis, which would moot the other two questions. I think that the issue, for example, about ALJ’s appointments under Article II, that’s a question that the Court has considered in a number of other cases, so it may just signal that they don’t really have a lot of new questions to ask on that topic, whereas the Seventh Amendment issue, I think, was one that warranted more focused consideration, because they have not considered precisely this question recently.

Jeremiah Williams: That’s a good point. Looking at the oral argument, a lot of it was focused on the interpretation of Atlas Roofing—that case dealt with the Occupational Safety and Health Act (“OSHA”), which established a commission, a regulatory structure similar to the SEC. OSHA enabled administrative law judges to hear matters, and then those matters would be appealed to the Commission, who could review it in the same way the SEC can. That statute allowed for civil penalties and abatement orders, even if there were no injuries to any employees. That’s an important point, because the Supreme Court in Atlas said that this was something that was a new type of claim. The ability to be able to bring civil penalties, and deal with employers even if there’s no injury is something somewhat different than what happens at common law, and so, that’s why there wasn’t a Seventh Amendment right. The Court found this to be a newly created public right, and the Court defined a public right as cases in which the government sues in its sovereign capacity to enforce public rights created by statues within the power of Congress to enact. A lot of the oral argument turned upon this interpretation of Atlas and whether the charges against Jarkesy were common law, basically, or were public right?

One point that was made—and this is something that Justice Kagan focused on a lot—is that there are some differences between the fraud charges the SEC brings versus fraud charges that happen between private litigants. The SEC charges are broader in a certain sense, and the SEC does not have to demonstrate injury to investors or that investors relied upon a misrepresentation, which is something that private litigants do generally have to demonstrate. So, there are some differences between the SEC charges and common law, but nevertheless, the Justices seemed to be skeptical of the SEC’s argument, and it seemed that the Justices were generally sympathetic towards finding a constitutional right here. Justice Kavanaugh noted that administrative proceedings were not a neutral process, that the deck is in a certain sense stacked against the respondents. Justice Kavanaugh also made the point that it seems strange to give full constitutional protections when it’s a private litigant, but not when a person’s facing the full force of the government—that seems counterintuitive. And Justice Roberts noted how federal agencies are much more powerful in the decade since Atlas, and he suggested that may call for greater constitutional protections. So, that was the oral argument.

Let’s talk a little bit about the implications of this decision. In the SEC context, one thing to keep in mind is that the SEC does bring quite a few federal cases. The SEC is very used to bringing federal cases—they prefer to have the choice, but they certainly are familiar with federal court. Doug, are there other agencies that maybe would be more dramatically affected if they had to bring all their matters into federal court?

Doug Hallward-Driemeier: I do think that it probably varies agency to agency. I think, for example, the FTC, that seems to like very much to utilize its in-house ALJs to bring its enforcement actions in the first instance. The FTC commissioners seem to be very comfortable to reverse those ALJs when they do not go along with the Commission’s enforcement proceeding. And so, it is one of those situations: heads, the government wins, tails, the private party loses. They may well be an example of an agency that would be more impacted by a ruling that required them to bring more of those enforcement actions in Article III courts at the outset.

I do think that the observation that a couple of the Justices made that you referenced, that somehow the fact that it’s a new right that’s brought by the government should make it less protected by the jury trial seems to have it backwards, when it’s the government with all of its resources and power enforcing it against you, perhaps that’s where the importance of the jury of our peers is even more important. But it will be interesting to see how the Court decides, and how broadly they write.

Jeremiah Williams: Yes, and as you noted earlier, Doug, it’s possible while they didn’t spend much time on removal and non-delegation in oral argument, that doesn’t mean that they won’t address that, and that could definitely have far-reaching implications for other agencies as well.

Doug Hallward-Driemeier: Indeed. If they decided the case on the nondelegation doctrine, that could have enormous implications for other agencies. I think that would arguably be consistent with things like the major questions doctrine that the Court has been developing. Of course, at some level, I think everybody agrees that Congress can’t anticipate everything, and so, needs to lay out the parameters and the principles that the agency is going to apply, but then leave its application of individual circumstances to the agencies—but I think the Court feels that perhaps Congress has gone too far in the other direction.

Jeremiah Williams: Agreed. It’s going to be an interesting couple of weeks coming up.

Doug Hallward-Driemeier: It is indeed. Of course, I think all of our audience knows that these cases can be blockbusters, or they can be duds, so it remains to be seen whether these are going to be big shifts in the area of administrative law or more minor tweaks to the direction. When those decisions come down, we will be here to assess them, and we look forward to sharing our thoughts at that time. Thanks for joining, and feel free to reach out to either Jeremiah, me, or any of your other Ropes & Gray points of contact, if you have specific questions about administrative law. Thanks everyone for listening.