Chevron ruling underscores companies' need for updated regulatory strategy

On June 28, 2024, the Supreme Court voted to overturn “Chevron deference,” a longstanding precedent that compelled federal courts to defer to administrative agencies’ interpretations of statutes that Congress directed the agency to implement and expand on. The ruling, Loper Bright Enterprises v. Raimondo, held that courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts can’t defer to an agency's interpretation of law simply because the statute is ambiguous.

Our view is that Loper Bright Enterprises marks an important change in administrative law, but that it will likely take time and further litigation to understand the full, practical implications. Here are our initial observations.

Chevron is explicitly overruled.
The decision is prospective, only. The Court makes clear that prior decisions relying on Chevron are still good law and “are still subject to statutory stare decisis despite our change in interpretive methodology.”
Courts can still rely on agency interpretations for guidance. An agency’s interpretation of a regulation constitutes “a body of experience and informed judgment to which courts and litigants may properly resort for guidance” and, when an issue is technical, the agency’s opinion may “have particular power to persuade.”

Congress can require courts to defer to agency interpretations. Congress can include in statutes a requirement that courts defer to agency interpretations, in the manner of Chevron.
Agency “policymaking” and “fact finding” actions remain subject to deferential standards under the Administrative Procedures Act. It’s not clear from the opinion exactly how courts will draw the lines between interpretation, policymaking and fact finding. Those distinctions will be important going forward and likely subject to further litigation.

Potential impact and takeaways

In many industries, concerns with rulemaking have been traditionally addressed through the notice-and-comment process, and lawsuits against regulators have been rare. That’s changing.

In the financial services sector alone, there have been over 15 suits filed against regulators in the past 18 months regarding new requirements in areas including fair lending and private fund disclosures. In the telecom space, court challenges to Federal Communications Commission (FCC) actions include recent cases opposing the agency’s digital discrimination rule, data collection requirements and connectivity funding.

As for the healthcare industry, the Centers for Medicare & Medicaid Services (CMS) publish, on average, a new Notice of Proposed Rulemaking every two weeks, which opens the door for a plethora of challenges. And while the Food and Drug Administration (FDA) tends to promulgate policy via nonbinding guidance rather than through rulemaking, the agency has seen hundreds of cases citing Chevron in reference to the agency.

The Supreme Court’s decision will likely fuel this trend as companies and industry groups challenge agency interpretations of broad or vague language. Examples of such language include:

“Unsafe and unsound.” Banking regulators have broad authority to regulate and supervise firms based on safety and soundness standards. Industry groups have commented that actions taken under this authority should “identify specific, demonstrably unsafe and unsound practices” and not contain “generic and conclusory assertions about ‘safety and soundness.’” We expect that firms will be emboldened to challenge banking regulators’ use of this term in issuing regulations and enforcement actions.
“Unfair, deceptive or abusive acts or practices” (UDAAP). Industry groups have already challenged the Consumer Financial Protection Bureau’s (CFPB’s) view that discriminatory conduct falls within its UDAAP enforcement powers. We expect the Supreme Court’s decision to expand legal scrutiny of actions taken by the CFPB under this authority.

“Adequate and well-controlled.” To gain FDA approval and market entrance, a medical product must be determined by the agency to have “substantial” evidence consisting of clinical trials that are “adequate and well controlled.” The agency’s current interpretation of this ambiguous statutory term is promulgated via rulemaking, which introduces vulnerability to litigation and uncertainty.

“Reasonable and necessary.” CMS is provided broad authority for Medicare and Medicaid coverage determinations through the Social Security Act. Decisions regarding which products or services will be covered are often challenged in court and may see increased scrutiny given the Supreme Court’s decision.

With increasing litigation over regulations, Congress may need to clarify the scope of an agency’s authority. That dependency could result in a backlog of unresolved questions, as the current, narrowly divided Congress has struggled to pass significant legislation. We don’t anticipate that clarifying agency powers will be an exception. Notably, in “major questions doctrine” cases such as West Virginia v. EPA, Congress has shown little urgency or willingness to respond.

Persistent uncertainty may, in turn, prompt the states to fill the policy void, as we’ve seen in areas such as privacy, online content moderation and artificial intelligence — a dynamic that can result in regulatory variation from one state to the next.

The outcome of the November 2024 elections could determine how aggressively the next Congress acts to clarify or remove existing regulatory authority that’s subject to conflicting interpretations.

We don’t expect a significant chilling effect on agency activities or rulemaking agendas. Agencies will, however, likely be more careful in tying their actions more explicitly to statutory authorization. Similarly, Congress will likely delineate more precisely the extent of agency powers in new legislation and potentially in amendments to existing laws.

The Supreme Court’s decision follows a series of rulings over recent years that have limited agency powers.

Courts have expanded the use of the “major questions doctrine,” which states that outside “clear Congressional authorization” agencies don’t have the authority to determine questions of substantial “economic or political magnitude.” This doctrine was notably applied in West Virginia v. EPA to find that the EPA lacks authority to consider shifting from higher-emissions resources (e.g., coal) to lower-emissions resources (e.g., renewable energy) when determining emissions reduction policies.
In SEC v. Jarkesy, decided on June 27, 2024, the Supreme Court held that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial. The SEC and other agencies therefore can’t bring enforcement cases for money damages before an administrative law judge (ALJ), a common and more cost-effective alternative to a jury trial.
In Kisor v. Wilkie, the Supreme Court limited “Auer deference,” a precedent similar to Chevron deference that compels courts to defer to agency interpretations of their own regulations. In Kisor, the Court imposed a series of checks on Auer deference, including that the interpretation must implicate the agency’s area of expertise and not create “unfair surprise” by, for example, conflicting with longstanding prior interpretations.
In Selia Law v. CFPB, the Supreme Court held that the Consumer Financial Protection Bureau’s structure — a single director that could only be removed “for cause” — unconstitutionally violated separation of powers. The Court determined that the CFPB director must be removable at the President’s will.

What should companies do?

For most organizations, there are no significant, immediate impacts from the decision, but the likelihood of increased litigation and courts scaling back agency authority presents an uncertain future of regulatory change and jurisdictional inconsistency. In response, companies should consider taking several proactive steps.

1. Assess the key regulations that impact your organization
2. Develop a policy response strategy
3. Maintain strong compliance practices
4. Prepare for regulatory change

1. Assess the key regulations that impact your organization

Inventory the regulations that are important to your business. Ask your legal team to identify which ones have not been previously reviewed or approved under Chevron and might now be more subject to court challenge. Then decide which of those regulations are harmful (or helpful) to your organization’s interests and prioritize them for potential action.

2. Develop a policy response strategy

Decide whether and how your organization should influence public policy, either through industry association engagement, direct lobbying of regulators and policymakers, or litigation. Consider your organization’s appetite for aggressive action, weighing the benefits of taking a leading role (e.g., pushing your agenda, framing the debate) against the costs (friction with regulators, reputational risk). Action may include defending regulations that help your organization or that are preferable to the uncertainty of a policy change. Consider how different 2024 election scenarios might alter your approach and plan accordingly.

3. Maintain strong compliance practices

While a number of regulations and other agency actions may seem ripe for judicial scrutiny, it will take time for litigation to arise and make its way through the courts. Further, the outcome of any potential litigation remains uncertain as evidenced by the Supreme Court, which has been receptive to scaling back agency authority, recently rejecting a challenge to the CFPB’s credit card late fee rule. In the meantime, continue to maintain robust compliance with all agency rules and guidance.

4. Prepare for regulatory change

Confirm that your regulatory change management processes are operating effectively to monitor regulatory developments, assess their impact on your organization and communicate those implications to the relevant stakeholders. Update your enterprise risk assessment and resulting risk inventory to reflect how this impact — and regulatory uncertainty more broadly — may affect your business strategies.

Considerations for sectors and executives

As a highly regulated industry, healthcare oversight relied heavily on the legal principle of Chevron deference as it underpinned the current framework of agency rulemaking from CMS to FDA and Federal Trade Commission (FTC). It is embedded into regulatory topics as wide ranging as product development and approval to reimbursement, coverage and administration of Medicare and Medicaid. Beyond this, Chevron deference also played a key role in current oversight of fraud and abuse laws such as Stark, Anti-kickback and False Claims Act.

Within these broad regulatory frameworks, the healthcare sector has its share of contested policies. While past court decisions that relied on Chevron will not be called into question, this does not limit the ability for new cases to be brought forth on topics such as the annual Medicare payment rules, FDA exclusivity policies, IRA price negotiations, quality ratings and the 340B program, among others. Litigants may also seek to bring forth cases regarding nondiscrimination rules, coverage for preventative services or FDA’s recent rulemaking regarding lab developed tests.

Health industry leaders should be prepared for new litigation of these contested policies with particular attention on decisions that do not implicate agency expertise and are not scientifically focused. These will be policies that focus more on legal or factual questions of interpreting statute into rulemaking.

With agencies like the FCC and FTC facing diminished interpretive power, the technology, media and telecommunications (TMT) sector should prepare for a less predictable regulatory environment. The syllabus released by the Reporter of Decisions even references National Cable & Telecommunications Assn. v. Brand X, saying the case set a precedent for court deferral to federal agency interpretation of ambiguous statutes that the overturning of Chevron aims to correct. More frequent court challenges to agency interpretations could also increase complexity in strategic planning and operational decisions. These developments come at a time when regulatory bodies are already tightening rules around data privacy, and states such as California, Connecticut, New York and Florida are drafting their own AI regulations.

One prominent regulation under scrutiny is the California Privacy Protection Agency’s (CPPA) proposed rules on automated decision-making technology (ADMT) under the California Consumer Privacy Act (CCPA). These rules mandate that consumers receive notice and the right to opt out of automated decision-making processes, which could significantly impact how TMT companies deploy AI for personalization and other automated services.

Regulatory uncertainty could stifle the sector’s signature ability to rapidly adapt to emerging technologies and increasingly disruptive market conditions. For startups and smaller firms, navigating this uncertainty could pose barriers to entry and reduce competition. And the potential for more litigation could drive up costs across the sector, diverting resources from innovation and growth.

TMT companies should take an even more proactive approach to compliance to manage potential risks and expenses. This environment demands vigilance and strategic agility to sustain growth and continue to innovate.

Banking regulators have recently faced a major upswing in litigation challenging rulemakings, guidance and enforcement practices. With Chevron now struck down, this trend is set to continue and intensify as judges will apply additional scrutiny to agencies’ interpretations of ambiguous language. Banking regulators rely heavily on their abilities to interpret such language.

In addition to the “unsafe and unsound” and UDAAP examples given above, agencies evaluate the impact to the “convenience and needs of the community” when approving merger applications, and this evaluation may be called into question going forward. The Financial Stability Oversight Council (FSOC) determines which institutions or activities pose a “threat to financial stability” when deciding whether to designate them as “systemically important,” which would subject them to increased prudential standards and supervision.

Further, the Office of the Comptroller of the Currency (OCC) has the authority to charter institutions that are engaged in “the business of banking,” and the agency’s ability to define this term could determine whether it can grant charters to fintechs or other nontraditional institutions.

For general counsel, consider taking the following steps.

Inventory the US regulations that have a material impact on the business.
Expect a flurry of litigation driven by issue-oriented groups, trade organizations or others. Monitor that litigation for anything that relates to the regulations in your inventory.
Consider whether a regulation is sufficiently harmful or helpful to your business to get involved in the lawsuit. Try to be early on this. Being an early plaintiff can give you the ability to frame the issues that will be placed before the court and to be the lead entity in making strategic decisions about the case. At the least, it’s likely to put you in the room where important matters are being discussed.
Remember there are regulations that are valuable to your business/industry. Even where you may not like existing regulations, the status quo may be better than a long period of instability and an unpredictable replacement
Understand your strategic position within your industry and among potential competitors. Current regulation may insulate you from competition from other sectors with very large players. And uncertainty and revision will tend to favor large, well-financed, powerful entities. Consider how that reality affects your strategic position.

For risk and compliance leaders, consider taking the following actions.

Work closely with your legal and government relations counterparts to understand the US regulations that may be challenged across your sector and how others (competitors, suppliers, customers, etc.) are responding.
Confirm that your regulatory change management processes are in place and operating effectively to consistently monitor emerging regulatory matters, assess their impact on the business and communicate implications to the company as needed.
Support your legal and government relations teams in understanding the potential implications for the company’s operations if regulatory changes were to result. Would strategic initiatives, business processes and controls and compliance programs require significant change? Could such changes, significant litigation or regulatory instability create issues for innovation or growth for the company?
Update your enterprise risk assessment and resulting risk inventory to consider the impact US legal and regulatory uncertainty may have on business strategies and interdependencies with other enterprise risks.
With the support of legal and government relations and as part of company regulatory change management processes, continue to monitor the regulatory environment and periodically assess the impact to the company and its risk profile.

We don’t believe that the Supreme Court’s decision should alter how companies are preparing to respond to the SEC’s climate disclosure rules, which are currently being challenged in the courts. As discussed above, the Court said that the highly deferential standards of the Administrative Procedures Act (APA) still apply to agency “policymaking” and “fact finding,” and it stressed a court can give great weight to agency interpretations when the agency is acting within its area of expertise.

For all these reasons, our view is that the potential effect of the opinion on the challenge to the SEC climate disclosure rules is highly uncertain. We don’t believe that Loper provides any reason to slow or interrupt a company’s current efforts and plans for complying with the SEC climate rule.

For companies that are also subject to obligations under the EU’s Corporate Sustainability Reporting Directive and other global sustainability related regulations, the need to respond to those requirements is not affected by this decision.

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