The Administrative State After Jarkesy, Loper Bright, and Corner Post – Context and Consequences

A Historic Term for Administrative Law

This month we wrote extensively on both the Loper Bright/Relentless decisions, which overturned the Chevron doctrine, and the Jarkesy decision, which dealt a significant blow to the SEC's in-house administrative law courts. A third opinion, Corner Post, Inc. v. Board of Governors of The Federal Reserve System, 603 U.S. __ (2024), continued the court's trend of encouraging challenges to agency action. In Corner Post, the court ruled that the six-year statute of limitations to challenge a regulation under the Administrative Procedure Act (APA) does not commence until the cause of action accrues, which the majority held was when the harm was suffered, rather than when the regulation became final.

The Supreme Court also signaled its willingness to consider aggressive challenges to regulatory efforts in two other cases this term. In National Rifle Association of America v. Vullo, 603 U.S. ___ (2024), the court allowed litigation filed by the NRA to go forward with respect to claims that New York Department of Financial Services Superintendent Maria Vullo had violated the First Amendment by coercing regulated entities to terminate their relationships with the NRA. In the opinion, the majority cautioned that regulators must exercise care in wielding their powers to threaten enforcement actions against regulated entities for engaging in a lawful business relationship with another entity. "The power that a government official wields … is relevant to the objective inquiry of whether a reasonable person would perceive the official's communication as coercive." Slip Op. at 12.

Additionally, in Ohio v. EPA, 603 U.S. ___ (2024), the court lowered the bar for what constitutes an "arbitrary and capricious" action by a regulator when it criticized the EPA for not more fully considering impacts on the implementation of an air pollution plan (to mitigate "downwind" ozone problems) in the event of changed circumstances (certain states dropping out of the plan). Writing for the court, Justice Gorsuch noted that for an agency action to avoid being arbitrary or capricious, it must offer "a satisfactory explanation for its action, including a rational connection between facts found and choices made.... Accordingly, an agency cannot simply ignore an important aspect of the problem." Slip Op. at 11-12. [Internal quotations omitted].

Scrutiny of agency action is at a new high. As a result, many of the advantages traditionally enjoyed by federal agencies have been limited or eliminated. And the success enjoyed by organizations funding litigation against agencies may well encourage more of the same. Moreover, because of Corner Post, federal agencies will need to defend their past rulemakings over longer periods of time, widening the aperture for challenges to regulations which may have been long considered as settled.

Altogether, the exercise of challenging federal agency regulations has gone from one of "tilting at windmills" to a serious contest between two markedly different views of the proper scope of governance. The rules of the game have changed and will likely change further still.

Context – Rebellion Against Chevron

Debates about the breadth of regulatory discretion are not new. They began in the 1930s upon the emergence of the broad population of regulatory agencies during the Roosevelt Administration. They culminated in what one author described as the product of a "fierce compromise"[1]– the APA.

However, given the way Chevron succeeded in limiting the debate over the scope of agency authority – with the government prevailing in the vast majority of cases – a reaction against it was not unexpected. Regulated parties began to push to confine the reach of regulatory agencies to the boundaries of the APA. This "long march" has yielded a body of law that will be employed vigorously going forward, marked by certain basic principles:

• Increasing consideration of the role of Congress in delegating its powers began to emerge, with the Major Questions Doctrine standing for the proposition that Congress could not intend to delegate decisions of significant economic moment to an administrative agency unless it did so in a clear and unambiguous fashion.[2]
• Closer attention to the requirements that agencies act within the limits of their authority, follow their own rules, and meet the requirements of the APA for public input and reasoned decision-making.[3]
• An insistence that for agency decision-making to be judged "reasonable" the agency must engage in a detailed and objective consideration of costs.[4] (Indeed, weaving together fidelity to the APA and separation of powers, the court went on to find that considerations of costs are at the center of whether Congress has properly delegated power to an agency under the Major Questions Doctrine.)[5]
• A more rigorous examination of the clarity and fair notice elements of due process in assessing agency action.[6]Remarkably, Justice Gorsuch argued for a revival of the Rule of Lenity (any reasonable doubt about the application of a law which administers punishment must be resolved in favor of liberty) to ensure that "fair warning should be given to the world in language that the common world will understand."[7]
• Providing litigants with the opportunity to challenge the constitutionality of an agency's structure in federal district court before exhausting their administrative remedies.[8]
• Limiting the powers of agency heads by clarifying that they are subject to presidential oversight under Article II and, where appropriate, removal.[9]

Consequences – The Impact on Agency Process

Demands for More Detailed Rulemaking

As Chief Justice Roberts noted in Loper Bright, the APA "means what it says[.]" In practical terms, this means that agencies will need to invest considerably more time, effort, and resources into building an administrative record prior to enacting new regulations. While requirements will likely vary based on the complexity and scope of the rule being proposed, we believe that to demonstrate APA compliance, administrative records will need to display many if not all the following factors:

• A description of how the intended regulation is within the powers delegated to the agency by Congress.
• A persuasive statement of the need for regulation in the marketplace sought to be regulated (the policy preferences of the agency can no longer be the sole "driver").
• A record that demonstrates the current need for regulation as described by the agency.
• A demonstration that the subject of the regulation is within the expertise of the agency.
• A record that contains a detailed economic analysis of the cost of the proposed regulation as well as its benefits, including consideration of alternatives.
• A record that is "well-reasoned" or, stated in the negative, is not "arbitrary and capricious."
• A record that is clear and transparent and provides fair notice to the regulated public of what will be required of it in the event the regulation becomes final.
• A full and fair opportunity for public participation.
• Strict compliance with companion provisions to the APA framework such as the Paperwork Reduction Act, the Regulatory Flexibility Act, and the Data Quality Act.
• More detailed reviews of agency regulatory efforts by OMB's Office of Information and Regulatory Affairs (OIRA).
• Provision of an opportunity for congressional oversight under the Congressional Review Act.

A Slower and More Expensive Pace of Regulatory Rulemaking

In addition to the detailed rulemaking record that will be required, considerations of public input also will likely slow down the rulemaking process. The cost and time associated with reviewing, analyzing, and responding to such public input will not be insubstantial. Practically speaking, this is likely to result in a slower regulatory process and requests from agency leaders for additional agency staff and resources.

More Frequent Litigation and Attendant Budgetary Strains

It is also likely that regulatory challenges will be more frequently litigated. This also increases strain on agency budgets. Federal court litigation is longer, more expensive, less certain, more public, and incompatible with staffing models for agencies with frequent staff turnover. Buoyed by the recent opinions, public interest law firms will likely be more inclined to file "impact litigation" challenging agency action at the earliest possible moment, including challenges to the structure of the agency itself. These attacks are likely to have the "knock-on" effect of shifting resources away from other matters.

Impact of Jarkesy and Loper Bright on Other Agencies – Banking

Other industries which traditionally have avoided direct regulatory challenges are becoming more willing to push back, the banking industry being one. For example, it is well known that the Bank Policy Institute is considering a challenge to the Federal Reserve's adoptions of more aggressive capital rules, known as the "Basel Endgame" rules. That has had an impact, with FRB Chair Powell announcing on July 8, 2024, a major rewrite of those rules.

Indeed, many of the flaws of internal adjudication highlighted in Jarkesy may be found in the world of bank supervision. Internal processes of the banking agencies have been criticized as confusing, opaque, and tilted in favor of the agency.[10] The broad and almost unreviewable discretion afforded to bank examiners has been referred to by some as the "Examination Crisis." The Jarkesy principles are likely to prompt a reconsideration of whether the current rules continue to pass muster.

Conclusion – Storm Clouds Are Growing for Agencies

Those at the forefront of challenges to agency action are not pausing for celebration. Practitioners should be attentive to what formerly would have been considered unthinkable – a full revival of the non-delegation doctrine. Justice Thomas signaled as much in his concurrence in Loper Bright, noting that "the Framers drafted a Constitution that divides the legislative, executive and judicial powers between three branches of Government" and that the "formulation of policy" cannot be exercised by an administrative agency without infringing upon the "legislative powers vested in Congress." Slip Op. at 2, 3-4 (Thomas, J., concurring). Indeed, some commentators have speculated that the Supreme Court's recent cases "are merely foreshocks for the real seismic shift that will resettle power away from administrative agencies and to the proper branch of government, as mandated by our constitutional order."[11]

Congress has joined the fray. On July 10, the chairs of key committees in the House of Representatives sent letters to roughly 30 agencies supervising energy, banking, healthcare, and transportation, demanding, among other things, information about agency legislative rules, interpretive rules, guidance documents, enforcement actions, and judicial decisions. This may be an effort to identify rules (regardless of age) which are vulnerable to challenge in the new world after Loper Bright and Corner Post. It certainly appears to be a flexing of congressional muscle, sending a message that agencies are to be "held accountable" and observe "proper checks on their power."

Practitioners and regulated entities will be closely watching how agencies respond to the storm clouds now swirling around their previously unassailable regulatory domains.