Supreme Court Alters Regulatory Environment for Business: the Loper Bright (Chevron), Corner Post and Jarkesy Decisions

Regulatory Impact

The demise of the Chevron deference will likely prove to have incalculable consequences. Most businesses can adapt to a rule if they know what the rule is and if there is some certainty that the rule will remain in place – this assurance allows them to plan accordingly. In the post-Chevron environment that is no longer possible. Combine this with the implications of Corner Post, which effectively does away with the six-year statute of limitations on suing the regulators, and now the uncertainty extends indefinitely.

A number of years ago, the sugar beet industry was converting from conventional seed varieties to Roundup-ready seed. Once the Roundup-ready trait was approved, it took two years to produce the seed, so the industry participants had to decide whether to invest in the production of this seed or not. They had to decide whether to process the sugar that’s produced from that seed, because at the time a number of environmental groups were challenging the deregulation of the Roundup-ready gene. The fundamental question was: do we allow growers to plant those Roundup-ready seeds while this litigation is pending? If the litigation turned out unfavorably, the entire sugar beet crop would have to be destroyed, and the company would have no product to sell. It was a bet-the-company decision. Ultimately the case was decided, in part because it relied on Chevron deference, offering assurance that the decision can be relied on and business plans can be made accordingly. But under the post-Chevron dispensation, how does a business make a decision about producing and planting a particular type of deregulated seed if there is no dereference to any doctrine, and the decision depends largely on the choice of a court or judge rather than on an expert opinion of an agency? This kind of environment invites second-guessing and judge-shopping.

Impact on Business Operations

Agribusiness owners would be well advised to build additional margin of error in terms of risk. The time horizon to recapture investment may need to be shorter, and the possibility of the regulatory decision being reversed needs to be accounted for. In the case of the Roundup-ready seed mentioned above, our client made a decision to produce additional, conventional seed varieties just in case the deregulation was reversed midstream. To the extent possible, business owners need to build in those kinds of hedges for protection against abrupt regulatory change. And planning with a view to recapturing their investment within six years could allow them to steer clear of any potential reversals occasioned by any Corner Post litigation.

Background

The last major act of Congress impacting the regulatory environment for the telecommunications industry in the United States was the Telecommunications Act of 1996. At the time the 1996 Act was enacted, the internet was a nascent technological phenomenon. Congress stated its policy goals for the internet in the 1996 Act, one of which was to “preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation.” Following a line of FCC decisions known as the Computer Inquiries, in which the FCC made a critical regulatory distinction between “enhanced services” (data processing services) and “basic services” (the transmission component underlying enhanced services), Congress codified that distinction in the 1996 Act. The 1996 Act equated “telecommunications services” with “basic services” (the transmission component), and “information services” with “enhanced services” (the data processing component). The distinction between a “telecommunications service” and an “information service” determines how a service is regulated. Telecommunications services are subject to Title II of the Communications Act of 1934, which established the traditional common carrier regulatory framework for telecommunications services. Information services are subject to “light touch” regulation under Title I of the federal Communications Act.

One of the cases frequently cited in Loper Bright Enterprises is Brand X Internet Services v. FCC (545 U.S. 967)(2005) in which SCOTUS reversed a 9^th Circuit Court of Appeals decision that had overturned the FCC’s 2002 declaratory ruling that cable modem services provided by cable companies are information services and not telecommunications services. Brand X held the 1996 Act failed to unambiguously classify cable modem internet service as either a “telecommunications service” or an “information service” and applied Chevron deference to the FCC’s declaratory ruling, upholding the FCC’s determination that cable modem service is an information service.

As the internet economy exploded, consumer groups and Silicon Valley tech giants began to pressure the FCC to adopt new “net neutrality” regulations on internet service providers (ISPs), citing concerns that ISPs had the power to block, throttle, or otherwise discriminate with respect to access that internet end users had to online content services. The FCC first attempted to adopt rules under the premise that internet services were “information services,” but its rules were largely overturned on appeal because the FCC lacked the authority to regulate information services as common carrier services.

In 2015, the FCC (without any further intervening action from Congress) reclassified internet services as “telecommunications services,” thus subjecting them to Title II common carrier regulation and the FCC’s net neutrality regulations. The FCC itself cited Chevron as providing the “well established power . . . to interpret ambiguous provisions in statutes they administer.” Two years and a presidential administration later, the FCC, also citing Chevron, again reclassified internet services as “information services” and largely repealed the net neutrality regulations in its Restoring Internet Freedom (RIF) Order. Finally, this past April, the Biden FCC volleyed again, reclassifying internet services as telecommunications services, and reinstituting the net neutrality rules. The FCC’s 2024 net neutrality rules are on appeal to the 6^th Circuit which on August 1, 2024, stayed the effective date of the FCC’s rules, ruling that they likely violate the “major questions doctrine.” The 6^th Circuit will hear oral arguments this Fall, including arguments about Brand X and Chevron.

The Chevron doctrine thus is largely responsible for the uncertainty about the regulatory status of the internet over the past two decades.

Impact on Communications Law

Loper Bright will have a major immediate impact on the field of communications law. The FCC’s most recent net neutrality order was obviously cognizant that Loper Bright was about to be decided. It attempted to steer clear of reliance on Chevron by opining that reliance on the doctrine was not necessary and that its conclusion as to the classification of internet service is the “best reading” of the 1996 Act.

Whatever the 6^th Circuit (and likely SCOTUS) decide about the regulatory classification of internet services, the final decision will profoundly impact the internet economy for decades. While the 2024 FCC chose to forbear from applying many traditional Title II regulations to internet services in its most recent net neutrality order, classification of internet service as a Title II service poses the possibility that traditional common carrier regulations could be applied in the future.

Impact on Business Operations

While Loper Bright did not decide the ultimate question about the regulatory classification of internet service, it does mean that the question will soon be decided by a court without deference to the FCC’s interpretation of law. That in itself should be a relief to ISPs who have been living in a state of regulatory uncertainty for decades. If a court determines that internet is a telecommunications service, ISPs will need to adopt to a fundamentally different regulatory framework than the one that they have been operating within for decades. They may need to resurrect traditional common carrier regulatory compliance regimes – one to deal with federal regulations, and another to handle state regulations. If a court determines that internet services are information services, the FCC could find itself out of the internet regulation business, replaced by a patchwork quilt of varying state internet regulations. While either pathway poses its own challenges, Loper Bright certainly presents a fork in the road, which seems preferable to the traffic circle we’ve been trapped in for the last 20 years.

Impact on State/Local Regulations

In the DC Circuit’s decision in Mozilla Corp v. FCC, upholding the RIF Order, the court held that the FCC did not have the authority to preempt state regulation of internet services if classified as “information services.” Seizing on the opening created for states in Mozilla, many states, including Minnesota, have filled the regulatory void and enacted state-specific net neutrality laws. In the FCC’s 2024 net neutrality order, the FCC concluded that, classified as telecommunications services, the FCC has the authority to preempt state regulations. The FCC chose not proactively to preempt states from the field of internet regulation, but rather stated that it would consider state preemption challenges on a case-by-case basis applying conflict preemption principles. Thus, under either classification, we will likely see more internet regulation from states.

Chevron has been applied somewhat inconsistently over the past 40 years within benefits law. Some courts use it as a simple method to justify decisions, while other courts simply claim that the deference was not warranted (using one of the many exceptions: lack of authority, major questions doctrine, lack of ambiguity, or lack of a reasonable interpretation). Nevertheless, the doctrine has been frequently used in Tax, Labor, Securities, and Health law cases, all of which have had an impact within the employee benefits specialty.

Regulatory Impact

There will definitely be an impact, but the extent to which it plays out in the short term is very uncertain. For instance, environmental, social, and governance (ESG) regulations issued by the Department of Labor survived a legal challenge last October (State of Utah v. Walsh), primarily due to a use of the Chevron deference doctrine in the District Court’s decision. The Fifth Circuit has already sent this case back to the District Court for reconsideration given the Loper Bright decision. Without a doubt, more politically controversial regulatory actions (such as Fiduciary Rule expansion) will find more judicial scrutiny.

That being said, all regulations on the books are not going to suddenly disappear. With so many benefits statutes that fail to readily adapt to real world situations, the regulatory process will still be vitally important for filling in the interpretive holes within legislation. A bigger issue might be whether the federal government will be as willing to issue regulations, particularly in cases where it hasn’t been specifically delegated interpretive authority. We might see more sub-regulatory actions (such as Field Assistance Bulletins, FAQs, Revenue Rulings, etc.) that fill a larger role in laying out agency interpretive positions.

From an ERISA Litigation front, Loper and Corner Post expose certain regulatory positions to additional judicial scrutiny. However, it does not mean that courts will simply abandon deference if the government can provide a compelling explanation for the choices made in regulations. Corner Post is possibly the more destabilizing decision because no regulation is ever truly safe from challenge, even if it has been uncontroversial in the past. A new company can always wedge the door back open.

Impact on Business Operations

In the short term, very little will happen in the non-litigation front. Except for the fact that the occasional regulation might be challenged and withdrawn, the decisions will likely lead to more ambiguity, but it is always useful to understand the agency’s interpretive position. Ultimately, if the goal is to maintain compliance and avoid conflict, most plan sponsors will not take the most aggressive position against an agency interpretation. Employers generally want to navigate the maze of benefits law rather than fighting unnecessary battles.

Impact on State/Local Regulations

As a general rule, ERISA preempts state laws that regulate the administration of benefit plans, with limited exceptions. Thus, the impact on state/local regulations likely is not a major issue for employee benefits practice when compared to many other practice areas. However, it is not clear that the Loper Bright decision will inherently overturn state court decisions relating to deference with respect to the areas where state regulation still applies (such as insurance).

Practical Considerations

Though for benefits practice and benefits compliance, this might be a shift in power to the courts, it likely will not change the basics of benefits law too extensively. Practitioners will use all statutory, regulatory, sub-regulatory, and case law guidance available in providing counsel, and a regulation still reflects an agency’s interpretive position. Given that regulatory interaction through audits or voluntary compliance programs (through the IRS or the Department of Labor) is a more common government interaction for plan sponsors than court cases against the government, it would be unwise to discount agency positions (particularly when a court might just decide to agree with it anyway). The cases might give more avenues to challenge an agency position in court, but they do not provide an easy lever against agency positions within the regulatory enforcement process.

The U.S. Supreme Court decisions in Loper Bright, Corner Post and Jarkesy have, not surprisingly, intensified discussions regarding regulatory authority in the employment law arena given the wide range of regulatory activity currently and historically emanating from the various federal agencies including the Department of Labor and its Wage and Hour and Office of Federal Contract Compliance Programs divisions, the National Labor Relations Board, and the Equal Employment Opportunity Commission.

The trio of decisions will, as with other areas of the law, certainly play a significant part in legal challenges to regulatory authority going forward and raise hope in a number of quarters that particular regulation will be enjoined, withdrawn or otherwise limited. In addition, the decisions presumably will have the effect of prompting the legislative branch to pay renewed and careful attention in the preparation of laws and amendments to laws to avoid the ambiguity prompting legal challenges in the first instance. However, the extent to which the decisions will have an immediate impact in terms of limiting or enjoining specific employment-related regulation is an open question. And of course, the agencies and their regulatory authority have not gone away. The current and future challenges must make their way through the lower courts and the inevitable appeals which can be a time consuming process.

In the interim, we have significant, longstanding regulations in the employment law arena which remain in effect and there are and will be approaching effective dates of new agency initiatives. As my colleagues throughout this article have noted, it is significant to understand that challenges to agency regulations and regulatory authority will proceed and will be considered on a case-by-case basis under the new standards and the results are difficult to predict. Courts are charged under Loper Bright with exercising “their independent judgement in deciding whether an agency has acted within its statutory authority.” They may still give “careful attention” to the judgement of the agency in the determination. The decision also does recognize that where Congress has lawfully delegated authority to an agency, “the court must respect the delegation, while ensuring the agency acts within it.”

Employers and practitioners are left, as a practical matter, with uncertainty and must continue to manage the balancing act of closely watching regulatory challenges as those challenges make their way through the courts and various appeals, while complying with current regulation and preparing to comply with new regulations. Employers are encouraged to work with their legal counsel in each instance to strategize as to the best approach for their particular business in navigating the complex landscape. 

In Iowa, Chevron has had a moderate impact, and more in the telecommunications and cable area than on energy matters, as telecommunications are more federally regulated than the majority of the energy work in Iowa, much of which focuses on siting of linear infrastructure and renewable energy projects. On the energy side, areas of federal supremacy like much of the regulation of natural gas or rates for electric transmission involve well-established jurisdictional boundaries, so the state agencies and state courts are generally not addressing issues of federal agency deference.

Energy Regulations

With regard to energy matters, the biggest impact is by way of environmental law. Energy is an interesting area for Chevron, because while conventional wisdom is that agencies like the EPA make things harder for energy producers, the volume of our renewable practice can cut the other way, where anti-emissions regulations help the market for many of our clients. But even traditional energy projects, like pipeline matters, may find Loper Bright a mixed bag: environmental regulations may present challenges for pipelines, while FERC rules and rulings and PHMSA rules and rulings are often helpful and supportive of infrastructure projects. Moreover, it has been clear for a couple of years that the Court had other tools it could and would use to limit major shifts in energy and environmental policy by agencies, such as the Major Questions Doctrine. See W. Virginia v. EPA, 597 U.S. 697 (2022).

Immediate Impact of The Court’s Decision

The magnitude of impact will depend on the extent to which Iowa follows or picks up on some of the reasoning in Loper Bright, Corner Post, and Jarkesy. In the short term, I would expect a burst of new litigation and new arguments in litigation attempting to test new theories and arguments based on these three cases, and to determine the scope of impact for the three cases. It will also put a new emphasis on legislative lobbying (obviously mainly at the federal level, at least at first) as Congress will now need to be more explicit as to the role of the administrative agency if Congress itself doesn’t want to delve into details.

Impact on State/Local Regulations

In Iowa, the three new cases will likely have a moderate impact, and more in the telecommunications and cable area than on energy matters, as telecommunications are more federally regulated than the majority of the energy work in Iowa. On the energy side, areas of federal supremacy like much of the regulation of natural gas or rates for electric transmission involve well-established jurisdictional boundaries, so the state agencies and state courts are generally not addressing issues of federal agency deference.

I think Loper Bright will have very few implications for Iowa state cases in part because the Iowa Supreme Court was somewhat ahead of the Supreme Court in going down this path. Beginning in 2010 with Renda v. Iowa Civil Rights Comm’n, 784 N.W.2d 8 (Iowa 2010), the Iowa Supreme Court has sought to rein in deference to administrative agencies and has taken a more searching look at the precise amount of delegation the legislature has made to agencies. This line of cases arguably reached its peak in 2018’s City of Des Moines v. Iowa Dep’t of Transportation, 911 N.W.2d 431 (Iowa 2018). That case opens with the assertion that “[t]he issue presented is the reach of the administrative state,” and the case proceeded to give a narrow reading to the rulemaking power of, and interpretive deference to, state agencies, requiring the legislature to be both clear and specific in its delegations for a court to be required to defer to the agency. As a result, Loper Bright will really have an impact only where local state and federal courts are applying federal law. Even in those cases, the impact may be mitigated both because in Loper Bright the Court did not strike down the older Skidmore decision, which still allows some deference to agency determination, but also because it asserted that prior decisions under Chevron remained entitled to stare decisis, and the body of law under the Federal Power Act, for example, is robust and long-standing.

Perhaps the most interesting question (albeit one that does not arise frequently) is what impact will follow from Jarkesy. Jarkesy does not directly impact state law, which between agency work at the Iowa Utilities Commission and in state court constitutes most of our Iowa work, because the Seventh Amendment has not been incorporated to constrain the states via the Fourteenth Amendment. That said, the Iowa Constitution has a strong right to a jury (see Iowa Const. Art. 1, § 9), and the legislature has made a broad grant of authority to the Iowa Utilities Commission to assess civil penalties. See, e.g., Iowa Code §§ 476.51, 479B.21. The authority is subject to few guardrails and, as in Jarkesy, is not clearly remedial but appears to have a punitive or deterrent intent. The values can be significant: in a 2023 order, the Iowa Utilities Board (since renamed Iowa Utilities Commission) fined a pipeline operator $1.6 million for operating without current state permits; that order is currently pending judicial review. It seems likely that a defendant will eventually challenge a civil penalty assessed by the agency under Iowa’s right to a jury and following the logic of the Jarkesy decision.

Impact on Business Operations

Other than some changes on the government relations side in what is asked of lawmakers, and some changes in litigation tactics when cases do end up in litigation, I do not expect these three decisions – despite the fact that lawyers see them as a tectonic shift – to change the day-to-day business operations much at all. While all three decisions reduce agency power, all three have significant exceptions and nuance. A company wouldn’t, for example, ignore a rule for which there are civil penalties just because the agency can no longer assess them directly; the agency can still go to court to seek them. While I think the changes may make business operations less certain of the impact of new rules and regulations, until there are further legal developments under the new regime it would be difficult for businesses to know what day-to-day changes to make.

Although focused on civil penalties the Securities and Exchange Commission assessed in the administrative context, there is good reason to believe the reasoning of Jarkesy can be applied to other federal agencies, such as the Environmental Protection Agency (EPA). The question each time the EPA assesses a civil penalty administratively from this point forward will be whether the penalized action involves a “public right” that is exempt from the Seventh Amendment right to a jury trial. If it is not, the reasoning in Jarkesy arguably applies, which would require the EPA to seek civil penalties through an Article III court, not its own administrative process. Fredrikson is already in the process of invoking this defense with regard to civil penalties the EPA is asserting administratively against a client for alleged violations of the Clean Air Act.

Impact on Business Operations

Enforcement actions by the EPA could be drastically affected if Jarkesy is determined to apply to EPA administrative penalties. The EPA will likely lack the resources and the inclination to bring enforcement actions in federal district court with the same frequency with which it brings administrative actions. Conversely, those actions it does bring in federal district court could be more expensive for regulated parties, both in terms of litigation costs (defense costs in district court tend to be higher than those in an administrative proceeding) and penalty amounts (penalties will be determined by a federal judge, not through a negotiated process between the parties which, depending on the judge and jurisdiction, could increase the final penalty amounts). In addition, with limited resources with which to bring an enforcement action in federal court, the types of actions EPA would bring will likely be the more serious infractions that, by their nature, will likely involve the prospect of higher penalties.

Impact State/Local Regulations (Minnesota, Wisconsin, North Dakota, South Dakota, Iowa)

Jarkesy will not have an immediate, direct effect on environmental penalties assessed by the Minnesota Pollution Control Agency (MPCA), because it was a decision made under the United States Constitution and applies only to federal agencies. It remains to be seen, however, whether the rationale the Supreme Court employed to strike down administrative penalties under the Seventh Amendment to the U.S. Constitution would apply to the jury trial right under Article I, Section 4 of Minnesota’s Constitution. The latter does state, “The right of trial by jury shall remain inviolate, and shall extend to all cases at law without regard to the amount in controversy.” If a Jarkesy-like challenge were to succeed regarding MPCA’s administrative penalty authority (and that of county boards that adopt ordinances giving them the same authority), the effect would likely be the same as would be expected at the federal level: less frequent enforcement action but the chances of higher penalties for those that end up on state district court.

Taken together, the U.S. Supreme Court decisions in Loper Bright, Corner Post and Jarkesy (the Decisions), are likely to have a profound impact on the regulations impacting government procurement and assistance in the coming years. Each Decision transferred power from federal agencies to federal courts. This article summarizes how the Decisions could impact government contractors and grantees.

Overview of the Decisions

After Loper Bright, federal courts are no longer required to defer to agency interpretations of ambiguous federal statutes; instead, courts must interpret the statutes themselves, while affording only “respect” to the “informed judgment” of agencies. Although Chevron is overturned, note that the Auer doctrine, which requires courts to defer to agency interpretations of their own regulations, remains in play. Therefore, as it stands today, federal courts will not defer to agency interpretations of statutes but they will defer to agency interpretations of their own regulations.

Under Corner Post, the six-year window of time during which someone harmed by a regulation can challenge that regulation begins when the individual was actually harmed, rather than when the regulation was implemented, effectively exposing all regulations to challenges. Under Jarkesy, agencies that impose civil penalties through administrative procedures must allow defendants to bring the dispute to a court of law where the defendant is entitled to a trial by jury.

Federal Contract and Grant Regulatory Landscape

To understand the potential impact of the Decisions on federal contracts and grants, it is important to understand the regulatory landscape. Federal contracts are governed by government-wide contract regulations found in the Federal Acquisition Regulations (the FAR) and agency-specific supplements. The Office of Federal Procurement Policy Act of 1974 (OPPA) directed federal agencies to adopt policies and practices to ensure the government could purchase the property and services needed at the lowest reasonable cost given the time and quality required. OPPA led to creation of the FAR Council, comprised of leaders from the General Services Administration, Department of Defense, and NASA, and implementation of the FAR in 1984, followed by 40 years of regulatory expansion to accommodate new congressional acts, executive orders, and other policy priorities.

Federal grants are also subject to standard regulations, terms and conditions located in the Office of Management and Budget (OMB) Uniform Guidance (Grant Regulations). Relying on the general authority granted to it, OMB adopted the Grant Regulations in 2013, and those regulations were then adopted in some manner by all federal agencies through their own rulemaking. Like the FAR, the Grant Regulations have grown over time to accommodate federal priorities and congressional acts.

New Opportunities to Challenge to Agency Regulations

Courts have long held that the FAR is entitled to agency deference under Chevron. See, e.g., Brownlee v. DynCorp., 349 F.3d 1343 (Fed. Cir. 2003). Without the limits of Chevron, courts reviewing challenges to agency regulations may have their first real opportunity to evaluate the hundreds of regulations spanning thousands of pages that government contractors and grantees contend with every day. The FAR and Grant Regulation largesse fills a lot of gaps in the congressional acts that authorized them. Whether challenges to the regulations are successful is likely to depend on how closely the regulations mirror the statutes. The further the regulations creep from the statutory language, the more vulnerable a regulation will be to successful challenge.

A good example of this is the recent challenge to the U.S. Department of Labor’s overhaul of Davis Bacon Act (DBA) regulations, which were challenged by the Associated General Contractors of America shortly after their implementation in late 2023. Even before Chevron was overturned, in June 2024 a federal court in Texas issued a nationwide preliminary injunction blocking the three provisions in the new DBA regulations that were challenged because they exceeded the agency’s authority under DBA. In the wake of Loper Bright, I would not be surprised to see additional lawsuits challenging other provisions of the new DBA rules that drift far from the statutory language.

By tying the statute of limitations to individual harm rather than the implementation date of regulations, Corner Post opened all regulations to new challenges. As a result, when individuals and entities new to the federal marketplace and are harmed by regulations for the first time, they have six years to challenge the regulations causing the harm. With this in mind, I suspect to see challenges to older regulations that are commonly viewed as outside the scope of agency authority, such as certain regulations implementing the Service Contract Act.

Enhanced Regulatory Stability Likely

One of the most disruptive aspects of the prior administrative environment was the fact that regulations frequently changed from administration to administration, creating significant uncertainty for government contractors and grantees. Managing multiple government contracts or grants is complicated, particularly when each contract may include hundreds of regulatory clauses. When implementation, interpretation and even the text of the FAR and Grant Regulations shift, it becomes nearly impossible to manage compliance. In the wake of the Decisions, we expect to see more regulatory stability from one administration to the next, as agencies proceed with greater caution when making regulatory changes.

In addition, as agencies develop new regulations, we expect the notice and comment process in rulemaking will become increasingly important as a way for the public and the agency to identify, challenge, and resolve inconsistencies between the statute and proposed regulations early in the process. As Congress passes new laws, they may become more explicit in describing the scope of authority delegated to agencies, which would be helpful for all involved.

New Opportunities to Challenge Agency Decisions and Enforcement Actions

Going forward, it may be easier to convince a court to overturn agency decisions. For instance, challenges to agency award decisions (e.g., bid protests, size protests) or agency contract administration decisions (e.g., requests for equitable adjustment, claims) that allege improper agency interpretations of a statute will prompt actual court review of the agency action, rather than mere deference to the agency. Of course, once a court takes up an issue, the actual outcome will depend on the judge and his or her view on the law and facts, but the opportunity for meaningful court review will be a welcome change for many frustrated parties.

Contractors and grantees now have new opportunities to challenge agency enforcement decisions. For instance, under Jarkesy agencies must give individuals and private entities a right to defend themselves from civil penalties before a jury. Given the time and expense of litigation, there may not be many contractors that move disputes into court, but the fact that the right now exists could impact how each side of a dispute approaches negotiations. Given the increased risk of court oversight and the related costs of court involvement, we expect the FAR Council, OMB and agencies that use administrative enforcement proceedings (e.g., Small Business Administration, Department of Labor) to evaluate the Jarkesy Decision when setting internal enforcement policies and making specific case decisions.

Recommendations

The Decisions are not likely to have a significant impact on government contractors and grantees in the near term, but we anticipate changes will be apparent over time. In contrast to the rapid expansion of FAR and Grant Regulations in the past decade, they may notice a welcome slowdown in new regulations. In the coming years, they may even see some regulations disappear in the wake of successful court challenges. For that reason, we recommend that contractors and grantees pay close attention to court cases that could impact contract requirements important to their business. Because so many regulatory requirements are packed into standard terms and conditions, the requirements of contract compliance could change, even if the agreements themselves are not changed.

In addition, we recommend that contractors and grantees consider whether they want to participate in the notice and comment process during rulemaking for regulations that are important to their business. Participation in relevant trade associations is often the most effective way for to engage with rulemaking.

Finally, when faced with uncertainty about applicable federal contract or grant regulations or an adverse agency action, we recommend that businesses evaluate their strategy in light of the Decisions. The Government Contracts and Grants team at Fredrikson & Byron is paying close attention to the shifting regulatory landscape and we welcome the opportunity to help you navigate these changes.

Background

There were three decisions involving administrative law that are likely to have major, and difficult to fully predict, impacts. Loper Bright changed the level of deference that a court must give to a federal agency’s position. Historically, under a case called Chevron, if there were multiple ways that a statute could be interpreted, and an agency picked one of those options, courts were required to defer to that interpretation even if the court felt another interpretation was superior. Now, the court can use its own independent judgment. The result is that challenges to agency rules are more likely to prevail, but just how much more likely is very difficult to know.

The next case (Corner Post) gives more time for someone to challenge the validity of a regulation. The Administrative Procedures Act has a six year statute of limitations. It was generally accepted that the statute ran at the time a rule was issued, but in this new ruling the court said that the statute runs when the affected party was injured. For example, a new business can challenge rules because the business wasn’t in existence when the rule was promulgated.

Finally, the third case (Jarkesy) concluded that the government can’t impose fines without giving an offer of a jury trial, meaning that fines can’t be imposed by an Administrative Law Judge. This will have impacts for federal civil monetary penalty fines, and it could also have implications for state administrative penalties, though the result is going to vary state by state, and that are difficult to predict with any confidence.

Together, the three cases result in a material shift in how regulations are enforced. But it is very, very difficult to predict how things will play out from a practical perspective. For example, it is possible that many judges will still defer to government agencies, with other judges being far less deferential. We will almost certainly enter a period where there is more judge to judge variability in decisions about regulations.

Regulatory Environment

Health Care is about as regulated as an industry can be. It is common for there to be challenges to agency interpretations. The fact that the Chevron case required courts to follow an agency’s regulation when it was a plausible reading of the law even if the judge was certain that it wasn’t the BEST reading of the law meant that more of those challenges were lost. But both before and after the Chevron decision, many judges tended to defer to the government. When my son was six, he asked me whether I was “on offense or defense” in a particular case where our client was suing the government. I explained that since we were suing, we were on offense. “When you’re fighting the government, you’re always on defense!” was his reply. He was right. In that case the government’s lawyer had told me that we had the stronger argument and should win. We didn’t. But Chevron wasn’t key to the decision.

Health Care law has two facets, advice about what do to, and litigation about what was done. The new cases won’t have a huge impact on the advice we give. When you think a regulation is wrong, you take a bit risk if you just disregard the law. There is another Supreme Court case, Illinois Council, that has NOT been reversed. That case requires organizations to exhaust their administrative remedies before going to court. That decision can make it difficult to obtain a declaratory judgment that a rule is invalid. Unless Illinois Council is reversed, it may be difficult to go to court to challenge rules before an organization is the target of an enforcement action. But when you are in a regulatory fight, these cases will help with the defense.

Finally, before getting too excited about these new cases, it is worth remembering that the Supreme Court’s decision in Schutte vs. SuperValu made it harder to use regulatory ambiguity to demonstrate a lack of improper intent in a False Claims Act Case. The legal landscape here is really complicated and I think even those of us who have practiced a long time aren’t certain of where things will go.

Increased Challenges to Regulations

One possible result is that there will be a wave of challenges to regulations. For example, some commentators have suggested that hospitals may challenge the two midnight rule, a regulation that says if a physician expects a patient to need two nights of hospitalization, the patient should be considered an inpatient. It is not clear how a challenge would fare, given that the rule was issued more than six years ago. One example of the consequences of the decisions is that a new hospital might have the ability to challenge the rule in a way that an older hospital could not. Within this uncertainty it will be important to keep the adage “be careful what you wish for” in mind. If the two midnight rule were invalidated, we would return to a situation where was a regulatory vacuum, with individual reviewers likely reaching very different conclusions about a patient’s status. There would be a high likelihood that the Medicare Contractors for different states would take different positions. In short, it is possible that if some regulations are invalidated the result could make operations more challenging, rather than less.

But much will depend on how courts chose to use their new discretion.

Administrative Burdens Could Increase—Or Decrease

There is a maxim “be careful what you wish for.” It is wise. There are some rules that everyone loves to hate, but consider the possibility that the absence of any rule may be worse. Sometimes a rule brings uniformity to a practice. Imagine if speed limits were repealed, and the new standard was “police can pull you over for driving at an unsafe speed.” What may have initially seemed like a “lowering of an administrative burden” might quickly become a much higher one as you attempt to comply with inconsistent application of unclear expectations. There might be rules that you COULD successfully challenge, but that won’t always mean that you SHOULD.

Impact on Health Care Business Operations

The new cases are not likely to make a huge difference in how businesses operate. Most businesses want to avoid regulatory uncertainty. It will be rare to say “well, we have better chances of getting this rule declared invalid, so let’s just ignore it.” Instead, there will be more legal challenges to rules, and if those challenges are successful, then business practices will change. Litigation will precede most business practice shifts.

The overruling of Chevron will likely have far-reaching and unpredictable impact on immigration law. In some areas, employers and individuals may be able to challenge unfavorable agency interpretations more effectively in federal courts, ranging from adverse United States Citizenship & Immigration Services (USCIS) decisions in H-1B, L-1, and O-1 nonimmigrant petitions to denials of EB-1 “extraordinary ability” or “outstanding professor/researcher” petitions. The Loper Bright decision also creates opportunities to challenge decisions made by other agencies in the immigration process, whether those challenges are to Prevailing Wage Determinations and PERM applications with the US Department of Labor (DOL), admissibility decisions by the US Department of State (DOS) and US Customs and Border Protection (CBP), or I-9 audits and findings by US Immigration and Customs Enforcement (ICE).

However, the new lack of Chevron deference to agency interpretations could also negatively impact numerous areas of immigration. Given the lack of congressional action in recent decades, many immigration statuses and policies have been established or modified by agency actions and interpretations, and the Loper Bright decision now opens the door to challenges. This includes employment authorization for H-4 spouses, Deferred Action for Childhood Arrivals (DACA, aka “Dream Act” kids), and Deferred Action for Labor Investigation individuals to F-1 STEM/Optional Practical Training (OPT) for international students with degrees in science, technology, engineering, and mathematics fields (STEM).

Overall, the Loper Bright decision will impact immigration law for years to come through increased legal challenges of agency decisions, and employers and individuals should work closely with immigration counsel to prepare proactively for this dynamic environment.

The Court’s ruling in Jarkesy will have a significant impact on the manner in which the SEC pursues civil penalties, particularly with respect to fraud. In Jarkesy, the Court concluded that a statute authorizing the SEC to adjudicate and assess civil penalties for fraud-related claims violates the Seventh Amendment. Instead, the SEC must bring such cases in court, where the defendant has a right to a jury trial. Jarkesy distinguished between suits at common law (which are subject to the Seventh Amendment), and matters of “public right,” which may be adjudicated by an agency. The Jarkesy Court held that SEC fraud-related claims for civil penalties are suits at common law because (i) the civil penalty remedy is monetary in nature, not equitable; and (ii) they are similar to common law fraud claims. The Court rejected the argument that statutory claims for civil penalties claims brought by government agencies are “matters of public right.”

For wealth advisers regulated by the SEC, Jarkesy will have some impact on those facing the unfortunate reality of an SEC enforcement action. Now, the SEC, when seeking civil penalties, must bring such actions in federal court rather than before administrative law judges who preside over the SEC’s in-house tribunals. This may result in a more balanced and fair proceeding, at least in the eyes of the defendant, and will be litigated under the federal rules of civil procedure.

Further, in light of Chevron, one can expect less certainty concerning the rules that agencies make and enforce. Not surprisingly, shortly after the Chevron opinion, two industry groups – the Securities Industry and Financial Markets Association and the Financial Services Institute – joined a lawsuit against the Department of Labor seeking to defeat the agency’s fiduciary rule. Although it is hard to predict the nature and timing of such changes, the Chevron Court’s move away from agencies filling in the gaps in ambiguous statutory language, and toward requiring that Congress do so (or risk having the courts do so), may lead to more litigation, particularly legal challenges to controversial newly proposed rules.

The real-world impact of these decisions may reveal a tendency to take more of a “wait-and-see” approach rather than rushing to revise and update internal compliance programs (to accommodate newly-proposed rules), all in an attempt to avoid having the football snatched away just before kicking it. Nonetheless, day-to-day regulatory compliance should not be much impacted. As the typical adviser is not involved in enforcement actions, and has grown used to monitoring and adapting to challenges to newly-proposed rules (e.g., the recently vacated Private Fund Rules), advisers should stay focused on strengthening their compliance programs based on current rules and be willing to adapt to the frequent updates or changes to those rules.

The elimination of the Chevron doctrine is likely to encourage challenges to regulations (for example, in the pending litigation in U.S. District Court in Wyoming challenging Fluid Mineral Leases and Leasing Process rules). Most of these challenges will likely relate to environmental regulations governing methane escaping from wells/air quality or requirements for Environmental Impact Statement for new federal leases or for drilling new wells on federal lands. It is, however, unclear whether the Chevron decision will result in a different outcome for any of these challenges than would have been the case under Chevron deference.

New oil and gas entities are created all the time, and in theory any such new entity could purchase interests subject to a given regulation and challenge it without the 6-year limitation, since it would not have been affected by that regulation prior to that new acquisition. Further, the Supreme Court in Jarkesy discussed a public rights exception. Many oil and gas civil penalties relate to federally owned oil and gas interests which are leased by the Bureau of Land Management, leased by the Bureau of Indian Affairs, or are unleased. It is unclear whether this exception would apply to any or all the existing civil penalties which the Department of the Interior has been authorized to impose under its regulatory scheme when related to publicly owned oil and gas.

Should any of the challenges to regulations be successful, the burden imposed by federal rules on our oil and gas clients may lessen. But patience is warranted while we watch and wait to see how the courts address challenges and move forward in a world following these decisions.

The Securities and Exchange Commission (the “SEC”) was formed ninety years ago and derives most of its rulemaking authority from two laws: the Securities Act of 1933 (the “Securities Act”) and the Securities and Exchange Act of 1934 (the “Exchange Act”). These statutes are vague and archaic, so the SEC establishes rules to adapt the statutes to evolving corporate and capital markets issues. Examples of rapidly evolving issues that the SEC recently has been encouraged to address through rulemaking include artificial intelligence, cryptocurrency, and human capital.

For 40 years, the Chevron doctrine has purported to give the SEC wide latitude in formulating rules which affect the compliance burden for U.S. public companies and any other entities raising capital through the sale of securities, whether on a private or public basis. For example, the SEC recently adopted rules to require disclosure about cybersecurity risks and incidents, climate and greenhouse gas disclosures, insider trading policies and plans under insider trading affirmative defenses, and company stock repurchases. Notably, many of these recent rules have faced legal challenges and some have been vacated or stayed.

These rules are intended to level the playing field and to provide consistent, comparable information to investors on topics that they say are of growing importance to their investment decisions. Although not all SEC rulemaking increases compliance burdens, and some rules are adopted pursuant to specific Congressional directives (such as the Dodd-Frank Act), critics of many of these rules argue that they are not aligned with any Congressional mandate and dramatically increase the cost of being a public company.

Impact on the Regulatory Environment

In the wake of the Supreme Court’s recent decisions, the SEC may be less likely to adopt new regulatory burdens in the absence of a clear Congressional mandate. However, in the near-term, we do not expect the decisions to have a significant practical impact on existing public company compliance burdens or other longstanding regulatory requirements, and companies should continue to consider enforcement risks when existing statutes and rules are unclear.

We expect Loper Bright’s impact to be limited for two reasons. First, it is unclear whether courts ever consistently applied the deferential standard set forth in Chevron to SEC rules, and the Court has significantly curtailed its scope throughout the past 40 years. Second, even where agency action has been upheld as valid under the Administrative Procedure Act, courts have found other bases to invalidate rules. For example, in 2015, the D.C. Circuit Court of Appeals partially upheld the SEC’s “conflict minerals” disclosure rule based on the Commission’s authority to construe a vague Dodd-Frank statute, citing Chevron. However, on First Amendment grounds, the decision gutted the key provision of the rule that would have required companies to state whether any of their products were not found to be “DRC conflict free.”

It is also important to keep in mind that Loper Bright continues to allow for deference where statutes specifically permit or instruct agencies to interpret statutory terms or issue rules. While there is no doubt that parties will continue to litigate the scope of Commission authority whenever a burdensome rule is adopted, the SEC will have an easier time justifying rulemaking pursuant to a specific Congressional directive, such as the rules implemented under the instruction of the Dodd-Frank Act and the JOBS Act.

On the other hand, the Supreme Courts’s willingness to consider expressly overturning Chevron, which the Court signaled two years ago in West Virginia vs. EPA, has emboldened challenges to the SEC’s recent rulemaking activity. Over the past year, federal circuit courts have not accorded much deference at all to SEC determinations. For example, in June 2024 a federal appeals court vacated an SEC amendment that purported to scale back previously adopted proxy advisor rules. And in December 2023 a federal appeals court vacated the SEC’s corporate stock buybacks disclosure rule. Similarly, despite a two-year public rulemaking process that considered tens of thousands of comments, the SEC has also stayed implementation of its long-anticipated climate disclosure rules, which were adopted in March 2024 and immediately contested in court as exceeding the agency’s authority and lacking congressional authorization.

All of this suggests that the SEC may be more cautious and moderate in adopting future rules, carefully considering feedback from the public comment period. Although many factors affect the SEC Chair’s rulemaking agenda, we may see a slowdown in new proposals, such as on human capital disclosure, in the absence of a congressional directive. For now, the SEC Chair has pushed all the Commission’s disclosure-based rulemaking activity to the post-election period.

The Corner Post and Jarkesy decisions may have a more significant impact on public companies than Loper Bright. Corner Post opens the door to challenges by newly public companies to SEC rules that were previously considered settled. In combination with the Loper Bright decision, the SEC could face challenges to existing rules in courts that no longer grant agency deference, and the SEC may find less success pursuing novel enforcement theories on topics like insider trading.

Further, the SEC’s enforcement authority was weakened under Jarkesy. The SEC already reduced the use of administrative litigation following a 2018 Supreme Court decision, Lucia v. SEC, in which the Court held that the SEC’s administrative law judge appointment process was unconstitutional. Thus, Jarkesy is unlikely to have a significant near-term effect on SEC enforcement strategies. Taken together with Loper Bright, though, it may defang the threat of “regulation by enforcement” that is often present when rulemaking activity is curtailed.

Impact on Business Operations

The SEC regulatory and enforcement environment can have a tangential effect on business operations, and in that regard, we may see compliance budgets stay level – or even shrink – in anticipation of limited rulemaking. We are hopeful that Loper Bright signals to companies that there are guardrails on the regulatory burdens associated with raising capital and with being a publicly held company. For example, although they are not completely off the table, reforms to private offering rules that may have complicated capital raising activities are no longer on the SEC Chair’s 2024 rulemaking agenda.

While companies may initially welcome stalled rulemaking, the downside is that the SEC and its staff may be less willing to provide guidance or to adopt rules that clarify vague congressional statutes. Moreover, the SEC may rely more on “regulation by enforcement” – bringing cases against less sympathetic companies and leaving others to extrapolate how rules should apply to their own situation.

Finally, public companies should consider whether the fallout from these cases will have a material effect on the company’s business. If the cases create new regulatory uncertainties or give competitors a new advantage, these impacts may need to be discussed in in quarterly and annual reports. This may be especially relevant for regulated entities, as discussed elsewhere in this memorandum.

Impact on State/Local Regulations (Minnesota, Wisconsin, North Dakota, South Dakota, Iowa)

We do not expect these decisions to affect private capital raising in the near term. Companies will need to ensure there is a federal exemption for any offers or sales of securities, as well as continue to evaluate whether an offering must comply with state “blue sky” laws. Companies often rely on federal preemption to avoid a state-by-state compliance exercise, and that is likely to remain a workable approach for the time being.

In addition to offering-related disclosures, state-level and business-driven periodic disclosure requirements have proliferated recently. For example, California enacted climate disclosure laws that would require disclosure by many public and private companies regardless of the ultimate result of challenges to the SEC’s climate rules. In the absence of valid SEC rulemaking that provides a federal disclosure framework, public companies may have to contend with patchwork regulation from states (in addition to international regulations, such as the European Union’s Corporate Sustainability Reporting Directive, that may apply), as well as commercial contract requirements from business partners that are subject to voluntary or mandatory disclosure regimes.

Tax practitioners consult agency guidance and regulations every day. At the federal level, tax lawyers often rely on Treasury Regulations and IRS publications to get detailed instructions on or clearer examples of how to apply vague, complicated tax statutes. In the state-and-local-tax (SALT) world, tax lawyers similarly must navigate through administrative rules, “fact sheets,” industry guides, and publications by state Departments of Revenue. While much of this guidance is hostile to taxpayers, it can sometimes provide clarity, particularly when it comes to specific industries or complicated transactions.

The Chevron doctrine, at least at the federal level and in states that have adopted similar deference rules, made it easy for courts to defer to taxing authorities’ reasonable interpretations of tax statutes. This deference contributed to the growth of taxing authorities’ power but may have also brought a measure of consistency and clarity.

In the wake of Loper Bright, federal judges no longer have to defer to reasonable agency interpretations of statutes; rather, “[c]ourts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority.” Loper Bright, 603 U.S. _____, slip op. at 35 (June 28, 2024). But, as Professor Kristin Hickman argues, “allowing judges to second-guess Treasury’s interpretive choices increases the incidence of like taxpayers not being treated alike, as circuits split and Treasury’s ability to resolve interpretive issues is hampered by stare decisis.” Kristin Hickman, The Need for Mead: Rejecting Tax Exceptionalism in Judicial Deference, 90 Minn. L. Rev. 1537, 1540 (2006). Abandoning Chevron thus opens up doors for taxpayers to challenge unfair Treasury guidance but risks treating similarly situated taxpayers differently.

At the state level—and particularly in tax disputes—many states have adopted Chevron-style rules deferring to administrative interpretations of statutes. In Minnesota, for example, the Commissioner of Revenue’s rules “have the force of law.” Minn. Stat. § 270C.06. And the Commissioner’s “interpretation” of tax statutes through regulation is “entitled to deference.” Marks v. Comm’r of Revenue, 875 N.W.2d 321, 327 (Minn. 2016). It is hard to imagine many state courts hamstringing their own Departments of Revenue by backpedaling on deference to state tax rules and regulations (even though most states purport to resolve tax ambiguities in favor of taxpayers). Although Loper Bright does not apply directly to state agency regulations, it may well inspire taxpayers to bring similar challenges to guidance published by state taxing authorities.

Impact on Taxpayers

The most immediate impact of Loper Bright is that taxpayers have more room to argue that courts should hesitate before deferring to taxing authorities’ interpretations of statutes. But tax experts are divided on whether judges will refrain from deferring to agency expertise. U.S. and state Tax Court judges routinely rely on agency guidance, and judges who are not tax experts—when they do hear tax cases—are also likely to consult agency guidance for technical expertise.

The main takeaway, from a tax perspective, is that Loper Bright places a check on the administrative state’s power but risks disparate tax treatment by making it harder to defer to taxing authority regulations. We will need to wait to see how big of an impact this decision has for taxpayers, and whether the Treasury Department and I.R.S. implement any changes when publishing guidance to taxpayers.