High Court Decisions May Prompt New Challenges to Longtime Governance Rules

By Alexandra R. Lajoux


Dodd-Frank Sarbanes Oxley Supreme Court Online Article

On July 1, the US Supreme Court voted 6-3 along partisan lines in Corner Post, Inc. v. Board of Governors to stretch the statute of limitations on lawsuits filed under the Administrative Procedure Act that allege harm from regulations. The old limit was six years; the Corner Post decision now starts the regulatory clock when the plaintiff first experiences harm, which can be years after a rule is passed. The decision prompted dissenting Justice Ketanji Brown Jackson to predict a “tsunami” of regulatory challenges.

Major litigation waves could also come from the High Court’s decision on June 28 to end the so-called Chevron deference, also decided 6-3 along partisan lines. The court’s finding in Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce, et al.—one in a long line of cases on judicial deference to administrative agencies—could destabilize many regulations currently under legal challenge due to statutory ambiguity, including the Environmental Protection Agency’s (EPA) rules on clean energy, the Federal Communications Commission’s net neutrality rules, and the Federal Trade Commission’s ban on noncompete agreements.

For directors, however, the most direct impact of the Corner Post and Loper decisions may be on rules affecting board operations and the board’s oversight role. 

The Chevron Standard

The Chevron doctrine grew out of the 1984 case Chevron USA Inc. v. Natural Resources Defense Council, Inc. involving the oil company’s challenge to environmental regulations. The plaintiff, Chevron, argued that the term “stationary source,” on which a major EPA rule was based, did not have a clear meaning so the EPA rules lacked a legal basis. But the court disagreed, with Justice John Paul Stevens stating in the court’s opinion: “When a challenge to an agency construction of a statutory provision … centers on the wisdom of the agency's policy, rather than whether it is a reasonable choice within a gap left open by Congress, the challenge must fail. In such a case, federal judges—who have no constituency—have a duty to respect legitimate policy choices made by those who do.”

For the next 40 years, the Chevron doctrine gave federal agencies the authority to pass and enforce regulations based on staff interpretations of laws. Courts had only limited power to challenge those regulations. But on June 28, Chief Justice John G. Roberts wrote in Loper that courts must “exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because a statute is ambiguous; Chevron is overruled.”

Are new challenges to Sarbanes-Oxley and Dodd-Frank rules likely?

The Loper decision, especially in combination with the lengthened statute of limitations under Corner Post, could support new challenges to any and all rules that lack an explicit basis in law—that is, rules based in a federal law that either says nothing about a topic or says something that is unclear. So, what does this mean for boards?

When it comes to corporate directors, the two laws with the most impact on their work (other than federal securities laws) are the Sarbanes-Oxley Act of 2002 (SOX) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. As observed early on by attorney Joel S. Telpner, Dodd-Frank is “littered with ambiguities.” He noted that many parts of the law do not explain how it should be implemented, but “delegate” that job to regulatory bodies. For example, the law mandated that the US Securities and Exchange Commission (SEC) pass certain rules—67 total—without giving additional guidance on what the rules should say. Some have taken more than a decade to emerge (e.g., the clawbacks rule is only two years old). While most SEC rules are based on Dodd-Frank provisions that have clear meaning, some are widely considered to be based on murky language and could be subject to a post-Loper challenge even at this late hour.

In the coming days, the legal community will be reassessing which regulations may be worth challenging. For instance, consider the Dodd-Frank whistleblowing provisions, which upended the reporting-up-the chain mandated by SOX rules. The old SOX rules supported a strong role for the audit committee in receiving and addressing complaints; the Dodd-Frank rules changed that. Instead of having employees, counsel, or auditors bring their concerns to management, or (through a hotline) to the audit committee, the Dodd-Frank rules offered incentives for a whistleblower to skip internal reporting and go directly to the SEC, which had considerable power to punish those accused of fraud (that power has been abridged following the June 27 case Securities and Exchange Commission v. Jarkesy et al., which said that in-house SEC proceedings to seek civil penalties for securities fraud are no longer allowed.)

The Dodd-Frank whistleblowing rules have already been vulnerable to legal challenges that cite Chevron. The US Supreme Court case Digital Realty Trust, Inc. v. Somers denied antiretaliation protections to an internal whistleblower, overturning a lower court Chevron-based decision that had found the statutory language ambiguous. The Digital decision found that the statutory language was clear so Chevron deference was not necessary. With Chevron overturned, and the statute of limitations on regulatory impact now extended, a future case might leave the determination once again up to the courts, encouraging new challenges to the Dodd-Frank whistleblower rules. And if Dodd-Frank is in fact “littered with ambiguities,” as Telpner has opined, more challenges could be on the way—not only to the whistleblower provisions of Dodd-Frank but many more rules affecting corporate governance.

Alexandra R. Lajoux
Alexandra Reed Lajoux, Ph.D., M.B.A., is a founding principal of Capital Expert Services, LLC (CapEx). She serves NACD as chief knowledge officer emeritus.