SCOTUS Clips Wings of SEC, NLRB & the Fed

The U.S. Supreme Court (SCOTUS) handed down enough precedent-breaking decisions this spring to make anyone’s head spin. The upshot: Businesses can expect to see fewer costly rules from federal regulators over the next 10 years.
ResourcefulFinancePro covered nearly all of these cases, from the time SCOTUS announced it would hear appeals of lower court rulings, to the decisions being announced starting in May. Even the rare case that didn’t go the way of the plaintiffs — the matter of what constitutes a realized gain that’s fair game to be taxed as income — is hardly settled law. All it will take is a more compelling case and one conservative justice joining his or her colleagues to upend that precedent.
SCOTUS Rulings = Regulatory Uncertainty
Many business owners and executives are pleased that the regulatory state is about to grow weaker. The major downside? Lower courts won’t always decide cases involving regulations and enforcement cases in a consistent manner. And SCOTUS and the circuit courts one rung below them only agree to hear a fraction of appeals.
Bottom line: Regulatory uncertainty is sure to be a side effect of SCOTUS reversing legal precedents. Here’s a roundup of recent SCOTUS rulings and how they’re likely to impact businesses like yours:
1. Agencies Can’t Deny Jury Trial Option
SCOTUS ruled 6-3 the SEC can’t deny a party charged with securities fraud to a jury trial in a federal court. Doing so violates the 7th Amendment. The SEC typically tried securities fraud cases before an in-house administrative law judge (ALJ) since the passage of the Dodd-Frank Act in 2010.
Hedge fund investor George Jarkesy disputed the SEC’s charges of defrauding investors and sued to win his day in court. The SEC — and other federal agencies that adjudicate using an ALJ — will need to be a lot more choosy about the cases it decides to pursue. Reason: The feds’ win rate in the court is lower than it is in front of agency ALJs.
2. Chevron Deference to Regulators is Dead
The 40-year-old Chevron deference afforded to federal agencies is no more. A case involving fishermen forced to pay for regulators to ride on their boats and observe their environmental compliance practices was the proverbial straw that broke the camel’s back.
Chevron gave agencies the benefit of the doubt in cases where a statute such as the Clean Air Act didn’t explicitly give the agency rulemaking power. Numerous cases went the feds’ way because a court ruled, in essence, “the agency knows best what the law says.”
In Loper Bright Enterprises v. Raimondo, SCOTUS concluded that: “The Administrative Procedure Act requires courts to 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. [Therefore] Chevron is overruled.”
3. Labor Board Must Follow the Law
The National Labor Relations Board (NLRB) went two steps too far in a class-action lawsuit against Starbucks. Seven employees at a Memphis, Tennessee Starbucks shop tried to unionize. They invited a TV crew to cover the event during store hours, against written company policy. Starbucks fired the so-called Memphis 7.
NLRB convinced a court to issue a preliminary injunction against Starbucks and reinstate the fired workers. Starbucks complied but sued NLRB. Justice Clarence Thomas, writing for the majority, concluded NLRB didn’t satisfy the four factors necessary for an injunction: 1) likelihood of winning the case based on merits; 2) chance of irreparable harm; 3) the balance of hardships tips in the agency’s favor; and 4) an injunction is in the public’s interest.
4. Omitting Data isn’t Grounds for Fraud Lawsuit
Entities can’t be sued under securities law if they omit data in public offering documents. SCOTUS ruled unanimously that pure omissions aren’t actionable under [SEC] rule 10b–5(b) “[which] makes it unlawful to make any untrue statement of a material fact or to omit to state a material fact.”
Macquarie Infrastructure, an operator of bulk liquid oil storage containers, was sued for failing to mention an environmental rule that impacted its business in its SEC filings. The company argued it didn’t seek to mislead the buying public.
SCOTUS reversed a lower court ruling in favor of investors who sued after Macquarie’s stock price tanked. All nine judges agreed that pure omission of a detail minus “any associated misleading statements” isn’t a violation of SEC rules.
5. Clock Starts Ticking to Sue Once a Rule Hurts a Business
Courts historically adhered to a six-year statute of limitations for an individual or company to challenge a regulation in court. Agencies always argued the clock starts ticking once a reg goes into effect.
No longer — SCOTUS ruled on July 1 that an aggrieved party’s clock to sue starts ticking once a regulation impacts it. A North Dakota truck stop, the Corner Post, sued the Federal Reserve after its cap on debit card fees started hurting its business. The Fed’s Reg II on debit card fees went into effect in 2011 and the Corner Post didn’t file its suit until 2021.
The upshot: Any statute or reg is fair game now! All it takes for a company to challenge the validity of a rule is to document when it began impacting its business, and file suit in under six years.
6. ‘Unrealized’ Gains Debate isn’t Over
SCOTUS declined to settle a disputed matter — namely, do unrealized (or passive) gains qualify as taxable income? The High Court ruled against a couple who paid a $14K foreign investment levy in the 2017 Tax Cuts and Jobs Act. Charles and Kathleen Moore argued they shouldn’t be forced to pay a “mandatory repatriation tax” on income they’d put back into their business.
The 16th Amendment states: “Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” Does an unrealized gain qualify as income? While SCOTUS punted on this question in the Moore decision, future cases could lead to a different opinion.
Reason: Four of the conservative judges say they support a requirement that only realized gains can be taxed as income. As we said earlier, a stronger case down the road could sway one or two more judges to change the law.
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