Supreme Court’s overturning of Chevron ruling shifts regulatory authority from agencies to courts

The Supreme Court’s landmark 1984 decision in Chevron v. Natural Resources Defense Council obligated federal courts to defer to administrative agencies’ reasonable interpretations of ambiguous laws. For the last 40 years, courts have issued numerous decisions based on this precedent. Last month, however, the Supreme Court overturned Chevron, setting new limits on the executive branch’s regulatory authority.

While the ruling is seen as mostly good news for businesses, it could have some negative implications as well.

The Chevron doctrine

The 1984 “Chevron doctrine” — also known as “Chevron deference” — instructed courts, when evaluating federal agency interpretations of statutes, to first determine whether Congress explicitly addressed the specific issue in question. If congressional intent was clear, no further inquiry was necessary; if the court found the statute was silent or ambiguous as to the specific issue involved, the court was then required to defer to the relevant agency’s interpretation of the statute, provided that interpretation was reasonable.

Under Chevron, the Supreme Court recognized that when Congress sets a policy, it may not always provide specific details regarding how that policy is to be executed. When it is unclear, the executive branch may have the necessary technical expertise to fill in the details, as it is charged with administering the policy enacted by statute. Further, the court noted that agencies with expertise are better suited to implement such policies, as judges are not experts in the relevant fields.

As a result, in disputes regarding statutory interpretation, courts have deferred to reasonable agency interpretations of law for the last four decades.

Overturning Chevron

The Supreme Court’s June 28 ruling to overturn the Chevron doctrine (opens a new window) came in two cases challenging the 1984 decision: Loper Bright Enterprises v. Raimondo and Relentless, Inc v. Department of Commerce. By a 6-3 margin, the court overruled Chevron, holding that courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and that courts are not required to defer to an agency interpretation of the law simply because a statute is ambiguous.

The court explained that Chevron deference is inconsistent with both the Administrative Procedure Act (APA) and the judicial branch’s duty to interpret laws enacted by Congress. The majority cited the language of the APA, which assigns to federal courts the authority to “decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action.”

The Supreme Court explained that while courts have historically deferred to agencies’ statutory interpretations, Chevron mandated a higher level of deference, requiring courts to mechanically defer to those interpretations. The court directly challenged the presumption of agency expertise, stating that “agencies have no special competence in resolving statutory ambiguities. Courts do.” Going forward, the court explained, federal courts must play a more active role in reviewing statutes by “using every tool at their disposal to determine the best reading of the statute and resolve the ambiguity.”

Less powerful regulatory agencies, but some complications

The overturning of Chevron is generally seen as a positive development for businesses that have been frustrated with the seemingly unlimited ability of federal agencies to set and enforce administrative rules. The ruling benefits businesses in two important ways.

First, the decision provides new grounds for businesses to contest administrative regulations that are arguably beyond an agency’s authority. Since Chevron was overturned, there have already been challenges to rules and policies established by the Securities and Exchange Commission (SEC), Internal Revenue Service, Environmental Protection Agency, and Department of Health and Human Services.

Specifically, we expect businesses to challenge cybersecurity-related rules promulgated by the SEC and other agencies, which plaintiffs could argue are acting outside the scope of their authority. Policies related to environmental protections and climate change will also likely be targeted, as will the Federal Trade Commission’s recent action to invalidate noncompete agreements. Additional pushback on rules and policies set by agencies governing finance, technology, safety, and intellectual property should be anticipated.

While legal challenges to administrative decisions under Chevron overwhelmingly favored agencies, the pressure will be on the government post-Loper Bright. The decision may temper aggressive policymaking and interpretation of existing regulations due to agencies’ concerns over more intense judicial oversight and scrutiny. As parties factor into their calculations the elimination of Chevron deference — and the possibility that plaintiffs may now have a greater chance of succeeding in litigation — settlement dynamics may also change.

Second, the decision will allow companies to create long-term plans that are not subject to modified statutory interpretations and regulations with every change in presidential administration. Going forward, agencies’ actions will require more certainty and must stand up to more intense legal scrutiny. This allows for greater company stability, innovation, and investment.

The disruption created by this reversal, however, will likely lead to more uncertainty in the short term, as it changes how agencies implement statutes and the way in which regulated industries challenge those agencies’ regulations. Regulated entities could be subject to new interpretations of statutes. Additionally, courts in different jurisdictions could interpret statutes differently, which could make compliance more difficult.

Some observers have questioned whether judges have the appropriate expertise to evaluate rules implemented by agency personnel. For example, the Southern Environmental Law Center (opens a new window), an advocate of environmental regulation, said the ruling “shifts power to judges who do not have the expertise of agency staff who live and breathe the science, financial principles, and safety concerns that federal agencies specialize in.”

The Loper Bright ruling could also adversely impact the passage of laws regulating new and complex technologies, such as AI and emerging areas like digital assets. With the legislative branch now responsible for technical regulatory details previously delegated to administrative agencies, congressional inefficiency and rulemaking could be further hindered.

Regulation and coverage post-Chevron

While we expect Loper Bright to spawn an initial flurry of legal challenges and be a significant factor in many court decisions, it is important to note that judges may still defer to agencies’ interpretations of statutes if they are persuaded by the government’s reasoning. And, while Loper Bright is a significant decision, many federal agencies have been preparing for the anticipated elimination of Chevron deference and have looked for alternative rationales for new regulations.

There is no doubt that existing regulations will be more vulnerable to court challenges. Litigation and potentially conflicting decisions between courts and circuits will increase and administrative agencies will more carefully enact rules and regulations to ensure they can withstand judicial review.

The Supreme Court’s restructuring and reduction of administrative agency authority may well benefit businesses, providing some protection from agency overreach and questionable regulatory enforcement actions. It could, however, prompt insurers to seek to modify coverage — particularly wording of regulatory coverage grants — in a variety of insurance forms. Among others, these could include directors and officers liability, employment practices liability, cyber, and environmental insurance policies.

Insurance buyers should continue to work closely with their brokers to stay abreast of any changes in coverage or other reactions from insurers. And they should consult with in-house and outside counsel about the potential legal implications of the Loper Bright decision.

For more information, contact a member of your Lockton team.