Defending the D.c. Circuit's Hard-look Review

• Publication year: 2016

Defending the D.C. Circuit's Hard-Look Review

Forrest E. Lind III

DEFENDING THE D.C. CIRCUIT'S HARD-LOOK REVIEW

Introduction

Although corporate governance is predominately a state law issue, many corporations are subject to the jurisdiction of the Securities and Exchange Commission ("SEC") because they either are publicly traded, trade in securities, or do both. As a result, these companies are affected by corporate governance and other rules promulgated by the SEC. It should not be surprising then that organizations challenge these rules when they dislike the substance of the rules or how they were promulgated. For the past decade, some organizations have been successful in challenging SEc rules under the National Securities Markets Improvement Act¹ of 1996 ("NSMIA"). In one of the more recent cases, a group of organizations successfully challenged a rule promulgated by the SEc that would have given shareholders in every state access to the nomination process for directors in publicly held corporations.² However, these successes have attracted criticism from legal scholars who allege that the court deciding the cases, the United States Court of Appeals for the District of Columbia Circuit, has usurped the SEC's rulemaking authority.³

I. A Hard Look at Hard-Look Review

For nearly sixty-two years the SEC's rulemaking authority was constrained by just two requirements.⁴ The SEC was required to promulgate rules that were "necessary or appropriate in the public interest" and, when it did so, it was required to consider whether the rule would promote the "protection of investors."⁵ However, in 1996 Congress amended the securities laws that form the backbone of the SEC's authority⁶ when it enacted the NSMIA.⁷ The NSMIA added the requirement that "whenever . . . the [SEC] is engaged in

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rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, the [SEC] shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation."⁸ Congress left undefined "consider," "efficiency," "competition," and "capital formation."⁹

The actions of all federal agencies are subject to review under the Administrative Procedure Act ("APA")¹⁰ and the respective agency's enabling statute. When the SEC promulgates a rule or issues a final order and that rule or order is challenged, it is often reviewed by the United States Court of Appeals for the District of Columbia Circuit ("D.C. Circuit"). Since Congress enacted the NSMIA, the SEC has endured a string of successful challenges to its rules in the D.C. Circuit.¹¹ In each of these challenges, the D.C. Circuit held that the SEC had not properly considered the rule's economic effects.¹²

The SEC's series of defeats in the D.C. Circuit have not gone unnoticed by commentators, many among whom are judges, professors, and attorneys.¹³ Instead of faulting the SEC's inability to articulate the reasoning behind its rules, some esteemed commentators have criticized the D.C. Circuit's "Hard-Look review" ("Hard-Look Review").¹⁴ These commentators ("Critics") believe that the D.C. Circuit has usurped the SEC's rule making authority and, in so doing, has acted against the will of Congress and the Supreme Court of the United States.¹⁵ Their criticism centers on the allegation that the D.C. Circuit goes beyond the review standard intended by Congress by requiring the SEC to conduct a cost-benefit-analysis ("CBA") whenever it considers the effects of a rule on the protection of investors, efficiency, competition, and capital formation ("Required Factors").¹⁶ These Critics seem to believe that, even if the D.C. Circuit does not require the SEC to do a cost benefit analysis,

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it is inappropriate to decide the validity of a rule based on the CBA the SEC conducted and put forth as justification for the rule.¹⁷

Does the D.C. Circuit usurp the SEC's rulemaking authority when it reviews the CBA the SEC conducts when considering the Required Factors? The short answer is "No." A thorough reading of the D.C. Circuit cases in question reveals that the D.C Circuit did not usurp the SEC's rulemaking power. This work will demonstrate that the D.C. Circuit applied well-settled precedent and applied the proper standard of review for agency action. To that end, this work will rely on the precedents that a rule promulgated by a federal agency stands or falls based on the justification the agency put forth at the time it adopted the rule¹⁸ and that ambiguity in an enabling statute is an "express delegation" of power to an agency to interpret the ambiguity.¹⁹ To establish a standard by which to judge the D.C. Circuit's analysis, Part II will explain the appropriate standard of review for agency action. Part III will discuss the statutes at issue. Part IV will then describe the D.C. Circuit decisions called into question and rebut the Critics' arguments.

II. Chevron Analysis: The Proper Standard of Review

Agency action, and the subsequent review of agency action, is governed by the APA.²⁰ The proper standard of review for agency action under the APA ("Proper Standard of Review") is derived from Supreme Court precedent in Chevron v. NRDC,²¹ United States v. Mead Corp,²² Vermont Yankee v. NRDC,²³ Motor Vehicles Mfrs. Ass'n v. State Farm Mut. Auto Ins. Co,²⁴ and National Cable & Telecommunications Ass'n v. BrandXInternet Services.²⁵ Together, these five cases set out the Proper Standard of Review for agency action.

A court reviewing agency action applies a Chevron analysis ("Chevron Analysis").²⁶ The analysis counsels courts to first ask whether Congress has

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explicitly or implicitly delegated authority to the agency to make rules with the force of law ("Chevron Step Zero").²⁷ Because Congress delegates authority to agencies under the assumption that the agency has expertise in its given area, courts grant agencies varying levels of deference based on the specific action taken by the agency.²⁸ If the statute neither explicitly or implicitly delegates such authority to the agency then it may still enjoy some "respect,"²⁹ but it will not receive Chevron-level deference ("Chevron Deference").³⁰ Only if the statute grants the agency the authority to make rules with the force of law will the reviewing court accord the agency Chevron Deference.³¹ If the statute does grant the agency such authority, the court's next step is to determine whether the language of the statute is ambiguous ("Chevron Step One").³² At this stage, the court searches for the meaning Congress intended to give the language at issue and will analyze the text of the statute, consult dictionaries, and, depending on the judge, examine the legislative history of the statute.³³ If Congress's intent is made clear by this inquiry then that is the end of the matter; the court and the agency must give effect to the unambiguously expressed intent of Congress.³⁴ However, if the statute is silent or ambiguous with respect to the specific issue at hand, the court must determine whether the agency's interpretation was based on a permissible construction of the statue ("Chevron Step Two").³⁵ Simply put, the court looks to see if the agency's interpretation was reasonable in light of the statute. Courts also assess the agency's interpretation in light of previous court decisions regarding the statute at issue.³⁶

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A reviewing court defers to the agency's interpretation unless it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law."³⁷ However, a reviewing court cannot set aside an agency rule that is "rational, based on consideration of the relevant factors, and within the scope of the authority delegated to agency by the statute."³⁸ Moreover, an agency is afforded a high level of deference when it interprets its enabling statute.³⁹ The reason for the high level of deference is found within Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837 ("Chevron"). In Chevron, the Supreme Court held that ambiguity in a statute is an "express delegation" of power to an agency to define the ambiguity.⁴⁰ Although it might appear that once an agency has progressed to Chevron Step Two it enjoys smooth sailing to the finish line, the Supreme Court has made it clear that agencies are required to support their actions with logical reasoning.

In Motor Vehicles Mfrs. Ass'n v. State Farm Mut. Auto Ins. Co ("State Farm"), 463 U.S. 29 (1983), the Supreme Court offered four possible ways that an agency's justification for its actions would be unsatisfactory under the arbitrary and capricious standard.⁴¹ Normally, "an agency rule would be arbitrary or capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view of the product of the agency expertise."⁴² Reviewing courts cannot "make up for such deficiencies" because courts "may not supply a reasoned basis for the agency's action that the agency itself has not given."⁴³

When a reviewing court thoroughly analyzes an agency's reasoning, it administers "Hard Look" Judicial Review ("Hard-Look Review").⁴⁴ Under Hard-Look Review, a court must "consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment."⁴⁵ To avoid having its action ruled arbitrary and capricious, an

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agency must "consider relevant factors," articulate a "rational connection between the facts found and the decision made," and offer a logical explanation for exercising its discretion.⁴⁶ When a court reviews an agency action, it is not to substitute its reasoning for that of the agency or provide reasoning for the agency that the agency has...