What Does Overruling Chevron Mean for Transnational Litigation?
July 9, 2024
For the past forty years, under Chevron U.S.A. Inc. v. Natural Resources Defense Council (1984), courts have deferred to an agency’s interpretation of a federal statute when the statute is ambiguous and the agency’s interpretation is reasonable. On June 28, 2024, the U.S. Supreme Court overturned Chevron. In Loper Bright Enterprises v. Raimondo, the Court held that, when a statute is ambiguous, a court rather than the administering agency must determine the “single, best meaning” of the statute.
Justice Kagan predicted in dissent that Chevron’s overruling “will cause a massive shock to the legal system.” That prediction is likely more true for some areas of law than for others. In this post, I consider the implications for transnational litigation.
The greatest impact in transnational litigation is likely to be on extraterritoriality. Many federal statutes that potentially reach abroad are administered by federal agencies, including antitrust laws, securities laws, and banking laws. In an article published seven years ago, I argued that courts should defer to reasonable agency interpretations of geographic scope. Without such deference, I noted, regulations on the notification of mergers between foreign firms, registration requirements for offshore sales of securities, and proprietary trading by banks outside the United States might well be invalid.
There are aspects of the Loper Bright decision that offer reassurance. An agency’s interpretation may still have power to persuade, under what is known as Skidmore deference. Congress can still delegate questions of interpretation to administrative agencies. And prior court decisions that relied on Chevron to interpret federal statutes still remain binding precedent. But overall, Loper Bright adds another destabilizing factor to the Court’s already volatile extraterritoriality jurisprudence.
The Loper Bright Decision
In Chevron, the Supreme Court articulated a two-step approach for reviewing agency interpretations of federal statutes. At step one, a court determined whether Congress had spoken directly to the question, using traditional tools of statutory interpretation. If Congress’s intent was clear, a court would reject any agency interpretation that was inconsistent with that intent. If, however, the statute was silent or ambiguous on the question, then at step two, a court had to defer to the agency’s interpretation if it was reasonable, even if that interpretation was not the one that the court itself would have reached. Chevron deference rested on the premise that statutory ambiguities are implicit delegations of authority from Congress to administrative agencies, buttressed by agency expertise and political accountability.
Writing for the Court in Loper Bright, Chief Justice Roberts held that Chevron deference violates § 706 of the Administrative Procedure Act, which requires a reviewing court to “decide all relevant questions of law.” He rejected Chevron’s premise that ambiguities are implicit delegations. Congress may have failed to consider a question, may have been unable to resolve it, or may have chosen language that failed to convey its intent. Moreover, “agencies have no special competence in resolving statutory ambiguities,” the Chief Justice wrote. “Courts do.”
Chief Justice Roberts seemed particularly upset by Chevron’s deference for agency interpretations that change over time. In National Cable & Telecommunications Association v. Brand X Internet Services (2005), the Supreme Court even held that a new agency interpretation of a statute could overcome a prior judicial interpretation. Every statute has “a single, best meaning,” the Chief Justice wrote, and that meaning “is fixed at the time of enactment.”
Chief Justice Roberts acknowledged that agencies sometimes have subject matter expertise that courts lack. Such expertise would justify Skidmore deference, based on the agency’s “power to persuade,” he noted, but it did not require vesting administrative agencies with “ultimate interpretive authority.”
He also acknowledged that Congress may, “subject to constitutional limits,” delegate discretionary authority to administrative agencies. Some members of the Supreme Court have signaled their willingness to impose limits on congressional delegations, but Loper Bright did not address this question. What the Court did say in Loper Bright is that statutory ambiguities will no longer be considered delegations.
Finally, the Court held that stare decisis did not require continued adherence to Chevron. Importantly, however, Chief Justice Roberts made clear that overruling Chevron did not mean overruling past decisions that had relied on Chevron. “The holdings of those cases that specific agency actions are lawful—including the Clean Air Act holding of Chevron itself—are still subject to statutory stare decisis despite our change in interpretive methodology.”
Implications for Extraterritoriality
Courts in the United States determine the geographic scope of federal statutes by applying a presumption against extraterritoriality. The Supreme Court has applied different versions of the presumption at different times (and sometimes has applied no presumption at all). Most recently, in Abitron Austria GmbH v. Hetronic International, Inc. (2023), a closely divided Court held that federal statutes apply only when the conduct relevant to the statute’s focus occurs in the United States unless Congress has clearly indicated otherwise. Absent binding precedent on the reach of a particular provision, it is this presumption that courts will apply to determine the geographic scope of statutes administered by federal agencies.
Hart-Scott-Rodino
Section 7 of the Clayton Act prohibits mergers and acquisitions when “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” Because it can be as hard to undo a merger as it is to unscramble an egg, Congress passed the Hart-Scott-Rodino Act (HSR) in 1976 to require pre-merger notification to the Department of Justice and Federal Trade Commission (FTC), plus a waiting period, for large mergers. HSR’s text says nothing about geographic scope. It does give the FTC authority to “define the terms used in this section,” “exempt … classes of persons, acquisitions, transfers, or transactions which are not likely to violate the antitrust laws,” and “prescribe such other rules as may be necessary and appropriate to carry out the purposes of this section.”
Exercising this authority, the FTC created three exemptions for mergers and acquisitions involving foreign commerce. But mergers that do not fit within one of these exemptions are subject to HSR—even when the merger is between two foreign firms. How might these regulations fare after Loper Bright?
To the best of my knowledge, there is no Supreme Court precedent on the scope of Clayton Act § 7, much less HSR. (The Court has held that the Sherman Act applies to foreign conduct causing anticompetitive effects in the United States and that § 4 of the Clayton Act applies to foreign injuries.) If a court were to apply the current presumption against extraterritoriality to HSR, it would find no clear indication of extraterritoriality and might apply the statute only to conduct in the United States. This could call into question the statute’s applicability to foreign mergers.
HSR delegates interpretive authority to the FTC. But there is no express delegation of authority to determine the geographic scope of the statute, and I doubt that the FTC’s authority to “define the terms used in this section” or to “prescribe such other rules as may be necessary” to carry out the section would be construed as such authority. The FTC also has authority to create exemptions—authority it used to define HSR’s geographic scope—but the FTC can create exemptions only if HSR applies in the first place. After Loper Bright, that is a question a federal court would determine by applying the presumption against extraterritoriality.
I do not mean to suggest that the FTC’s interpretation of HSR’s geographic scope is necessarily invalid. But defending that interpretation has become more complicated after Loper Bright than it was before.
Regulation S
Section 5 of the Securities Act makes it illegal to sell a security unless a registration statement is in effect. The text of this provision says nothing about geographic scope. Section 19 gives the Securities and Exchange Commission (SEC) authority to make “such rules and regulations as may be necessary to carry out the provisions of this subchapter.”
With this authority, the SEC adopted Regulation S, interpreting the registration requirements not to apply to “offers and sales that occur outside the United States.” This is probably how a court applying § 5, too. Indeed, in Morrison v. National Australia Bank Ltd. (2010), the Supreme Court adopted a similar “transactional test” for Section 10(b) of the Securities Exchange Act.
The problem appears when one looks closely at the SEC’s interpretation of “outside the United States.” The details are complex. For present purposes, it is enough to note that offers and sales “specifically targeted at identifiable groups of U.S. citizens abroad, such as members of the U.S. armed forces serving overseas,” do not count as offshore transactions, while offers and sales to certain non-U.S. persons in the United States do. The fine distinctions that Regulation S draws between different buyers and different sales efforts make good sense as a matter of policy, but it is hard to see how a court could justify them relying only on traditional tools of statutory interpretation.
The Second Circuit has upheld Regulation S as reasonable interpretation of § 5, but it did so relying on Chevron deference. Under Loper Bright, this decision remains binding precedent but, of course, only in the Second Circuit. If Regulation S were challenged elsewhere, the court would apply the presumption against extraterritoriality and might reject the SEC’s nuanced approach, creating a circuit split. The issue might then end up in the Supreme Court where, again, the Second Circuit’s decision would carry no weight as precedent. In short, an interpretation of the Securities Act’s registration requirements that seemed settled has become less so.
The Volcker Rule
In 2010, following a serious financial crisis, Congress passed the Dodd-Frank Act. One part of the act is the so-called Volcker Rule, which prohibits banks from engaging in proprietary trading. The rule creates an exemption for certain trading that “occurs solely outside the United States.” Congress gave federal banking agencies, the SEC, and the Commodity Futures Trading Commission authority to “adopt rules to carry out this section.” The agencies duly adopted a regulation defining the Volcker Rule’s geographic scope in detail. Oversimplifying substantially, it turns on such things as where a bank is organized, where its personnel are located, where the financing comes from, and the proportions of assets, revenue, and income held or derived inside versus outside the United States.
Because no precedent governs the geographic scope of the Volcker Rule, a court would apply the presumption against extraterritoriality. Here, there is a clear indication of extraterritoriality in the statute’s exemption for trading outside the United States (if the rule did not apply abroad, no exemption would be necessary). But the statute gives no further guidance on what “occurs solely outside the United States” means. I suspect that most judges, applying traditional tools of statutory interpretation, would conclude that this phrase refers to the location of the transaction rather than where personnel are located or financing comes from.
The Dodd-Frank Act was intended to prevent another financial crisis by reducing systemic risk. Much of the act applies extraterritorially because systemic risk does not stop at national borders. But the text of the act does not fully delineate its geographic scope. Under Chevron, that task fell to administering agencies; under Loper Bright, it falls to courts. Perhaps a sympathetic court could defer to the agencies’ expertise and uphold their interpretation of the Volcker Rule’s reach under some form of Skidmore deference—but only by making it look an awful lot like Chevron deference.
Conclusion
During the Chevron era, in my view, administrative agencies did not use their interpretive authority enough to define the geographic reach of federal statutes. I have noted, for example, that the SEC could have used its rulemaking authority after Morrison to clarify when transactions in unlisted securities occur in the United States for purposes of antifraud litigation under § 10(b), a question with which lower courts have struggled. That possibility no longer remains.
Moreover, instances in which administrative agencies have used their interpretive authority to define the reach of federal statutes now lie open to challenge. Yes, past cases upholding agency regulations under Chevron are still binding. But not many of these involve questions of geographic scope. Yes, Congress could delegate authority to determine a statute’s extraterritorial reach. But existing delegations are probably insufficient and amending these statutes is not easy. Skidmore deference the best hope for sustaining regulations such as those discussed above.
U.S. extraterritorial regulation is likely to be clunkier under Loper Bright than it was under Chevron. Nuanced agency rules that draw fine distinctions and turn on multiple factors may give way to plain language interpretations of statutory text. Ironically, clunkier regulation is more likely to lead to the sort of conflicts with other countries that the presumption against extraterritoriality is supposed to avoid.
In my article seven years ago, I concluded that courts should defer to agency interpretations of geographic scope because agencies are better at it than courts:
Agencies are better at understanding the purposes of the statute, the range of regulatory options available to effectuate those purposes, and the potential conflicts with other nations that each of these options presents. Moreover, agencies may adopt more fine-grained regulatory schemes that maximize the achievement of statutory purposes while minimizing conflicts with other nations.
That still seems right to me.