A few weeks ago, the Supreme Court issued its opinion in West Virginia v. Environmental Protection Agency, striking down the Environmental Protection Agency’s “Clean Power Plan Rule.” That rule sought to reduce carbon dioxide emissions using a new “generation shifting” approach that moved existing power plants “from higher-emitting to lower-emitting producers of electricity.” The Court, in analyzing the statutory grant under which the EPA claimed authority, concluded that the rule exceeded the EPA’s power, as it presented a “major question” of economic and national importance that required a clearer statement from Congress to confer such authority.
But the “major questions” doctrine, as it is known, also has implications for other federal agencies—who together issue an estimated three thousand to five thousand final rules per year. For instance, the SEC’s proposed Enhancement and Standardization of Climate-Related Disclosures for Investors Rule (“Climate Rule”), which seeks to impose extensive disclosure requirements on U.S. public companies and foreign private issuers relating to climate change and climate-related risks, raises may of the same issues posed in West Virginia. Following the Supreme Court’s decision, if the SEC finalizes the Climate Rule in substantively similar form, it will likely trigger challenges under the major questions doctrine and, with it, skepticism from courts as to whether it runs afoul of the agency’s statutory authority.
But West Virginia doesn’t spell the end for the SEC’s Climate Rule. Rather, absent additional congressional authorization, the opinion provides insights into the Climate Rule’s potential weaknesses, and thereby offers both a potential path forward for would-be challengers who want to do away with the rule altogether and an SEC that is focused on enacting a rule that can stand the test of time.
The Court’s West Virginia v. EPA Holding
Under the Obama administration in 2015, the EPA first issued the Clean Power Plan Rule under Section 111(d) of the Clean Air Act. Section 111(d), in short, directs the EPA to regulate power plants by setting a “system of performance” for the emission of certain pollutants that reflects “the best system of emission reduction” that the agency has determined to be “adequately demonstrated” for that particular category. Under the Clean Power Plan Rule, the EPA identified three measures for regulating carbon dioxide. The first was “heat rate improvements at coal-fired plants,” which fit comfortably within the agency’s prior emission-reduction strategies. The second and third measures, however, took a new “generation shifting” approach, which required power plant facilities to reduce their own production of electricity or otherwise implement alternative, cleaner methods such as natural gas, wind, or solar. Importantly, the EPA’s own modeling “concluded that the rule would entail billions of dollars in compliance costs (to be paid in the form of higher energy prices), require the retirement of dozens of coal-fired plants, and eliminate tens of thousands of jobs across various sectors.”
The issue did not reach the Supreme Court until 2022, however, due to a seesawing of policy changes under rotating administrations. In 2019, the EPA under the Trump administration repealed the Clean Power Plan Rule, concluding that it went beyond the EPA’s statutory authority. Litigation ensued, and the D.C. Court of Appeals ultimately held the EPA’s repeal rested on a mistakenly narrow reading of the statute. Shortly after the Court of Appeals’ decision, however, the Biden administration took over. That administration sought a stay of the Court of Appeals’ decision in order to reconsider the Clean Power Plan Rule. Various parties in favor of its repeal nonetheless sought Supreme Court review.
Given this unique procedural posture, the Court first had to determine whether it had Article III standing to review the case. It concluded that the EPA’s “voluntary cessation” of conduct—namely, its decision to stay the repeal pending new rulemaking—was insufficient to moot the case. The Court thus turned to the merits.
The Court noted that the “fundamental canon of statutory construction,” which looks to the text of a statute and the overall statutory scheme, is in some cases influenced by the gravity of the question presented: “whether Congress in fact meant to confer the power the agency has asserted.” The Court noted that “extraordinary cases” involving broadly asserted authority and significant economic and political issues should cause the Court to pause before finding Congress conferred such authority upon the agency in question. In these extraordinary cases, the Court reasoned that “both separation of powers principles and a practical understanding of legislative intent make us reluctant to read into ambiguous statutory text the delegation claimed to be lurking there.” In such instances, an agency “must point to clear congressional authorization for the power it claims.” In other words, when an agency action involves a “major question” of political and national significance, a clear statement from Congress delegating that authority is required.
Applying to the case at hand, the Court concluded the agency action—the proposed Clean Power Plan Rule—was an extraordinary case implicating the major questions doctrine. The EPA’s assessment of its rulemaking authority, according to the Court, would “empower[] it to substantially restructure the American energy market” and constituted a “transformative expansion in its regulatory authority.” The Clean Power Plan Rule, according to the majority, represented a different regulatory method from prior EPA rules “by forcing a shift throughout the power grid from one type of energy source to another.” As such, the Court was skeptical of the EPA’s “newly discovered authority” under § 111(d) to implement such different policy judgments. The Court was additionally troubled by the fact that Congress had previously “considered and rejected multiple times” similar regulatory methods for carbon emissions. Finally, the Court highlighted that the EPA did not have the technical and policy expertise associated with certain aspects of the proposed rule.
Therefore, because the agency’s action implicated a major question, the Court required a clear statement from Congress delegating requisite authority to the EPA. In analyzing the statute, the Court concluded that the word “system” could not bear the full weight of the agency’s action: “almost anything could constitute [] a ‘system’; shorn of all context, the word is an empty vessel.” Moreover, although other regulatory schemes within the Clean Air Act used similar systems as the proposed rule, those programs operated under preset emission limits. It was another thing entirely, the Court reasoned, to have the agency itself both implement the system and set the emissions cap that, under such a system, “is indeterminate.”
Joining the Court’s opinion in full but writing an additional concurring opinion, Justice Neil Gorsuch, joined by Justice Samuel Alito, laid out the constitutional and democratic underpinnings of the major questions doctrine. More pertinent here, the concurring opinion also gave what could ultimately serve as guideposts for applying the “major questions doctrine” to future agency actions. As for determining what constitutes a “major question,” Gorsuch offered several factors:
1) when an agency claims the power to resolve a matter of “great political significance” subject to “earnest and profound debate across the country”;
2) when an agency “seeks to regulate a significant portion of the American economy or require billions of dollars in spending by private persons or entities”; and
3) when an agency “seeks to intrude into an area that is the particular domain of state law,” the major questions doctrine is implicated.
Gorsuch additionally offered elements for courts to consider in determining whether Congress has provided a clear statement: Courts are to
1) analyze the legislative provisions with “a view to their place in the overall statutory scheme”;
2) consider “the age and focus of the statute the agency invokes in relation to the problem the agency seeks to address”;
3) assess “the agency’s past interpretations of the relevant statute”; and
4) be skeptical “when there is a mismatch between an agency’s challenged action and its congressionally assigned mission and expertise.”
Applying the factors, Gorsuch concluded that “agency officials have sought to resolve a major policy question without clear legislative authorization to do so.”
From EPA to SEC: Application of West Virginia Holding to Climate Rule
Prior to the Court’s decision in West Virginia, various parties debated (and submitted comment letters questioning) the SEC’s authority to issue its proposed Climate Rule. Now, as the SEC works to address public comments and shape the Rule’s final form, West Virginia and the major questions doctrine will likely play a significant part in the Rule’s substance, longevity, or both.
Does the Major Questions Doctrine Apply to SEC’s Climate Rule?
Although the Climate Rule remains in proposed form, if the agency finalizes the rule in similar form, it’s likely the Court would find the major question doctrine applies.
Notably, in West Virginia much of the tension between the majority decision and dissent arose from how the agency action is characterized. The majority viewed the EPA’s rule as “restructuring the Nation’s overall mix of electricity generation” and “forcing a shift throughout the power grid.” Conversely the dissent, penned by Justice Elena Kagan, characterized the rule more narrowly, viewing it as reducing the carbon-emissions of fossil-fuel plants through well-established tools of environmental regulation. The same clash of characterizations can be made with the SEC’s rule: Is the Climate Rule ultimately about issuer disclosure, something within the SEC’s regulatory ambit, or is it a more sweeping rule of major economic significance? West Virginia offers clues as to how a court might answer that question.
First, the issues of environmental regulation and climate change are, undoubtedly, hotly debated topics of great political significance in the United States and across the world. Second, similar to the EPA’s proposed rule, although the SEC’s Climate Rule seemingly fits within a subset of its general regulatory ambit—establishing disclosure rules for public companies—the derivative implications would likely be a massive restructuring of operations for not only public companies, but also many of the private companies with whom they conduct business. Additionally, as many companies and trade associations noted in comment letters in response to the proposed rule, implementing the significant structural changes to ensure compliance with the rule could result in tens—if not hundreds—of millions of dollars of additional expenditures for each company.Third, prior SEC climate-related rules (such as Items 101(c)(2)(i) and 103 of Regulation S-K) and the agency’s 2010 guidance centered around the agency’s long-standing materiality threshold. The present proposal is not so limited. Fourth, even though the SEC could credibly differentiate itself from the EPA’s more rare usage of § 111(d), this Court could view the explosive new breadth of the Climate Rule as the agency’s discovery of an “unheralded power” in a “long-extant statute.” Finally, as detailed further below, the congressional history of attempted—and failed—legislation on similar issues favors the application of the major questions doctrine.
Do the broad rule-making provisions in the Securities Act and Securities Exchange Act provide clear congressional authorization?
During the comment process for the Climate Rule, a collection of 30 legal professors argued the SEC possesses such authority under both the Securities Act of 1933 and the Securities Exchange Act of 1934. Conversely, a separate collection of 22 legal professors argued, among other things, that the agency overstepped its legal authority. So which is it?
Various statutes provide plausible textual hooks for the SEC’s Climate Rule. Among them are Section 7 of the Securities Act, which allows the Commission to require disclosure in the registration statement for public offerings “as the Commission may by rules or regulation require as being necessary or appropriate in the public interest or for the protection of investors.” Similarly, Section 12 of the Exchange Act permits the agency to promulgate disclosure requirements “as necessary or appropriate in the public interest or for the protection of investors, in respect of the following:. … the organization, financial structure, and nature of the business.” Other potential sources of authority exist.
But “shorn of all context,” phrases such as the “public interest” or the “protection of investors” are likely insufficient vessels for such broad regulatory authority. As the D.C. Circuit noted in Business Roundtable v. SEC,“public interest is never an unbounded term,” and the phrase “must be limited to the purposes Congress had in mind when it enacted legislation.” To that end, a review of the 1934 House Report for the adoption of the Exchange Act notes that Congress did not confer on the SEC “unconfined authority to elicit any information whatsoever” but rather “essential” information for investors about the “true condition of the company.” Can the SEC credibly argue that Scope 3 emissions data or proposed Regulation S-X assumptions and estimates tied to climate-related transition risks fall within the public interest ambit Congress had in mind nearly 100 years ago? Possibly. However, the analysis in West Virginia suggests that this Court will not be persuaded by such a position.
Climate Rule may be Viewed as an “End Around” to Congress.
As noted above, the Court considered it persuasive that Congress consistently rejected proposals to amend the Clean Air Act. In his concurring opinion, Justice Gorsuch similarly noted that the Court found it telling when Congress has previously considered and rejected something akin to the proposed course of action.
If the SEC’s proposed Climate Rule is finalized in substantially similar form, we expect challengers in litigation to advance similar arguments, as Congress has unsuccessfully tried to pass climate-related legislation conferring the SEC with specific powers. For example, last year, the House passed the Corporate Governance Improvement and Investor Protection Act (H.R. 1187) by a 215-214 vote. The proposed legislation included a compilation of several new rules and included two titles (Titles I and IV) dedicated to the SEC’s powers around ESG issues and disclosures. However, the proposed bill has remained in the Senate’s Banking, Housing, and Urban Affairs Committee since June 17, 2021. Additionally, other bills were introduced in recent years—such as the Climate Risk Disclosure Act of 2019—and never passed either house. When considering the SEC’s Climate Rule, a court could view these facts as indicative of an administrative end around to constitutional safeguards.
Where does the SEC go from here?
Regardless of one’s opinion about the SEC’s attempts to mandate more climate-related disclosures, the West Virginia opinion shows that the proposed Climate Rule would likely be viewed by the Supreme Court, and possibly by lower courts based on the West Virginia holding, as the type of rulemaking typically reserved for Congress. However, the SEC can now move forward with the benefit of the West Virginia opinion to guide its next steps. The agency can use the West Virginia opinion as an opportunity to reframe the final rule in a way that can advance its goal of increasing what it sees as informative-to-investors climate-related disclosures while addressing some of the constitutional concerns raised by the Court. Will the agency reconsider Scope 3 emissions disclosures? Could it reinstitute certain materiality qualifiers to some of the proposed disclosures? Will it reconsider the burdensome financial statement requirements under proposed Regulation S-X Rule 14-02 to reduce the significant financial costs?
Whether the SEC makes such changes as it works to finalize the Climate Rule remains to be seen, but it seems likely the agency will face challenges under the major questions doctrine and should consider those challenges when deciding whether to modify the rule in an effort to ensure its longevity.
Scott F. Mascianica is an experienced investigative and litigation attorney and a member of Holland & Knight’s Securities Enforcement Defense and White Collar Defense and Investigations teams. He joined Holland & Knight in 2022 after serving for nearly a decade at the U.S. Securities and Exchange Commission, most recently serving as assistant regional director for the SEC’s Division of Enforcement for the Fort Worth Regional Office.
Jessica Magee is the former associate director of enforcement at the SEC and is now a partner in Holland & Knight’s Dallas office. She focuses her practice on federal and state governmental investigations and enforcement actions, internal investigations, securities class actions, corporate governance and complex commercial litigation involving partnership and company disputes.
Danny Athenour is an attorney in Holland & Knight’s Dallas office and a member of the firm’s Litigation and Dispute Resolution Practice. Mr. Athenour focuses his practices on a variety of matters involving internal investigations and compliance, commercial real estate disputes and complex commercial litigation.