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Executives love to blame their woes on bureaucratic red tape. If only time-consuming and unnecessary regulations could be eliminated, they say, their companies would be much more efficient and profitable.
In the U.S., that hope is close to being realized. Late last month, six conservative members of the Supreme Court handed down a heavy-handed verdict on American companies. The high court’s majority tore up a 40-year-old precedent known as “Chevron deference,” which requires judges to defer to government experts when the law is unclear. They also ruled in a separate case that even long-standing rules can be challenged by new industry players. But CEOs should be careful what they wish for.
The decisions, known as Loper Bright and Corner Post, have reverberated across the country. The justices sent nine cases about wetlands, renewable energy and other regulations back to lower courts for reconsideration. A federal judge in Texas said last week that plaintiffs seeking to overturn the Biden administration’s ban on noncompetition agreements are likely to win now that judges, not agencies, have the final say on regulations.
Then on Tuesday, a federal appeals court asked how the Loper decision would affect the future of a separate Biden rule that would allow retirement plans to use environmental, social and governance factors when choosing between investments with similar financial profiles. Environmentalists, investor and consumer groups despaired, while lawyers predicted that U.S. regulators would have to be more cautious in imposing new rules on everything from money managers to social media platforms and pharmaceutical groups.
That’s just the beginning. Hospitals, utility companies and even gun rights advocates are lining up to use the ruling as a club to fight new rules and challenge existing ones. Some corporate law firms are drawing up lists of regulations they want to attack.
However, many US businesses will be shocked to see the real-world consequences of overturning the regulatory regime that has been in place in America since 1984. There are several reasons why companies should not be too vocal in their support for the Supreme Court.
First, government resources are limited. If agencies have to spend more effort defending their decisions in court, they will have less time to focus on their day-to-day work. Libertarians might like the idea of fewer regulations. But companies that need official sanction to sell drugs, launch investment funds, and build power plants will likely have to wait longer for decisions.
When approved products and permits face legal challenges from competitors, consumer groups or other opponents, they will be heard by judges who may be less inclined to respect the agency’s decisions. Abortion opponents failed in their first attempt to overturn the Food and Drug Administration’s approval of chemical abortion, but don’t be surprised if they find a way to try again. Similarly, it can take years to get approval for pipelines and plants. That process is likely to get even more drawn out.
There will be no certainty either. Until last week, most challenges to the new rules had to be filed within six years of their enactment. But the Corner Post ruling states that companies that do not exist at the time are not bound by the cap. So all the industry has to do is start a new company and any rules become vulnerable at any time.
Given that the private fund industry recently formed a new association in Texas to file a lawsuit against the Securities and Exchange Commission before a very conservative appeals court, they and others in the industry are likely to repeat the trick.
“At least until then there is a clear universe of things that can be challenged, and you will have more confidence after a certain period of time,” said Varu Chilakamarri, a partner at K&L Gates.
CEOs also need to be wary of regulation through enforcement. Agencies like the SEC have a long history of using investigations and fines to set new standards rather than putting them all into regulation. The harder it is to make rules, the greater the temptation to use a case involving one company’s wrongdoing to change the behavior of an entire industry.
Finally, companies should be prepared for different rules in different places. Now that the federal agency is out of the picture, individual judges may come to different conclusions. And if the national standards are overturned, Democratic states like New York and California may enact even more national standards. The result is a disparate set of rules that may not be a problem for local businesses, but could be a nightmare for businesses looking to sell across the country.
“There are benefits in the market for regulation. Regulation provides a level playing field and stability,” said Rachel Weintraub, executive director of the Coalition for Sensible Safeguards, which lobbies for it.
All this uncertainty makes planning difficult and discourages good corporate citizenship. Why should companies invest in the technology and equipment needed to comply if they know some competitors will delay and sue. Running a business while hemmed in by red tape can be frustrating; trying to do it in an uneven and ever-changing landscape can be even worse.
brooke.masters@ft.com
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