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Slide text: J.P.Morgan, Eye on the Market, J.P.Morgan. JULY 2024. The Supreme Court vs The Regulatory State. A presenter speaks from a video call tile on the right of the slide, while the left shows an AI-generated image of Supreme Court justices in black robes, standing over rubble of the Supreme Court and hoisting pillars on ropes.

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Good afternoon, everybody. This is Michael Cembalest with the early July 2024 Eye on the Market webcast. I wanted to do a brief webcast on what's happened to the Supreme Court. Nothing to do with the Trump immunity cases. I wanted to focus on something that a lot of our clients are focused on and affects the economy, productivity, and many of the businesses that our clients own and operate.

The Supreme Court term just ended, and there were some major decisions made regarding the regulatory state. And we could be facing the biggest rollback or challenge slash push back on the regulatory state since the early days of the Reagan administration. So I thought it was important to comment on this. We do have a big piece coming out for portfolio managers, chief investment officers, and other diversified investors on US small cap stocks and how miserably they've done. We're going to release that either next week or the week afterwards. But this Zoomcast is on is on the latest news out of the Supreme Court regarding regulations.

Whenever I talk about regulations, there's a couple of examples I like to use when talking about the need at times to slow the regulatory engine.

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Text: "A politician's dream in a businessman's nightmare", by George McGovern. "When Picking Apples on a Farm With 5,000 Rules, Watch Out for the Ladders", New York Times.

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My personal favorite is a piece written by George McGovern in 1992, and for those of you that remember McGovern, he was one of the most liberal and progressive senators of the 20th century. And after he retired, he opened up this hotel in Connecticut called the Stratford Inn, and a combination of red tape and regulations completely killed his business.

And he wrote a really thoughtful and heartfelt article called A Politician's Dream Is a Businessman's Nightmare about the impact of regulations on small business and how hard it is to strike the right balance and how he wished he had known all of this while he was a senator because it would have made him a much better legislator. And so that was surprised to hear that from McGovern and maybe even more surprising is from The New York Times, double exclamation point, they wrote an article a couple of years ago about the Apple orchards in New York and how difficult it is for them to survive with 5,000 rules, hundreds of which deal with things like the angling of ladders used and then over 10,000 words on pesticide spraying.

But whenever I talk about this, I want to be balanced, and we also live in a world where there have been some toxic train derailments recently, other deadly Amtrak derailments, a lot of which have to do with an excessively deregulatory or under-regulated industry. We now have something called PFAS, which are cancer-causing forever chemicals in food and water. We live in a country where around half of all the rivers, streams, lakes, and ponds are too polluted for swimming, fishing, eating fish, or drinking water, and then we had massive under-regulation of the pharmaceutical sector as it related to the opioid crisis. So striking the right balance in regulation is important, which is presumably what the court's trying to address

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A graph with a blue and a gold line is titled, Regulatory barometers. Years from 1961 to 2021 extend along the x-axis. Number of new pages per year for the Federal Register, 4 year moving average, lies on the left-side y-axis, while Number of new pages per year for the Code of Federal Regulations, 4 year moving average, extends along a right-side y-axis. Both the Federal Register and Code of Federal Regulations lines spike around 1981. After dipping down briefly around '89, the Federal register line climbs steadily upward, reaching past 80k in 21. The Code of Federal Regulations line has a spiky, irregular pattern, reaching about 1k in 2021.

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There-- it's hard to come up with really good clean barometers of the regulatory state. There's a couple of them that we-- that we do look at. One of the widely cited ones is there's something called the federal register, and there's another one called the code of federal regulations. Both of those are-- and explained it in the piece and the written piece if you want to see the details-- both of those are codifications of federal rules and regulations that individuals and businesses and other regulated entities have to comply with.

And as you can see from the chart, the largest and most sustained deregulatory agenda took place in the early Reagan administration and what the chart here is showing for each one of the variables, the number the number of new pages published in these things. You can also see that there was a substantial deregulatory push during the Trump administration, but a lot of that was or at least a good chunk of it was then reversed by Biden using some of the same techniques that Trump had used.

So now the Supreme Court has waded into this-- yeah, one more quick chart here.

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Another chart is entitled, Economically significant rules published in first year. Cumulative number of rules. Number of months in office from 0 to 12 extends along the x-axis. Cumulative number of rules from 0 to 75 extends along the y-axis. The chart compares presidents Regan, Bush 41, Clinton, Bush 43, Obama, Trump and Biden, with lines for each. The line for Biden far surpasses the others, reaching about 73 at 12 months in office, followed by Obama, then Clinton, Bush 43, Bush 41, Trump, and Regan, whose line barely reaches above 0 at 12 months. Text: Source: Federal Register, Office of Regulatory Affairs, JPMAM, 2024.

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Here's a chart on the number of economically significant rules published in the first year of each president. And, again, the window here is Reagan at the bottom then Trump then the Bushes then Clinton then Obama and then Biden all the way at the top. So this is another barometer. None of these is perfect, but when you put them all together, you get a pretty clear picture of these kinds of things.

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Text: End of Chevron deference. Revised statute of limitations when challenging government regulations. Major Questions Doctrine. Right to a jury trial. LNG exports.

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So what just happened and why are we doing an Eye on the Market on something like this as arcane as Supreme Court rulings at the end of the term? Again, we may now get when you put this all together a really substantial push back on the regulatory state. But of the five things I'm going to talk about briefly-- the end of Chevron deference, a change in the statute of limitations when challenging government regulations, something new called the Major Questions Doctrine, the right to a jury trial surprisingly enough makes its way into this discussion, and then recently a-- I just want to give an update on a ruling as it relates to LNG exports.

So let's start with the big one, which is the Chevron deference.

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Text: Most bills are passed with a lot of vague, ambiguous and underspecified language. Since the Chevron deference ruling in 1984, the government agencies have figured it out What is a "stationary pollution source," What is a "vehicle." Chevron deference was a frequently invoked concept in American law: the case has been cited in 70 Supreme Court decisions and in 17,000 lower court opinions.

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So most bills are passed with an enormous amount of vague at times deliberately ambiguous and underspecified language. So if you're going to give in the energy bill an energy credit, you might just simply say, well, if you buy an electric vehicle, you qualify.

Well, what does electric mean? Is that plug-in hybrids? Is it any-- is it have other kind of regular hybrids? What's a vehicle? Does it include an ATV, a tractor, or only passenger cars?

In the original case that this came from, a statutory source of pollution was the thing that was at issue. Since the Chevron Deference Ruling in 1984, the government agencies have figured it out because in that decision, the Supreme court ruled, well, the agencies are best positioned to interpret all this vague and ambiguous language in government bills. Let them just do it. And when you then went to challenge a rule or regulation in court, the courts were instructed based on the Supreme Court guidance that the courts should give deference to the government agencies, and this has been a very frequently used concept in American law. I think 70 supreme court decisions and over 15,000 lower court opinions since that time have relied on Chevron deference.

So the agencies basically get to come in and say, look, here's how we interpret it, and we-- if you don't like it, too bad. That's the way we've interpreted it. And Justice Roberts, for the majority opinion, has now thrown all of this out, basically saying the agencies have no special competence-- is his phrase-- no special competence. If somebody said I had no special competence to do this job, I'd be pretty offended.

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Text: Justice Roberts, for the majority: agencies have no special competence here and there is no reason for courts to be compelled by agency interpretations. Easier for courts, particularly Republican judges and a GOP-dominated Supreme Court, to strike down environmental regulations, SEC and labor regs and restrictions on heavily regulated industries. Wave of litigation challenging agency rulings, judge-shopping (KBJ/Kagan: "flood of lawsuits"). Even bipartisan legislation may now be harder to pass since Congress will have to add greater specificity in its bills, rather than leaving such work to agencies. Many bills that Congress intends to put in front of Biden before his term ends could be affected: Al privacy, funding hospitals and community health centers, telehealth/pharmacy benefit manager rules, etc. Turnabout is fair play: if Trump wins, anti-development groups may engage in judge shopping and appeals to postpone projects and DC Circuit court judges appointed by Biden and Obama may challenge Trump cabinet regulatory rollback decisions. The DC Circuit currently has 7 judges appointed by Democratic Presidents and only 4 appointed by Republican Presidents. Supporters of the Chevron deference hope that a future Congress passes legislation to codify it, this could be challenged by conservative justices citing Article Ill concerns.

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But he said, the agencies have no special competence and there's no reason for the courts when people come in to challenge government regulations that the court should be bound or compelled by whatever the agency said. And the courts can decide for themselves whether or not the agencies made a sensible decision or not. Because of this, it's going to be a lot easier for the courts, particularly the GOP-appointed ones, to strike down certain environmental regulations, SEC, and labor rules on heavily-regulated industries, things like that.

And you're also going to get a good amount of judge shopping. For those of you that know what that's all about, you can pick a court that you'd like to challenge something in because you think it might be favorable to you. And Ketanji Brown Jackson and Kagan on the court in their dissent, are predicting a flood of lawsuits and litigation because of this, challenging all sorts of agency rulings.

It's going to make it harder to be a Congressman now because in the past, you could use pretty vague language. Your staffers could help you figure out what it means for those in Congress that pay attention to these details. Now they're not going to be able to just leave the interpretation of the vague language up to the government agencies. If you really want something to happen knowing that an agency ruling might be challenged in court, you're going to have to be more specific in the drafting of the bills.

I think the average person that you talk to on the street would say, well, that's a good thing. These legislators should legislate and spell out exactly what it is they want. Well, it takes longer to draft bills if you're going to do that, there's going to be more fighting to get bills passed because more of that stuff's going to have to be thrashed out in Congress, and it's probably going to slow the pace of legislation. And a lot of the bills that Congress intends to put in front of the Biden before the end of his term could be affected by this, which means that the bills are going to have to get redrafted or they're going to just have to take their chances that when the agencies interpret them, they're all going to get challenged.

Now turnabout is fair play. So if Trump wins, then anti-development groups that are against infrastructure projects, pipelines, things like that can do it themselves, and they can go to the DC circuit court where there's a lot of democratically appointed judges and try to block projects by challenging Trump's cabinet interpretations of rulings. So this can be used by both sides to just slow the pace of everything.

The supporters of the Chevron Deference the way that it was, and I think both Kagan and Jackson said this. They hope some future Congress comes along and says we're actually going to pass a law codifying that deference. In other words, we're going to pass a law saying any unspecified vague language in any bill, we direct the agencies to figure it out. But given the direction the court is going, I wouldn't be surprised if some of the conservative justices would have a problem with that as well.

They would cite Article 3 concerns, essentially against impinging on the rights of the courts and the fact that the agencies themselves just have no special constitutional power to bind the courts with their interpretation. So this is a pretty big deal for something to be thrown out that lasted since 1984 and heavily impacted the way that lawmaking and rules work.

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Text: Any agency action with "vast economic and political significance" requires clear Congressional authorization. Examples of MQG applied by the Supreme Court since 2021: Alabama Association of Realtors v Dept of Health and Human Services: Court rules that HHS overstepped its authority in trying to implement an eviction moratorium. National Federation of Independent Business v Dept of Labor: Court rules that OSHA overstepped its authority by implementing wide-reaching vaccine mandates without congressional authorization. West Virginia v EPA: Court held that the EPA overstepped its authority granted by the Clean Air Act when implementing the Clean Power Plan and regulating CO, emissions from existing power plants. Biden v Nebraska: Court held that the HEROES Act, which allowed the Secretary of Education to "waive or modify" legal provisions governing student loans due to war or national emergencies, did not empower him to waive $430 billion in student loans by reducing or eliminating most debts when the pandemic ended.

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So that's the first one.

The second one, something called the Major Questions Doctrine, and in English it means any major doctrine adopted by Congress, if the agency tries to interpret whether it's an energy bill, clean power plan, or anything else, if there's substantial economic and political significance, the agencies can't do anything without express written clear Congressional authorization in the bill to do that. They can't come up with their own meanings, and there have been four examples of this since 2021.

The first one was a case where the court ruled that HHS overstepped its authority during COVID in trying to implement an eviction moratorium. Again, the court basically saying if Congress wanted that, they should have specified it. You can't leave that decision to HHS.

The court also ruled that OSHA overstepped its authority by implementing a wide-reaching vaccine mandate, again, without Congressional authorization. The court also held that the EPA was overstepping its bounds related to the Clean Air Act and the Clean Power Plan when they tried to regulate CO2 emissions on existing power plants. And then the last one is the court held that the secretary of education without express legislative power to do so was overstepping its bounds by waiving and modifying student loans. So this is another piece of the puzzle where the Supreme Court is saying the agencies can't just take a concept that's present in a bill and expand it into something with a vast economic and political significance unless the bill clearly authorizes that.

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Text: In Corner Post v Federal Reserve Board of Governors (June 2024), the Court held that the statute of limitations for bringing pre-enforcement challenges to a federal regulation starts at the time a business is adversely affected by the regulation, rather than when the regulation was first adopted. It will now be possible for companies to challenge regulations that were adopted more than six years ago (and even decades earlier), as long as the plaintiff can prove that its own injury from the regulation began within the last six years.

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So number three, the statute of limitations for challenging federal regulations, this one sounds boring, but I guarantee you it's not. So when the statute of limitation-- a statute of limitations everybody probably remembers who watched 1970s police and procedural shows, how long does something-- how long a period of time has to elapse before you can't sue anymore? And the law-- the rules used to be that there was a six-year period from the time that a rule was adopted, and after six years after the rule's adopted, if you're affected by it, too late. Rules on the books. You can't do anything.

The court has now ruled at the end of this term in June just now that companies can challenge regulations that were adopted way more than six years ago, maybe decades ago, as long as the injury to them is less than six years old. So if you can prove that your own injury from that regulation started within the last six years, you can still sue. So what that means is a new company opens its doors today is negatively affected by a regulation that was passed 22 years ago, they have standing in court to challenge regulation. They may lose, but it's a big deal that they have standing to challenge those regulations, which they didn't used to have.

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Text: In SEC v Jarkesy (June 2024), the Supreme Court ruled that the 7th amendment right to a jury trial also generally applies to many types of civil fines and penalties levied by federal agencies, including by the SEC under the Dodd Frank Act. In many cases, federal regulators and administrative law judges can no longer impose fines without first going to federal court and having a jury trial before lay people. Result: enforcement of federal regulatory measures may become harder, slower and more burdensome.

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And then the last big ruling is something called SEC versus Jarkesy, which ruled that the seventh amendment right to a jury trial also applies to a lot of civil fines and penalties levied by federal agencies. So what's this all about? Up until this case was adjudicated, federal regulators and administrative law judges could just impose fines on people and those fines would have to be paid and they were binding.

They didn't have to go to a federal court and have a jury trial. Now if somebody-- if the-- if a government agency wants to fine you, you have the right to go before a jury of your peers, and the result here is that the enforcement of some of these federal fines and penalties may become a lot harder and slower and more burdensome.

So if you put all of these together-- the right to a jury trial rather than just having a decision by an administrative law judge, the change in the statute of limitations, which makes it easier to challenge regulations, the Major Questions Doctrine, which is trying to cut off the agencies from making vast decisions, and then the end of Chevron Deference-- this is a pretty big deal as it relates to how the whole regulatory system is probably going to function.

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Text: January 2024: D O E announces pause in export applications for exports to countries without free trade agreements with the US. On July 1 the US District Court for the Western District of Louisiana issued a preliminary injunction barring D O E from implementing its moratorium. Court held that plaintiff states could sue in federal court rather than waiting for D O E to reject particular applications, citing the negative impact on tax revenues and investment. Preliminary injunction can remain in eftect until the district court issues a final judgment which may take another year. Government may appeal district court's preliminary injunction to US Court of Appeals for the Fifth Circuit (very conservative) and eventually from the Supreme Court. Bottom line: the government's LNG export moratorium just got harder to defend since it will no longer be entitled to the benefit of Chevron deference.

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And then just to wrap up as an example of that, a district court in western Louisiana has now said that Biden-- Biden's LNG export moratorium, which was passed in January, is no good. And the judge issued a preliminary injunction barring the Department of Energy from implementing this moratorium, and the moratorium had to do with LNG export applications to countries that don't have free trade agreements with the United States. So that's a pretty big deal, and the court held that you could-- that plaintiffs could sue the federal court-- could sue in federal court rather than waiting for the DOG to-- the Department of Energy to reject their applications.

Now, look, this is just a western district of Louisiana court that issued this injunction, and so the federal government, the agent, the Department of Energy, is probably going to first appeal this to the court of appeals and for the fifth circuit and then eventually the Supreme Court if needed. But when they get there, they're going to find that there's a Chevron Deference issue involved because the Department of Energy is no longer going to be given the benefit of the doubt when it came up with this LNG export moratorium in the first place. So this whole export moratorium may be-- may

The Department of Energy may still drag its feet on LNG export applications. Of that, I'm sure, but it's going to be harder for them to defend the concept of a moratorium because they're no longer going to be entitled to the benefit of the doubt with the end of Chevron Deference.

So anyway, that's the story.

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Text: Slide text: J.P.Morgan, Eye on the Market. JULY 2024. The Supreme Court vs The Regulatory State.

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Thank you for listening. Again, we're going to have our small cap piece coming up in the next couple of weeks, but I thought this was really important and particularly as it relates to the next election. Obviously, if anything does change with respect to either party nominee deciding to run or not run, we'll try to have a live webcast where you can ask questions within 24 to 48 hours of that announcement should it ever happen. Thanks for listening. See you soon.

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Text: J.P.Morgan.