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Chief executives are quick to blame their woes on bureaucratic red tape: They say their companies would be more efficient and profitable if they could just get rid of time-consuming, pointless regulations.
In the United States, that wish is on the verge of coming true. Late last month, six conservative justices on the Supreme Court handed down a tough ruling for American companies. The court majority overturned a 40-year-old precedent known as “Chevron deference,” which said judges must defer to government experts when the law is unclear. And in a separate case, they ruled that even long-established rules can be challenged by new entrants in the industry. But CEOs should be careful what they wish for.
Those decisions, known as “Roper Bright” and “Corner Post,” are already sending ripples across the country. The Supreme Court has sent nine cases involving wetlands, renewable energy and a variety of other regulations back to lower courts for rehearing. A federal judge in Texas said last week that plaintiffs seeking to invalidate the Biden administration’s non-compete measures are likely to prevail because judges, not government agencies, have the final say on regulations.
And on Tuesday, a federal appeals court asked how the Roper ruling might affect the future of another Biden rule that allows pension plans to consider environmental, social and governance factors when selecting investments with similar financial profiles.Environmentalists, investors and consumer groups are despairing, while lawyers predict U.S. regulators will be forced to be more cautious about imposing new rules on everything from asset managers to social media platforms to pharmaceutical groups.
And this is just the beginning: Hospitals, public utilities, and even gun-rights groups are already using the decision as a cudgel to fight off new rules and challenge existing ones, and some corporate law firms are compiling exclusion lists of regulations they want to attack.
But many U.S. companies will be shocked when they see the real-world consequences of dismantling the regulatory regime the U.S. has followed since 1984. There are several reasons why companies should not cheer the Supreme Court’s decision with open arms.
First, government resources are limited. If government agencies have to expend a lot of effort defending their decisions in court, they will have less time to focus on their day-to-day operations. Liberals may like the idea of fewer rules. But companies that need official approval to sell medicines, start investment funds, or build power plants are likely to wait longer for decisions.
If an approved product or permit faces legal challenges from rivals, consumer groups, or other opponents, the case will be heard by a judge, who may not have much deference to 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 already takes years to get permits for pipelines and plants; that process will likely drag on even longer.
It also removes certainty: Until last week, most challenges to new regulations had to be brought within six years of their implementation, but the Corner Post ruling said that companies that didn’t exist at the time wouldn’t be bound by those restrictions, so all an industry needs to do is set up a new company, putting any rules at risk at any time.
Given that the private fund industry recently formed an entirely new association in Texas and sued the Securities and Exchange Commission in a particularly conservative appeals court, it’s likely they and others will repeat this tactic.
“At least in the past, there were clear things that could be challenged and the degree of certainty would increase over time,” said Val Chilakamali, a partner at K&L Gates.
CEOs should also be wary of regulation by enforcement. Agencies like the SEC have a long history of using investigations and fines to set new standards rather than writing everything into regulations. The harder it is to make rules, the greater the temptation will be to use one company’s case of wrongdoing to change behavior across an industry.
Finally, companies should prepare for different rules depending on the location. Now that a federal agency no longer has influence, individual judges may reach different conclusions. And if national standards are repealed, Democratic states like New York and California may push for even more standards. The result will be a jumble of different rules that may not be a problem for local companies, but could be a nightmare for companies that want to sell nationally.
“Regulation has market benefits. It creates a level playing field and stability,” said Rachel Weintraub, executive director of the Coalition for Enlightened Security, which lobbyes for just that.
This uncertainty makes planning difficult and inhibits good corporate citizenship. Why should a company invest in the technology and equipment needed to comply with the rules when it knows its competitors will sit back and sue? Operating a business bound by bureaucracy is stressful, but operating in an uneven and constantly changing environment is even worse.
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