A Trio of Supreme Court and D.C. Circuit Decisions Shake Up Agency Authority
On June 28, 2024, the Supreme Court overturned its long-standing ruling in Chevron v. Natural Resources Defense Council (467 U.S. 837 (1984). The coverage of this decision has been extensive, as the overturning of Chevron severely curtails the regulatory authority of all federal agencies, including the Federal Maritime Commission. But two other recent decisions that have garnered less attention—one from the Supreme Court and another from the United States Court of Appeals for the District of Columbia Circuit—also dealt blows to the FMC and are equally interesting rulings for those in the shipping industry.
The Supreme Court Ends Chevron Deference
To be sure, the Supreme Court’s overturning of Chevron was significant. For almost 40 years, that decision has resulted in deference to federal agencies’ interpretations of statutes that are ambiguous or silent on a particular issue. The Supreme Court had previously held that as long as an agency’s interpretation of statutory gaps was reasonable, a court should uphold it and not impose its own statutory construction to fill those gaps. In its June 28 ruling on two fishing industry cases, Relentless v. Department of Commerce and Loper Bright Enterprises v. Raimondo, the Supreme Court ended deference to agency statutory interpretations and handed the courts the authority to interpret all such questions. While the ruling was expected, there were questions about whether it would result in a challenge to the thousands of prior decisions that relied on Chevron. The Court’s majority opinion answered that question, explicitly noting that holdings in such cases remain lawful and intact and are not subject to re-litigation.
The Supreme Court’s decision is seen as a win for regulated entities and a blow for federal agencies such as FMC. The decision is likely to slow down rulemaking, as already overburdened federal courts see an uptick in regulatory litigation and have to undertake a de novo judicial review of statutory provisions. The end of judicial deference to an agency’s statutory interpretation should result in more successful regulatory challenges. On the downside for business, we can expect some regulatory uncertainty as judges with varying ideologies and levels of expertise conduct their own independent review of every question of statutory interpretation, without industry knowledge or the agency resources that go into rulemaking. That, however, is less of a concern in the maritime transportation arena, which has a long-standing body of legal precedent. If the FMC publishes rules that run contrary to that established maritime law, it is now particularly vulnerable to successful legal challenge.
The D.C. Circuit Vacates an FMC Order
Indeed, earlier this month, the D.C. Circuit chided the FMC for “arbitrary and capricious” application of its own interpretive rule on demurrage and detention and vacated the agency’s order against an ocean carrier. The FMC had found that Evergreen Shipping’s detention charges assessed against a trucking company for the late return of a shipping container were “unjust and unreasonable” because they were charged for days when the port was closed and unable to accept a returned container. Evergreen petitioned the D.C. Circuit for review. In its July 5, 2024, Evergreen Shipping Agency v. FMC decision, the D.C. Circuit found that the FMC failed to respond reasonably to Evergreen Shipping’s arguments and failed to adequately analyze the incentive effect of the detention charges, as its own rule required. The court vacated the Commission’s order and remanded the matter back to the FMC for further proceedings.
The Evergreen case revolves around the determination of the reasonableness of detention charges. As background, the Shipping Act of 1984 requires ocean carriers to “establish, observe, and enforce just and reasonable” practices relating to the assessment of detention charges. The Act left it to the FMC to determine whether a detention charge meets that “just and reasonable” standard. In 2020, the FMC finalized an interpretive rule on the matter to clarify what would be considered just and reasonable practices on demurrage and detention charges when ports are congested or inaccessible. In its interpretive rule, the FMC set forth an “incentive principle,” which provides that—“absent extenuating circumstances”—the determination of whether a detention charge is reasonable is based on the extent to which that charge serves the primary purpose of financially incentivizing “freight fluidity.” As the D.C. Circuit noted in its July 5 decision, while the rule had specified that detention charges would likely be found unreasonable when they do not serve the incentivizing purposes, “such as when empty containers cannot be returned,” the agency had acknowledged that the rule—as an interpretive rule—did not create requirements, mandates, or a “bright line rule” on the issue.
The D.C. Circuit agreed with dissenting Commissioner Bentzel that the incentive principle does not replace the “reasonableness” standard of the Shipping Act and that the Commission was still required—as it had promised—to consider the particular facts and “extenuating circumstances” of a case. It found that the FMC failed to do this, glossing over critical facts and extenuating circumstances raised by Evergreen and effectively treating the incentive principle as the “bright line” rule it had explicitly denied creating in its interpretive rule. The court ruled that it was “arbitrary and capricious for the FMC to commit to making a circumstantial, fact-bound inquiry in the interpretive rule and then, when it came time to apply the rule, to jettison all but its favorite factor.” It went on to hold that the agency’s position that the detention charge at issue had no incentivizing effect, when the detention was charged for a port closing that was announced before the trucking company picked up the equipment, was “illogical” and inconsistent with FMC’s own reasoning. The court vacated the FMC’s order and remanded it back to the agency.
This ruling came even with the court giving deference to the agency, which may no longer be the required standard of review after the overruling of Chevron. If that is the case, the FMC can expect even greater scrutiny of its decisions going forward. And if it is given deference, as it was here, the agency is still on notice that courts are paying attention and will not tolerate arbitrary and unreasonable orders against ocean carriers and other shipping industry entities.
The Supreme Court Ends SEC In-House Tribunals
The FMC may have been dealt a third blow by the Supreme Court’s June 27, 2024 Securities and Exchange Commission v. Jarkesy ruling, which essentially stripped the SEC of its ability to use in-house enforcement proceedings against individuals and entities accused of securities fraud. Agencies like the SEC and the FMC often bring enforcement actions through internal agency tribunals, not in federal court. Those tribunals do not provide a jury trial and are overseen by administrative law judges who are appointed by the agency itself and who can impose civil penalties. The petitioner in the Jarkesy case contended that these in-house proceedings violated the Seventh Amendment, which protects the right for citizens to have certain cases decided by a jury in federal court.
The Supreme Court agreed that the SEC’s securities fraud rules must be enforced before a jury in federal courts, not through agency tribunals and administrative law judges. While the ruling was focused on the SEC, its broad findings likely make it harder for any regulatory agency to bring enforcement actions involving punitive civil penalties. Still, there are many open questions about how wide the decision’s reach will be and what its impact will be on other agencies, especially the FMC. In her dissent, Justice Sotomayor noted that Congress has empowered the FMC (among many other agencies) to impose civil penalties in administrative proceedings. Does the Supreme Court’s majority decision, as Justice Sotomayor states, mean that these agencies “could be stripped of their power to enforce laws enacted by Congress”? Is the decision limited to “civil penalty suits for fraud,” as the majority claims or will it be read more broadly? Even if it is limited, certain FMC civil penalties, such as civil penalties for making false claims or giving false statements, seem comparable to the SEC fraud claims. Must the agency now bring such claims in federal court instead of before an agency proceeding? Moreover, the Court noted that the Seventh Amendment does not apply to cases in admiralty and maritime jurisdiction. Are all FMC enforcement cases, including fraud claims, admiralty matters?
These questions will likely have to be answered in litigation and it may be some years before the full impact of Jarkesy is clear. But, for now, it certainly sounds a warning bell for the FMC and gives the industry a potential basis for challenging at least some of the Commission’s in-house enforcement proceedings.
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