UPDATE: On April 4, 2024, the SEC announced a voluntary stay on the climate-related disclosure rule. This voluntary stay is intended to delay implementation of the rule while the legal challenges are unfolding.
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In 2024, the Securities and Exchange Commission (“SEC”) released a final rule on climate-related disclosures for business. Lawsuits challenging this rule were immediately filed in courts across six different jurisdictions. Additionally, in 2023, California passed two climate-related disclosure laws, and these laws are also being challenged. While the lawsuits are all slightly different, the plaintiffs raise similar legal arguments against both the SEC and California rules.
Background
The SEC rule and California laws both require some businesses to disclose specified climate-related information. On March 6, 2024, the SEC released the final rule that will require most registrants, as defined in the SEC regulations, to disclose climate-related information such as “a description of the actual and potential material impacts of any climate-related risk on the registrant’s strategy, business model, and outlook” and “a description of any processes the registrant has for identifying, assessing, or managing material climate risks.” The Enhancement and Standardization of Climate-Related Disclosures for Investors, 89 Fed. Reg. 21,668, 21,915-16 (March 27, 2024). Some larger companies will have additional reporting requirements including disclosing scope one and two emissions. The final SEC rule imposes a graduated compliance date schedule with the earliest compliance date being 2026 for the largest registrants. A prior NALC article provides a more in-depth overview of the SEC rule and California laws.
On October 7, 2023, Governor Gavin Newsom of California signed into law two climate-related disclosure bills – SB 253 and SB 261. SB 253 requires business entities with total annual revenue over $1 billion who do business in California to disclose scope one and two emissions starting in 2026 and scope three emissions starting in 2027. SB 261 requires business entities with total annual revenue over $500 million who do business in California to prepare a public report on climate-related financial risks starting in 2026.
Legal Challenges to the SEC Rule
Within a week of the SEC releasing the final rule, nine cases were filed in six circuit courts challenging the rule. In the Second Circuit, the plaintiffs filed Natural Resources Defense Council, Inc. v. SEC, 24-01623 (March 12, 2024). In the Fifth Circuit, plaintiffs filed four cases which were consolidated into Liberty Energy Inc. v. SEC, 24-01624 (March 8, 2024)(“Liberty Energy”). In the Sixth Circuit, the plaintiffs filed Ohio Bureau of Workers’ Compensation v. SEC, 24-01631 (March 13, 2024). In the Eighth Circuit, the plaintiffs filed Iowa v. SEC, 24-01522 (March 12, 2024). In the Eleventh Circuit, the plaintiffs filed West Virginia v. SEC, 24-01634 (March 6, 2024). Finally, in the D.C. Circuit, the plaintiffs filed Sierra Club v. SEC, 24-01633 (March 13, 2024). While the cases are brought by different people in different courts, they were all based on the same legal principle that allows parties to challenge agency regulations.
Specifically, under the Securities Act of 1933, a party may ask the U.S. Court of Appeals to review a SEC rule. The requesting petition must be filed within sixty days of the agency publishing the final rule. The court is directed to “affirm and enforce the rule unless the [SEC’s] action in promulgating the rule is found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; contrary to a constitutional right, power, privilege, or immunity; in excess of statutory jurisdiction, authority, or limitations, or short of statutory right; or without observance of procedure required by law.” The plaintiffs in all of the lawsuits filed their cases under this petition for review provision, claiming that the SEC acted outside of its statutory authority, abused its discretion, and that the rule was arbitrary and capricious.
On March 19, 2024, the SEC filed a Notice of Multicircuit Petitions for Review with the Judicial Panel on Multidistrict litigation. Multidistrict litigation is meant to preserve judicial resources in situations like this, where multiple cases on the same issue have been filed in several judicial circuits. All cases are then transferred to one jurisdiction, where a single circuit court is randomly chosen from the group where the petitions were originally filed. In this case, the Court of Appeals for the Eighth Circuit was selected. Multidistrict litigation does not combine the cases themselves- in fact, all of the petitions for review will be reviewed by the Eighth Circuit separately. A prior NALC article provides an overview of multidistrict litigation.
Because the multidistrict litigation process is still in the early stages, the plaintiffs in most of the cases have not filed their complaints outlining all of their arguments. However, because the plaintiffs in the Liberty Energy case asked the Fifth Circuit to grant an administrative stay, they were required to file a complaint detailing their arguments. The arguments in the other cases will likely be similar to theirs.
The plaintiffs in Liberty Energy asked the Fifth Circuit to issue both administrative stay as well as a stay pending review on enforcement of the final rule. They were both granted. When a court issues an administrative stay of an agency rule, it prevents the rule from going into effect while the court is reviewing the case. Before making the decision to grant a stay, a court will consider four factors. These are 1) whether the party is likely succeed on the merits of their argument; 2) whether the party will be “irreparably injured” without a stay; 3) if other parties to the case will be substantially injured if a stay is granted; and 4) if granting the stay is in “the public interest”. Nken v. Holder, 556 U.S. 418, 426 (2009).
In support of the first factor, Liberty Energy argued that plaintiffs are likely to succeed on the merits of the case because the SEC final rule violates the major-questions doctrine, is arbitrary and capricious and is not supported by substantial evidence, and is a First Amendment violation.
The major questions doctrine, developed by the United States Supreme Court, holds that without explicit Congressional authority, federal agencies cannot adopt regulations that “concern an issue of vast economic and political significance.” The plaintiffs argue that the major questions doctrine is implicated because the rule “imposes over $4 billion in compliance costs [and] involves broad scientific considerations that lie outside of the SEC’s core competencies.” According to the plaintiffs, the SEC lacks the explicit Congressional authority to adopt this regulation because Congress delegated regulatory authority over climate and emissions related issues to the Environmental Protection Agency, not the SEC. The plaintiffs argue that this shows that Congress knows how to provide explicit authority to an agency regarding climate-related disclosures, and chose not to give the SEC this authority.
The plaintiffs further argue that the rule is arbitrary, capricious, and not supported by substantial evidence. The plaintiffs claim that the type of information businesses are required to disclose related to greenhouse gas emissions and climate risks is “subjective and speculative”, which is arbitrary and capricious. The plaintiffs also claim that the SEC rule is not supported by substantial evidence because there is “mixed evidence showing that an SEC rule will result in improved board and company performance and shareholder value.”
Lastly, the plaintiffs argue that the rule violates the First Amendment to the U.S. Constitution, which prohibits Congress from making laws “abridging the freedom of speech.” Courts utilize three tiers of scrutiny to determine if a law is constitutional under the First Amendment, with strict scrutiny being the highest standard. The plaintiffs rely on the Supreme Court’s holding in Nat’l Inst. of Family & Life Advocates v. Becerra, 585 U.S. 755 (2018), which was a case concerning the disclosures California required for licensed and unlicensed crisis pregnancy centers . In this case, the Court held that content-based regulations of speech are generally analyzed using strict scrutiny, but the Court has analyzed “[laws that] require professionals to disclose factual, noncontroversial information in their commercial speech” or “regulation of professional conduct, even though that conduct incidentally involves speech” with a lower standard. However, the plaintiffs in this case claim that the information required in the SEC disclosures is politically charged and highly controversial and argue that the court should apply “strict scrutiny”. To pass the strict scrutiny test, the government must prove that the law is narrowly tailored to serve a compelling state interest. The plaintiffs argue that the final rule cites consumer interest as one of the purposes of the rule and consumer interest is not enough to be a “compelling state interest.” For these reasons, the plaintiffs argue that they are likely to succeed on the merits of the case. A prior NALC article provides a more in-depth overview of the First Amendment.
To support the second factor in asking the court to grant a stay, the plaintiffs argue that they will suffer irreparable harm due to the compliance costs of the rule and impairment of their First Amendment rights. The plaintiffs claim that they will need to “create elaborate internal control systems and disclosure control procedures to capture and distill information related to physical and transition risks, severe weather events, severe natural conditions, and greenhouse gas emissions” to comply with the final rule.
The plaintiffs did not address why they think they will succeed on the third factor in asking the court to grant a stay. For the fourth factor, plaintiffs argue that the public interest weighs in favor of granting the stay. According to the plaintiffs, the SEC is attempting to enforce an invalid rule that will negatively affect the energy sector.
As part of the multidistrict litigation process, when the cases were transferred to the Eighth Circuit, the Fifth Circuit dissolved the original stay. The plaintiffs have filed a new (and similar) petition for a stay in the Eighth Circuit, but no ruling has been released. This litigation is at the very beginning stages, and will develop over months and maybe years to come. In the meantime, the plaintiffs have filed a new case in the Northern District of Texas, Liberty Energy Inc. v. SEC, 3:24-cv-00739 (March 28, 2024) challenging the rule with similar legal arguments, although procedurally different statutes. A stay has been requested in the new case as well.
Legal Challenge to the California Laws
In 2023, California passed two laws requiring some businesses to disclose climate related risk information and greenhouse gas emissions. On January 30, 2024, the plaintiffs filed Chamber of Commerce of the U.S. v. Randolph, 2:24-cv-00801 (C.D. Cal.). In this case, a group of industry associations led by the Chamber of Commerce of the United States filed a lawsuit against the California Air Resources Board alleging that the two California climate-related disclosure laws impermissibly regulate speech and regulate areas outside of California’s authority. Specifically, the plaintiffs claim that the laws violate the First Amendment to the U.S. Constitution, are preempted by the Clean Air Act (“CAA”), and violate the U.S. Constitution’s Dormant Commerce Clause.
The plaintiffs claim that SB 253 and SB 261 violate the First Amendment to the U.S. Constitution, which prohibits Congress from making laws “abridging the freedom of speech.” States are also prohibited from “abridging the freedom of speech” through the Due Process Clause of the Fourteenth Amendment of the U.S. Constitution. The plaintiffs rely on the Supreme Court’s holding in Nat’l Inst, of Family & Life Advocates v. Becerra, discussed above, and asks the court to apply strict scrutiny.
The plaintiffs in Chamber of Commerce of the U.S. v. Randolph claim that both California climate-disclosure related laws apply to noncommercial speech because the climate-related disclosures are required regardless of whether a commercial transaction is occurring. Additionally, the plaintiffs claim that the California laws “[compel] companies to engage in costly speech on ‘climate change,’ an issue the Supreme Court has acknowledged is ‘controversial.’” Because the plaintiffs claim that the speech is noncommercial and on a controversial topic, they ask the court to hold California to the high standard of the strict scrutiny test. The plaintiffs claim that the laws are not narrowly tailored because the laws apply to any business entity that meets the revenue threshold and does business in California, regardless of whether the business is organized in California and does not provide exceptions for “companies that have low greenhouse-gas emissions or face negligible risks from climate change.” The plaintiffs further allege that the laws do not serve a compelling state interest because the “legislation cites no evidence, for example, that the public’s response to the disclosures would result in material changes in companies’ emissions.” For these reasons, the plaintiffs claim that the laws will fail the strict scrutiny test.
The plaintiffs also claim that the California laws are preempted by the CAA. The U.S. Constitution includes a Supremacy Clause in Article VI that states that federal law is the “supreme law of the land.” This means that when conflict exists between state and federal law, the federal law preempts the state law. The plaintiffs claim that it is the federal government’s job under the CAA to “implement programs to regulate pollution, including greenhouse gases.” While the federal government and the states work cooperatively to implement the CAA, the plaintiffs argue that states may not regulate pollution sources outside of their borders and may only comment on another state’s emission plan. To learn more, click here for an NALC article on federal preemption.
Lastly, the plaintiffs claim that the California laws violate the Dormant Commerce Clause of the U.S. Constitution. The Dormant Commerce Clause prohibits states from passing legislation that is significantly burdensome on interstate commerce. The plaintiffs claim that the California laws are regulating emissions outside of California by requiring “out of state companies that do little business in California” to comply with the disclosure requirements if the business meets the revenue threshold. It’s important to note that in May 2023, the Supreme Court issued a ruling in National Pork Producers Council v. Ross, 598 U.S. 356, which held that the dormant commerce clause permitted states to pass facially neutral laws that happen to have an outsized effect on out-of-state businesses. The effect of this ruling and how it will impact dormant Commerce Clause implementation going forward is largely unknown. To learn more, click here for an NALC article discussing the ruling.
The case challenging the California laws is also in the early stages. The defendants filed a motion to dismiss, and the court has not ruled on this motion yet.
Conclusion
The cases challenging the SEC rule pending in the Eighth Circuit and the California laws are still in the early stages. The lawsuits are all slightly different, but they make similar legal arguments. The cases will unfold in the coming months and years.
To read the final SEC rule, click here.
To read the California climate related disclosure laws, click here for SB 253, and here for SB 261.
To read the Securities Act of 1933, click here.