The court’s decision is the latest development in the litigation over the SEC’s final rules, which have faced numerous legal challenges since their adoption.

On March 15, 2024, the US Court of Appeals for the Fifth Circuit granted an administrative stay of the Securities and Exchange Commission’s recently finalized climate disclosure rules, in response to a March 8 request.[1] Petitioners had requested the stay in light of the “irreparable injury in the form of unrecoverable compliance costs and constitutional injuries” that they said would result from the rules. In opposing the petitioners’ request, the Commission stated that it was too early for the Fifth Circuit to issue a stay given that the final rules have yet to be published in the Federal Register and will not require disclosures until 2026 at the earliest. The Commission also referenced the lottery by which a court will be chosen to handle the litigation challenging the regulations, accusing the petitioners of forum shopping. The three-judge panel did not provide details on its reasoning.

The stay is just the latest development in the rapidly evolving litigation landscape with respect to the SEC’s final rules, which had been predicted to be subject to litigation since the SEC issued the proposed rules in March 2022. Now, nearly two years later, the final rules have been the focus of a number of legal challenges in the first days since adoption.[2] In addition to the Fifth Circuit petition that has resulted in the administrative stay:

• attorneys general from 19 states[3] have filed petitions for review in the Eighth and Eleventh Circuits, indicating that the petitioners will argue that the final rules exceed the Commission’s authority and are otherwise arbitrary, capricious, an abuse of discretion, and not in accordance with law;
• the US Chamber of Commerce has filed a petition for review in the US Court of Appeals for the Fifth Circuit (which was consolidated into the petition described above and resulting in the administrative stay); and
• the Ohio Bureau of Workers’ Compensation with the state attorneys general of Kentucky and Tennessee have filed a petition for review in the Sixth Circuit.

The primary bases for these legal challenges include the following:

• The Administrative Procedure Act (APA), under which courts generally must set aside agency action found to be, among other things, (1) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; (2) contrary to constitutional right, power, privilege, or immunity; (3) in excess of an agency’s jurisdiction, authority, limitations, or short of statutory right; and (4) issued without observance of the procedure required by law. An example of the APA in action, and a case that may be tangentially indicative of the direction of travel with respect to certain of the challenges against the SEC’s final climate rules, is Chamber of Commerce v. SEC,[4] in which the Fifth Circuit ruled that the SEC acted arbitrarily and capriciously in its enactment of its share repurchase rule, violating the APA.
• The major questions doctrine, which is a principle in certain administrative law cases that takes the position that Congress does not delegate to executive agencies issues of major political or economic significance. A case that may also relate to the current challenges is West Virginia v. EPA,[5] in which the Supreme Court ruled that certain EPA regulation fell under the major questions doctrine and that Congress did not grant the EPA authority to regulate emissions from existing power plants based on generation shifting mechanisms. While the West Virginia case is distinct from the cases brought against the Commission in the current instance, it is one example of how certain legal principles may play out in this context.
  It is also worth mentioning that the Supreme Court is considering whether to overturn the Chevron doctrine this year.[6] The Chevron doctrine was established 40 years ago in Chevron v. Natural Resources Defense Council,[7] which held that courts should defer to an agency’s reasonable interpretation of an ambiguous statute. A ruling overturning the Chevron doctrine could position courts to apply a keener eye of scrutiny to the SEC’s final rules, either through applying the major questions doctrine or otherwise.
• Finally, under the First Amendment, complainants may take the position that the Commission’s final rules violate corporations’ free speech. As an example, in National Association of Manufacturers, et al., v. Securities and Exchange Commission[8] the District of Columbia Circuit struck down parts of the Commission’s conflict minerals rules on the basis that those portions violated free speech rights.

These challenges will ultimately be consolidated in one Circuit Court, selected by random lottery by the Judicial Panel on Multidistrict Litigation. If the Fifth Circuit wins the lottery, the stay is likely to remain in place; if another Circuit is chosen, however, that Circuit is likely to make its own determination whether to maintain the stay during the pendency of the litigation.[9] Either way, the losing party is reasonably likely to ask the Supreme Court to make the final determination on whether the regulation is stayed during the litigation.

All this raises an important question: whether or how the Fifth Circuit’s stay affects the ultimate compliance dates for the final rules. We think the Fifth Circuit’s initial stay, assuming it remains in effect after the circuit lottery and any Supreme Court review, may not have any formal effect on the ultimate compliance dates of the final rules. However, in the unlikely event that the rules were upheld in their entirety despite a stay having been issued, we could see a change in the compliance dates, either as a result of court action or as a result of the Commission acting on its own. Regardless, market actors continue to look for climate-related risks and strategies to be integrated more fully into business decisions and capital allocation. While ultimately the SEC’s final rules may be overturned in part or in their entirety, or not enforced by a future Commission, state-level developments, regulatory advances in other jurisdictions, and private ordering regarding sustainability matters are likely to continue.

Developments also continued on the same date (March 15) that the European Council endorsed a compromise text on the Corporate Sustainability Due Diligence Directive (CSDDD) after considerable negotiation. The CSDDD would require companies to conduct due diligence to identify and assess environmental and human rights issues across their value chain, and to take steps to prevent and eliminate them, and will also apply to US companies generating over €450 million annual turnover in the EU. (See our blog post for further details.) This development stands in contrast to what is likely to be an extended pushback to the SEC’s final climate rules in the US, and serves to further highlight both global trends and jurisdictional divergences with respect to climate-related disclosure regulation.

Latham & Watkins will continue to monitor these developments.

Endnotes

[1] The request was filed with the Fifth Circuit by Liberty Energy, Inc., and Nomad Proppant Services, L.L.C., and the Court consolidated with that request requests filed by the State of Louisiana, the State of Mississippi, the State of Texas, Texas Alliance of Energy Producers, Domestic Energy Producers Alliance, the US Chamber of Commerce, the Texas Association of Business, and the Longview Chamber of Commerce.

[2] In addition to the challenges described above, on the other side of the policy debate, the Sierra Club is suing the SEC in the US Circuit Court of Appeals for the District of Columbia, alleging that the final rules will yield much less information about companies’ exposure to climate-based risks than the proposed rules would have.

[3] Attorneys general for Alabama, Alaska, Georgia, Indiana, New Hampshire, Oklahoma, South Carolina, Virginia, West Virginia, and Wyoming, filed a petition for review in the US Court of Appeals for the Eleventh Circuit and attorneys general for Arkansas, Idaho, Iowa, Missouri, Montana, Nebraska, North Dakota, South Dakota, and Utah filed a petition for review in the US Court of Appeals for the Eighth Circuit.

[4] Chamber of Com. of the USA v. SEC, No. 23-60255, at *4 (5th Cir. Dec. 19, 2023).

[5] W.Va. v. EPA, 597 U.S. _ (2022).

[6] The cases before the Court that may result in a change to the Court’s approach with respect to deference to federal agencies are Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce.

[7] Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

[8] Nat’l Ass’n of Mfrs. v. Sec. & Exch. Comm’n, 800 F.3d 518, 524 (D.C. Cir. 2015).

[9] 28 U.S.C. 2112(a)(4).