Podcast - Non-Delegation Doctrine, FTC's Non-Compete Rule and Green Guides ... Oh My!

Andy Kriha: Hello and welcome to this episode of "An Energized Exchange." I'm Andy Kriha, an associate in the D.C. Office of Holland & Knight, and I am joined today by Halley Townsend, also an associate in the D.C. office of Holland & Knight. We're going to do things a little bit differently today than we normally do. If you have listened before, you know we typically talk about a recent rulemaking and how it is going to impact you and your business right away, or surely as soon as the rule comes into effect. Today, we're talking about a couple of recent court decisions, but they're not going to have an impact for quite some time. But we still think this is some really important stuff to talk about. This is kind of the next big administrative law fight, now that Chevron is done. We might mention Chevron a little bit as well, but we've put out a lot of other content on that. So really what we're talking about today is the non-delegation doctrine and we are going to kind of explore the history of how the non-delegation doctrine has developed in the Supreme Court and more recently in some lower courts. We are going to talk about that in the context of the FTC's non-compete rule, which is currently being challenged in a district court in Texas, and then ultimately tell you why that matters for energy and environmental projects, and specifically the FTC's Green Guides, which are the primary tool for enforcing against greenwashing at the federal level and were promulgated under the same statute as the FTC's non-compete rule. So this is going to be a little bit more of a dense, legal theory-heavy episode. It's going to take us a little while to get to that point about energy and environmental law and climate law. And so just quickly, at the top, if you are on the commercial side of the business and don't want to listen to everything, here's your top-level takeaways, specifically for the Green Guides. This non-compete case is not likely to directly impact the Green Guides. There's a very small chance it could, a little bit higher chance that it's going to indirectly impact the Green Guides by providing a roadmap for how to challenge the Green Guides. But ultimately, any successful challenge to the Green Guides would not remove state authority in the same area, and states, at least to date, have been more aggressive than the federal government anyway, although certainly a new Democratic administration, whether that's Biden or otherwise, could be more aggressive in the next term. Obviously some other events, such as the upcoming election, will intervene in the meantime, but this still matters because this is the primary way for any federal action on greenwashing claims and so we think it's an important thing to talk about.

Halley Townsend: And top-level takeaways with respect to the non-delegation doctrine in general. If there is an expansive version of it like that which was previously approved by the Fifth Circuit, implemented nationwide, then any law that gives an agency discretion will be at some level of risk. Actually dismantling laws that give agencies discretion will of course involve case-specific, statute-by-statute challenges to determine if the agency has actual policy discretion instead of just the ability to adjust policy in response to fact finding, and if so, whether that policy discretion is the type that has been constitutionally granted to the executive or whether it belongs to the legislature. We know that there are at least four votes for an expansive non-delegation doctrine at the Supreme Court, but it isn't at all clear that there are five, so we might be more likely to see a watered down version of the non-delegation doctrine. So jumping in, what is the non-delegation doctrine? This is the concept that the Constitution exclusively granted policymaking authority to Congress in Article I of the Constitution, and Congress cannot delegate that authority to the executive branch not expressly in the Constitution. The non-delegation doctrine was used by the Supreme Court in two cases a long time ago. In 1935, to determine that laws were unconstitutional, but the doctrine has its roots in earlier cases, including a 1928 case that established an earlier version of the intelligible principle test. What is that? The intelligible principle test basically states that so long as Congress provides some level of guidance that establishes the policy goal and keeps the executive branch within the policy goal, Congress can still delegate to the executive significant discretion in how to implement the policy. The intelligible principle test has been weakened over the years, and has not been used to strike down a law since those two 1935 cases.

Andy Kriha: Yeah. So let's look at an example here. And let's look at the Clean Air Act as an example. For a moment, let's set aside what we know about the major questions doctrine and about Chevron deference and that being overturned because those would also intertwine with the non-delegation doctrine in this example. So let's say, you know, EPA under the statute can set pollution limits on a category of stationary sources — you know, some class of industrial facilities — and the statute says EPA is doing this to, quote, "protect the public health." That would probably survive the existing intelligible principle test as it has existed post-1935. EPA is guided by the principle of improving public health, and so it can, you know, promulgate any pollution limits that it needs to in furtherance of that goal, but it can't necessarily deviate from that goal or weigh other factors more than that goal. Still, that might not survive the more rigorous version of the non-delegation doctrine that is, as we'll talk about later, currently good law in the Fifth Circuit, possibly coming back nationwide, because it does give EPA some discretion in determining what exactly "public health" means. Does climate change mean public health because additional heat ultimately impacts health? Little bit of a Chevron question as well. It's kind of ambiguous, but also just a, you know, breadth of authority issue more akin to the non-delegation doctrine. And further, you know, how to weigh other factors. EPA would have a lot of discretion theoretically to weight any other factors it wants, so long as it's still promoting that goal of public health as well. And, and that adds a level of discretion that we think, you know, the current court would be pretty suspicious of. So as we'll discuss more later, say there's a law, the Clean Air Act, basically, as it exists, that tells EPA to set pollution limits and stationary sources consistent with the best available control technology that is economically feasible, and sets a handful of factors for what exactly that means. That would probably survive even the more stringent non-delegation doctrine that might be coming down the road. Because while it doesn't say EPA set this specific limit, it says EPA, go engage in some fact finding. Find out what is the best technology on the market right now. And then, once you've come up with that technology, as long as you can reasonably support that that is the best technology, set the limit based on that. And that's going to be allowed because fact finding is a traditionally executive branch function.

Several conservative justices on the Supreme Court have demonstrated interest in strengthening the non-delegation doctrine to force Congress to pass more narrowly tailored laws that limit executive branch discretion. The closest we've come to a revival to something at 1935 levels or stricter was a 2019 case that was decided by an eight-member court, that was evenly divided ideologically, four conservatives, four liberals. Justice Kavanaugh did not participate because the oral argument for that case occurred in October of 2018, just before he was sworn in. Each of the four conservatives at the time — Roberts, Thomas, Alito and Gorsuch — expressed support for a strengthened non-delegation doctrine. The dissent, written by Justice Gorsuch, laid the groundwork for what a revived doctrine might look like, and still left room for executive discretion in areas of traditional executive authority, like foreign affairs, like fact finding, as we've talked about, so long as the specific factual outcomes result in specific actions. So just as the example I gave above, you know, another example would be tariffs. If the executive branch finds that there is unfair competition from a foreign government, they're undercutting prices, the executive can set a tariff equivalent by how much the foreign government is undercutting prices. An interesting twist here. A lot of people kind of thought, hey, as soon as Kavanaugh joins the court, he might be that fifth vote that's needed. He's actually written on the non-delegation doctrine in the past in some law review articles and, based on those writings, doesn't actually seem like a prime candidate to vote for its revival. Although potentially could vote for something stronger than the status quo, but weaker than what Justice Gorsuch advocated for in that 2019 case. And then, obviously, Justice Barrett has joined the court since then, could be a potential candidate to provide that fifth vote.

Halley Townsend: So bringing it back to energy. Why are we talking about the non-delegation doctrine right now on an energy and climate podcast? The issue is currently raised in a lawsuit at the federal district court in Texas regarding the FTC's non-compete ban rule. And the Fifth Circuit, where Texas is located, currently has binding precedent that takes a much more expansive view of non-delegation than we think even the Supreme Court will ultimately take, but the Supreme Court left that decision in a recent case called Jarkesy v. SEC undisturbed. And so it remains good law until a new case such as the FTC non-compete case gets to the Supreme Court. So the FTC non-compete ban was promulgated pursuant to the same statutory provision, Section 5 of the FTC Act, although slightly different language under the statute as the FTC Green Guides: the non-compete ban under the FTC's authority to prosecute unfair methods of competition and the Green Guides under the authority in the same provision to prosecute unfair and deceptive practices. The Green Guides are particularly susceptible to a non-delegation challenge if the doctrine is strengthened, and if the court strikes down the non-compete rule based on the non-delegation doctrine, depending on how broadly the ruling is framed, it could take down the Green Guides as well, without the Green Guides even needing to be separately challenged. Although we think that the likelihood of that is extremely low.

Andy Kriha: And so what are the Green Guides for this context? Well, they provide the FTC's definitive view on how it can use its unfair and deceptive practices authority, which we'll describe more later, to prosecute exaggerated or inaccurate environmental marketing claims, also known as greenwashing. So that would include claims that products are sustainable, or that a company is net zero or has reached carbon neutrality. Right now, the Green Guides are simply non-binding guidance about how the FTC will use its authority in case-by-case prosecutions against individual companies. So far in its history, the FTC has stuck mostly to traditional environmental issues. Some recent enforcement examples include identifying non-organic products labeled as organic or synthetic flooring that was labeled as bamboo flooring. It has not done much in the way of energy or environmental claims even though the Green Guides do have specific sections devoted to carbon offsets and renewable energy certificates. About a year and a half ago, the FTC issued a request for information seeking comment about whether and how it should update the Green Guides, including the potential to provide more specific guidance about the methodologies underlying carbon offsets, and asking whether it should convert the Green Guides to binding regulations, which would be a pretty big and novel step. More akin to what it's doing with the non-compete rule right now. The industry in general, anybody who is using carbon offsets, or RECs, has been anxiously awaiting further guidance ever since, and we've been following that very closely here at Holland & Knight for our Greenwashing Mitigation Team.

Halley Townsend: So like we said a couple of minutes ago, the Supreme Court just decided Jarkesy. This involved a man that an SEC administrative law judge found had committed various security law violations. The ALJ imposed civil monetary penalties on the man, and the case was appealed. The case was decided by the Fifth Circuit on three different issues, including the non-delegation doctrine. And this was on the basis that giving prosecutors a choice of bringing a securities case in front of an ALJ, or an Article III federal court, is an impermissible delegation of policymaking discretion. This is an extremely broad view of what counts as policy discretion because most people would think of choice of forum as not a policy choice, but more a run of the mill enforcement discretion. The Supreme Court decided the case entirely on one of the other two issues and did not reach non-delegation, and this preserves the Fifth Circuit’s expansive non-delegation views as binding laws in the states under its jurisdiction, including Texas.

Andy Kriha: And if I could just interject here. One interesting note if I want to, you know, put my tinfoil hat on and be a conspiracy theorist, is there was actually a line in Jarkesy in which the Supreme Court, in the majority opinion, called out a 1920s case in which it upheld a law that allowed the president to set tariffs to counter, quote, "unfair methods of competition." As we're going to get into later here, unfair methods of competition is exactly what we're talking about in this non-compete case, it's the exact same language. This 1920s case was different. It was not decided on a non-delegation basis, it was decided under a different theory, very different reasoning and very different facts, but to the extent that you think the Supreme Court might be looking forward at cases that could be coming its way in the future and be on the lookout for a good non-delegation case to bring this doctrine back. You might think there's not coincidences. You might think they're looking at this non-compete case and saying please decide that on other grounds. That's not the one that we want to decide the non-delegation doctrine. And as we did just see a couple of days ago, as of this recording, in the preliminary injunction order in the non-compete case, it does look like that is going to be decided on other grounds and probably not the non-delegation doctrine. So just a little interesting facts to throw in there.

Halley Townsend: Yeah. So let's zoom in more about what the deal is with this non-compete ban. Earlier this year, the FTC voted to ban nearly all non-compete agreements entered into between for-profit employers and their employees. As written, the rule is effective in early September. Several affected parties immediately filed suit, like we talked about, and most have been put on hold pending the outcome of the first filed case, which is in federal district court in Texas, so Fifth Circuit. The judge in the case issued a preliminary injunction on July 3. The injunction lasts until the court makes a final decision on the merits, which is expected on or before August 30, and like we said, the rule is not set to take effect until September 4 anyway. But regardless of any subsequent decision on the merits in this case, it will almost certainly be appealed, which will go first to the Fifth Circuit. The non-compete ban was promulgated under the FTC's authority to prosecute unfair methods of competition, which, like we said, is located in Section 5 of the FTC Act, but this is the exact same section that gives the FTC the authority to prosecute unfair or deceptive practices, which is the cited authority for the Green Guides. The plaintiffs have several arguments as to why the FTC does not have authority to issue the non-compete ban. Most of these center on the rulemaking process itself — plaintiffs argue that the promulgation of the rule is arbitrary and capricious — or on whether the FTC has the authority to issue a blanket ban instead of prosecuting individuals for unfair non-competes on a case-by-case basis. These are both based on statutory interpretation of the FTC's rulemaking authority under Section 6(g) of the FTC Act and based on the major questions doctrine. But, plaintiffs also raise a non-delegation issue, which could have a much more wide-ranging effect. Like we said, there's been a preliminary injunction decision, and the preliminary injunction held both that the FTC likely does not have substantive rulemaking authority with respect to unfair methods of competition, and that a blanket ban likely was arbitrary and capricious. As a result, the court in the preliminary injunction decision did not reach the non-delegation issue, although that will continue to play a role throughout the remainder of the case as we get to the merits.

Andy Kriha: And so the next question is which of the arguments in this non-compete case could potentially apply to the Green Guides? And the high-level answer is probably just the non-delegation argument. Any argument about the rulemaking process itself, such as that the agency was arbitrary and capricious in failing to consider certain evidence, in this case, the court said that this blanket ban based on some, you know, high-level studies that don't take into consideration specific factors that apply to specific businesses, was arbitrary. That's highly specific to this non-compete rulemaking. There could be an arbitrary and capricious argument brought against the Green Guides if the FTC decides to convert the Green Guides into a binding rule, and if that's the case, depending on the exact information before the FTC at the time, and its reasoning could very well be a valid claim. It's just going to be a very different arbitrary and capricious claim than the one that was brought in the non-compete case because they're very docket-specific. The major questions argument, which the primary plaintiffs really leaned into in their final brief, which says even if there's broadly written authority, that authority is exercised in a way that greatly expands the authority relative to how it has historically been exercised and implicates questions of great social or economic importance, then Congress couldn't have meant for the power to be exercised in that way. Again, that's going to be pretty specific to the individual case, right? Here, the authority that is being cited is not the authority to prosecute unfair methods of competition where if you just focused on the word unfair, might have more applicability to unfair and deceptive practices. Instead, what they're looking at is the authority to engage in a rulemaking and a substantive rulemaking that broadly, makes rules about unfair methods of competition. For that authority, the FTC cited Subsection G of Section 6 of the FTC Act, which gives the FTC authority to, quote, "make rules and regulations for the purpose of carrying out the provisions of this chapter." The plaintiffs argued that this has not been used for substantive rulemaking except for a few times several decades ago and rather is just for more ministerial rulemaking about agency procedure. Those arguments don't matter for us because even if true, one, the Green Guides, as we've stated multiple times, are currently not a binding rule, just guidance that is used on a case-by-case basis, and there is very clear authority in Section 5 for this case-by-case prosecution, and even the plaintiffs admit is an OK practice. And two, even if the FTC did make a future rule about the Green Guides, it would not have to rely on Section 6(g) of the FTC Act. In fact, in 15 U.S.C. Section 57a, there are very detailed, specific procedures that allow substantive rulemaking for unfair or deceptive practices. So there would be a much, much stronger statutory basis for a rule about the Green Guides. And so at the end of the day, that really just leaves the non-delegation doctrine as the one argument from the non-compete case that could directly or indirectly impact how we view a new Green Guides rule.

Halley Townsend: So how does the non-delegation doctrine impact the non-compete rule, and what is the impact for the Green Guides? So the argument is that the phrase "unfair methods of competition" is so broad that it delegates policymaking authority to the FTC, meaning the FTC gets to decide what is unfair when that should be defined by statute, or at least limited by statute in some meaningful way. One of the two 1935 cases that use the non-delegation doctrine to hold laws unconstitutional expressly consider the FTC's unfair methods of competition authority, albeit in dicta as a comparison to the law being challenged in the case, and found that the FTC's authority for unfair methods competition was sufficiently narrow, at least in part because the designation of unfair and deceptive practices was to occur, quote, "in particular instances upon evidence in the light of particular competitive conditions," end quote, rather than exercised via non-particularized rules. The plaintiffs seem to have these in mind and how they crafted the allegation claim by framing the non-delegation argument as applicable only if the court determines that the statute would otherwise allow a rulemaking. Under the plaintiffs' framing, the court would have multiple avenues to strike down this rule without striking down the entire law. For example, by ruling that the rulemaking authority of Section 6(g) is unconstitutional and not get to the unfair methods of competition authority.

Andy Kriha: But let's say the court doesn't take any of those off ramps to a narrow opinion, or at least one that doesn't implicate the non-delegation doctrine. Does that still kill the Green Guides? Probably not. The Supreme Court generally tries to keep its decisions narrow, not deciding more than it needs to be decided and not striking down validly passed legislative language that has not otherwise been ruled unconstitutional, so long as the language is not rendered meaningless by removing the offending language. So it would seem likely that even if the court rules that unfair methods of competition language is unconstitutional, it would likely leave in place the unfair and deceptive practices language because it has not received or considered evidence on whether that language is unconstitutional and the language is not rendered meaningless by removing the unfair methods of competition authority from the statute. Still, it's always possible that the court could issue a broader ruling, such as stating that giving the executive discretion to determine what is unfair is overly broad, regardless of what the unfairness is applied to. This could be used as justification to strike down the entire provision, in which case this case could do away with the Green Guides. If the court leaves unfair deceptive practices in place, that would require future challengers to bring a case saying that unfair deceptive practices is equally broad as unfair methods of competition, and so should also be struck down. That would further delay the process of getting rid of the Green Guides, and frankly, the timelines we're looking at could go even past the 2028 election. So plenty of events in the world could intervene between now and then.

In conclusion, the non-compete case is a better case for the Supreme Court to take up the non-delegation issue than the securities case, Jarkesy, that we just talked about. But it's still not a perfect case, and there's some reason to believe that it won't even get to the Supreme Court, at least not on the non-delegation issue, perhaps on some of these more rule-specific issues. The justices are keenly aware that the court has held up unfair methods of competition statutes before, and so it might take a perfect case with perfect facts to get that fifth vote on board. While more traditional APA arguments and statutory interpretation arguments do not seem particularly strong, the court might be incentivized to rule on these issues in order to avoid the constitutional arguments. The Green Guides, if they ever do become subjects to a rulemaking, are on much more solid footing than the non-compete ban. So a ruling relying on those issues would not have a direct impact on the Green Guides, most likely. But still, this is a very important topic to watch moving forward. We will have more for you, not only in the coming months as the non-compete case develops, but in the coming years as this entire doctrine develops and potentially upends energy and climate law even further. Thank you for joining us.