As I noted in a post at the time (here), last Thursday, the U.S. Supreme Court issued its decision in SEC v. Jarkesy, striking down the SEC’s use of in-house courts in enforcement actions seeking monetary penalties. Then on Friday, the Court issued its decision in Loper Bright Enterprises v. Raimondo, in which the court wiped out the so-called Chevron doctrine, in which courts deferred to agency interpretations of ambiguous statutes. In the following guest post, Sarah Abrams, Head of Claims, Baleen Specialty, a division of Bowhead Specialty Underwriters, takes a look at these two decisions and examines some of the decisions’ implications from a D&O insurance perspective. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
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As anticipated, the Supreme Court has now decided both Securities and Exchange Commission v. Jarkesy et. Al, 603 U.S. (2024)[i] and Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce, et al., 603 U.S. (2024)[ii] in favor of less regulatory oversight and involvement in private enterprise.
It is certainly no coincidence that since the Supreme Court took both cases under Writ of Certiorari, public and private D&O markets have been seeing additional regulatory coverage offered with a full policy limit for little to no premium increase.
The question now becomes whether the D&O insurers offering complete coverage without additional cost have taken the right hedge on the impact of both Jarkesy and Loper.
While Loper was getting more spotlight for specifically addressing the question whether Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984) should be overruled (which it was) the Jarkesy decision may have an immediate effect on limit exposure to D&O Insurers.
The majority in Jarkesy held that “[w]hen the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial.”[iii] George Jarkesy, the defendant in an SEC administrative proceeding, argued that the SEC’s use of its Administrative Law Judge (ALJ) to enforce civil penalties against him individually and his firm, Patriot28 LLC, for alleged violations of the federal securities laws “antifraud provisions” violated his right to trial by a jury of his peers.[iv]
In the broadest of terms, the SEC cannot use its own judges to decide its own enforcement actions.
As D&O carriers are aware, the cost of a jury trial is significantly more than that of an administrative proceeding. When litigation involves allegations of financial fraud or fraud on the market, the need for counsel with capital market and regulatory expertise is tantamount. Given that public company policies are indemnity only, carriers have little or no ability to push back on the insured’s selection of counsel and hourly rates.
Of course litigation may result in a favorable outcome for a defendant insured, but at what cost? SEC filings of complaints alleging violations of federal securities law in federal court will mean that federal civil procedure dictates the pace of litigation. With additional counsel often needed to represent the individual officers and fund partners, that cost increases exponentially.
The reframe of the Jarkesy litigation impact can be found in the dismantling of the Chevron doctrine by Loper.
The Supremes’ holding in Loper states:
“The Administrative Procedure Act requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because a statute is ambiguous; Chevron is overruled.”
In sum, Courts should have the final interpretation of laws.
In Loper, the plaintiff fisherman argued that the expansion of the Magnuson–Stevens Fishery Conservation and Management Act, to require plaintiffs’ fishing vessels to “carry” federal monitors on board to enforce the agency’s regulations, particularly to prevent overfishing, at the fishermens’ own cost was an overreaching interpretation. The Loper court overturnedthe Chevron doctrine requirement that “Courts must defer to the authority of administrative agency’s interpretation of a statute whenever both the intent of Congress was ambiguous and the agency’s interpretation is reasonable or permissible.”[v]
Chevron was requiring that courts look to the agency creating the law for guidance on the statutory application. Loper now allows courts to decide whether a regulation is ambiguous and likely its enforcement. This could be positive in a venue with a court that does not view government involvement in private industry favorably.
So while Jarkesy increases the likelihood of court filings by regulatory agencies for statutory violations, certainly by the SEC, Loper allows for the judge or jury deciding the case the existence of a statutory violation. Thus, courts are truly becoming the judge, jury and executioner.
The venue where enforcement actions are brought, and which counsel are hired to represent the Insured are now the deciding factors. The costs borne by the insurers that cover the D&Os and companies caught in a courthouse regulatory fight may see the highest negative returns.
[i] 22-859 SEC v. Jarkesy (06/27/2024) (supremecourt.gov)
[ii] 22-451 Loper Bright Enterprises v. Raimondo (06/28/2024) (supremecourt.gov)
[iii] Jarkesy, Pp. 6–27.
[iv] Id.
[v] Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984),