Whether government action survives judicial review often hinges on the strength of the government’s reasons for taking the action it did. How critically a court scrutinizes the government’s rationale depends on the sort of action undertaken. Under the First Amendment, for example, the government may compel certain commercial speech only if it can show that the disclosure is reasonably related to a legitimate state interest and not unduly burdensome. See Zauderer v. Off. Disciplinary Couns. Sup. Ct. Ohio, 471 U.S. 626, 651 (1985). Similarly, the Administrative Procedure Act (APA) requires agencies to “examine the relevant data and articulate a satisfactory explanation for [their] action[s] including a rational connection between the facts found and the choice made.” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto Ins. Co., 463 U.S. 29, 43 (1983) (cleaned up).
Because these different standards generally apply to different categories of government actions, it is not always clear whether one is stricter than the other. Will a rationale demonstrating a reasonable relationship to a legitimate state interest under Zauderer, for example, necessarily satisfy the APA’s reasoned-explanation requirement? The Fifth Circuit confronted that question recently when several Texas business associations challenged a U.S. Securities and Exchange Commission (SEC) rule compelling publicly traded companies to disclose their reasons for repurchasing their own shares. See Chamber of Commerce v. SEC, No. 23-60255 (5th Cir. Oct. 31, 2023).
Prompted by increasing public skepticism of share repurchases, the SEC studied the issue and concluded that buybacks could either signal that the issuer’s shares were undervalued (and hence an attractive investment) or a company’s attempt to boost its metrics or increase executive compensation (and hence a poor investment). To assist investors in determining whether a share repurchase was intended to increase the company’s value or, instead, was improperly motivated or opportunistic, the SEC promulgated a rule requiring issuers to disclose their rationales for buybacks.
The petitioners challenged this rule, arguing (among other things) that the rationale-disclosure requirement violated the First Amendment by impermissibly compelling their speech and that the SEC’s cost-benefit analysis was not the product of reasoned decisionmaking and thus violated the APA. Applying Zauderer, the Fifth Circuit held that the rationale-disclosure requirement did not violate the First Amendment because it compelled disclosure of purely factual, uncontroversial information, was reasonably related to a legitimate state interest, and was not unduly burdensome. In concluding that the disclosure requirement was reasonably related to a legitimate state interest, the court emphasized that the SEC had demonstrated that the harm of improperly motivated or opportunistic buybacks was “potentially real” and “not purely hypothetical.” That, according to the court, showed that the rationale-disclosure requirement was reasonably related to a legitimate state interest.
The court was quick to emphasize, however, that it “need not be persuaded by the SEC’s reasoning to hold that … the rationale-disclosure rule is justified as that word is used in Zauderer.” It went to explain that, while the harm of improperly motivated or opportunistic issuer share repurchases is not purely hypothetical, the SEC had not shown that they “are … genuine problems.” Indeed, the SEC conceded that it never substantiated that proposition in either the proposed or the final rule. But it maintained that its rule was justified because as long as the opportunity for—and thus possibility of—opportunistic or improperly motivated buybacks exists, investors may be uncertain about a company’s motivations for repurchasing shares.
The court disagreed. “If opportunistic or improperly motivated buybacks are not genuine problems,” it reasoned, “then there is no rational basis for investors to experience any of the uncertainty the SEC now claims warrants the rule.” Because the SEC never identified benefits of its rule that “b[ore] a rational relationship to the … costs imposed,” the court held that it was not, as the APA requires, the “product of reasoned decisionmaking.” Accordingly, the Fifth Circuit granted the petition. It recognized, however, that “there [wa]s at least a serious possibility that the agency w[ould] be able to substantiate its decision given an opportunity to do so.” Accordingly, the court granted a remand without vacatur, directing the SEC to correct the defects in the rule within 30 days.
Will a rationale sufficient to demonstrate a reasonable relationship to a legitimate state interest under Zauderer, for example, necessarily satisfy the APA’s reasoned-explanation requirement? According to the Fifth Circuit’s decision in Chamber of Commerce v. SEC, the APA’s reasoned-decisionmaking requirement will, sometimes at least, pose a higher bar to agency action than forms of intermediate scrutiny. Does this mean we will see more challenges to this effect in the near future? Or will advocates simply drop First Amendment claims in these circumstances to focus more attention on APA arguments? Time will tell.
