Supreme Court Overturns Chevron Deference, Potentially Limiting Deference Granted to OFAC in Sanctions Enforcement

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The Supreme Court has delivered a landmark ruling that overturns the four-decade-old Chevron deference. Under that doctrine, if the statute is silent or ambiguous with respect to the specific issue, a court was required to uphold the agency’s interpretation of the statute as long as it was based on a reasonable construction of the statute. Recently, the Supreme Court issued a decision that significantly alters the balance of power between the legislative, judiciary, and executive branches.

I. What is Chevron Deference and How Has it Changed

The Chevron doctrine, established in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. (1984), compelled courts to defer to federal agencies’ interpretation when the language drafted by Congress was ambiguous or silent on the specific issue. The case established a two-step review used by courts to analyze an agency’s legal interpretations of an ambiguous statute. Under the review process, courts considered (1) Congress’ clear intent in passing a law, and (2) if the court found ambiguities in the law, whether an agency’s interpretation was reasonably construed. The doctrine was rooted in the belief that agencies, with their specialized expertise and experience, were better equipped than courts to handle the intricacies of regulatory and technical matters. Chevron deference aimed to ensure that regulatory implementations were consistent and predictable, thereby allowing agencies to effectively fill in legislative gaps and maintain stability in regulatory practices.

The Chevron decision, issued 40 years ago, has been a centerpiece of administrative case law, having been cited by federal courts more than 18,000 times.

The paradigm has shifted following the Supreme Court’s recent ruling in Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce on June 28, 2024. The Court overruled Chevron, now mandating that judges exercise independent judgment when interpreting silent or ambiguous federal statutes, thereby reducing the interpretative authority previously wielded by federal agencies.

Going forward, courts will independently interpret the scope of agency authority and the propriety of agency action under the relevant statutes. This shift marks a significant change in administrative law, requiring agencies to provide more explicit justifications for their regulatory actions and likely resulting in increased judicial scrutiny and litigation.

We are expecting the changes to affect a large number of fields of administrative law: environmental, international trade, immigration, labor, health care, and sanctions.

II. Implications for U.S. Sanctions

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the U.S. Department of State’s interpretation of various key statutes is likely to be significantly affected by this ruling.

OFAC and the Department of the State have enjoyed considerable latitude in interpreting statutes, including the International Emergency Economic Powers Act (IEEPA), the Foreign Narcotics Kingpin Designation Act (Kingpin Act), the National Emergencies Act (NEA), and the Trading with the Enemy Act (TWEA). In applying Chevron, courts have only rarely upheld challenges to the regulations and enforcement actions taken under these laws.

Increased Judicial Scrutiny: According to Loper Bright, courts should no longer automatically defer to any reasonable interpretation made by OFAC’s and the Department of State’s interpretations of federal statutes when the statutes are ambiguous. This change, resulting from the mandate that judges exercise independent judgment when interpreting ambiguous federal statutes, will likely lead to increased litigation as parties challenge agencies’ regulatory decisions and interpretations, and may curtail the large margin of discretion enjoyed by OFAC so far. However, courts may still defer to sanctions agencies for reasons separate and apart from Chevron, including the Supreme Court’s traditional deference to the Executive in foreign affairs and national security cases.

Potential Effect on OFAC’s Interpretation of its Own Regulations: The Supreme Court’s decision to overturn Chevron deference raises questions about Auer deference, which instructed courts to give deference to an agency’s long-standing interpretation of its own regulations. Traditionally, courts deferred to such interpretations unless plainly erroneous or inconsistent with the regulation.

Presaging the Court’s decision in Loper Bright, the Supreme Court narrowed Auer deference five years ago in Kisor v. Wilkie. In Kisor, the Court narrowed Auer deference, stating it applies only if the regulation is genuinely ambiguous and the agency’s interpretation is reasonable and reflects its expertise. The Court stated, “a court should not afford Auer deference unless the regulation is genuinely ambiguous… If genuine ambiguity remains, the agency’s reading must still be reasonable.” However, four members of the Court, including Chief Justice Roberts and Justices Kavanaugh, Alito, and Gorsuch, wrote separately, and with the replacement of Justice Ginsberg with Justice Barret in 2020, the continuing vitality of what remains of Auer remains in doubt.

The Kisor and Loper Bright decisions suggest a trend towards limiting deference to agencies, which could lead to more rigorous judicial reviews of OFAC’s decisions. This means, potentially, OFAC’s interpretations of even its own regulations may face more judicial scrutiny.

Impact on Sanctions Compliance: Companies subject to U.S. sanctions will need to closely monitor judicial interpretations of the federal statutes such as IEEPA, the Kingpin Act, NEA, and TWEA. Compliance strategies may need to be adjusted frequently in response to new court rulings, leading to increased compliance costs and potential legal risks. By the same token, the movement away from Auer and the overruling of Chevron is likely to offer opportunities to companies who wish to be proactive in mitigating compliance costs and legal risks due to sanctions regimes that are excessively broad, poorly designed, or have now become otherwise liable to viable court challenges.

Potential for Legislative Action: To address the regulatory gaps and uncertainties created by this decision, Congress may pass more detailed and specific legislation regarding sanctions. This could involve clearer definitions and more precise guidelines for OFAC’s and the Department of State’s authority, potentially leading to more stable and predictable regulatory environments in the long term.

Conclusion

The Supreme Court’s decision to significantly curtail Chevron deference marks a pivotal shift in administrative law. By mandating that judges exercise independent judgment when interpreting ambiguous federal statutes, the Court has reduced the interpretative authority previously granted to federal agencies such as OFAC. This change introduces new complexities and uncertainties into the regulatory landscape, particularly regarding the implementation and enforcement of U.S. sanctions laws. It also offers opportunities to companies which desire to be proactive.

Those subject to U.S. sanctions must now closely monitor judicial interpretations of federal statutes and adapt their compliance strategies accordingly. This is in addition to regularly monitoring OFAC press releases, recent actions, frequently asked questions, guidances, general licenses, directives, determinations, and executive orders. The field of sanctions compliance is complex and will only become more so with the increased judicial scrutiny and evolving legal interpretations following the recent Supreme Court ruling.