The Volokh Conspiracy

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Environmental Law

Did Environmental Groups Drop Challenges to SEC Climate Disclosure Rule Because They Lost the Lottery?

Green groups dropped their suits after the various challenges to the SEC's climate disclosure rule were consolidated in a fairly conservative circuit.


In March, the Securities and Exchange Commission (SEC) finalized its long awaited climate disclosure rule, which requires public companies to disclose their greenhouse gas emissions and various climate-related risks to investors as various climate -related risks. According to a majority of the SEC, this information is important to investors, but companies have not disclosed this information adequately in a consistent and accessible fashion. Not all of the SEC Commissioners agreed.  (For background on the issues underlying climate disclosure, I recommend this webinar we hosted at CWRU.]

Business groups and conservative states immediately filed suits against the rule–seven suits in total–even though it was less aggressive than some had feared, it remained controversial. Critics charge the rule extends beyond the scope of the SEC's delegated authority and, insofar as investors desire such information, companies have an incentive to provide it.  Some have also raised First Amendment concerns about the scope of required disclosure.

Interestingly enough, environmental groups filed suit against the rule too, alleging that the SEC had not gone far enough. In particular, these groups were upset that the SEC dropped a proposal to require companies to disclose information about "Scope 3" GHG emissions (those emissions from suppliers and customers). According to the Sierra Club, for instance, investors would not be able to adequately assess climate-related risks without such information and it was arbitrary for the SEC to drop this aspect of the proposed rule. Two suits were filed. One in the U.S. Court of Appeals for the Second Circuit (NRDC v. SEC) and the other in the U.S. Court of Appeals for the D.C. Circuit (Sierra Club v. SEC).

Even more interesting than the environmental groups' decision to challenge the SEC rule was their subsequent decision to drop the litigation. Both suits were dropped last Friday.  Why? According to the filings in each case, the groups had decided to focus their efforts on improving climate disclosure requirements "outside" of court.

The idea that the SEC was legally obligated to include Scope 3 emissions in its climate disclosure rule is quite the aggressive claim. Indeed, most observers believe the SEC dropped this aspect of the rule so as to reduce its legal vulnerability. Particularly in the wake of West Virginia v. EPA, it is hard to imagine that the Supreme Court would look favorably on such an expansive interpretation of the SEC's regulatory authority, particularly insofar as the climate disclosure rules require the disclosure of information that has not traditionally been understood as material to investors under the federal securities laws.

That said, there is a long history of flanking litigation in environmental law. That is, environmental and industry groups often file suits challenging new environmental regulations from opposite directions, and it often appears that some of this litigation is designed to make rules in question seem reasonable. Think of this as a "Goldilocks" strategy: If some say the rule is too weak and others say it's too strong, perhaps it is just right. It is also the case that environmental groups and industry trade associations sometimes file suit (or submit amicus briefs) to show their members that they are fighting the good fight–and justify continuing donations–even when the legal claims are somewhat weak.

It is possible that the environmental groups filed their challenges to the SEC rule to provide this sort of flanking or covering fire for the agency. It is also possible that the suits were filed in an effort to get the case into a sympathetic circuit. After all, some circuit courts of appeal could be considered more favorable terrain for attempts to defend an aggressive environmental regulation.

Consider that the seven "conservative" challenges to the SEC rule were all filed in fairly conservative circuits. Four were filed in the U.S. Court of Appeals for the Fifth Circuit, while the others were filed in the Sixth, Eighth, and Eleventh.  The environmentalist suits, on the other hand, were filed in the Second and D.C. Circuits.

The filing of multiple challenges to the SEC rule in multiple circuits meant that the cases would be consolidated and there would be a lottery to determine where the various suits would ultimately be heard as a single case. (For details on how this works, see this post by Josh Blackman about the lottery in the OSHA vaccinate-or-test rule litigation.) By filing suit in the Second and D.C. Circuit, the environmental groups created the possibility that the challenges could be heard in courts that might be inclined to uphold the rule (perhaps by reading the major questions doctrine narrowly).

Whether or not the environmental groups were seeking to influence the lottery, they failed to do so. The Eighth Circuit "won" the lottery, and will hear the consolidated cases as Iowa v. SEC. The Eighth Circuit is a fairly conservative court; only one of the eleven judges in active service (and none of the active senior circuit judges) was appointed by a Democratic president. Perhaps in recognition of how the litigation might go, the SEC  stayed the climate disclosure rule in April, so no company will be forced to comply with the new requirements before the litigation runs its course.

The lottery result might well explain the sudden decision by all of the environmental group challengers to drop their suits (particularly if one shares my assessment of the legal arguments that the SEC was legally obligated to adopt a more expansive rule). Filing suits in liberal circuits at least created the opportunity the challenge could be held in a circuit less inclined to stay the rule or hold it to be unlawful. This could, in turn, induce some public companies to increase their climate disclosures during the pendency of the litigation, such that climate disclosures would increase even if the rule were ultimately invalidated by the Supreme Court (as companies would be unlikely to reverse course once they had invested in such disclosures). But now that the case is in the Eighth Circuit–and the SEC has chosen to stay its own rule–there is less reason to devote resources challenging the rule as too lenient.

Whether or not environmental groups filed suit against the SEC rule in an effort to influence the lottery and secure a more favorable forum, other groups may well adopt such a strategy in high-stakes policy-related litigation. Given the number of groups (and states) eager to sue federal agencies, there is ample opportunity for mischief. Indeed, given the way the lottery works–a circuit is chosen even before courts consider jurisdictional questions--litigants who lack Article III standing could file suit in an effort to influence the process. Legal groups will go to great lengths these days to find a way to file suit in a favorable forum, so it only makes sense some might seek out lottery tickets hoping for a more favorable draw.