Original post with images here: https://x.com/NuclearHerbs/status/1758522777013993941
Welcome back to #PulseChainLawSchool. Today we’ll try to answer some of your “major questions.”
As Richard’s attorneys noted in their letter to the court (screenshot below), they may bring a challenge to the SEC’s authority to bring this case under the Major Questions Doctrine (MQD). So let’s first figure out what that is before we discuss whether it applies.
The simplest way to explain the MQD is to say that administrative agencies only have the authority given to them by Congress, and if an agency wants to take control over something new and important, it must prove that Congress gave them the authority to do so.
That’s the summary, here’s the law. It requires that “in the extraordinary case where an agency claims the ‘power to regulate a significant position of the American economy’ that has ‘vast economic and political significance,’ it must point to ‘clear congressional authorization for that power.” Util Air Reg. Grp. v EPA, 573 U.S. 302 (2014). The assumption the courts rely on is that Congress would speak clearly and not through vague terms if it intended to grant an agency authority to make decisions that would have far-reaching economic and political consequences.
Got it? That was easy. See you next week.
Oh, never mind. I see one hand in the back. I guess we’ll continue.
Anyway, the MQD isn’t really that old. It essentially began in 2000 in a Supreme Court case called FDA v Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000), where the FDA wanted to regulate tobacco products as “drugs and devices” and SCOTUS said they didn’t have authority from Congress to do that. It specifically held that in interpreting a statute that gives an agency authority, the inquiry must be “whether Congress…meant to confer the power the agency has asserted.”
There really aren’t a lot of cases that discuss the MQD, but the ones that do tend to show the Courts aren’t buying what the agencies are selling. My own personal opinion is that it’s probably because over the past 25 years or so, executive branch agencies have been acting like it’s their God-given right to expand their power and control every chance they get, and that’s fucking up the whole separation-of-powers thing. After all, the more shit you do, the bigger your budget requests can be, and the more power that agency has. The more power the executive branch agencies take without clear legislative authority, the less power the legislative branch has. So the judiciary has to balance that out and return some control to the complete morons we keep electing to Congress.
Recent examples include a 2021 case called Alabama Assn. of Realtors vs Dept of Health and Human Services, where SCOTUS found the CDC didn’t have the authority to institute a nationwide eviction moratorium. Before that, in Gonzalez v Oregon, SCOTUS shot down the AG’s claim that he could revoke the medical license of a physician who prescribed a controlled substance for assisted suicide. And in NFIB v OSHA, SCOTUS again rejected OSHA’s mandate that either 84 million Americans take the COVID vax or undergo weekly medical testing at their own expense.
In order to invoke the MQD, there’s basically a 2-part test: (1) is the agency action “major”, meaning a major economic or political significance (“major” is, of course, subjective and means basically whatever the court wants it to mean), and (2) is the agency action “exceptional,” which means basically whatever the court wants it to mean. Making arguments like these are why lawyers get paid. If the answers to both questions are yes, then the agency is required to show it has “clear” statutory authorization for the actions it wants to take.
Well, that sounds good so far, right? I mean, it’s pretty fucking obvious that Congress didn’t specifically authorize the SEC to regulate crypto assets when it passed the 1934 SEC act. Nor did Howey address crypto, because it was decided almost 70 years before Satoshi burst on the scene.
So given this backdrop, you would think this would be easy for defendants in crypto actions to say “Hey, SEC, you don’t have statutory authority from Congress to regulate crypto, so you can’t regulate crypto.”
And that’s what’s been happening. But MQD in crypto regulation cases is getting zero traction with courts, so let’s explore why.
Coinbase argued MQD at oral argument recently. Judge Failla appeared to find those arguments unpersuasive, although we won’t know for sure until we see a ruling. The judge did question the litigants about the brief filed by Sen. Cynthia Lummis, which urged the court to consider the MQD with respect to crypto cases, specifically noting that Congress had not spoken on this issue yet.
This is also why I’ve been urging you all to contact Sen Lummis and ask her to file a similar amicus brief in @RichardHeartWin’s case. It’s the exact same issue as in Coinbase, so I don’t know why there would be any hesitation or resistance on her part.
Back to the Coinbase hearing. Interestingly, the SEC brushed off Coinbase’s claim that the crypto industry has a major economic impact. If I remember right, the SEC claimed that the $1-2T industry was a “rounding error” in comparison to other major financial industries. This argument is, of course, stupid, because the eviction case I cited above had an impact of only $50B, and it was still analyzed under the MQD.
And last year, in the Terraform labs ruling, Judge Rakoff dismissed Terraform’s arguments about the MQD, stating that “the crypto-currency industry – though certainly important – falls far short of being a “portion of the American economy” bearing “vast economic and political significance.” SEC v Terraform, 23-cv-1346 (SDNY Jul 31, 2023, ruling). To be fair, it seemed obvious that the judge in Terraform was going to find literally any rationale that supported that conclusion, because he wasn’t about to let Do Kwan get away.
But IMO, this is like asking a court in 1994 to find that the internet has no significant economic impact on the economy. 10 years ago, in 2014, the entire market cap of crypto was around $10B. Now, even coming out of a bear, it’s approaching $2T. That’s a 20,000% increase in 10 years. Imagine where it will be in another 10. Major economic impact? That seems a fait accompli. Unless it’s strangled to death in the crib, which is what the SEC appears to be trying to do.
OK, so now we’re seeing that courts don’t want to invoke the MQD with respect to the crypto industry, but why? I have a couple of thoughts on that, based on my analysis of the cases I have in front of me. Keep in mind that an appellate ruling or SCOTUS ruling could drastically change the game at any time. But here goes:
First off, the SEC is proceeding with enforcement actions using the Howey test that’s been around forever. Enforcement actions are not “exceptional” by any means. In fact, they’re routine. So that’s one prong of the MQD analysis that’s difficult to satisfy, regardless of whether or not the court believes the other prong (the economic significance of the crypto market) is satisfied. If you can’t satisfy both initial prongs of the analysis, you never get to the point where the agency has to show clear authority from Congress.
Second, as I mentioned in last class, it’s not just the SEC that has the ability to file cases alleging securities violations – there’s a corresponding private right of action that lets you and me do it too. This private right of action complicates things, in that you’re essentially asking judges to find that the SEC lacks the authority to bring the same enforcement action that a private citizen already can. That’s a tough ask, and a pretty solid reason why the MQD will not be found to apply, even if it does. The law isn’t a straight line and doesn’t always make sense. It’s more of a fucked up patchwork quilt that has patterns and colors that clash sometimes.
And finally, Judges don’t like to be reversed on appeal. Being told you fucked up by a panel of circuit court judges doesn’t sit well with a lot of trial court judges, some of which have aspirations of someday being circuit court judges. The “safer” route is to go with the flow and find that the MQD doesn’t apply. After all, the SEC now has a pretty long history of taking these enforcement actions (whether or not it has the authority to do so), and it’s going to be hard for a circuit court of appeals to rule that every court in their jurisdiction has been fucking up for years. That’s another tough ask.
An objective analysis of any problem requires you to look at it from many angles. Here, you have to look at it from the perspective of the courts as well. If they all-of-a-sudden find that the MQD applies and hold that the SEC doesn’t have the authority to regulate crypto assets, the courts could believe that crypto investors would be somehow “unprotected” from bad actors until Congress gets its shit together and passes additional legislation. It seems unlikely that courts will find this scenario acceptable. After all, Congress can still act in the interim, and the courts can leave the status quo until they do. SCOTUS has also said as much in Slack Technologies v Pirani, where it noted “Congress remains free to revise the securities laws at any time” and that the judiciary’s “only function lies in discerning and applying the law as we find it.”
Let’s wrap up:
On the surface, it would seem that the MQD should apply to the crypto industry, but unfortunately there are a lot of other factors in play, and courts don’t seem to want to invoke the MQD in crypto cases. But defendants need to continue to raise it until they find a judge who is willing to climb out on a limb and say that it applies, which would essentially force a court of appeals and possibly SCOTUS to take a hard look at it.
The SEC is dedicating far too much time and money towards an industry they called a “rounding error” in court. These self-important jackasses have declared themselves the guardians of all crypto investors and will continue to fuck with this industry until they’re reined in by either Congress or the courts.
Congress is lazy and stupid, and it’s an election year, so don’t expect any coherent legislation anytime soon.
Vote however you want this fall, but if you want Gensler gone, you should consider which candidate is more likely to make that happen. Remember, he was appointed by Biden.
And, just because Hexlena said she was looking forward to this class, I’ll end with: lolz.
