Whitman v. United States: U.S. Supreme Court Considers Deference to Agencies Interpretations of Two Justices Suggest That Agencies Interpretations Should Not Be Entitled To Deference When Considering Statutes With Criminal Penalties SUMMARY Earlier this week, the Supreme Court denied certiorari in Whitman v. United States, No. 14-29 (Nov. 10, 2014), a criminal prosecution for insider trading under Section 10(b) of the Securities Exchange Act. In Whitman, the Second Circuit deferred to the Securities and Exchange Commission s interpretation of Section 10(b) in affirming the defendant s conviction. Although Justices Scalia and Thomas agreed that further review was not warranted in Whitman, they wrote separately to question whether agencies interpretations should receive deference when considering statutes that have both criminal and administrative applications. They observed that deference to agency interpretations of statutory provisions to which criminal prohibitions are attached is inconsistent both with [t]he rule of lenity and the principle that only the legislature may define crimes and fix punishments. 1 They expressed interest in considering that question in a future case. Companies and individuals accordingly should take care to preserve this issue for appellate review and consider raising it in legal presentations to regulators and prosecutors. THE SUPREME COURT S DECISION Douglas Whitman was convicted of multiple counts of securities fraud and conspiracy to commit securities fraud, in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b). On appeal, Whitman contended, among other things, that the jury had been improperly instructed on the New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com
requirements of Section 10(b). He argued that the jury should have been required to find not merely that inside information was a factor in his trading decisions, but that it was a significant factor. The Second Circuit disagreed, deferring to the SEC s contrary interpretation of Section 10(b). 2 The court of appeals therefore affirmed Whitman s convictions. Although the Supreme Court denied Whitman s petition for review, Justice Scalia, joined by Justice Thomas, wrote separately to raise the following question: Does a court owe deference to an agency s interpretation of a law that contemplates both criminal and administrative enforcement? 3 The justices noted that many federal courts of appeals have deferred to executive interpretations of a variety of laws that have both criminal and administrative applications, but they questioned whether federal administrators can in effect create (and uncreate) new crimes at will, so long as they do not roam beyond ambiguities that the laws contain. 4 The justices reasoned that deference in those circumstances upend[s] ordinary principles of interpretation because [t]he rule of lenity requires interpreters to resolve ambiguity in criminal laws in favor of defendants. 5 Justice Scalia criticized the Court s previous decision in Babbitt v. Sweet Home Chapter of Communities for a Great Oregon, 6 for deferr[ing], with scarcely any explanation, to an agency s interpretation of a law that carried criminal penalties. 7 Although the Court in Babbitt had said that the regulation at issue provided fair warning to would-be violators, 8 in Justice Scalia s view that is not the only function performed by the rule of lenity. 9 [E]qually important, he explained, the rule of lenity vindicates the principle that only the legislature may define crimes and fix punishments. 10 He concluded that Congress cannot, through ambiguity, effectively leave that function to the courts much less to the administrative bureaucracy. 11 In other words, two justices suggest that courts should not defer to administrative agencies interpretations of statutes that contain criminal penalties. Although the justices agreed that Whitman was not an appropriate vehicle for review, they stated that they would be willing to grant a future petition properly presenting the question. 12 IMPLICATIONS Federal courts of appeals generally have deferred to agency interpretations of laws that have both criminal and administrative applications. 13 For instance, courts have deferred to agency interpretations in criminal prosecutions under the federal securities laws, 14 environmental laws, 15 and campaign finance laws. 16 They also have deferred in civil enforcement actions brought by the SEC, 17 CFTC, 18 and NLRB, 19 among others, pursuant to statutory provisions that also carry criminal penalties. Recently, however, in the context of HUD regulations under the Real Estate Settlement Procedures Act, Sixth Circuit Judge Jeffrey Sutton questioned whether agencies interpretations should receive deference when agencies interpret statutory provisions that carry both civil and criminal penalties. 20-2-
Justices Scalia and Thomas statement in Whitman picks up on Judge Sutton s concern namely, that principles of fair notice and separation of powers require Congress to define crimes clearly in statutes, rather than leaving the definition of crimes to agency administrators. Although this opinion carries no precedential value, in the past decade Justices Scalia and Thomas have led major shifts in criminal law jurisprudence. 21 In the event that the Supreme Court eventually grants review of this issue, it may call into question judicial deference to agency interpretations in a wide variety of both criminal and civil contexts. When a statutory provision carries both criminal and civil penalties, it is possible that an agency interpretation might not be given judicial deference not only in a criminal prosecution under the statute, but even in a civil action brought under the same statute. That is because, as Judge Sutton recently noted, [a] single law should have one meaning, and the lowest common denominator, as it were, must govern all of its applications. Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722, 730 (6th Cir. 2013) (Sutton, J., concurring) (quoting Clark v. Martinez, 543 U.S. 371, 380 (2005)). That approach would represent a significant change in current doctrine by increasing judicial scrutiny of administrative interpretations in both the criminal and civil enforcement context. Companies and individuals therefore should consider raising and preserving this issue in cases in which the government relies upon an agency interpretation of an ambiguous statutory provision with both criminal and administrative applications. In addition, companies and individuals negotiating with regulators and prosecutors about the meaning and application of federal laws that carry potential criminal penalties should consider noting that there is increasing uncertainty as to whether federal courts ultimately will defer to the regulator s interpretation of the particular statute. * * * Copyright Sullivan & Cromwell LLP 2014-3-
ENDNOTES 1 Whitman v. United States, S. Ct., 2014 WL 5799568, at *1-2 (Nov. 10, 2014). 2 See United States v. Whitman, 555 Fed. Appx. 98, 107 (2d Cir. 2014) (citing United States v. Royer, 549 F.3d 886, 899 (2d Cir. 2008)); Royer, 549 F.3d at 899 ( SEC rules are entitled to Chevron deference. (citation omitted)). 3 Whitman, 2014 WL 5799568, at *1. 4 Id. 5 Id. 6 515 U.S. 687 (1995). 7 Whitman, 2014 WL 5799568, at *2. 8 515 U.S. at 704 n.18. 9 Whitman, 2014 WL 5799568, at *2. 10 Id. (emphasis in original). 11 Id. 12 See id. 13 See, e.g., Nat l Rifle Ass n v. Brady, 914 F.2d 475, 479-80 & n.3 (4th Cir. 1990) (deferring to the ATF s interpretation of the Gun Control Act); In re Sealed Case, 223 F.3d 775, 779 (D.C. Cir. 2000) (deferring to the FEC s interpretation of the Federal Election Campaign Act). 14 See, e.g., United States v. Rajaratnam, 719 F.3d 139, 157-59 (2d Cir. 2013) (upholding insider trading conviction based on SEC regulations); United States v. Corbin, 729 F. Supp. 2d 607, 617-19 (S.D.N.Y. 2010) (denying motion to dismiss indictment for securities fraud based on SEC regulations). 15 See, e.g., United States v. Hubenka, 438 F.3d 1026, 1032-33 (10th Cir. 2006) (upholding conviction for discharging pollutants in violation of the Clean Water Act based on United States Army Corps of Engineers regulations). 16 See, e.g., In re Sealed Case, 223 F.3d at 779; United States v. Kanchanalak, 192 F.3d 1037, 1047 & n.17 (D.C. Cir. 1999) (reversing district court s dismissal of campaign finance violations based on FEC regulations). 17 See, e.g., Teicher v. S.E.C., 177 F.3d 1016, 1019-21 (D.C. Cir. 1999). 18 See, e.g., R&W Technical Servs. Ltd. v. C.F.T.C., 205 F.3d 165, 171-72 (5th Cir. 2000). 19 See, e.g., N.L.R.B. v. Okla. Fixture Co., 332 F.3d 1284, 1286-87 (10th Cir. 2003) (en banc). 20 See Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722, 733 (6th Cir. 2013) (Sutton, J., concurring). 21 See Apprendi v. New Jersey, 530 U.S. 466, 498-99 (2000) (Scalia, J., concurring) (requiring that any fact that increases the penalty for a crime above the statutory maximum must be submitted to a jury); see id. at 499-523 (Thomas, J., concurring); Blakely v. Washington, 542 U.S. 296 (2004) (Scalia, J.) (striking down state mandatory sentencing guidelines for violating the Sixth Amendment right to a jury trial); United States v. Booker, 543 U.S. 220 (2005) (applying the Sixth Amendment to the Federal Sentencing Guidelines under Apprendi and Blakely); Crawford v. Washington, 541 U.S. 36 (2004) (Scalia, J.) (introducing testimonial hearsay approach to Confrontation Clause); Davis v. Washington, 547 U.S. 813 (2006) (Scalia, J.) (defining testimonial hearsay for Confrontation Clause). -4-
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