Kenneth Jacobs considers the implications of a US Supreme Court decision that will hobble federal rulemaking and unleash a wave of litigation

Contrary to conventional wisdom, the US Supreme Court’s reversal of the four-decade-old “Chevron deference” doctrine is potentially one of its most anti-business rulings yet. The damage to companies – especially highly innovative firms – could be profound, with serious long-term consequences for the US economy.

In essence, the recent decision in Loper Bright Enterprises v. Raimondo means that when Congress has been either silent or ambiguous on specific rules to enforce a statute, courts need no longer defer to executive-branch agencies’ interpretation of that statute. This may sound arcane, but the real-world effect is dramatic. Courts, rather than regulators, will now be the final rule-makers in the United States on everything from drug approvals and transportation regulations to food safety – all without the requisite scientific and domain expertise.

Before this ruling, most US companies could simultaneously launch new products in all 50 states. The sheer size of this market, combined with a uniform set of regulations, created enormous economies of scale and allowed for an efficient allocation of capital. It is one reason why the US became such a powerful magnet for innovators.

By restricting the executive branch’s ability to craft and enforce regulations, the Supreme Court has opened the door to the Balkanisation of the US economy. The rulemaking vacuum at the federal level will mean that important issues are increasingly addressed by the states. Instead of a large and cohesive economy of 330 million people subject to the same rule of law, the US will likely end up with smaller regional and state economies, often organised around ideology and local business interests.

That might work for an issue like schooling; but for economic policy, it is a recipe for inefficiency. Massachusetts may wind up with completely different standards than Florida for household appliances, food that is deemed safe in Texas may be deemed unsafe in California, and so on.

The abandonment of the Chevron doctrine ends the predictability that is essential for a healthy economy and stable capital markets. Virtually any rule previously imposed by a federal agency can now be contested. Judges and juries with no specialised training will rule on issues that were previously decided – or at least informed – by experts and scientific authorities. This matters because when an issue in dispute is put to experts, one can anticipate with a reasonable degree of accuracy what the outcome will be. That is not the case when the same question is left to judges and juries.

Under Chevron deference, a federal rule might have been objectionable, but at least it was the same for all economic actors. Now, whenever a court finds a federal rule to be disagreeable, it could trigger a flurry of disparate rulemaking at the state level.

Innovation will be the first casualty. Imagine trying to launch a new Food and Drug Administration-approved product in this climate of uncertainty. Claimants – perhaps bankrolled by a company with a competing, inferior product that’s already on the market – are now empowered to second-guess career scientists and challenge the product’s safety. Litigation always seems to favour incumbents over innovators.

And the problem doesn’t stop there. Imagine if federal agencies decide, post-Chevron, that they lack the authority to create guidelines for the acceptable level of “forever plastics” in packaging. One state might respond by banning such packaging, whereas another state, home to many large plastics manufacturers, might ban the packaging favoured by the first state. Companies would then have to produce two different products or exit certain markets.

The Supreme Court’s decision also could slow economic development. Very few business leaders consider the federal government to be efficient at approving large projects. But with the reversal of Chevron, litigation challenging federal permitting decisions could make the process even worse; it certainly makes the process less predictable.

It is no accident that the least innovative industries in the US are those that are already regulated at the state level: health-care services, utilities, and financial services. State-level enterprises don’t enjoy economies of scale, because companies must offer different products in each state. Legislation and rulemaking at the state level is often even more opaque than it is at the federal level. When there is more state-level regulation, the US economy will come to look like Europe, where innovation is undermined from the start by the complexity of differing standards and requirements.

The reversal of Chevron poses an existential threat to the core pillars of the American economic miracle: uniform rule of law and a cohesive national economy. The decision hurts businesses, especially entrepreneurial ones, and the downstream costs will be borne by all American workers and consumers. The only clear winners will be lawyers, incumbent businesses, and special-interest groups. They will further burden the already over-loaded judicial system and keep the courts busy deciding cases where judges lack the expertise to adjudicate. 

This is one case where the cure is worse than the disease. The reversal of Chevron is not pro-business. It is pro-court. 

*Kenneth Jacobs is Executive Chairman of Lazard. Copyright: Project Syndicate, 2024, published here with permission.