The End of Chevron Deference: What It Means for Government Contractors

On June 28, 2024, the Supreme Court of the United States overruled a cornerstone of contemporary administrative law when it determined­­­­, in a 6-3 ruling, that the Supreme Court's decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), was wrongly decided.

In Chevron, the Supreme Court considered whether an Environmental Protection Agency regulation was consistent with the term "stationary source," as used in the Clean Air Act. 467 U.S. at 840. In resolving that question, the Court announced a two-step approach ("Chevron Doctrine") to evaluate whether a governing statute permitted a particular agency action. Id. at 842-43. First, a court must consider whether Congress, by statute, had "directly spoken to the precise question at issue." Id. at 842. If congressional intent was clear from the relevant statute, then that intent would control the court's assessment of the agency's regulation. Id. If the relevant statute was silent or ambiguous as to congressional intent, however, then the court would defer to the agency's "permissible construction of the statute," even if the court thought there was a better interpretation. Id. at 843.

In Loper Bright Enterprises v. Raimondo, the Supreme Court held this step-two approach could not be reconciled with the Administrative Procedure Act, 5 U.S.C. §§ 551 et seq. (APA), which the Court concluded "requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because a statute is ambiguous." No. 22-1219, 2024 WL 3208360, at *1 (U.S. June 28, 2024). Thus, the Supreme Court's 40-year precedent in Chevron is now dead. In its wake, courts must now turn to the longstanding precedent in Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944), when determining the best interpretation of a particular statute. Under Skidmore, when engaging in independent statutory interpretation, courts may accord persuasive, but not controlling, value to an agency's informed judgment regarding how to implement a statute. 323 U.S. at 140.

A detailed overview of the Supreme Court's decision in Loper can be found here. The purpose of this article is to discuss the potential impacts that the fall of the Chevron Doctrine may have on public procurements generally and government contractors specifically. In short, the end of the Chevron Doctrine appears unlikely to alter drastically the regulatory requirements to which government contractors are subject and which contractors routinely accept as part of their government contracts. Contractors are unlikely to expend the time and resources to try to overturn age-old regulatory requirements for which contractors have already developed compliance frameworks. Instead, it is more likely that we will see ad hoc challenges to agency regulations when a particular contractor needs to make such a challenge to preserve or ensure a remedy. In addition, contractors may target new regulations to prevent new regulatory requirements from ever taking effect.

Potential Impacts on Government Contractors

• Reduced Potential for Regulatory Whiplash. Chevron required courts to defer to agency interpretations of ambiguous statutes so long as the agency's interpretation was "permissible." Chevron, 467 U.S. at 842-43. But because agency leadership often changes with turnover in the Presidency, Chevron opened the door for successive administrations to advance differing interpretations of the same statutory language, creating uncertainty for regulated parties. See Loper, 2024 WL 3208360, at *21 ("Chevron thus allows agencies to change course even when Congress has given them no power to do so. By its sheer breadth, Chevron fosters unwarranted instability in the law, leaving those attempting to plan around agency action in an eternal fog of uncertainty."). Under Loper, however, the courts, rather than the agencies, will have the ultimate authority for statutory interpretation, limiting the potential for ever-changing interpretations of applicable law (at least once a court has ruled on the best interpretation of a statute and appeals are exhausted). This could mean less regulatory whiplash - especially in areas such as labor law - for government contractors between changing political administrations.
• Skidmore "Respect" Returns to Prominence. Although the Supreme Court held in Loper that it is improper under the APA for a court to defer to an agency on an interpretation of law, it reiterated the longstanding rule that courts should give "respect" to the "informed judgment of the Executive Branch." Loper, 2024 WL 3208360, at *10, *15. Quoting the Supreme Court's decision in Skidmore, the Supreme Court explained that the amount of respect given to such Executive Branch judgments depends on "the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control." Id. at *2, *10. Thus, although Chevron Doctrine no longer compels the Court to defer to permissible agency interpretations of law, Skidmore "respect" continues to require the Court to consider an agency's informed basis for implementing an ambiguous statute in the way it has and to assign persuasive value accordingly. See id. Nevertheless, as Justice Kagan noted in her dissent in Loper, it is not altogether clear how the "respect" a court must pay agency judgment differs from the deference previously required under Chevron.Id. at *51 ("If the majority thinks that the same judges who argue today about where 'ambiguity' resides (see ante, at ----) are not going to argue tomorrow about what 'respect' requires, I fear it will be gravely disappointed."). In this way, although Loper eliminated Chevron deference, it may have left a similarly amorphous concept in its place.[1] How courts assess the "respect" due an agency's informed judgment will ultimately dictate the lasting impact of Chevron's demise.
• Potential Challenges to Existing or New Government Contracts Regulations. The Supreme Court's overruling of Chevron opens the door for government contractors to try to overturn existing government contract regulations as contrary to their underlying statute. Prior to Loper, an interested party challenging an agency regulation under the APA as arbitrary and capricious had to demonstrate either that the regulation was contrary to an unambiguous statute or that the agency's construction of the ambiguous statute was not permissible. Chevron, 467 U.S. at 842-43. That was a heavy burden for contractors. Post-Loper, however, that burden has significantly lessened. Contractors no longer have to clear the Chevron two-step analysis. Instead, they need only show that a particular regulation is contrary to a statute, as interpreted by the court de novo and with due "respect" given to the relevant agency's informed judgments. Loper, 2024 WL 3208360, at *1. This standard, stripped of the previously required binding deference to agency interpretation, could embolden contractors to challenge regulations under ambiguous statutes. Indeed, in a subsequent decision this term, Corner Post v. Board of Governors of the Federal Reserve System, the Supreme Court held that the default six-year statute of limitations for APA claims does not begin to accrue until after the agency action first affects a company. No. 22-1008, 2024 WL 3237691, at *1 (U.S. July 1, 2024) ("An APA claim does not accrue for purposes of § 2401(a)'s 6-year statute of limitations until the plaintiff is injured by final agency action."). As Justice Jackson noted in her dissent, this decision, alongside Loper, has the potential to create a "tsunami of lawsuits against agencies" that may "devastate the functioning of the Federal Government." Id. at *35.

It is not yet clear to what extent, if any, interested parties will take advantage of the fall of Chevron to challenge existing government contracts regulations as contrary to their underlying statutes.[2] The Federal Circuit has previously held that "the provisions of [the Federal Acquisition Regulation (FAR)] are entitled to Chevron deference." Brownlee v. DynCorp., 349 F.3d 1343, 1354 (Fed. Cir. 2003) (citing Info. Tech. & Applications Corp. v. United States, 316 F.3d 1312, 1321-22 (Fed. Cir. 2003); Newport News Shipbuilding and Dry Dock Co. v. Garrett, 6 F.3d 1547, 1552 (Fed. Cir. 1993); United States v. Grumman Aerospace Corp., 927 F.2d 575, 578 (Fed. Cir. 1991)). And at least one U.S. Court of Appeal has concurred. See Cont. Mgmt., Inc. v. Rumsfeld, 434 F.3d 1145, 1147 (9th Cir. 2006) (affirming district court decision that Small Business Administration and FAR regulations were entitled to Chevron deference). That deference could explain why contractors have not frequently relied on APA challenges to the FAR: the odds of success were relatively low. With Chevron deference dead and buried, however, contractors may be encouraged to revisit regulations of questionable origin that impose continuing burdens.

One specific area to watch is the burgeoning field of cybersecurity regulation. Given the broad reach of recent proposed rules, contractors may be interested in challenging cybersecurity regulations as contrary to statute. Whether contractors could successfully challenge such regulations, however, is an open question. For example, the Cyber Incident Reporting for Critical Infrastructure Act of 2022 (CIRCIA) expressly directed the Cybersecurity and Infrastructure Security Agency (CISA) to publish a notice of proposed rulemaking to implement the statute, to publish a final rule, and to issue regulations to amend or revise the final rule. 6 U.S.C. § 681b(b). Such express delegation would appear to indicate congressional intent to defer to CISA as to how to implement CIRCIA. See United States v. Mead Corp., 533 U.S. 218, 229 (2001) (noting "a very good indicator of delegation meriting Chevron treatment [is] express congressional authorizations to engage in the process of rulemaking or adjudication that produces regulations or rulings for which deference is claimed"). Consequently, although a court may not blindly defer to CISA regarding how to implement CIRCIA, as it might have done were Chevron still good law, its review may be limited only to determining whether the CISA engaged in "reasoned decisionmaking" within the confines of its discretion. See Loper, 2024 WL 3208360, at *2 ("And when the best reading of a statute is that it delegates discretionary authority to an agency, the role of the reviewing court under the APA is, as always, to independently interpret the statute and effectuate the will of Congress subject to constitutional limits. The court fulfills that role by recognizing constitutional delegations, fixing the boundaries of the delegated authority, and ensuring the agency has engaged in reasoned decisionmaking within those boundaries." (cleaned up)).[3]

• Increased Importance of Notice and Comment Rulemaking. Notice and comment rulemaking is likely to take on even greater importance post-­Loper in ensuring agency rulemakings are consistent with underlying statutes. The notice and comment process will provide interested parties with their first opportunity to raise concerns that a proposed regulation is contrary to law. It will also provide agencies with their first opportunity to address such concerns prior to finalizing a new regulation. Notice and comment rulemaking thus can potentially help stakeholders iron out perceived inconsistencies between proposed regulations and their underlying statutes short of litigation.

The Office of Federal Procurement Policy Act, 41 U.S.C. § 1707, governs the publication of the FAR and agency FAR supplements. It requires notice and comment for any regulation that has a significant effect beyond the internal operating procedures of the federal government or that has a significant cost or administrative impact on contractors or offerors.[4] Government contractors should continue to harness the notice and comment process to influence agency rulemaking and, in particular, highlight areas where agencies may be overstepping their statutory authority.

• Statutory Specificity. In Loper, the majority explained that Chevron improperly forced courts to "pretend that ambiguities are necessarily delegations [of authority to agencies to fill in statutory gaps]." 2024 WL 3208360, at *4. Thus, post-Loper, it appears Congress will need to sharpen its pencil during the legislative process either to make desired delegations of authority express and clear (as Congress appears to have done with CIRCIA), or to make congressional intent clear so that agencies implement that intent correctly. Neither seems easy to accomplish in a divided and often dysfunctional Congress, which may introduce yet another reason for the legislative process to grind to a halt. Interested parties should pay particular attention to annual defense authorization bills and appropriations acts, which often authorize new government contracting requirements for agencies to implement through regulation.
• Contract Interpretation Disputes. The U.S. Court of Appeals for the Federal Circuit has long evaluated contractual ambiguities using traditional contract interpretation techniques. See, e.g., Turner Const. Co. v. United States, 367 F.3d 1319, 1321 (Fed. Cir. 2004). This practice, however, was not uniform across Circuits. In 2017, the Supreme Court denied a petition for a writ of certiorari in Scenic America, Inc. v. Department of Transportation, which addressed, among other things, this circuit split as to whether courts must provide Chevron deference to an agency's interpretation of ambiguous contract terms. 583 U.S. 936 (2017). Foreshadowing the Court's decision in Loper, Justice Gorsuch expressed skepticism that Chevron deference should "displace the traditional rules of contract interpretation," such as contra proferentem, which requires a court to resolve contractual ambiguities against the party that drafted the agreement. Id. Now, with Chevron's demise, the Supreme Court has seemingly resolved the question it declined to consider in Scenic America: contractual ambiguities must be resolved through traditional contractual interpretation tools. The Court's decision thus has confirmed the Federal Circuit's longstanding approach to contractual ambiguities, which means Chevron's fall should not have any effect on government contract disputes.

Conclusion

The ripple effects from the Supreme Court's landmark decision in Loper remain to be seen, but there is good reason to believe Loper will not have a significant disruptive effect on government contracts, at least in the short term. Over time, however, Loper could fundamentally alter the manner in which agencies implement federal statutes, including those pertaining to government contractors. Only time will tell.

[1] The "respect" required under Skidmore is often referred to as "Skidmore deference," although the Loper majority avoids that terminology in its opinion. 2024 WL 3208360, at *51.

[2] As we saw during the COVID-19 pandemic, various states successfully challenged the legality of Executive Order 14042, Ensuring Adequate COVID Safety Protocols for Federal Contractors, on the ground that the Executive Order's vaccination requirements exceeded the authority conferred upon the President by the Federal Property and Administrative Services Act of 1949. These states prevailed in their challenges based on the Major Questions Doctrine, which was an exception to the Chevron Doctrine and precludes agencies from addressing matters of "vast economic and political significance" without clear statutory authorization to do so. West Virginia v. EPA, 597 U.S. 697, 716 (2022).

[3] Of course, any delegation of authority by Congress must still comply with the Nondelegation Doctrine, which provides that Congress cannot delegate its legislative powers unless it provides an "intelligible principle" that directs the delegee how to conform its actions with legislative intent. Touby v. United States, 500 U.S. 160, 165 (1991) ("Thus, Congress does not violate the Constitution merely because it legislates in broad terms, leaving a certain degree of discretion to executive or judicial actors. So long as Congress lays down by legislative act an intelligible principle to which the person or body authorized to act is directed to conform, such legislative action is not a forbidden delegation of legislative power." (cleaned up)).

[4] The APA requires notice and comment rulemaking for non-FAR regulations promulgated by executive agencies. 5 U.S.C. § 553.

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