How the judicial branch navigates its relationship to administrative agencies can shed light on the allocation of lawmaking power among the three branches of government, says Penn Law Professor Jill Fisch. Fisch, a securities law expert, is using the case of Levy v. Sterling Holding Co. to explore this issue.
Mark Levy, a shareholder of Fairchild Semiconductor International Inc., sued Sterling Holding Co. LLC and National Semiconductor Corp. for profits that the companies had made from short-swing trading. A company can seize profits made by corporate insiders who buy or sell a company’s stock within a six-month period, under section 16(b) of the Securities Exchange Act of 1934. The SEC, however, exempts certain transactions from liability.
Fairchild was spun-off from National as a new company, and National and Sterling invested in the company by purchasing two types of common stock and preferred stock. Several years later, Fairchild decided to undertake an initial public offering and underwriters advised the company to convert all its preferred stock to common stock.
The preferred stock owned by Sterling and National was reclassified as common stock and within six months, Sterling sold 11 million shares of common stock and National sold 7 million shares. The companies earned a sizeable profit because the stock price had increased 84 percent since the reclassification.
Levy argued that the reclassification of preferred stock as common stock constituted a purchase and that the short-swing profits made by National and Sterling belonged to Fairchild. The companies claimed that the transactions were not liable under two exemptions outlined by rule 16(b). In its original decision, the Third Circuit Court found that the exemptions were ambiguous and determined that even under the best interpretation they did not cover the short-swing trade, said Fisch.
After the Third Circuit’s decision, the Securities and Exchange Commission amended the exemptions to clarify that they did cover the Sterling and National transactions and stated that the amendments applied retroactively, said Fisch. In response, the Third Circuit reversed its decision, relying on principles of deference to administrative agency rule-making articulated by Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.
For Fisch, Levy raises two issues: the scope of agency power to enact retroactive “interpretive” changes to its rules, and the power of an administrative agency to overturn a judicial decision. While the Court has repeatedly affirmed the power of Congress to change the law and to apply changes retroactively, she said, it has placed limits on the powers of both Congress and executive officials to reverse judicial decisions. Briefings to the Supreme Court in the second round of Levy focused on the retroactivity issue because administrative agencies are generally prohibited from retroactive rulemaking unless Congress gives them the statutory authority to do so, said Fisch.
But for Fisch, the second issue of the limited power of Congress and other executive offices to reverse judicial decisions is potentially more interesting because it has only been explored by a handful of cases. Levy offers a chance, said Fisch, to study these limits and whether these limits apply in the same way to independent administrative agencies.