You might recall that, in 2023, the National Center for Public Policy Research submitted a shareholder proposal to The Kroger Co., which operates supermarkets, regarding the omission of consideration of “viewpoint” and “ideology” from its equal employment opportunity policy. Kroger sought to exclude the proposal as “ordinary business” under Rule 14a-8(i)(7), and Corp Fin concurred. After Corp Fin and the SEC refused reconsideration of the decision, NCPPR petitioned the Fifth Circuit for review. The SEC moved to dismiss the appeal. But after the NCPPR filed its appeal, Kroger filed its proxy materials with the SEC and included the NCPPR proposal in the proxy materials to be submitted for a shareholder vote. The proposal received less than two percent of the vote. Now, a three-judge panel of the Fifth Circuit has issued its opinion, dismissing the case for lack of jurisdiction; Judge Edith Jones dissented.
Background. In December 2022, NCPPR submitted a proposal to Kroger requesting that Kroger “issue a public report detailing the potential risks associated with omitting ‘viewpoint’ and ‘ideology’ from its written equal employment opportunity (EEO) policy.” (If the name NCPPR rings a bell, it may be because the organization has been a plaintiff in litigation challenging California’s board diversity statutes, SB 826 and AB 979 (see this PubCo post), the Nasdaq board diversity rule (see this PubCo post) and the SEC’s climate disclosure rules (see this PubCo post.)) In its supporting statement, NCPPR observed that Kroger’s EEO policy did not explicitly prohibit discrimination based on viewpoint or ideology, and pointed to “ample evidence” that persons with conservative viewpoints “may face discrimination at Kroger.” For example, NCPPR contended that Kroger removed “patriotic and Second Amendment related paraphernalia from store shelves” and “simultaneously pushed a leftwing social agenda.” “Removing pro-America items,” NCPPR contended, “from store shelves while publishing ‘allyship’ training guides for staff certainly raises concerns over how Kroger treats employees with diverse points of view….”
Kroger sought to exclude the proposal, and asked Corp Fin for a no-action letter, arguing that the proposal related to the company’s “ordinary business operations” within the meaning of Rule 14a-8(i)(7). In support, Kroger pointed out that “the Staff consistently has permitted exclusion of proposals under Rule 14a-8(i)(7) that relate to management of a company’s workforce” and identified several proposals that were “substantially similar” to the NCPPR proposal where the Staff “permitted exclusion of proposals under Rule 14a-8(i)(7),… including proposals submitted after the publication of SLB 14L in November 2021.” (See this PubCo post.) In this case, Kroger maintained, “the Proposal focuses on Kroger’s management of its workforce and policies concerning employees, both of which are ordinary business matters.” Although Kroger acknowledged that “a proposal may not be excluded under Rule 14a-8(i)(7) if it is determined to focus on a significant policy issue,” simply “touch[ing] upon a significant policy issue,… does not preclude exclusion….In this instance, even if the Proposal were to touch on a potential significant policy issue, the Proposal’s overwhelming concern with how Kroger manages its workforce through employee policies demonstrates that the Proposal’s focus is on ordinary business matters.”
NCPPR responded that substantial discrimination was a significant social policy issue that transcended ordinary business. The proposal, NCPPR said, did not seek to manage the workforce, but rather “seeks the issuance of a report gauging the risk of not prohibiting discrimination—a request that has been consistently recognized by the Staff as an appropriate request that either does not inappropriately interfere with workforce management or implicates such significant social policy issues as to transcend that concern.” Consistent with SLB 14L, NCPPR argued, the proposal raised “human capital management issues with a broad societal impact,” which the SLB stated “would not be subject to exclusion solely because the proponent did not demonstrate that the human capital management issue was significant to the company.”
In addition, NCPPR contended that Kroger’s request was, in effect, “asking the Staff to discriminate on the basis of viewpoint in violation of the First Amendment.” Corp Fin has “routinely denied no-action relief to similar requests focusing on risks from discrimination on other grounds….So if the Staff opts to issue relief to exclude our Proposal, one might reasonably conclude that it could only do so because of its opinion of the distinctive political views our Proposal expresses.” According to polling, NCPPR said, “the vast majority of conservatives feel discriminated against,” and NCPPR had “been sounding the alarm over viewpoint and ideology discrimination for years, yet these concerns have been—and continue to be—ignored by the Staff.” It appeared to NCPPR that “the only reason the Staff has refused to agree with this assessment is because it, as a matter of personal policy preference, or perhaps unconscious or even conscious bias, does not object to viewpoint and ideology discrimination of the sort that too many companies have indulged in over the past few years.” If the Staff doesn’t deny relief to Kroger, NCPPR argued, that “would provide a clear demonstration of how the Staff’s open-ended discretion in determining which views count as ‘socially significant’ may be facially invalid under the First Amendment.”
Corp Fin agreed with Kroger that the proposal could be excluded under Rule 14a-8(i)(7) because it “relates to, and does not transcend, ordinary business matters.” NCPPR sought reconsideration of Corp Fin’s decision by the staff and the SEC itself, but without success. NCPPR then filed a petition in the Fifth Circuit requesting review of the Staff’s letter, contending that the no-action decision was “deemed a final order of the Commission and thus reviewable.” The Court then issued an administrative stay. But Kroger went ahead and filed its 2023 proxy materials for its annual meeting—and included the proposal of NCPPR. When submitted for a vote, the measure received shareholder approval of less than two percent.
The opinion. As described in the opinion, the SEC had moved to dismiss the appeal on two jurisdictional grounds—both mootness and lack of subject matter jurisdiction. The SEC contended that NCPPR “received the relief it sought after Kroger included the measure at issue in its 2023 proxy materials. Kroger’s doing so, the Commission reasons, extinguished any dispute on appeal.” In addition, the SEC argued that the Court did not have subject matter jurisdiction over the challenged letter because the no-action letter was “informal and nonbinding staff advice, not a ‘Commission order.’ “ As a result, the SEC asserted, the Court had “no authority to review the merits of the Center’s challenge.” The panel majority agreed.
First, as to mootness, NCPPR contended that, proxy materials and shareholder vote notwithstanding, its challenge was still viable under, as the Court characterized it, the “‘capable-of-repetition-yet-evading-review’ exception to the mootness doctrine, a standard used in only the most ‘exceptional circumstances.’” NCPPR maintained that it would refile the proposal in the future, both at Kroger and at other companies, and that the same course of events would ensue.
But the Court was not convinced. According to the Court, that exception is “narrowly limited to situations where ‘(1) the challenged action is in its duration too short to be fully litigated prior to its cessation or expiration, and (2) there is a reasonable expectation that the same complaining party will be subjected to the same action again.’” The Court found that NCPPR failed as to the second prong because it did not show “either a ‘demonstrated probability’ or a ‘reasonable expectation,’ . . . that it will be subject to the same unlawful governmental action.” As precedent, the Court cited a 1972 case, SEC v. Medical Committee for Human Rights, where, on similar facts, SCOTUS reasoned that, “[g]iven ‘the meager support the proposal attracted,’… one could ‘only speculate’ that the company would continue including ‘the proposal when it again becomes eligible for inclusion, rather than to repeat [the] litigation.’ …That same reasoning holds equally to foreclose the Center’s arguments here. There is no reasonable expectation that what happened in 2023 will recur anytime soon. By rule, Kroger need not include the Center’s proposal for the next three years because it attracted less than five percent of the votes cast.” And if NCPPR did submit the proposal again, Kroger would have that procedural basis to exclude it, although it might not even bother, given the low vote on the proposal. “In either case,” the Court said, “we can ‘only speculate’ about Kroger’s future actions.” The Court found equally theoretical NCPPR’s other claim that it would “submit the same proposal to other companies which will reject it, and naturally, the Commission will again issue the same no-action letter as the one it sent to Kroger in 2023.” Ultimately, the Court found, NCPPR “‘accomplished the purpose for which it sought ancillary assistance from the SEC.’….Kroger, which was not required to do anything under a court judgment, or by order from the SEC, chose to include the challenged measure in its proxy materials. Doing so extinguished any live controversy on appeal.” The Court held that the appeal was moot and, as a result, did not address the merits of NCPPR’s challenge.
Second, the Court held, even if the case were not moot, it would be dismissed on the basis that the Court had no authority to resolve it. Under the Section 25 of the Exchange Act, a “person aggrieved by a final order of the Commission” may seek review in the federal courts of appeal. But, the Court maintained, there was no final SEC order in this case; the staff had just issued informal staff guidance, which does “‘not constitute an official expression of the Commission’s views,’ much less an order.”
NCPPR had advocated that the Court “apply an expansive reading to ‘final order’ and find the letter here reviewable under the Administrative Procedure Act,” contending that the APA “permits judicial review of ‘final agency action[s].’” But the Court considered Section 25 to be “a narrower concept than that of ‘agency action’ reviewable” under the APA, and NCPPR’s “challenge here falls outside of those parameters.” Further, the Court maintained that NCPPR’s “belief that SEC staff advice constitutes a Commission order runs counter to the wealth of judicial authority on the topic.” Nor was the no-action letter a “final agency action” with any legal consequences; the letter was not binding on anyone. And while the letter may have been persuasive for future SEC decisions, “‘persuasive’ does not equate to ‘precedential.’” Accordingly, the Court granted the SEC’s motion to dismiss and also dismissed the appeal for lack of subject matter jurisdiction.
In her dissent, Judge Edith Jones contended that the “SEC is playing catch-me-if-you-can with legal challenges to its recent penchant for issuing viewpoint-discriminatory no-action letters about controversial shareholder proposals. The agency brazenly admits that, if put to a legal test, its no-action letter here should be vacated as arbitrary and capricious. Sadly, the panel majority lets the SEC’s manipulations prevail.” First, she argued that, because it was “impracticable to fully litigate a challenge to the SEC’s no-action policy within the interval between issuance of a no-action letter and a company’s distribution of proxy materials,” and because there was “no reason to believe the agency will not follow its past practice of issuing no-action letters against the National Center for Public Policy Research’s shareholder proposals concerning ideological discrimination in the workplace,” the case was “tailor-made for the mootness exception for cases capable of repetition yet evading review.” Second, in her view, like prior precedent concerning an FTC no-action letter, this letter “was a judicially reviewable final agency action under the APA. This court should exercise jurisdiction and vacate the SEC’s no-action letter as arbitrary and capricious under the APA, because the agency engages in rank viewpoint discrimination.”
