New York City Employees’ Retirement System v. Securities and Exchange Commission

Cracker Barrel Old Country Store, Inc. (Cracker Barrel), issued a press release, stating that the company would no longer employ homosexuals. Cracker Barrel subsequently fired several gay employees. The New York City Employees’ Retirement System (NYCERS) (plaintiff) and two other institutional investors (plaintiffs), who were shareholders of Cracker Barrel, proposed a new policy to Cracker Barrel’s board of directors that would prohibit discrimination on the basis of sexual orientation. NYCERS requested that the policy be put to a shareholder vote. Under Rule 14a-8(c)(7), 17 C.F.R. § 240.14a-8(c)(7), of the Securities and Exchange Commission (SEC) (defendant), publicly traded companies are required to include shareholder-requested proposals in the proxy materials for a shareholder vote, unless the proposal deals with ordinary business operations. The SEC had indicated in a 1976 rule that corporations could not use this exception to exclude proposals that inherently involved matters with significant policy, economic, or other implications. Cracker Barrel requested a no-action letter from the SEC regarding the omission of the proposal from the proxy materials. The SEC issued the requested no-action letter and indicated that proposals dealing with employment policies and practices would no longer be interpreted to fall outside of Rule 14a-8(c)(7)’s parameters when dealing with social issues. NYCERS and the two other institutional investors sued the SEC, alleging that the SEC had adopted a new legislative rule without complying with the notice-and-comment requirements of the Administrative Procedure Act (APA), 5 U.S.C. § 553(b). The district court found that the SEC had adopted a new legislative rule without first submitting the rule for notice and comment and enjoined the SEC from issuing any additional no-action letters that were inconsistent with the 1976 rule. The SEC appealed to the United States Court of Appeals for the Second Circuit.