2008 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

10-1-2008

Levy v. Sterling Holding Co

Precedential or Non-Precedential: Precedential

Docket No. 07-1849

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

________

No. 07-1849

_________

MARK LEVY,

 Appellant

 v.

STERLING HOLDING COMPANY, LLC;

NATIONAL SEMICONDUCTOR CORPORATION;

FAIRCHILD SEMICONDUCTOR INTERNATIONAL,

INC.

_________

On Appeal from the United States District Court

for the District of Delaware

(D.C. Civil No. 00-cv-00994)

District Judge: Honorable Gregory M. Sleet

__________
2

Argued March 24, 2008

Before: McKEE, RENDELL, and TASHIMA,*

 Circuit Judges

(Filed: October 1, 2008)

 

Jeffrey S. Abraham, Esq. [ARGUED]

Abraham, Fruchter & Twersky

One Penn Plaza, Suite 2805

New York, NY 10119-0000

Counsel for Plaintiff-Appellant

Mark Levy

(continued)

__________________

 * Honorable A. Wallace Tashima, Senior Judge of the

United States Court of Appeals for the Ninth Circuit,

sitting by designation. 
3

Carolyn H. Feeney, Esq.

Steven B. Feirson, Esq. [ARGUED]

Dechert

Cira Centre, 18th Floor

2929 Arch Street

Philadelphia, PA 19104-0000

Counsel for Defendant-Appellee

Sterling Holding Company, LLC

Paul Vizcarrondo, Jr., Esq.

Wachtell, Lipton, Rosen & Katz

51 West 52nd Street

New York, NY 10019-0000

Counsel for Defendant-Appellee

National Semiconductor Corporation

Megan W. Casio, Esq.

Morris, Nichols, Arsht & Tunnell

1201 North Market Street

P. O. Box 1347

Wilmington, DE 19899-0000

Counsel for Defendant–Non-Participating

Fairchild Semiconductor International, Inc.

Allan A. Capute, Esq. [ARGUED]

Securities & Exchange Commission

100 F Street, N.E.

Washington, DC 20549-0000

Counsel for Securities and Exchange Commission

Amicus Appellee
4

__________

OPINION OF THE COURT

__________

RENDELL, Circuit Judge.

Mark Levy filed a shareholder derivative suit on behalf

of Fairchild Semiconductor International, Inc. (“Fairchild”)

against Sterling Holding Company, LLC (“Sterling”) and

National Semiconductor Corporation (“National”) for

disgorgement of short-swing profits, pursuant to section 16(b)

of the Exchange Act of 1934. National and Sterling contend

that two separate SEC Rules, 16b-3 and 16b-7, exempt them

from section 16(b) liability. When this case was before us

previously, at the motion-to-dismiss stage, we ruled that neither

exemption applied here. Levy v. Sterling Holding Co. (Levy I),

314 F.3d 106 (3d Cir. 2002). Thereafter, however, the SEC

amended Rules 16b-3 and 16b-7 to, as it put it, “clarify the

exemptive scope” of these two Rules, making clear that both

apply to the instant fact pattern. Ownership Reports and

Trading by Officers, Directors and Principal Security Holders,

Exchange Act Release No. 52,202 (“2005 Amendments

Release”), 70 Fed. Reg. 46,080, 46,080 (Aug. 9, 2005). The

District Court then ruled in favor of National and Sterling and

against Levy on cross motions for summary judgment. We must
5

decide whether our rulings in Levy I, or the SEC’s more-recent

Rule amendments, govern the case at this stage. For the reasons

that follow, we conclude that at least one of the amendments is

controlling and, therefore, we will affirm the District Court’s

grant of summary judgment to National and Sterling, and its

denial of summary judgment to Levy. 

I. 

A. 

In 1997, Fairchild was spun off from National as a new

company. Three classes of Fairchild stock were created:

(1) Class A common stock; (2) Class B common stock, which

differed from Class A common because it did not entail voting

rights; and (3) preferred stock, which offered a cumulative 12%

dividend. Class A common and Class B common were freely

convertible into each another, but preferred stock was not

convertible into either Class of common. National received a

mix of all three classes of stock and, in exchange for its $58.5

million investment in the new company, so did Sterling. The

only other initial investors were a number of National employees

slated to become key Fairchild employees. The governing

shareholder agreement gave National the power to designate one

of Fairchild’s seven directors and gave Sterling the power to

designate two. 
We have rounded off the figures throughout this opinion 1

because the precise figures are unimportant.

6

In 1999, Fairchild decided to undertake an initial public

offering (“IPO”) to raise additional capital and was told by a

number of underwriters that it should eliminate its preferred

stock in order for the IPO to be successful. Consistent with this

advice, a majority of Fairchild’s board voted that, as part of the

IPO, all of the company’s outstanding shares of preferred stock

would automatically be reclassified as shares of Class A

common stock. A majority of each of the three classes of

shareholders subsequently approved the reclassification by

written consent. Preferred shares were to be valued at their

contractual liquidation value — the original price plus

accumulated unpaid dividends — and Class A common shares

were to be valued at the price at which the Class A shares would

be offered to the public in the IPO, less underwriting fees and

commissions. Dividing the former by the latter yielded a

76-to-1 conversion ratio, meaning that each share of preferred

stock would become 76 shares of Class A common. Prior to 1

the execution of the IPO, according to the IPO prospectus,

Sterling owned 48% of the outstanding Class A common, 85.1%

of the outstanding Class B common, and 75.9% of the

outstanding preferred, while National owned 14.8%, 14.9%,

and 16.7%, respectively. 

On August 9, 1999, the IPO was completed and the

shares of preferred stock owned by Sterling and National were
 Section 16(b) provides, in pertinent part: 2

For the purpose of preventing the unfair use of

information which may have been obtained by

such beneficial owner, director, or officer by

reason of his relationship to the issuer, any profit

realized by him from any purchase and sale, or

any sale and purchase, of any equity security of

such issuer (other than an exempted security) or a

security-based swap agreement . . . involving any

such equity security within any period of less than

six months, unless such security or security-based

7

reclassified as 4 million and 900,000 shares of Class A common,

respectively. On January 19, 2000 — less than six months later

— with Fairchild undertaking a secondary offering of Class A

common stock, Sterling sold 11 million shares of Class A

common and National sold 7 million shares of Class A common.

The share price of Class A common had increased 84% since the

reclassification.

B. 

In November 2000, Levy, a Fairchild shareholder, filed

a derivative suit against National and Sterling, pursuant to

section 16(b) of the Securities and Exchange Act of 1934, which

generally provides for the disgorgement of any profits earned by

statutory insiders from short-swing trading. See 15 U.S.C.

§ 78p(b). The four elements required for section 16(b) liability 2
swap agreement was acquired in good faith in

connection with a debt previously contracted,

shall inure to and be recoverable by the issuer,

irrespective of any intention on the part of such

beneficial owner, director, or officer in entering

into such transaction of holding the security or

security-based swap agreement purchased or of

not repurchasing the security or security-based

swap agreement sold for a period exceeding six

months. . . . This subsection shall not be construed

to cover any transaction where such beneficial

owner was not such both at the time of the

purchase and sale, or the sale and purchase, of the

security or security-based swap agreement . . .

involved, or any transaction or transactions which

the Commission by rules and regulations may

exempt as not comprehended within the purpose

of this subsection.

Securities Exchange Act of 1934 § 16(b), 15 U.S.C. § 78p(b).

8

are (1) a purchase of a security and (2) a sale of that security

(3) by a director or officer of the issuer or by a beneficial owner

of 10% of any Class of the issuer’s securities (4) within a sixmonth period. See id.; Levy I, 314 F.3d at 111. As a general

rule, any profits earned through transactions that meet these

elements rightfully belong to the issuer. There is no mens rea

requirement — section 16(b) creates a strict liability regime. 
National and Sterling also maintained — and continue to 3

maintain — that, under the so-called “unorthodox transaction”

doctrine, the reclassification did not constitute a “purchase” for

section 16(b) purposes. See Kern County Land Co. v.

Occidental Petroleum Corp., 411 U.S. 582, 593-94 (1973). We

will refrain from addressing this argument because our analysis

of Rules 16b-3 and 16b-7 below makes it unnecessary for us to

9

According to the statute itself, the purpose of section

16(b) is “preventing the unfair use of information which may

have been obtained by such beneficial owner, director, or officer

by reason of his relationship to the issuer.” 15 U.S.C. § 78p(b).

The statute authorizes the SEC to promulgate rules and

regulations exempting from liability transactions that are “not

comprehended within [this] purpose.” Id.; see Levy I, 314 F.3d

at 112. Exercising this authority, the SEC has established a

number of section 16(b) exemptions. See 17 C.F.R. §§ 240.16b1, .16b-3, .16b-5 to .16b-8 (codifying SEC Rules 16b-1, 16b-3,

and 16b-5 to 16b-8).

Levy claimed that the reclassification of National’s and

Sterling’s preferred stock holdings constituted a “purchase” of

Class A common stock so that the profits that National and

Sterling earned from their sale of Class A common less than six

months later belong to Fairchild. National and Sterling filed

motions to dismiss, contending that two separate exemptions —

Rule 16b-3 and Rule 16b-7 — shielded them from section 16(b)

liability.3
do so. 

10

Adopted in 1996, the version of Rule 16b-3 that was in

effect until 2005 provided, in pertinent part:

Transactions between an issuer and its officers or

directors.

(a) General. A transaction between the issuer

(including an employee benefit plan sponsored by

the issuer) and an officer or director of the issuer

that involves issuer equity securities shall be

exempt from section 16(b) of the Act if the

transaction satisfies the applicable conditions set

forth in this section.

. . . .

(d) Grants, awards and other acquisitionsfrom the

issuer. Any transaction involving a grant, award

or other acquisition from the issuer (other than a

Discretionary Transaction) shall be exempt if:

(1) The transaction is approved by the

board of directors of the issuer . . . ;

(2) The transaction is approved or ratified

by . . . the written consent of the holders of
11

a majority of the securities of the issuer

entitled to vote . . . ; or

(3) The issuer equity securities so acquired

are held by the officer or director for a

period of six months following the date of

such acquisition . . . .

17 C.F.R. § 240.16b-3 (amended 2005).

The 1991 version of Rule 16b-7, which remained in

effect until 2005, provided, in pertinent part:

Mergers, reclassifications, and consolidations.

(a) The following transactions shall be exempt

from the provisions of section 16(b) of the Act:

(1) The acquisition of a security of a

company, pursuant to a merger or

consolidation, in exchange for a security of

a company which, prior to the merger or

consolidation, owned 85 percent or more

of either:

(i) The equity securities of all other

companies involved in the merger or
12

consolidation, or in the case of a

consolidation, the resulting company; or

(ii) The combined assets of all the

companies involved in the merger or

consolidation . . . .

17 C.F.R. § 240.16b-7 (amended 2005). Even though the SEC

added the word “reclassifications” to the Rule’s title in 1991, the

Rule’s text did not specifically refer to them. 

National and Sterling argued that Rule 16b-3(d)

exempted them from any liability related to the reclassification

because the reclassification fit within the category of a “grant,

award, or other acquisition from the issuer” — as an “other

acquisition” — and was approved by a majority of Fairchild’s

board and a majority of the voting shareholders (even though

approval by either of the two would have sufficed). They

maintained that Rule 16b-7’s exemption applied as well because

they acquired the disputed Class A common stock as part of a

“reclassification” that met the Rule’s 85% cross-ownership

requirement. 

The District Court granted National’s and Sterling’s

motions to dismiss, finding that the reclassification fell within

the scope of Rule 16b-7 and that Levy’s section 16(b) suit thus

necessarily failed. The Court did not rule on the applicability of

Rule 16b-3(d). Levy then appealed to our Court.
13

C. 

In an opinion filed December 19, 2002, we reversed,

concluding that neither Rule 16b-3(d) nor Rule 16b-7 exempted

National or Sterling from section 16(b) liability. As to Rule

16b-3(d), we reasoned that, despite the apparent open-endedness

of the language “other acquisition from the issuer,” and despite

the fact that the Rule made no mention of “compensation,” the

SEC intended it to apply only to transactions with a

compensatory nexus. Levy I, 314 F.3d at 120-24. We reviewed

in depth the release issued by the SEC in 1996 in connection

with the adoption of the Rule, and relied on a number of

excerpts that, we thought, indicated that the SEC adopted the

1996 version of the Rule in order to spur participation in

employee benefit plans and to make it clear that the exemption

applied to participant-directed transactions, such as the exercise

of a stock option. Id. at 122-24. We did acknowledge,

however, that one portion of the release “appear[ed] to cut

against our position” that Rule 16b-3(d) required a

compensatory nexus. Id. at 124. In that portion, the SEC

explained: 

New Rule 16b-3 exempts from short-swing profit

recovery any acquisitions and dispositions of

issuer equity securities . . . between an officer or

director and the issuer, subject to simplified

conditions. A transaction with an employee

benefit plan sponsored by the issuer will be
14

treated the same as a transaction with the issuer.

However, unlike the current rule, a transaction

need not be pursuant to an employee benefit plan

or any compensatory program to be exempt, nor

need it specifically have a compensatory element.

Ownership Reports and Trading by Officers, Directors and

Principal Security Holders, Exchange Act Release No. 37,260

(“1996 Rule 16b-3 Release”), 61 Fed. Reg. 30,376, 30,378-79

(June 14, 1996) (emphasis added) (footnotes omitted).

Nonetheless, we concluded that “the weight of the SEC’s

pronouncements on Rule 16b-3, and particularly Rule 16b-3(d),

suggest that the transaction should have some connection to a

compensation-related function.” Levy I, 314 F.3d at 124. 

Examining the applicability of the exemption set forth in

Rule 16b-7, we began our analysis by noting that “the SEC has

not set forth its interpretation clearly so our threshold challenge

is to ascertain what in fact was its interpretation.” Id. at 112.

We reasoned that the SEC must have added “reclassifications”

to the Rule’s title for a reason, but found that, “[u]nfortunately,

. . . the title and text of the rule, standing alone, do not provide

us assistance in our effort to ascertain the SEC’s purpose.” Id.

at 113. 

Based on a pair of SEC releases, we concluded that the

SEC intended for Rule 16b-7 to exempt some, but not all,

reclassifications from section 16(b) liability. Id. at 113-15. The
15

first release was from 1981 (i.e., ten years before

“reclassifications” was added to the Rule’s title) and included a

question and answer regarding the Rule’s applicability to

reclassifications:

Question: Although not specifically mentioned,

does Rule 16b-7 apply to transactions structured

as (1) statutory exchanges; (2) liquidations; or

(3) reclassifications?

Answer: The staff is of the view that, for

purposes of Rule 16b-7, a statutory exchange may

be the substantive equivalent of a merger,

consolidation or sale of assets. Therefore, the

acquisition and disposition of stock in a statutory

exchange would be exempt under Rule 16b-7,

assuming all of the conditions of the rule are

satisfied. A liquidation, on the other hand, is not

covered by Rule 16b-7, since the liquidation in

substance and purpose bears little resemblance to

the types of transactions specified in the rule.

Rule 16b-7 does not require that the security

received in exchange be similar to that

surrendered, and the rule can apply to

transactions involving reclassifications.

Interpretive Release on Rules Applicable to Insider Reporting

and Trading, Exchange Act Release No. 18,114, 46 Fed. Reg.
16

48,147, 48,176-77 (Oct. 1, 1981) (emphasis added) (footnotes

omitted). Essentially, we read the language “can apply” to mean

“sometimes applies.” Levy I, 314 F.3d at 113-14.

The second release, from 2002, pertained to proposed

amendments to Form 8-K and exempted from reporting

requirements “[a]cquisitions or dispositions pursuant to holding

company formations and similar corporate reclassifications and

consolidations.” Form 8-K Disclosure of Certain Management

Transactions, Exchange Act Release No. 45,742, 67 Fed. Reg.

19,914, 19,919 (Apr. 23, 2002) (emphasis added). It noted that

“[t]hese are the transactions exempted from Section 16(b) shortswing profit recovery by Exchange Act Rule 16b-7.” Id. at

19,919 n.56. We reasoned that this release “does not suggest

that all reclassifications are per se exempt” and that, because it

“clearly hedges on the point,” it “thus supports a conclusion that

some but not all reclassifications are exempt from section

16(b)’s restrictions.” Levy I, 314 F.3d at 114.

Next, lacking “specific SEC guidance about which

reclassifications are exempt from section 16(b) under Rule 16b7,” we devised a two-part test, under which a particular

reclassification would be exempt if it (1) met the 85% crossownership requirements that the Rule clearly made applicable to

mergers and consolidations and (2) was a transaction “not

comprehended within the purpose” of section 16(b). Id. at

114-15 (quoting 15 U.S.C. § 78p(b)).
 While we wrote “National and Sterling” here, the context 4

makes clear that this was a mistake and that we meant to write

“Fairchild.” 

17

Applying our newly-created test, we found that the

reclassification here failed part two — at least at the motion-todismiss stage. Id. at 115-18. We rejected National and

Sterling’s argument that the reclassification changed only the

form, not the substance, of their investments in Fairchild such

that it did not present an opportunity for insiders to benefit over

the public and thus did not implicate Congress’s purpose in

enacting section 16(b). Indeed, we concluded that it did present

such an opportunity. We based our conclusion on two

independent grounds. First, we found that, reading the

pleadings in the light most favorable to Levy, the

reclassification proportionately increased National’s and

Sterling’s interests in Fairchild by leaving them with a greater

percentage of Fairchild’s common stock. Id. at 116-17. Second,

after contrasting the pros and cons of common-stock and

preferred-stock ownership, we decided that the reclassification

“so chang[ed] the risks and opportunities of the preferred

shareholders in [Fairchild ] that the SEC would not have 4

intended to exempt the reclassification from section 16(b) by

Rule 16b-7.” Id. at 117-18. 

National and Sterling petitioned for rehearing, and the

SEC submitted an amicus brief in support. We denied the

rehearing request, despite the fact that the SEC maintained in its
 Despite Levy’s contention to the contrary, “[t]he failure of 5

a petition to achieve the necessary votes for rehearing does not

. . . imply any judgment on the merits and has no jurisprudential

significance.” In re Grand Jury Investigation, 542 F.2d 166,

173 (3d Cir. 1976).

18

brief that our ruling in Levy I was inconsistent with its view that

both exemptions applied here.5

D. 

In 2005, in response to our opinion in Levy I, the SEC

adopted amendments to Rules 16b-3 and 16b-7 in order “to

clarify the exemptive scope of these rules, consistent with

statements in previous Commission releases.” 2005

Amendments Release, 70 Fed. Reg. at 46,080. The SEC

explained its disagreement with Levy I and its impetus for the

amendments in the adopting release:

In particular, the Levy v. Sterling opinion read

Rules 16b-3 and 16b-7 to require satisfaction of

conditions that were neither contained in the text

of the rules nor intended by the Commission. The

resulting uncertainty regarding the exemptive

scope of these rules has made it difficult for

issuers and insiders to plan legitimate

transactions, and may discourage participation by

officers and directors in issuer stock ownership
19

programs or employee incentive plans. With the

clarifying amendments to Rules 16b-3 and 16b-7

that we adopt today, we resolve any doubt as to

the meaning and interpretation of these rules by

reaffirming the views we have consistently

expressed previously regarding their appropriate

construction.

Id. at 46,081.

Rule 16b-3(d) was amended to read, in pertinent part:

(d) Acquisitions from the issuer. Any transaction,

other than a Discretionary Transaction, involving

an acquisition [by an officer or director] from the

issuer (including without limitation a grant or

award), whether or not intended for a

compensatory or other particular purpose,shall be

exempt if [one of the same three conditions from

the 1996 version of the Rule are met].

17 C.F.R. § 240.16b-3(d) (new material underlined). Thus,

there is now no doubt that Rule 16b-3(d) does not require a

compensatory nexus. 

Rule 16b-7 was amended to read, in pertinent part:
20

(a) The following transactions shall be exempt

from the provisions of section 16(b) of the Act:

(1) The acquisition of a security of a

company, pursuant to a merger,

reclassification or consolidation, in

exchange for a security of a company that

before the merger, reclassification or

consolidation, owned 85 percent or more

of either:

(i) The equity securities of all other

companies involved in the merger,

reclassification, or consolidation, or in the

case of a consolidation, the resulting

company; or

 (ii) The combined assets of all the

companies involved in the merger,

reclassification, or consolidation . . . .

. . . .

(c) The exemption provided by this section

applies to any securities transaction that

satisfies the conditions specified in this

section and is not conditioned on the

transaction satisfying any other conditions.
21

17 C.F.R. § 240.16b-7 (new material underlined). Thus, there

is no now no doubt that Rule 16b-7 applies to any

reclassification that meets the Rule’s 85% cross-ownership

requirement. 

Further, the SEC explicitly indicated that “because [the

Rule 16b-3 amendments] clarify regulatory conditions that

applied to [that exemption] since [it] became effective on

August 15, 1996, they are available to any transaction on or after

August 15, 1996 that satisfies the regulatory conditions so

clarified.” 2005 Amendments Release, 70 Fed. Reg. at 46,080.

The SEC similarly made clear its view that “because [the Rule

16b-7 amendments] clarif[y] regulatory conditions that applied

to that exemption since it was amended effective May 1, 1991,

[they are] available to any transaction on or after May 1, 1991

that satisfies the regulatory conditions so clarified.” Id. The

transaction at issue here occurred in August 1999 — well after

both of these dates, but six years before the adoption of the

“clarifying” regulations.

E. 

Before the adoption of the 2005 amendments, Levy,

National, and Sterling had filed cross motions for summary

judgment. After the amendments were adopted, the District

Court denied Levy’s motion and granted those of National and

Sterling, finding that the new versions of both Rules applied to

the 1999 reclassification and shielded National and Sterling
Although denials of summary judgment usually are not 6

appealable, we have repeatedly made clear that “‘when an

appeal from a denial of summary judgment is raised in tandem

with an appeal of an order granting a cross-motion for summary

judgment, we have jurisdiction to review the propriety of the

denial of summary judgment by the district court.’” Transportes

Ferreos de Venezuela II CA v. NKK Corp., 239 F.3d 555, 560

(3d Cir. 2001) (quoting Nazay v. Miller, 949 F.2d 1323, 1328

(3d Cir. 1991)). 

22

from section 16(b) liability. Levy v. Sterling Holding Co., 475

F. Supp. 2d 463 (D. Del. 2007). Specifically, the Court

concluded that the new Rules were permissible constructions of

section 16(b), id. at 470-74, and that applying them here would

have no impermissible retroactive effect because the changes

made to the old Rules were “clarifying” rather than

“substantive,” id. at 475-78. Levy then filed this timely appeal.

II. 

The District Court had jurisdiction pursuant to 15 U.S.C.

§ 78aa and 28 U.S.C. § 1331, and we now have appellate

jurisdiction pursuant to 28 U.S.C. § 1291. We review de novo 6

the grant or denial of summary judgment by a district court.

Abramson v. William Paterson Coll. of N.J., 260 F.3d 265, 276

(3d Cir.2001). Summary judgment is appropriate “if the

pleadings, depositions, answers to interrogatories, and

admissions on file, together with the affidavits, if any, show that
23

there is no genuine issue as to any material fact and that the

moving party is entitled to a judgment as a matter of law.”

Fed. R. Civ. P. 56(c).

III.

Levy raises three issues on appeal. First, he maintains

that, under the doctrine of stare decisis, the mandate that we

issued in Levy I requires the grant of summary judgment in his

favor. Second, Levy contends that new Rule 16b-3 and new

Rule 16b-7 both exceed the authority that Congress delegated to

the SEC in section 16(b). Third, he asserts that applying either

of the new Rules to exempt National’s or Sterling’s acquisition

of Class A common stock through Fairchild’s 1999

reclassification would have an impermissible retroactive effect.

Levy does not argue, however, that the transactions at issue

failed in any way to meet the requirements of the new Rules.

Thus, he has effectively conceded that if we were to conclude

that either of the new Rules is a permissible exercise of the

SEC’s authority that may properly be applied to a 1999

reclassification, we would affirm the District Court’s grant of

summary judgment to National and Sterling and its denial of his

motion for summary judgment. 

A. 

Levy argues that the following three premises, together,

require the grant of summary judgment in his favor: (1) all four
24

elements of a section 16(b) violation were met by both National

and Sterling; (2) we already ruled in Levy I that neither Rule

16b-3 nor Rule 16b-7 exempted National or Sterling from

liability; and (3) prior panel decisions may only be overruled by

our Court sitting en banc, which has not happened here. Even

assuming that these premises are correct, however, Levy’s

proposed conclusion does not follow from them.

In National Cable & Telecommunications Associates v.

Brand X Internet Services, 545 U.S. 967 (2005), the Supreme

Court left no doubt that if a court of appeals interprets an

ambiguous statute one way, and the agency charged with

administering that statute subsequently interprets it another way,

even that same court of appeals may not then ignore the

agency’s more-recent interpretation. In 2000, the United States

Court of Appeals for the Ninth Circuit held that broadband cable

Internet service constituted a “telecommunications service”

under Title II of the Communications Act, a classification with

significant regulatory implications. Id. at 979-80. In 2002,

however, the Federal Communications Commission (“FCC”)

issued a declaratory ruling that the term “telecommunications

service” did not encompass broadband cable Internet service.

Id. at 977-78. When numerous parties challenged the FCC

ruling, the Ninth Circuit held, under principles of stare decisis,

that it was bound by its interpretation of “telecommunications

service,” notwithstanding the FCC’s conflicting interpretation

from two years later. Id. at 979-80.
 As discussed below, under Chevron U.S.A. Inc. v. Natural 7

Resources Defense Council, Inc., courts generally must accord

great deference to an agency’s interpretation of a statute that

Congress has authorized it to administer. 467 U.S. 837, 842-43

(1984).

25

The Supreme Court reversed, explaining that “[a] court’s

prior judicial construction of a statute trumps an agency

construction otherwise entitled to Chevron deference only if the 7

prior court decision holds that its construction follows from the

unambiguous terms of the statute and thus leaves no room for

agency discretion.” Id. at 982. The Court reasoned that

“allowing a judicial precedent to foreclose an agency from

interpreting an ambiguous statute . . . would allow a court’s

interpretation to override an agency’s,” which would fly in the

face of “Chevron’s premise . . . that it is for agencies, not courts,

to fill statutory gaps.” Id. Further, the Court emphasized, the

Ninth Circuit’s approach “would produce anomalous results,” as

the relative weight of conflicting judicial and agency

interpretations of an ambiguous statute “would turn on the order

in which the interpretations issue.” Id. at 983; see also Smiley

v. Citibank (S.D.), N.A., 517 U.S. 735, 744 n.3 (1996) (“Where

. . . a court is addressing transactions that occurred at a time

when there was no clear agency guidance, it would be absurd to

ignore the agency’s current authoritative pronouncement of what

the statute means.”); Reich v. D.M. Sabia Co., 90 F.3d 854, 858

(3d Cir. 1996) (“Although a panel of this court is bound by, and

lacks authority to overrule, a published decision of a prior panel,
26

a panel may reevaluate a precedent in light of intervening

authority and amendments to statutes or regulations.” (emphasis

added) (citation omitted)).

We see no reason why these principles should not apply

equally to the interpretation of a regulation. After all, “[w]hen

the construction of an administrative regulation rather than a

statute is in issue, deference is even more clearly in order.”

Udall v. Tallman, 380 U.S. 1, 16-17 (1965); see also Facchiano

Constr. Co. v. U.S. Dep’t of Labor, 987 F.2d 206, 213 (3d Cir.

1993) (“[A]n administrative agency’s interpretation of its own

regulation receives even greater deference than that accorded to

its interpretation of a statute.”). Accordingly, we conclude that

a judicial opinion construing an agency’s regulation does not

necessarily bar a court from giving effect to a subsequent,

different interpretation by the agency, unless, according to the

earlier opinion, the judicial construction flowed unambiguously

from the terms of the regulation. To find otherwise would

produce the same “anomalous results” that the Brand X Court

sought to avoid, creating a first-in-time rule for determining

whether a judicial or administrative interpretation of a regulation

is authoritative.

We reached a similar conclusion in a similar context in

United States v. Marmolejos, 140 F.3d 488 (3d Cir. 1998), a

case that involved an amendment by the Sentencing

Commission of an application note that accompanied an

ambiguous section of the Sentencing Guidelines. There, we
27

made clear that an earlier, conflicting judicial construction of the

ambiguous Guidelines section did not preclude us from

considering the more-recent interpretation of that section

provided by the Commission in the application note amendment.

Id. at 492-93 & n.7. In such a situation, we explained, “‘this

court is not bound to close its eyes to the new source of

enlightenment.’” Id. at 493 (quoting United States v. Joshua,

976 F.2d 844, 855 (3d Cir. 1992)). Importantly, as we noted in

Marmolejos, the Supreme Court has analogized Sentencing

Commission commentary on the Guidelines to an agency’s

interpretation of its own rules. Id. at 493 n.7 (citing Stinson v.

United States, 508 U.S. 36, 44-45 (1993)). 

Here, the new Rules constitute both (1) interpretations of

a statute, as they construe the provision of section 16(b) granting

the SEC authority to exempt transactions “not comprehended

within [the statute’s] purpose,” and (2) interpretations of

regulations, as they set forth the SEC’s understanding of what

the old Rules meant all along. Looking at the new Rules from

either perspective, it is clear that, notwithstanding the doctrine

of stare decisis, Levy I does not necessarily foreclose us from

considering them. In Levy I, we did not conclude that section

16(b) unambiguously precluded the SEC from exempting

transactions like the 1999 reclassification. Similarly, we did not

indicate that our reading of old Rule 16b-3 or of old Rule 16b-7

flowed unambiguously from their terms. Indeed, we struggled

to divine their applicability to the instant fact pattern. With

respect to Rule 16b-3, we concluded only that “the weight of the
28

SEC’s pronouncements . . . suggest[ed]” that we should read in

a compensatory nexus requirement. Levy I, 314 F.3d at 124

(emphasis added). Further, we recognized that a portion of the

SEC’s adopting release “appear[ed] to cut against” this

interpretation. Id. As to Rule 16b-7, we repeatedly noted the

lack of clear guidance in the text or elsewhere regarding whether

and to what extent reclassifications fell within the Rule’s scope.

Id. at 112-14. Our conclusion as to both represented our view

of what the SEC probably intended. 

Accordingly, Levy I does not control the result here

simply by virtue of the fact that it came first and has not been

overturned. 

B. 

Levy also contends that new Rule 16b-3 and new Rule

16b-7 are improper exercises of the authority that Congress

granted the SEC in section 16(b). This argument equates to a

claim that both new Rules are impermissible interpretations of

the portion of the statute that provides that section 16(b) does

not apply to “any transaction or transactions which the

Commission by rules and regulations may exempt as not

comprehended within the purpose of this subsection.” 15 U.S.C.

§ 78p(b). Because Chevron deference applies here, and the

statutory interpretations embodied in the new Rules easily pass
29

muster under this lenient standard, we disagree with Levy on

this issue as well. 

Chevron deference applies to an agency’s statutory

interpretation “when it appears that Congress delegated

authority to the agency generally to make rules carrying the

force of law, and that the agency interpretation claiming

deference was promulgated in the exercise of that authority.”

United States. v. Mead Corp., 533 U.S. 218, 226-27 (2001). If

we determine that the situation does indeed call for Chevron

deference, we proceed to a two-step inquiry. First, we ask

“whether Congress has directly spoken to the precise question

at issue.” Chevron U.S.A. Inc. v. Natural Res. Def. Council,

Inc., 467 U.S. 837, 842 (1984). If the answer is yes, we “must

give effect to the unambiguously expressed intent of Congress”

and our inquiry ends there. Id. at 842-43. If, however, the

answer is no, we move on to step two, under which we must

give the agency’s interpretation “controlling weight” unless it is

“arbitrary, capricious, or manifestly contrary to the statute.” Id.

at 843. In other words, where Congress has left a “statutory

gap” for the agency to fill, we must accept any interpretation by

the agency that fills the gap “in reasonable fashion.” Brand X,

545 U.S. at 980. 

Here, Congress has generally authorized the SEC to make

rules that have the force of law in implementing the Exchange

Act, Securities Exchange Act of 1934 § 23(a), 15 U.S.C.

§ 78w(a), and has specifically authorized it to create binding
30

exemptions from short-swing profit recovery, 15 U.S.C. §

78p(b). Because the SEC was acting pursuant to this authority

when it promulgated new Rule 16b-3 and new Rule 16b-7,

Chevron deference clearly applies. See 2005 Amendments

Release, 70 Fed. Reg. at 46,084-85 & nn.54, 71. Further, by

broadly pronouncing that section 16(b) does not apply to “any

transaction or transactions which the Commission by rules and

regulations may exempt as not comprehended within the

purpose of this subsection,” 15 U.S.C. § 78p(b), Congress

certainly left a gap for the agency to fill. Thus, the key question

for us to answer is whether it was reasonable for the SEC to

think that the transactions exempted by the new Rules are “not

comprehended within the purpose” of section 16(b).

As noted above, section 16(b)’s self-proclaimed purpose

is “preventing the unfair use of information which may have

been obtained by such beneficial owner, director, or officer by

reason of his relationship to the issuer.” 15 U.S.C. § 78p(b).

The Supreme Court has expanded upon this purpose:

The general purpose of Congress in enacting

s[ection] 16(b) is well known. Congress

recognized that insiders may have access to

information about their corporations not available

to the rest of the investing public. By trading on

this information, these persons could reap profits

at the expense of less well informed investors. In
31

s[ection] 16(b) Congress sought to “curb the evils

of insider trading [by] . . . taking the profits out of

a Class of transactions in which the possibility of

abuse was believed to be intolerably great.” It

accomplished this by defining directors, officers,

and beneficial owners as those presumed to have

access to inside information and enacting a flat

rule that a corporation could recover the profits

these insiders made on a pair of security

transactions within six months.

Foremost-McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232,

243-44 (1976) (alterations in original) (citations and footnotes

omitted) (quoting Reliance Elec. Co. v. Emerson Elec. Co., 404

U.S. 418, 422 (1972)). 

In the 2005 adopting release, the SEC explained why it

believed the transactions exempted by new Rule 16b-3 —

transactions between directors or officers and the issuer — were

not comprehended within this purpose: 

Typically, where the issuer, rather than the trading

markets, is on the other side of an officer or

director’s transaction in the issuer’s equity

securities, any profit obtained is not at the

expense of uninformed shareholders and other

market participants of the type contemplated by

the statute.
 Levy maintains that the SEC’s reasoning is flawed because 8

it “ignores [the fact] that such unfair short-term speculative

activity can take place even absent a transaction with an

uninformed member of the investing public.” (Appellant’s Br.

60 (emphasis added)). But Levy’s argument is based on a faulty

premise, as a transaction “need not . . . pose absolutely no risk

of speculative abuse” for the SEC to be free to exempt it from

section 16(b) liability. Dreiling v. Am. Express Co., 458 F.3d

942, 950 (9th Cir. 2006). Rather, as indicated by the Supreme

Court in its above explanation of section 16(b)’s purpose, the

relevant inquiry is whether the risk of speculative abuse is not

“‘intolerably great.’” Foremost-McKesson, Inc., 423 U.S. at 243

(quoting Reliance Elec. Co., 404 U.S. at 422); accord Dreiling,

458 F.3d at 950 . 

32

2005 Amendments Release, 70 Fed. Reg. at 46,083 (quoting

1996 Rule 16b-3 Release, 61 Fed. Reg. at 30,377). 

In other words, the purchase of securities from, or sale of

securities to, the issuer by a director or officer does not present

the same informational asymmetry, and associated opportunity

for speculative abuse, that, according to the Supreme Court,

Congress was targeting in enacting section 16(b). Because this

rationale is perfectly reasonable — and applies equally whether

or not the transaction has a compensatory nexus — we conclude

that new Rule 16b-3 is a permissible construction of section

16(b) and a valid exercise of the SEC’s congressionally

delegated authority. The two courts of appeals that have 8

considered this question reached the same conclusion. Roth v.
33

Perseus, L.L.C., 522 F.3d 242, 249 (2d Cir. 2008); Dreiling v.

Am. Express Co., 458 F.3d 942, 949-52 (9th Cir. 2006). 

As for new Rule 16b-7, the SEC explained in the 2005

adopting release that it is “based on the premise that the

exempted transactions” — including reclassifications — “are of

relatively minor importance to the shareholders of a particular

company and do not present significant opportunities to insiders

to profit by advance information concerning the transaction.”

2005 Amendments Release, 70 Fed. Reg. at 46,085. “Indeed,”

the SEC continued, “by satisfying either of the rule’s 85%

ownership tests, an exempted transaction does not significantly

alter the economic investment held by the insider before the

transaction.” Id. In essence, the SEC’s position is that

reclassifications, in addition to mergers and consolidations, that

meet the 85% cross-ownership requirement do not pose much

risk of abuse of inside information because they usually change

merely the form of the insider’s pre-existing investment in the

issuer. Id. We think this is a reasonable explanation as to why

the exempted transactions are not comprehended within the

purpose of section 16(b) and, therefore, conclude that new Rule

16b-7, like new Rule 16b-3, is a permissible construction of

section 16(b) and a valid exercise of the authority delegated to

the SEC by Congress. We note that the only other court of

appeals to have faced this issue as to Rule 16b-7 agreed, finding

that new Rule “falls safely within the Commission’s delegated

authority.” Bruh v. Bessemer Venture Partners III L.P., 464

F.3d 202, 214 (2d Cir. 2006). 
34

C. 

Finally, Levy contends that, even if Levy I does not bind

us for any of the reasons discussed above, and even if the new

Rules are permissible constructions of section 16(b), actually

applying the new Rules here to the 1999 reclassification would

have an impermissible retroactive effect 

Drawing on the well-established principle that

“[r]etroactivity is not favored in the law,” the Supreme Court

held in Bowen v. Georgetown University Hospital, 488 U.S.

204, 208 (1988), that an agency may not promulgate rules that

operate retroactively unless Congress has expressly delegated to

it the authority to do so. However, we have held that a new rule

should not be deemed to be “retroactive” in its operation — and

thus does not implicate the Supreme Court’s concerns in Bowen

— if it “d[oes] not alter existing rights or obligations [but]

merely clarifie[s] what those existing rights and obligations

ha[ve] always been.” Appalachian States Low-Level

Radioactive Waste Comm’n v. O’Leary, 93 F.3d 103, 113 (3d

Cir. 1996). Thus, where a new rule constitutes a clarification —

rather than a substantive change — of the law as it existed

beforehand, the application of that new rule to pre-promulgation

conduct necessarily does not have an impermissible retroactive

effect, regardless of whether Congress has delegated retroactive

rulemaking power to the agency. 
35

Many of our sister courts of appeals have endorsed

similar approaches, finding retroactivity to be a non-issue with

respect to new laws that clarify existing law. See, e.g., Piamba

Cortes v. Am. Airlines, Inc., 177 F.3d 1272, 1283 (11th Cir.

1999) (“[C]oncerns about retroactive application are not

implicated when an amendment that takes effect after the

initiation of a lawsuit is deemed to clarify relevant law rather

than effect a substantive change in the law.”); Pope v. Shalala,

998 F.2d 473, 483 (7th Cir. 1993) (“A rule simply clarifying an

unsettled or confusing area of the law. . . does not change the

law, but restates what the law according to the agency is and has

always been: ‘It is no more retroactive in its operation than is a

judicial determination construing and applying a statute to a case

in hand.’” (quoting Manhattan Gen. Equip. Co. v. Comm’r, 297

U.S. 129, 135 (1936))), overruled on other grounds by Johnson

v. Apfel, 189 F.3d 561, 563 (7th Cir. 1999); Cookeville Reg’l

Med. Ctr. v. Leavitt, 531 F.3d 844, 849 (D.C. Cir. 2008); Brown

v. Thompson, 374 F.3d 253, 258-61 & n.6 (4th Cir. 2004);

ABKCO Music, Inc. v. LaVere, 217 F.3d 684, 689-91 (9th Cir.

2000); Orr v. Hawk, 156 F.3d 651, 654 (6th Cir. 1998); Liquilux

Gas Corp. v. Martin Gas Sales, 979 F.2d 887, 890 (1st Cir.

1992). But see Princess Cruises, Inc. v. United States, 397 F.3d

1358, 1363 (Fed. Cir. 2005).

In determining whether a new regulation merely

“clarifies” the existing law, “[t]here is no bright-line test” to
 Marmolejos and a number of other Third Circuit cases that 9

we discuss in this section involve amendments to the Sentencing

Guidelines or its commentary made after the defendant had

already been sentenced. Generally, a defendant’s sentence is to

be based on the version of the advisory Guidelines and

commentary in effect at the time of sentencing. U.S.S.G.

§ 1B1.11(a). However, unless an Ex Post Facto Clause violation

would result, “a post-sentencing amendment . . . should be given

effect” — and the defendant’s sentence adjusted accordingly —

“if it ‘clarifies’ the guideline or comment in place at the time of

sentencing.” Marmolejos, 140 F.3d at 490 (emphasis added).

Because the ultimate inquiry is the same, we think our

statements as to when an amendment to the Guidelines or its

commentary is “clarifying” are equally applicable to the

determination of whether an amendment to a statute or

regulation is “clarifying.” 

36

guide us. Marmolejos, 140 F.3d at 491. After reviewing the 9

relevant case law from our Court and other courts of appeals,

however, we think that four factors are particularly important for

making this determination: (1) whether the text of the old

regulation was ambiguous, see, e.g., ABKCO Music, Inc., 217

F.3d at 691; Piamba Cortes, 177 F.3d at 1283-84; (2) whether

the new regulation resolved, or at least attempted to resolve, that

ambiguity, see, e.g., Marmolejos, 140 F.3d at 491; Liquilux Gas

Corp., 979 F.2d at 890; (3) whether the new regulation’s

resolution of the ambiguity is consistent with the text of the old

regulation, see, e.g., Marmolejos, 140 F.3d at 491; Boddie v.

Am. Broad. Cos., 881 F.2d 267, 269 (6th Cir. 1989); and
 Levy devotes a number of pages in his briefs to the 10

argument that the new Rules may not be applied to the 1999

reclassification because they are “legislative,” as opposed to

“interpretive.” This distinction, however, does not advance his

cause. The significance of a rule’s classification as “legislative”

is that an agency must promulgate it through the use of the

formal notice-and-comment rulemaking procedures contained in

the Administrative Procedure Act (“APA”). Chao v. Rothermel,

327 F.3d 223, 227 (3d Cir. 2003). Although the inquiries may

hinge on some of the same factors, the legislative-interpretive

dichotomy has no bearing on whether a rule has an

impermissible retroactive effect. Similarly, in response to

another of Levy’s contentions, we note that an agency’s decision

to use the APA’s formal rulemaking procedures to promulgate

a rule does not affect whether that rule may be applied to prepromulgation conduct. 

37

(4) whether the new regulation’s resolution of the ambiguity is

consistent with the agency’s prior treatment of the issue, see,

e.g., First Nat’l Bank of Chi. v. Standard Bank & Trust, 172

F.3d 472, 479 (7th Cir. 1999); Orr, 156 F.3d at 654. 

10

Before turning to the application of these four factors to

the case before us, we note that there are two other factors on

which some courts of appeals rely that we do not find to be all

that significant. First, we do not consider an enacting body’s

description of an amendment as a “clarification” of the preamendment law to necessarily be relevant to the judicial

analysis. United States v. Diaz, 245 F.3d 294, 304 (3d Cir.
 There are Guideline amendment cases in which we have 11

made statements to the contrary, suggesting that a conflict with

a prior judicial interpretation does make an amendment

substantive, as opposed to clarifying. But these cases are

distinguishable. In United States v. Brennan, 326 F.3d 176,

197-98 (3d Cir. 2003), Diaz, 245 F.3d at 303, and United States

v. Bertoli, 40 F.3d 1384, 1405-07 (3d Cir. 1994), applying the

new amendment would have resulted in a greater sentence for

the defendant and thus would have implicated the Ex Post Facto

Clause. As we explicitly indicated in Marmolejos, when ex post

facto issues are involved, the rules of the game are different.

140 F.3d at 492 n.6. In United States v. Roberson, 194 F.3d

408, 417-18 (3d Cir. 1999), there was no pre-existing ambiguity

in the Guidelines section at issue. The Sentencing

Commission’s amendment to the commentary conflicted not

only with a prior judicial construction, but also with the plain

meaning, of the relevant provision. Id. 

38

2001); Marmolejos, 140 F.3d at 493. But see Heimmerman v.

First Union Mortgage Corp., 305 F.3d, 1257, 1260 (11th Cir.

2002); First Nat’l Bank, 172 F.3d at 478. Second, we do not

take the fact that an amendment conflicts with a judicial

interpretation of the pre-amendment law to mean that the

amendment is a substantive change and not just a clarification.

Marmolejos, 140 F.3d at 492-93. As we explained in

Marmolejos, “one could posit that quite the opposite was the

case — that the new language was fashioned to clarify the

ambiguity made apparent by the caselaw.” Id. at 492. But see 11

Nat’l Mining Ass’n v. Dep’t of Labor, 292 F.3d 849, 860 (D.C.
 Levy contends that “other acquisition” in the phrase “grant, 12

award or other acquisition from the issuer” unambiguously

referred only to transactions with a compensatory nexus because

“grants” and “awards” both involve compensation. As support,

he invokes the interpretive canon ejusdem generis, under which

“where general words follow specific words in a statutory

enumeration, the general words are construed to embrace only

objects similar in nature to those objects enumerated by the

preceding specific words.” Circuit City Stores, Inc. v. Adams,

532 U.S. 105, 114-15 (2001) (internal quotation marks omitted).

But while this may be one way to approach the language, it is

not the only way. See Chicakasaw Nation v. United States, 534

U.S. 84, 94 (2001) (“[C]anons [of interpretation] are not

39

Cir. 2002); United States v. Capers, 61 F.3d 1100, 1110 (4th

Cir. 1995).

Focusing first on Rule 16b-3, we think that all four

factors identified above point to the conclusion that the new

Rule is a clarification of the previous version and that, thus,

applying it to the 1999 reclassification would have no

impermissible retroactive effect. First, we already determined

in Levy I that old Rule 16b-3(d)’s reference to “[a]ny transaction

involving a grant, award or other acquisition from the issuer”

was ambiguous. As discussed above, we thought it unclear from

the text of the Rule whether “other acquisition” referred truly to

any other acquisition or, instead, only to those acquisitions that,

like grants and awards, involve compensation. Levy I, 314 F.3d

at 121-22. Second, new Rule 16b-3 resolved this ambiguity, 12
mandatory rules. They are guides that ‘need not be

conclusive.’” (quoting Circuit City Stores, Inc., 532 U.S. at

115)). 

 Levy also maintains that by including subsection (f), which 13

provided that certain “discretionary transactions” involving

employee benefit plans required a six-month waiting period in

order to be exempt, the SEC somehow implicitly conveyed the

40

explicitly providing that the Rule’s exemption is available

“whether or not [the transaction at issue was] intended for a

compensatory or other particular purpose.” 17 C.F.R.

§ 240.16b-3(d). Third, the new Rule’s resolution of the

ambiguity is consistent with the text of the old Rule, which

made no mention of a compensatory nexus requirement.

Finally, the new Rule’s resolution of the ambiguity is not at odds

with the SEC’s earlier-expressed understanding of the old Rule.

To the contrary, as noted above, the SEC stated in the release it

issued upon adopting the old Rule that “a transaction need not

be pursuant to an employee benefit plan or any compensatory

program to be exempt, nor need it specifically have a

compensatory element.” 1996 Rule 16b-3 Release, 61 Fed. Reg.

at 30,379. Levy points to a number of SEC statements that

suggest that, in promulgating old Rule 16b-3(d), the agency was

primarily concerned with transactions pursuant to employee

benefit plans; however, these statements do not conflict with the

position that the old Rule also applied to transactions with no

compensatory nexus whatsoever.13
view that old Rule 16b-3(d) required a compensatory nexus.

Specifically, he contends that it would have been irrational for

the SEC not to exempt these discretionary transactions but to

exempt purely volitional, non-compensation-related

transactions, given that the latter arguably present greater

opportunity for speculative abuse. Although Levy’s argument

may raise questions as to the wisdom of a particular regulatory

scheme, we do not think that the SEC’s inclusion of subsection

(f) equated to a statement from the SEC that only transactions

involving compensation fell within the scope of old Rule

16b-3(d).

41

While the District Court chose to address the retroactivity

implications of new Rule 16b-7 as well, we decline to do so.

We have already determined that new Rule 16b-3(d) is a valid

exercise of the SEC’s authority, whose application to the 1999

reclassification would not give rise to any retroactivity concerns.

Because this is a sufficient independent ground for affirming the

District Court’s disposition of the case, we express no opinion

as to whether new Rule 16b-7 merely clarifies the old Rule or,

relatedly, whether applying it here would have an impermissible

retroactive effect. 
42

IV.

In light of the foregoing, we will AFFIRM the District

Court’s grant of summary judgment to National and Sterling and

its denial of summary judgment to Levy. Further, to the extent

it is inconsistent with our opinion today, we OVERRULE

Levy I.