On April 17th, the Fifth Circuit Court of Appeals held that an FCC penalty violates the Seventh Amendment based on the Supreme Court’s landmark ruling in SEC v. Jarkesy.
The Seventh Amendment provides for the right to a jury trial in civil cases when the claim is legal in nature. Last summer, the Supreme Court struck down SEC civil fraud penalties. Simply put, the Supreme Court held that you are entitled to a jury trial before the Government can impose a punitive penalty. The Court in Jarkesy held the penalty to be punitive rather than equitable or remedial.
In AT&T v. FCC, the Fifth Circuit Court of Appeals similarly struck down punitive penalties because the FCC did not first provide a jury trial before assessment. At issue was 47 U.S.C. § 503(b), which allows the FCC to assess penalties on telecom carriers for failing to protect customer confidentiality. When assessing these penalties, the FCC took into account the gravity of the violation, the degree of culpability, and prior offenses. The Court held that these penalties are legal in nature because they are meant to “punish or deter” and are analogous to common law causes of action. Following Jarkesy, the Court relied on the non-remedial character of the penalties and their historical analogs.
The AT&T case is an important and unsurprising ruling. The Supreme Court breathed life into the Seventh Amendment and opened an array of civil penalties to attack. Most IRS penalties are safe from Jarkesy due to the public rights exception and the right to a jury trial through refund suits. However, there are some IRS penalties that could implicate Seventh Amendment rights. For example, TEFRA or BBA partnerships may not have the right to a jury trial, even in District Court. And if the penalties assessed on these partnerships are punitive and go beyond the ordinary collection of revenue, then the holdings of Jarkesy and AT&T may apply. In fact, there are penalties beyond the civil fraud penalty that may fall in this category. In this new age of regulatory and constitutional challenges to once established law, these cases illustrate how it is important to keep all arguments on the table.
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