The Supreme Court on June 27 issued its opinion in Securities and Exchange Commission v. Jarkesy in which it held that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial.

The case came out of the Fifth Circuit, which had vacated a Securities and Exchange Commission (SEC) affirmation of an order that had been issued by an Administrative Law Judge (ALJ). The ALJ had determined that George Jarkesy, the creator and investment advisor for two hedge funds, along with his firm Patriot28, committed securities fraud resulting, among other things, in their being fined $300,000 and required to disgorge $685,000.

In ruling against the SEC, the Fifth Circuit concluded that:

1. The SEC’s decision to adjudicate the matter in-house rather than in court violated the defendants’ Seventh Amendment right to a jury trial
2. Congress violated the nondelegation doctrine (i.e., Congress cannot delegate its Article I legislative powers to executive agencies) by authorizing the SEC without adequate guidance to choose whether to litigate the action in an Article III court or adjudicate the matter itself
3. The insulation of the SEC’s ALJs from executive supervision via two layers of for-cause removal protections violated Article II separation of powers

Following the Fifth Circuit decision, the Supreme Court granted certiorari and, considering only the Seventh Amendment issue, affirmed the Fifth Circuit and remanded the case for further proceedings.^[1]

In limiting its decision to the Seventh Amendment issue, the Court side-stepped the remaining constitutional questions that we have been tracking as they relate to the question whether the structure and therefore operation of the Federal Trade Commission (FTC) is unconstitutional — the implications of which in the health care context are obviously enormous given the enforcement power of the FTC in regard to merger, acquisition and related transactions.^[2]

Constitutional issues were front and center, but left unresolved, in Axon Enterprise v. FTC, 598 U.S. 175 (2023), a case on which we previously reported on in April and October that went up to the Supreme Court, but only on the question whether parties challenging the FTC’s constitutionality are required to submit to agency review prior to bringing suit in federal court. The Court, in a unanimous opinion, held that they do have the right to immediately file suit, but the case ended without any adjudication as to the constitutional issues when the FTC dropped the case.^[3]

The constitutional issues were also very much present in Illumina, Inc. v. FTC, a case in which the FTC asserted that llumina, Inc.’s acquisition of Grail, Inc. violated Section 7 of the Clayton Act. The Fifth Circuit considered the constitutional questions and, analyzing them in much the same manner as they later did in Jarkesy, rejected Illumina’s assertions that:

1. The FTC’s proceedings were the result of an unconstitutional delegation of legislative power in violation of Article I
2. The FTC unconstitutionally exercised executive powers while insulated from presidential removal in violation of Article II
3. The FTC violated Illumina’s due process rights by serving as both prosecutor and judge
4. There was an equal-protection violation because there is no rational basis for allocating certain antitrust enforcement actions to the FTC and others to the Department of Justice

The Court remanded the case to the FTC on account of issues unrelated to the constitutional ones, and Illumina announced just a few days later that it was divesting itself of Grail. Accordingly, as was the case with Axon, the issues were never presented to the Supreme Court.

That said, it is important to note that constitutional challenges are presently being asserted in other pending cases.

Most recently, in Meta Platform’s ongoing dispute with the FTC over the FTC’s attempt to modify an administrative order that had been put in place in 2012 directing it to take certain actions to cease and desist from engaging in allegedly unfair trade practices, Meta filed suit in federal district court asserting that the FTC’s modification proceedings violated provisions of the Constitution and seeking preliminary injunctive relief to prevent the FTC from moving forward with the proceedings.

The FTC opposed Meta’s motion and cross-moved to dismiss the complaint on the ground that none of Meta’s claims were legally viable.

On March 14, the U.S. District Court for the D.C District denied both Meta’s request for the injunction and the FTC’s request for dismissal. On March 29, the Court of Appeals denied Meta’s motion for a preliminary injunction pending appeal.^[4]

Much like Axon and Illumina, Meta in its complaint challenges the constitutionality of a number of structural characteristics of the FTC which it asserts render the FTC proceeding unconstitutional:

1. The Commissioners exercise executive authority while being unconstitutionally insulated from removal by the President who can remove a Commissioner only for inefficiency, neglect of duty or malfeasance in office.
2. Congress unconstitutionally delegated to the FTC the power to assign disputes to administrative adjudication rather than litigating them before an Article III court
3. The FTC adjudicates private rights in violation of Article III
4. The adjudication of these issues by the FTC in a proceeding that affords Meta no right to a trial by jury, and pursuant to a statutory scheme that provides for the potential future imposition of civil penalties, violates Meta’s right to a jury trial under the Seventh Amendment.
5. The FTC is structured so that in administrative adjudications, including the FTC proceeding against Meta, the FTC has a dual role as prosecutor and judge in violation of the due process clause

The Court of Appeals, affirming the District Court, rejected each of these five challenges in respect of injunctive relief, concluding that:

• With respect to Meta’s argument that the combination of investigative and adjudicative functions within a single agency violates Meta’s due process rights, under longstanding precedent, it is settled that an agency generally can constitutionally undertake both investigative and adjudicative functions (citing Withrow v. Larkin, 421 U.S. 35, 55–58 (1975), and In re Zdravkovich, 634 F.3d 574, 579 (D.C. Cir. 2011))

In addition, according to the court, both FTC regulations and the Administrative Procedures Act (APA) require some structural separation between the adjudicative and investigative operations of federal agencies.

• With respect to Meta’s claim that the FTC Act likely violates Article II by limiting the President’s power to remove the Commissioners:
  • The Supreme Court’s decision in Humphrey’s Ex’r v. United States, 295 U.S. 602, 629–32 (1935) held that the FTC’s enabling act did not run afoul of Article II because, essentially, the FTC was vested with quasi-legislative/quasi-judicial authority rather than purely executive authority
  • Notwithstanding that there has been much discussion as to whether that case should continue to apply given certain changes in circumstances, the Supreme Court has not disturbed that precedent
  • Therefore, the Humphrey’s case applies adverse to Meta
• As to Meta’s claim that the FTC Act likely violates the nondelegation doctrine, the Court rejects that challenge because “[w]hen Congress creates a statutory right, Congress also determines the options for its adjudication …. [and] Meta identifies nothing in this case that involves a congressional delegation of that legislative function. Once presented with statutory options, it is then the Executive Branch’s Article II prerogative to choose where and how to enforce that right in a particular case”
• As to Meta’s Seventh Amendment jury trial claim, the Court, considering the claim in a manner consistent with the principles later enunciated in Jarkesy, explains that the FTC in this case has issued an order to show cause regarding the proposed equitable modification of its consented-to administrative order

“The Commission is not seeking penalties or any form of relief arguably analogous to damages or other relief available at law. It seeks only Meta’s response to asserted failings in its privacy policies. So the Seventh Amendment’s guarantee of a jury trial for ‘suits at common law’ has no application here.”

• Finally, with respect to Meta’s Article III claim, according to the Court,
  • Meta is only challenging the federal government’s attempt to hold a hearing to decide whether the FTC should amend, for the second time, its own administrative order to obtain equitable relief for possible statutory violations pertaining to consumer-protecting limitations
  • Meta has provided no persuasive reason to believe that the ensuing show-cause proceeding would adjudicate anything other than “public rights” as to which the Seventh Amendment would not apply[5]

A final note: Notwithstanding that the constitutional challenges to the FTC were ultimately never addressed by the Supreme Court in Axon and Illumina:

1. Given the ongoing challenges involving the FTC and similarly involving other federal agencies including the SEC as evidenced by Jarkesy
2. Given Justice Gorsuch’s concurring opinion in Jarkesy in which Justice Thomas concurred and in which Justice Gorsuch writes separately to highlight the fact that “other constitutional provisions reinforce the correctness of the Court’s course. The Seventh Amendment’s jury-trial right does not work alone. It operates together with Article III and the Due Process Clause of the Fifth Amendment to limit how the government may go about depriving an individual of life, liberty or property”
3. Given the Court’s most recent decision in Loper Bright Enterprises v. Raimondo and Relentless v. Department of Commerce, in which the Court overrules the Chevron doctrine and limits agency authority by holding that the APA requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority

It is all but certain that these constitutional questions will be decided by the Supreme Court at some point in the not-too-distant future.

^[1] The Court held that the SEC’s action against Jarkesy implicated the Seventh Amendment’s right to a jury trial because the SEC’s antifraud provisions “replicate common law fraud, and it is well established that common law claims must be heard by a jury.” More specifically, the Court held that the Seventh Amendment extends to statutory claims that are “legal in nature,” that such relief is legal in nature when it is designed to punish or deter the wrongdoer rather than solely to restore the status quo, that the SEC is not obligated to use civil penalties to compensate victims, and that the SEC’s civil penalties are thus “a type of remedy at common law that could only be enforced in courts of law.”

The Court’s decision in Jarkesy makes it highly likely that the Seventh Amendment issue will impact many other federal agencies — at least 12 according to Justice Sotomayer in her dissent.

As to the FTC, where it is only seeking an injunction in the exercise of its enforcement authority under Section 7 of the Clayton Act, the Seventh Amendment right would not apply. The FTC can obtain penalties against a company that “acted unfairly or deceptively” through its Penalty Offense Authority, found in Section 5(m)(1)(B) of the Federal Trade Commission Act. Under this authority, the FTC can sue in federal court seeking civil penalties if it proves that (1) the company knew the conduct was unfair or deceptive in violation of the FTC Act, and (2) the FTC had already issued a written decision that such conduct is unfair or deceptive.

^[2] In her dissenting opinion as to the Seventh Amendment issue, Justice Sotomayer (joined by Justices Kagan and Jackson), emphasized that, while addressing only the Seventh Amendment issue because that was the only one discussed in the majority opinion, she nevertheless disagrees with the Fifth Circuit’s holding that the SEC’s discretion to bring the case within the agency instead of federal court violated the nondelegation doctrine and that a for-cause restriction on the ALJ’s removal violated Article II and the separation of powers.

^[3] Perhaps foreshadowing a future case, Justice Thomas, in a concurring opinion wrote that he has “grave doubts about the constitutional propriety of Congress vesting administrative agencies with primary authority to adjudicate core private rights with only deferential judicial review on the back end. By permitting administrative agencies to adjudicate what may be core private rights, the administrative review schemes here raise serious constitutional issues.”

^[4] Interestingly and notwithstanding that it concluded that Meta’s constitutional arguments were “squarely foreclosed by Supreme Court precedent,” the District Court in denying the FTC’s request for dismissal referenced the then pending Jarkesy case and noted that it is was possible that the Supreme Court’s decision in that case “might cast portions of this case in a new light.”

[5] This is basically the analytical construct later articulated by the Supreme Court in Jarkesy.

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