On June 27, 2024, the Supreme Court of the United States released its opinion in SEC v. Jarkesy, a case involving a Securities and Exchange Commission (“SEC”) enforcement action for civil penalties against an investment advisor, Jarkesy, and his firm for alleged violations of the antifraud provisions contained in the federal securities laws. Although it had the option of pursuing its enforcement action in federal court, the SEC elected to prosecute the case “in-house,” through its Division of Enforcement overseen by the Commission. In that context, the Commission or its delegee — typically an administrative law judge (“ALJ”) — acts as factfinder and decides discovery disputes, and the SEC’s Rules of Practice govern.

In Jarkesy, the Supreme Court addressed whether the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties for securities fraud. Finding that the SEC’s enforcement action had hallmarks of fraud theories that existed at common law (that is, before the passage of specific antifraud statutes), the Court held that the Seventh Amendment applied and the defendants therefore enjoyed the constitutional right to a jury trial.

The Court reasoned that the Seventh Amendment encompasses statutory claims that are “legal in nature.” To determine whether a suit is legal in nature, courts must consider whether the cause of action resembles common law causes of action and whether the remedy sought is the sort that was traditionally obtained in a court of law. Of these factors, the remedy is the more important factor — even, as it was in Jarkesy, potentially dispositive.

Applied to the SEC enforcement action at issue, the Court held that, because the SEC sought civil penalties, a form of monetary relief, the action was legal in nature because it was designed to punish or deter the wrongdoer rather than solely “restore the status quo.” The “close relationship” between federal securities fraud laws and common law fraud reinforced that conclusion, according to the Court. Both target the same basic conduct: misrepresenting or concealing material facts. By using “fraud” and other common law terms of art when it drafted the federal securities laws, Congress incorporated common law fraud prohibitions into those laws.

The Court next examined, and rejected, the SEC’s argument that a “public rights” exception should apply to take the SEC’s enforcement action out of the Seventh Amendment’s penumbra. The Court found that “public rights” matters are those that historically could have been determined exclusively by the executive and legislative branches, such as the collection of revenue, aspects of customs law, immigration law, relations with Indian tribes, the administration of public lands, and the granting of public benefits. The Court stressed that, even with respect to matters that arguably fall within the scope of the “public rights” doctrine, the presumption is in favor of Article III courts. Consequently, as the dissent observed, “It is not clear what else, if anything, might qualify as a public right, or what is even left of the doctrine after today’s opinion.”

The Court thus concluded that the Seventh Amendment’s right to a jury trial applies even to novel statutory regimes, such as securities regulations, so long as the statutory claims are akin to common law claims. The Court held that “Congress cannot conjure away the Seventh Amendment by mandating that traditional legal claims be taken to an administrative tribunal.” Instead, “what matters is the substance of the suit, not where it is brought, who brings it, or how it is labeled.” To do otherwise “would permit Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the Executive Branch. That is the very opposite of the separation of powers that the Constitution demands.”

How Does Jarkesy Apply to Healthcare?

So, with the Court’s broad application of the Seventh Amendment in the Jarkesy securities case, how does this translate to the healthcare arena? Congress has created labyrinthian administrative appeals processes for almost every facet of the healthcare system, from enforcement to reimbursement. By design, the healthcare appeals processes are multilayered. Like the SEC process, they are conducted by ALJs.

Take, for example, the Office of Medicare Hearings and Appeals (“OMHA”), which administers the nationwide ALJ hearing program for many types of Medicare appeals. OMHA ALJs generally conduct the third level of a five-level appeals process. One type of Medicare appeal that must currently navigate the OMHA ALJ process arises from reimbursement denials imposed by auditors called Unified Program Integrity Contractors (“UPICs”).

Per their contracts with the Secretary of Health and Human Services (“HHS”), UPICs must “investigate potential fraud, waste, or abuse on the part of providers, suppliers, and other entities that receive reimbursement under the Medicare program for services rendered to beneficiaries.” Medicare Program Integrity Manual, Chapter 4, § 4.7. “The primary task of the UPIC is to identify suspected fraud . . . . ” Id. at § 4.7.4. While not seeking to impose penalties, as was the case in Jarkesy, the UPICs, through HHS, are seeking to recover Medicare payments (i.e., “monetary relief”) from providers under theories of fraud — a remedy that the Jarkesy Court found was legal in nature and therefore “all but dispositive” in triggering Seventh Amendment protections.

Numerous other facets of the Medicare and Medicaid administrative enforcement process could likewise warrant Seventh Amendment protections, thus requiring jury trials in federal or state courts. Take for example the survey process for healthcare facilities. Surveyors routinely impose heavy, sometimes draconian, civil money penalties (“CMPs”) for alleged violations by providers of regulatory conditions of participation. For example, in 2020, just months into the COVID-19 pandemic, the Centers for Medicare & Medicaid Services (“CMS”) imposed more than $15 million in CMPs on more than 3,400 nursing homes, averaging over $55,000 per facility. Currently, when CMS imposes a remedy, such as a CMP, the provider is constrained to an administrative appeal before HHS’s Departmental Appeals Board, the first level of which is before an ALJ. But of the 47 nursing home cases that were appealed and decided in 2022, CMS prevailed 46 times — with only one provider victory. In fact, CMS has prevailed in over 95% of nursing home appeals for many years. Under Jarkesy, may providers now demand their Seventh Amendment right to jury trials in federal court, rather than trying to run the gauntlet of the current lopsided administrative appeals process? In a dissent, Justice Sotomayor suggested that this may very well be the case, observing that the majority’s opinion could impair the authority of over two dozen agencies, including HHS, to seek civil penalties through administrative proceedings.

Another potential program ripe for a Seventh Amendment challenge is the newly enacted No Surprises Act (“NSA”), which took effect on January 1, 2022. Congress passed the NSA to protect patients from “surprise” bills for out-of-network care. Under the law, the amount a patient owes for out-of-network emergency care and non-emergency services delivered at in-network facilities may not exceed the cost-sharing the patient would owe for similar in-network care. Rather than allowing access to the courts or even an ALJ, however, the NSA establishes an independent dispute resolution (“IDR”) process between payors and providers. The IDR process is mandatory and, therefore, unlike arbitration, is devoid of the consent of the parties. IDR disputes are overseen by a list of only 13 entities. The parties do not know the identity of the individual who renders the decision. And the award is made without a hearing or exchange of written submissions between the parties. On the flip side, if challenged, the government would likely argue that, with the NSA, Congress created a new cause of action that did not exist at common law and therefore can limit the process for seeking recoveries. But in the end, the recovery sought in an NSA claim is monetary relief, which the Supreme Court just held in Jarkesy is “all but dispositive” in implicating the Seventh Amendment.

In summary, the Jarkesy opinion could have broad implications in the federal and state healthcare appeals arenas. Providers should consider raising Seventh Amendment challenges when pursuing appeals, although some providers, because of cost and expediency, may prefer to remain within the administrative appeals paradigm. But for larger cases with more at stake, having an appeal overseen by a judge applying uniform rules of evidence in front of an impartial jury will present an attractive option for providers if they can convince a court that the Seventh Amendment applies. That choice of whether to pursue an administrative appeal or a jury trial, however, may exist only in the short term. Eventually there will be precedent for what Jarkesy means for, say, the NSA. All providers will be bound by that — whether it’s the outcome they like or not.

And making the court system even more attractive could be the Supreme Court’s opinion in Loper Bright Enterprises v. Raimondo, in which the Court held that judges no longer have to give deference to an agency’s interpretation of a statute or rules, thus even further leveling the playing field for healthcare providers when vindicating their rights. For more on Loper, please click here.