Near the end of its term, SCOTUS decided SEC v. Jarkesy, the case challenging the constitutionality of the SEC’s administrative enforcement proceedings. There were three questions presented, and Jarkesy had been successful in the appellate court on all three:
- “Whether statutory provisions that empower the Securities and Exchange Commission (SEC) to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment.
- Whether statutory provisions that authorize the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine.
- Whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.”
Had SCOTUS broadly decided that the statute granting authority to the SEC to elect to use ALJs violated the nondelegation doctrine, the case had the potential to be enormously significant in limiting the power of the SEC and other federal agencies beyond the question of ALJs. After all, Jarkesy had contended that, in adopting the provision in Dodd-Frank permitting the use of ALJs but by providing no guidance on the issue, “Congress has delegated to the SEC what would be legislative power absent a guiding intelligible principle” in violation of that doctrine. A column in the NYT discussing Jarkesy explained that, if “embraced in its entirety, the nondelegation doctrine could spell the end of agency power as we know it, turning the clock back to before the New Deal.” And in Bloomberg, Matt Levine wrote that “a total victory on the nondelegation argument…could mean that all of the SEC’s rulemaking (and every other regulatory agency’s rulemaking) is suspect, that every policy decision that the SEC makes is unconstitutional. Much of U.S. securities law would need to be thrown out, or perhaps rewritten by Congress if they ever got around to it. Stuff like the SEC’s climate rules would be dead forever.” (For a discussion of the nondelegation doctrine, see the SideBar in this PubCo post.) But that didn’t happen. During oral argument, the Justices did not even give lip service to the nondelegation question—the discussion was instead focused almost entirely on the question of whether the SEC’s use of an ALJ deprived Jarkesy of his Seventh Amendment right to a jury trial (see this PubCo post). In its decision, the majority held that, in the SEC’s action seeking civil penalties against Jarkesy for securities fraud, Jarkesy was entitled to a jury trial under the Seventh Amendment. And, “[s]ince the answer to the jury trial question resolve[d] this case,” SCOTUS did “not reach the nondelegation or removal issues.” Nevertheless, it was yet another strike against the administrative state.
Background. As described by SCOTUS, between 2007 and 2010, Jarkesy raised about $24 million from accredited investors for two investment funds. The SEC charged Jarkesy (and his co-defendant fund) with securities fraud under the Securities Act, the Exchange Act and the Investment Advisers Act, claiming that he “misled investors in at least three ways: (1) by misrepresenting the investment strategies that Jarkesy and [his co-defendant] employed, (2) by lying about the identity of the funds’ auditor and prime broker, and (3) by inflating the funds’ claimed value so that Jarkesy …could collect larger management fees.” The SEC brought the case before one of the SEC’s administrative law judges, who found Jarkesy liable and ordered that he cease and desist, pay a civil penalty of $300,000 and disgorgement of $685,000. The SEC affirmed the decision on appeal and Jarkesy appealed to the Fifth Circuit. By a vote of two to one, the appellate court vacated the SEC’s decision and remanded for further proceedings, holding that the agency’s proceedings were unconstitutional: “(1) Petitioners were deprived of their constitutional right to a jury trial; (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide it with an intelligible principle by which to exercise the delegated power; and (3) statutory removal restrictions on SEC ALJs violate Article II.” In addition, the appellate court determined that the action by the SEC did not fall under the “public rights doctrine,” which allows non-Article III tribunals, such as the SEC’s ALJs, to adjudicate cases that involve “public rights.” The SEC appealed. The Fifth Circuit denied rehearing en banc, and SCOTUS granted cert. (For a more detailed discussion of the lower court decision and subsequent oral argument, see this PubCo post.)
Majority opinion. As explained by Chief Justice John Roberts, writing for the majority, the SEC could bring an enforcement action in federal court or it could adjudicate the matter itself. The choice of forum by the SEC “dictates two aspects of the litigation: The procedural protections enjoyed by the defendant, and the remedies available to the SEC.” In federal court, a jury finds the facts; in the other forum, instead of a jury, the SEC or an SEC administrative law judge presides and finds the facts while the SEC’s Enforcement Division prosecutes the case. Although, after the proceedings have concluded, judicial review is available, that “review is deferential. By law, a reviewing court must treat the agency’s factual findings as ‘conclusive’ if sufficiently supported by the record,…even when they rest on evidence that could not have been admitted in federal court.” Originally, civil penalties were available as a remedy only in federal court, but Dodd-Frank changed that.
To the majority, the case posed
“a straightforward question: whether the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties against him for securities fraud. Our analysis of this question follows the approach set forth in Granfinanciera and Tull v. United States, 481 U. S. 412 (1987). The threshold issue is whether this action implicates the Seventh Amendment. It does. The SEC’s antifraud provisions replicate common law fraud, and it is well established that common law claims must be heard by a jury. Since this case does implicate the Seventh Amendment, we next consider whether the ‘public rights’ exception to Article III jurisdiction applies. This exception has been held to permit Congress to assign certain matters to agencies for adjudication even though such proceedings would not afford the right to a jury trial. The exception does not apply here because the present action does not fall within any of the distinctive areas involving governmental prerogatives where the Court has concluded that a matter may be resolved outside of an Article III court, without a jury. The Seventh Amendment therefore applies and a jury is required. Since the answer to the jury trial question resolves this case, we do not reach the nondelegation or removal issues.”
As analyzed by the majority, application of the Seventh Amendment to a particular statutory claim depends on whether the claim is “legal in nature.” To assess that issue, the courts are “to consider the cause of action and the remedy it provides….In this case, the remedy is all but dispositive. For respondents’ alleged fraud, the SEC seeks civil penalties, a form of monetary relief. While monetary relief can be legal or equitable, money damages are the prototypical common law remedy.” Since “the civil penalties in this case are designed to punish and deter, not to compensate[, t]hey are therefore ‘a type of remedy at common law that could only be enforced in courts of law.’… That conclusion effectively decides that this suit implicates the Seventh Amendment right, and that a defendant would be entitled to a jury on these claims.”
Although the Government and the dissent argued that the “public rights” exception applied—which would allow Congress to “assign the matter for decision to an agency without a jury, consistent with the Seventh Amendment”—the majority rejected that contention. The distinction between public and private rights has not been “‘definitively explained,’” and the majority did “not claim to do so today.” That being said, 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.” Given that the actions were for fraud, provided a punitive remedy in civil penalties and “target[ed] the same basic conduct as common law fraud, employ[ed] the same terms of art, and operate[d] pursuant to similar legal principles,” the majority concluded that this “action involves a ‘matter[] of private rather than public right.’” The fact that the Government was the party prosecuting was not enough to transform this action into one involving a public right. The majority distinguished Atlas Roofing—which held that adjudication of Congressionally created new statutory public rights could be assigned to an administrative agency—as a case that did not involve a traditional legal claim, but rather, citing Atlas, as “a new cause of action, and remedies therefor, unknown to the common law.” By contrast, courts of law “have dealt with fraud actions since before the founding.” Further, citing other precedent, the majority explained that “the Seventh Amendment does apply to novel statutory regimes, so long as the claims are akin to common law claims,” and “the public rights exception does not apply automatically whenever Congress assigns a matter to an agency for adjudication.”
“A defendant facing a fraud suit,” the majority held, “has the right to be tried by a jury of his peers before a neutral adjudicator.” To find otherwise would be “the very opposite of the separation of powers that the Constitution demands.” The majority did “not reach the remaining constitutional issues and affirm the ruling of the Fifth Circuit on the Seventh Amendment ground alone.”
Concurrence. Justice Neil Gorsuch, joined by Justice Clarence Thomas wrote a concurring opinion “to highlight 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.”
Dissent. In her lengthy dissent, Justice Sonia Sotomayor, joined by Justices Elena Kagan and Ketanji Brown Jackson, contended that “the Constitution does not require these civil-penalty claims belonging to the Government to be tried before a jury in federal district court. Congress can instead assign them to an agency for initial adjudication, subject to judicial review.” (The dissent also noted that she disagreed with the Fifth Circuit ruling on the nondelegation and removal issues, neither of which was reached in the majority decision.) Citing in support Atlas Roofing, she contended that SCOTUS “has blessed that practice repeatedly, declaring it ‘the “settled judicial construction”’ all along; indeed, “from the beginning.”’ With that in mind, she wrote, it should come as no surprise that “Congress has taken this Court’s word at face value. It has enacted more than 200 statutes authorizing dozens of agencies to impose civil penalties for violations of statutory obligations.” This is “the very first time,” she contended, that SCOTUS has held “that Congress violated the Constitution by authorizing a federal agency to adjudicate a statutory right that inheres in the Government in its sovereign capacity, also known as a public right.”
According to the dissent, the “question is whether Congress improperly bestowed federal judicial power on a non-Article III forum…. For more than a century and a half, this Court has answered that Article III question by pointing to the distinction between ‘private rights’ and ‘public rights,’” which can “always can be assigned outside of Article III.” And where the Government is a party, public rights are involved: it “has long been settled and undisputed that, at a minimum, a matter of public rights arises ‘between the government and persons subject to its authority in connection with the performance of the constitutional functions of the executive or legislative departments.’” Citing Atlas Roofing, she contended that “[w]hen a claim belongs to the Government as sovereign, the Constitution permits Congress to enact new statutory obligations, prescribe consequences for the breach of those obligations, and then empower federal agencies to adjudicate such violations and impose the appropriate penalty.”
The dissent saw another judicial “power grab” (see also Kagan dissent discussed in this PubCo post) with “momentous consequences….The majority pulls a rug out from under Congress without even acknowledging that its decision upends over two centuries of settled Government practice. Today’s decision is a massive sea change. Litigants seeking further dismantling of the ‘administrative state’ have reason to rejoice in their win today, but those of us who cherish the rule of law have nothing to celebrate.”
According to the dissent, this
“ruling is part of a disconcerting trend: When it comes to the separation of powers, this Court tells the American public and its coordinate branches that it knows best…. The Court tells Congress how best to structure agencies, vindicate harms to the public at large, and even provide for the enforcement of rights created for the Government….Make no mistake: Today’s decision is a power grab. Once again, ‘the majority arrogates Congress’s policymaking role to itself.’… It prescribes artificial constraints on what modern-day adaptable governance must look like. In telling Congress that it cannot entrust certain public-rights matters to the Executive because it must bring them first into the Judiciary’s province, the majority oversteps its role and encroaches on Congress’s constitutional authority. Its decision offends the Framers’ constitutional design so critical to the preservation of individual liberty: the division of our Government into three coordinate branches to avoid the concentration of power in the same hands…. Judicial aggrandizement is as pernicious to the separation of powers as any aggrandizing action from either of the political branches.”
In her view, in concluding that “the Constitution requires the Government to seek civil penalties for federal securities fraud before a jury in federal court” and that the “nature of the remedy is…virtually dispositive,” the majority was
“plainly wrong. This Court has held, without exception, that Congress has broad latitude to create statutory obligations that entitle the Government to civil penalties, and then to assign their enforcement outside the regular courts of law where there are no juries. Beyond the majority’s legal errors, its ruling reveals a far more fundamental problem: This Court’s repeated failure to appreciate that its decisions can threaten the separation of powers. Here, that threat comes from the Court’s mistaken conclusion that Congress cannot assign a certain public-rights matter for initial adjudication to the Executive because it must come only to the Judiciary. The majority today upends longstanding precedent and the established practice of its coequal partners in our tripartite system of Government. Because the Court fails to act as a neutral umpire when it rewrites established rules in the manner it does today, I respectfully dissent.”
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