In a landmark decision issued last week, SEC v. Jarkesy, the Supreme Court held that the Seventh Amendment guarantees a defendant a jury trial when the SEC seeks civil penalties against the defendant for committing securities fraud. The Supreme Court grounded its decision in its prior jurisprudence holding that the Seventh Amendment generally applies to all claims—even congressionally-created ones like the SEC’s—that resemble traditional common law claims (such as fraud) seeking traditional legal remedies (such as monetary penalties).  The ruling curtails the SEC’s ability to bring a litigated enforcement action, at least one alleging fraud seeking civil penalties, in its own administrative proceedings. 

The scope of Jarkesy’s reach is left unclear—after all the SEC is not the only federal agency that uses administrative courts to enforce federal statutes. Indeed, this decision could have far-reaching implications for other federal agencies that typically adjudicate civil penalties “in house.”

Background

The Jarkesy holding is more than a decade in the making. In 2013, the SEC charged various parties, including George Jarkesy (“Jarkesy”), with violations of the Securities Exchange Act, the Securities Act, the Investment Advisers Act, and the Investment Company Act. The case was to proceed before an administrative law judge.

Days before the administrative proceeding was to begin, Jarkesy asked the United States District Court for the District of Columbia for declaratory relief and to enjoin the administrative proceeding on grounds that it violated respondents’ constitutional rights. The district court denied the requested relief, applying the Supreme Court’s precedent in Thunder Basin Coal Co. v. Reich (Thunder Basin), 510 U.S. 200 (1994) and Free Enterprise Fund v. Public Co. Accounting Oversight Board (Free Enterprise), 561 U.S. 477 (2010). The United States Circuit Court of Appeals for the District of Columbia affirmed.

The administrative proceeding was then held. Jarkesy and a co-respondent were found liable of securities fraud. The SEC subsequently imposed a civil penalty, disgorgement of ill-gotten gains, and enjoined Jarkesy from engaging in various securities industry activities. Respondents petitioned for the SEC to review the decision and filed a motion asking the SEC to stay further proceedings pending a decision by the D.C. Circuit, which the SEC denied.

Jarkesy then appealed the SEC’s decision to the United States Court of Appeals for the Fifth Circuit, which held that: (1) Jarkesy’s trial by an administrative law judge violated his Seventh Amendment right to a jury trial; (2) Congress unconstitutionally delegated legislative power to the SEC by failing to properly articulate an “intelligible principle” to guide the SEC’s decision as to whether to seek a penalty for fraud in federal court or within a federal agency; and (3) the removal restrictions protecting administrative law judges violated Article II’s “Take Care” clause, unconstitutionally limiting presidential power. In holding that Jarkesy’s right to a jury trial was violated, the Fifth Circuit found that the “public rights” exception to the Seventh Amendment did not apply because the SEC’s claims were no different from common law fraud claims and that these kinds of claims were not transformed into public rights simply by being litigated by the government. The Fifth Circuit thus vacated the SEC’s decision and remanded the case for further proceedings consistent with the opinion.

The SEC petitioned the Supreme Court for a writ of certiorari, which affirmed that Respondents are “entitled to a jury trial in an Article III court” while declining to “reach the remaining constitutional issues.”

In its opinion, the Supreme Court framed the case as posing “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.” SEC v. Jarkesy, slip op. at 6. The Court, which anchored its analysis to longstanding precedent articulated in Granfinanciera, S. A. v. Nordberg, 492 U. S. 33 (1989) and Tull v. United States, 481 U. S. 412 (1987), then held that the case implicated the Seventh Amendment 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.” Id. The Court reasoned that Congress had “deliberately” imported common law concepts and “fraud” into the securities laws and thus “incorporated prohibitions from common law fraud into federal securities law” and in rulemaking by, for example, using common law fraud concepts in promulgating Rule 10b-5. Id. at 11-12 (also recognizing that federal securities claims may be narrower in some respects). According to the Court, “Congress’s decision to draw upon common law fraud created an enduring link between federal securities fraud and its common law “ancestor,” id. at 12, thus compelling its holding.

Then, addressing both the dissent and the SEC’s arguments, the Court declined to find that the “public rights” exception applied. The Court recognized “[a] hallmark that we have looked to in determining if a suit concerns private rights is whether it ‘is made of the stuff of the traditional actions at common law tried by the courts at Westminster in 1789.’ If a suit is in the nature of an action at common law, then the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory.” Id. at 14. The Court reasoned that Granfinanciera “effectively decides this case” because the substance of a claim is what matters not where Congress assigned it and “in this case, the substance points in only one direction.” Id. at 20-21. The Court rejected the SEC’s argument that the government’s involvement in the case necessarily transformed the case into a public rights action, stating that it had “never held that ‘the presence of the United States . . . is sufficient’ by itself to trigger the exception.” Last, while the Supreme Court recognized a class of “public rights” cases that “historically could have been decided by the executive and legislative branches,” slip op. at 14, it found Jarkesy was not within that set of cases in no small part because the nature of relief sought was no different from that sought at common law.  

Potential Impacts

Jarkesy means that all future SEC cases alleging fraud and seeking civil penalties will need to be brought in federal district court, where the defendant will have a right to a jury. Practically speaking, however, that will merely continue the status quo. Over the past few years, the SEC was already voluntarily directing all litigated fraud cases to federal court anyway, given concerns over the expanding constitutional challenges to its administrative proceedings. Jarkesy now means it no longer has a choice in the matter.

But this decision almost certainly will affect a much wider swath of government enforcement cases—not only SEC cases and not just ones alleging fraud and seeking civil penalties. Other federal agencies now face at least some uncertainty as to their future ability to rely on their administrative courts. For any claim that is “akin to” a common law claim and where the remedy sought is one that traditionally “could only be enforced in court of law,” Jarkesy provides strong support that the defendant has a right to a jury under the Seventh Amendment.  Consumer deception claims are a prime example. The CFPB, but not the FTC, has the ability to obtain civil penalties for deceptive acts or practices.  We expect there will be challenges to the CFPB’s ability to pursue those claims in-house as well.

Historically, the SEC and respondents alike often preferred to use administrative proceedings to facilitate settlements, which can provide a quicker and more certain resolution, and because of certain collateral consequences that apply in federal court action seeking an injunction that do not apply in an administrative action. These settled enforcement actions filed administratively should be able to proceed if the Respondents agree to waive the right to a jury.

Notably, Jarkesy did not completely nullify the SEC’s administrative courts. Thus, while agency administrative tribunals have been severely wounded, they are not dead—yet.