On June 26, 2024, the Supreme Court issued a decision in SEC v. Jarkesy, holding that “[w]hen the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial.”[1] The decision limits the types of actions that the SEC can bring in administrative proceedings and calls into question the ability of other agencies to seek civil penalties through administrative proceedings.

Background

As the Court recounts, the SEC brought an enforcement action in 2013 against George Jarkesy, Jr. and Patriot28, LLC, which he managed, (collectively “Jarkesy”) for violations of the antifraud provisions of the Securities Act of 1933 (“Securities Act”), the Securities Exchange Act of 1934 (“Exchange Act”), and the Investment Advisers Act of 1940 (“Advisers Act”), “and sought civil penalties and other remedies.”[2] The SEC decided to bring these claims through an administrative proceeding instead of a lawsuit in federal district court. This, as both majority and concurrence opinions stressed, meant that Jarkesy would be subject to different procedural protections. “[I]n federal court a jury finds the facts, depending on the nature of the claim” and an “Article III judge presides”; in contrast, in an administrative proceeding, the Commission, or “an administrative law judge (ALJ) that it employs” acts as the judge and factfinder.[3]

As covered in an earlier blog post, an SEC ALJ found Jarkesy liable for securities fraud and ordered various remedies, including civil penalties, and the SEC affirmed the decision on appeal. Jarkesy then raised several constitutional challenges to the SEC’s proceedings in a petition to the Fifth Circuit. The Fifth Circuit vacated the SEC’s decision on three grounds: first, that Jarkesy was unconstitutionally deprived of his right to a jury trial under the Seventh Amendment; second, that Congress unconstitutionally delegated its legislative authority to the SEC, by leaving it to the SEC to determine whether to bring an action in an administrative proceeding, rather than in federal court; and finally, that the ALJs were unconstitutionally insulated from removal.[4]

After the Fifth Circuit denied rehearing en banc, the SEC filed a cert petition, and the Supreme Court granted the appeal. The Court affirmed the Fifth Circuit’s decision to vacate solely on the Seventh Amendment ground, with Chief Justice Roberts writing the majority opinion, joined by Justices Thomas, Alito, Gorsuch, Kavanaugh, and Barrett. Justice Gorsuch wrote a concurrence, joined by Justice Thomas, and Justice Sotomayor wrote the dissent, joined by Justices Kagan and Jackson.

Reasoning

The opinion 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."[5] The Court used the approach from Granfinanciera, S. A. v. Nordberg, 492 U. S. 33 (1989) and Tull v. United States, 481 U. S. 412 (1987) to answer that question, determining first “whether this action implicates the Seventh Amendment” and then—if the Seventh Amendment applies—“whether the ‘public rights’ exception to Article III jurisdiction applies.”[6]

As to the first step, the Seventh Amendment states that “[i]n Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved . . . .”[7] Courts have interpreted the “common law” to cover claims in law, as opposed to claims in equity (and admiralty). In determining whether a claim is legal in nature and thus covered by the Seventh Amendment, Chief Justice Roberts explained that courts consider “the cause of action and the remedy it provides,” with the remedy being more important.[8] Focusing on the remedy analysis, the Court observed that “[w]hile monetary relief can be legal or equitable, money damages are the prototypical common law remedy.”[9] Nonetheless, courts examine monetary relief to determine whether “it is designed to punish or deter”(legal) or “restore the status quo” (equitable).[10] Chief Justice Roberts then walked through the statutory framework for the civil penalties that the SEC sought against Jarkesy and determined that the civil penalties were aimed at punishment and deterrence—legal. “In this case, the remedy is all but dispositive” and the Court concluded the Seventh Amendment was implicated.[11] Chief Justice Roberts further observed that “the close relationship between federal securities fraud and common law fraud confirms that this action is ‘legal in nature.’”[12]

As to the second step, the Court explained that, under the public rights exception, “Congress may assign the matter for decision to an agency without a jury, consistent with the Seventh Amendment.”[13] Chief Justice Roberts then recounted some of the Court’s decisions on the public rights exception, observing that the exception applies to “cases involving the collection of revenue,” immigration, assessment of tariffs, “relations with Indian tribes, . . . the administration of public lands, . . . and the granting of public benefits such as payment to veterans [], pensions [], and patent rights . . . .”[14] The SEC’s claims did not fall into any of those exceptions. Rather, the majority reasoned that this case resembled Granfinanciera, where the Supreme Court held that the public rights exception did not apply, since the fraudulent conveyance claims at issue were not closely intertwined with the bankruptcy regime, and that the Seventh Amendment required jury trials over those statutory claims whose remedies traditionally sounded in law.

Chief Justice Roberts further addressed arguments by the SEC and the dissent by reading Atlas Roofing Co. v. Occupational Safety and Health Review Commission, 430 U. S. 442 (1977) narrowly. Atlas Roofing involved a challenge to the Occupational Safety and Health Review Commission’s use of in-house administrative proceedings to impose civil penalties for violations of OSHA regulations. The majority opinion distinguished Atlas Roofing on the basis that “OSH Act did not borrow its cause of action from the common law” and “instead resembled a detailed building code.”[15] Thus, Atlas Roofing was limited to the conclusion that “that Congress could assign the OSH Act adjudications to an agency because the claims were ‘unknown to the common law.’”[16]

At core, the majority opinion reasoned that “the Government has created claims whose causes of action are modeled on common law fraud and that provide a type of remedy available only in law courts”; therefore, “Jarkesy and Patriot28 [were] entitled to a jury trial in an Article III court.”[17]

Implications

While the Supreme Court’s decision in Jarkesy does limit the SEC’s enforcement powers in theory, it will likely have little impact to the SEC’s approach to enforcement matters in practice. As noted in our earlier coverage, the SEC has filed virtually all of its contested proceedings in federal court since the Supreme Court’s Lucia decision in 2018. The impact of Jarkesy will likely be more significant for other agencies that rely more heavily on in-house administrative proceedings to obtain civil penalties. In the challenges that will inevitably follow in the wake of Jarkesy, the fight will likely be around how to characterize the agency’s claims: whether the claims have analogues in law or equity (or admiralty); whether the penalties are closer to punishment and deterrence or whether they aim to restore the status quo; and, whether claims fall into one of the historic public rights exception categories identified by the Jarkesy Court or are otherwise unknown to the common law.

[1] SEC v. Jarkesy, 603 U.S. ____, at 2 (2024) (No. 22-859) available at https://www.supremecourt.gov/opinions/23pdf/22-859new_kjfm.pdf. Citations in this blog post are to the PDF page numbers in the hyperlinked copy of the opinion.

[2] Id.at 10.

[3] Id. at 7–8; see also Id.at 34–35 (Gorsuch, J., concurring in the judgment).

[4] Jarkesy v. SEC, 34 F.4th 446 (5th Cir. 2022).

[5] Jarkesy 603 U.S. ____, at 11.

[6] Id.at 11.

[7] U. S. Const. amdt. VII.

[8] Jarkesy, 603 U.S. ____, at 14.

[9] Id.

[10] Id.

[11] Id.

[12] Id.at 18.

[13] Id.

[14] Id.at 18–22 (internal citations omitted).

[15] Id. at 28.

[16] Id. at 30 (citing Atlas Roofing Co. v. Occupational Safety and Health Review Commission, 430 U. S. 442, 461 (1977)). In contrast, the dissent would have read Atlas Roofing broadly for the proposition 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.” Jarkesy at 68 (Sotomayor, J., dissenting); see also Brief for Petitioner at 13, SEC v. Jarkesy, 603 U.S. ____, (2024) (No 22-859) available at https://www.supremecourt.gov/DocketPDF/22/22-859/278330/20230828183013049_22-859tsUnitedStates.pdf, (arguing that, under Atlas Roofing, “the public-rights doctrine clearly permits Congress to create ‘new statutory obligations,’ impose ‘civil penalties for their violation,’ and commit ‘to an administrative agency the function of deciding whether a violation has in fact occurred.’”).

[17] Jarkesy at 27, 32.