July 10, 2024
SEC v. Jarkesy, 603 U.S. ___, No. 22-859 (June 27, 2024)
Response by Professor Richard Pierce
Geo. Wash. L. Rev. On the Docket (Oct. Term 2023)
Slip Opinion | SCOTUSblog
SEC v. Jarkesy: Agencies Cannot Adjudicate Most Civil Penalty Disputes
The Securities and Exchange Commission (SEC) has long had the power to bring an enforcement action in court to obtain a civil penalty against someone who commits securities fraud.1 In the Dodd-Frank Act of 2010 Congress gave the SEC the option of either bringing a civil fraud penalty action in court or assigning one of its administrative law judges (ALJ) to adjudicate a civil fraud dispute, subject to review by the SEC and a circuit court.2
The SEC assigned an ALJ to adjudicate its claim that Jarkesy had committed securities fraud and to decide whether to impose a civil penalty on him.3 The ALJ found that Jarkesy had committed securities fraud and imposed a large civil penalty on him.4 The SEC upheld the ALJ’s decision, and Jarkesy sought review of the SEC decision in the Fifth Circuit.5
The Fifth Circuit held that the SEC adjudication violated the Constitution in three ways.6 First, the agency adjudication violated the Seventh Amendment by depriving Jarkesy of his right to a jury trial.7 Second, the Dodd-Frank Act violates the nondelegation doctrine by giving the SEC unlimited discretion to choose whether to bring a civil penalty action in court or to adjudicate the dispute itself.8 Third, the Administrative Procedure Act violates the vesting clause because it limits the circumstances in which an officer appointed by the president can remove an ALJ.9
The Supreme Court granted certiorari to address all three issues, but the majority addressed only the first issue. That was predictable based on the oral argument. The Justices asked many questions about the jury trial issue and no questions about the nondelegation or removal issues.10 Since the Court did not address those issues, the other holdings in the Fifth Circuit opinion remain the law in that circuit. Thus, in the Fifth Circuit all ALJs are unconstitutional because of the limits on their removal imposed by the Administrative Procedure Act.
The Court divided six to three on the jury trial issue.11 The majority held that an agency cannot adjudicate a case in which it is attempting to impose a civil penalty if the cause of action has a close relationship with a common law cause of action.12 The precise relationship between a common law cause of action and a statutory cause of action that is required to trigger the Seventh Amendment right to a jury trial is not clear. The majority recognized that securities fraud and common law fraud differ in several respects, but the majority concluded that a “close relationship” between the two is enough.13
The majority emphasized the nature of the remedy to be imposed in the adjudication. In the majority’s words, “the remedy is all but dispositive”14 because “civil penalties are a type of remedy at common law that could only be enforced in courts of law.”15 The majority distinguished between common law remedies and equitable remedies to which the Seventh Amendment does not apply.16 Equitable remedies include cease and desist orders, injunctions, and restitution orders. The majority suggested that they also include money damage awards that are solely compensatory; though Article III might be an independent obstacle to agency adjudications that award compensatory money damages to individuals.17
The majority devoted many pages of discussion to the distinction that it has frequently made between the power to adjudicate private rights and the power to adjudicate public rights.18 The Court has often held that Congress has discretion to assign to agencies the power to adjudicate disputes with respect to public rights. In a masterpiece of understatement, the majority acknowledged that “[o]ur opinions governing the public rights exception have not always spoken in precise terms. This is an area of frequently arcane distinctions and confusing precedents. The Court has not definitively explained the distinction between public and private rights, and we don’t claim to do so today.”19
The majority attempted to clarify the distinction between public and private rights by distinguishing the case before it from a precedent.20 In Atlas Roofing v. OSHA,21 the Court upheld OSHA’s power to use its own adjudication process to impose civil penalties for violations of the Occupational Safety & Health Act. The majority characterized the cause of action that OSHA was implementing as “a new cause of action, and remedies therefor, unknown to the common law.”22 By contrast, in Dodd-Frank, “the Government [] created claims whose causes of action are modeled on common law fraud and that provide a type of remedy available only in law courts.”23
The majority emphasized that the public rights doctrine is an exception to the rule that the right to jury trial applies to civil penalty cases.24 It cautioned against allowing the exception to “swallow the rule.”25 It rejected the argument that practical considerations can justify extending the public rights exception beyond the narrow context in which the Court applied it in Atlas Roofing.26 It emphasized that the Seventh Amendment applies even to “novel statutory regimes, so long as the claims are akin to common law claims.”27
Two Justices joined in a lengthy concurring opinion in which they engaged in excoriating criticism of all agency adjudications and argued that all agency adjudications are fundamentally unfair and violate due process.28
Three Justices dissented.29 They disagreed with the majority’s interpretations and characterizations of precedents and criticized the majority for ignoring the long history of agency adjudication and the critical need for agency adjudication to enforce regulatory statutes.30 They argued that the majority had created a new precedent that will have severe adverse effects on efforts to govern. They noted that Congress “has enacted more than 200 statutes authorizing dozens of agencies to impose civil penalties of statutory violations.”31
The Court’s opinion in Jarkesy is unlikely to have severe adverse effects on the SEC. It had already changed its enforcement strategy to rely more on courts and less on in-house adjudications in recent years in response to the controversies surrounding its relatively recent heavy reliance on in-house adjudications. It also has access to several powerful equitable remedies that it can enforce through use of its in-house adjudication process.
It is impossible to know whether the Court’s decision will have severe adverse effects on other agencies. I was one of the co-authors of the report that the dissenting Justices rely on as the basis for their statement that Congress has enacted over 200 statutes that authorize dozens of agencies to impose civil penalties for statutory violations.32 My co-authors and I made no attempt to draw the distinction that the Court announces and applies in Jarkesy.
I don’t know how many of those hundreds of agency-administered statutory causes of action for civil penalties will fail the vague test that the Court announced because they bear too close a resemblance to a pre-existing common law cause of action. It will take many years and a lot of litigation to determine the precedential effects of the Court’s decision.
I am also concerned that the Court may rely on Article III and the reasoning in Jarkesy as the basis to extend the holding to equitable remedies. The Court has used the same problematic distinction between public and private rights to draw the line between causes of actions that can be adjudicated by agencies and causes of action that can only be adjudicated by courts. If the Court takes that action, regulatory agencies will be powerless to enforce statutes without going to court, and courts will be flooded with a deluge of agency enforcement actions that vastly exceeds the capacity of the courts to adjudicate.
Finally, the Court must address promptly the ALJ removal power issue that it ducked in Jarkesy. Agencies use ALJ’s to adjudicate tens of thousands of enforcement disputes every year. In most cases, agencies are required by statute to use ALJs for that purpose. A legal regime in which that universal practice is unconstitutional in some circuits and not others cannot persist.
Professor Pierce is the author of over twenty books and 130 articles on administrative law, government regulation, and the effects of various forms of government intervention on the performance of markets. His books and articles have been cited in hundreds of judicial opinions, including over a dozen opinions of the U.S. Supreme Court.
Recommended Citation
Richard Pierce, SEC v. Jarkesy, Geo. Wash. L. Rev. On the Docket (July 10, 2024), https://www.gwlr.org/sec-v-jarkesy-agencies-cannot-adjudicate-most-civil-penalty-disputes.
