On June 27, 2024, the Supreme Court of the United States (“SCOTUS”) released its opinion in Securities and Exchange Commission v. Jarkesy, 601 U.S. – (2024). This case concerned the authority of the administrative adjudication system and what types of cases can be heard through this system. In a 6-3 decision, SCOTUS ruled that in cases where the federal agency seeks civil penalties for a violation that resembles common law fraud, the defendant is entitled to a jury trial under the Seventh Amendment to the United States Constitution.

Background

In 2013, the Securities and Exchange Commission (“SEC”) brought an administrative action against Jarkesy and Patriot28 for allegedly violating the antifraud provisions in the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisors Act of 1940 (“securities laws”). The SEC can enforce the antifraud provisions of the securities laws through its own administrative procedures or by filing a case in federal district court. However, up until 2010, the SEC could only seek civil penalties through filing a case in federal district court. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which allowed the SEC to seek civil penalties through its administrative proceedings.

The SEC chose to bring the case against Jarkesy and Patriot28 through its administrative proceedings instead of filing a case in federal court. The SEC alleged that “Jarkesy and Patriot28 misled investigators in at least three ways: (1) by misrepresenting the investment strategies that Jarkesy and Patriot28 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 and Patriot 28 could collect larger management fees.” The SEC ordered, among other things, Jarkesy and Patriot28 to pay $300,000 in civil penalties.

Jarkesy and Patriot28 appealed this decision to the United States Court of Appeals for the Fifth Circuit. The Fifth Circuit held that the SEC’s administrative proceedings violated Jarkesy and Patriot28’s Seventh Amendment right to a jury trial. Additionally, the Fifth Circuit determined that “Congress violated the nondelegation doctrine by authorizing the SEC, without adequate guidance, to choose whether to litigate this action in a [federal court] or to adjudicate the matter itself.” Lastly, the Fifth Circuit held that the administrative law judges at the SEC have two levels of for-cause removal protections, which violates the separation of powers principle. For more information on the Fifth Circuit’s ruling, click here for NALC article “Fifth Circuit Rules SEC Administrative Proceedings Unconstitutional.”

The SEC appealed the Fifth Circuit’s decision to SCOTUS and SCOTUS granted certiorari. The SEC asked the Court to consider:

  • “Whether statutory provisions that empower the 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; and
  • Whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.”

SCOTUS issued a 6-3 ruling in SEC v. Jarkesy with a majority opinion authored by Chief Justice Roberts, a concurrence authored by Justice Gorsuch, and a dissent authored by Justice Sotomayor.

Majority Opinion

The majority of justices in SEC v. Jarkesy concluded that the SEC’s administrative proceedings violated Jarkesy and Patriot28’s Seventh Amendment right to a jury trial. Because the Court concluded that Jarkesy and Patriot28 were entitled to a jury trial, the Court did not decide whether Congress violated the nondelegation doctrine or the separation of powers doctrine.

In the majority opinion, authored by Justice Roberts, the Court first considered whether the Seventh Amendment to the U.S. Constitution was implicated when the SEC sought civil penalties against Jarkesy and Patriot28. The Seventh Amendment guarantees a right to a trial by jury for “suits at common law, where the value in controversy shall exceed twenty dollars.” In other words, defendants are entitled to a trial by jury in most civil cases in federal court. The majority, relying on Granfinanciera, S.A. v. Norberg, 492 U.S. 33 (1989), held that “the Seventh Amendment extends to a particular statutory claim if the claim is legal in nature.”

To determine if the claim is legal in nature, courts consider the cause of action and the available remedy, with the available remedy being the more important factor. The Court, relying on Tull v. United States, 481 U.S. 412 (1987), held that when monetary penalties are designed to punish the wrongdoer, the remedy is legal in nature and the defendant is entitled to a jury trial. When the monetary penalties are imposed to restore the status quo, the remedy is not legal in nature. The court first analyzed the remedy associated with the SEC’s antifraud provisions. According to the antifraud provisions in the securities laws, there are six situations in which the SEC can seek civil penalties:

  • “Whether the alleged misconduct involved fraud, deceit, manipulation, or deliberate or reckless disregard for regulatory requirements;
  • Whether it caused harm;
  • Whether it resulted in unjust enrichment, accounting for any restitution made;
  • Whether the defendant had previously violated securities laws or regulations, or had previously committed certain crimes;
  • The need for deterrence; and
  • Other matters as justice may require.”

The Court highlighted that several of the six situations point to the SEC using civil penalties to punish the individual instead of restoring the status quo. Additionally, the size of the remedy available is determined using a three-tiered system and the higher tiered penalties are assessed depending on the defendant’s culpability and the need for deterrence. Lastly, the SEC has no obligation to return the money to the victims of the fraudulent behavior, which the Court says points to the civil penalty being imposed to punish the wrongdoer. The Court held that because the penalties are intended to be punitive and not restore the status quo, the remedies available point to the statutory claim being legal in nature.

The court then considered the particular cause of action. The SEC alleged that Jarkesy and Patriot28 violated the antifraud provisions of the securities laws. The conduct targeted in the antifraud provisions of the securities laws is misrepresentation or concealment of material facts. The Court held that when Congress drafted the antifraud provisions of the securities laws, it targeted the same conduct and included the elements of common law fraud in the antifraud provisions. The Court did recognize that the antifraud provisions and common law fraud are not identical. For example, the Court highlights that not every instance of common law fraud constitutes a securities violation. Additionally, the SEC is not typically required to show that the defendant actually harmed an investor when alleging a violation of the antifraud provisions. Common law fraud does require a showing of harm. However, the Court held that although the antifraud provisions of the securities laws and common law fraud are not identical, their “close relationship…confirms that this action is legal in nature.” Therefore, the Court concluded that the cause of action and remedy are legal in nature and the Seventh Amendment to the U.S. Constitution was implicated in the case against Jarkesy and Patriot28.

The SEC argued that if the Seventh Amendment was implicated, the public rights exception applied. Under the public rights exception, Congress can assign certain public matters to adjudications through an agency, even though the adjudication would not afford the defendant a jury trial. The Court held that if a matter can solely be determined by the executive or legislative branch, it can be classified as a public right and an initial adjudication by a federal judge is not required. Justice Roberts concedes that determining public rights is a difficult task and looks to past SCOTUS precedent to determine the kinds of rights that fit into the public rights exception. Examples of public rights that Justice Roberts highlighted include Congress’ authorities to collect revenue, oversee foreign commerce, assess tariffs, handle relations with Indian Tribes, govern public lands, and grant public benefits, and patent rights. The Court also defined what a private right is by relying on Murray’s Lessee v. Hoboken Land & Improvement Co., 18 How. 272 (1856). In Murray’s Lessee, the Court held that private rights are “[rights] made of the stuff of the traditional actions at common law tried by the courts at Westminster in 1789.”

The SEC argued that Congress enacted a statute, the Dodd-Frank Act, that allows the SEC to seek civil penalties through its own adjudications, which triggers the public rights exception. Justice Roberts relied on a similar legal analysis here as he did in the analysis on whether the Seventh Amendment was implicated. The Court held that “traditional legal claims must be decided by courts, whether they originate in a newly fashioned regulatory scheme or possess a long line of common law forebears.” The Court further held that “Congress cannot conjure away the Seventh Amendment by mandating that traditional legal claim be…taken to an administrative tribunal.” Justice Roberts highlighted that the antifraud provisions of the securities laws target the same kinds of conduct and have similar elements to common law fraud, which makes the claim a traditional legal claim.

Lastly, the SEC argued that the public rights exception is also triggered by the federal government being a party to the case. The majority disagreed, holding that the government being a party to the case is not sufficient by itself to trigger the exception. The Court held that the substance of the case is the more important factor. Here, the Court said that the cause of action is a private right and the Seventh Amendment entitles the defendants to a trial by jury. Therefore, because the Seventh Amendment is implicated in the case against Jarkesy and Patriot28, and the public rights exception to the Seventh Amendment does not apply, the Fifth Circuit’s decision is affirmed.

Concurrence

Justice Gorsuch issued a concurrence in SEC v. Jarkesy. He joined the majority opinion but wrote separately to address other constitutional provisions that would have supported the outcome of the case. Justice Gorsuch states that, along with the Seventh Amendment, Article III and the Due Process Clause of the Fifth Amendment would also have supported the majority’s holding that Jarkesy and Patriot28 were entitled to a trial by jury.

First, Justice Gorsuch contends that Article III of the U.S. Constitution would support the majority’s holding. According to Justice Gorsuch, “Article III entitles individuals to an independent judge who will preside over [the jury guaranteed by the Seventh Amendment].” Justice Gorsuch argues that when the SEC utilizes an administrative law judge to decide a case, the defendant is deprived of their right to an independent judge.

Next, Justice Gorsuch argued that the Due Process Clause of the Fifth Amendment would also support the majority’s holding. Under the Due Process Clause, “no person…shall be deprived of life, liberty, or property without due process of law.” Justice Gorsuch states that the civil penalties sought by the SEC deprive Jarkesy of his property, which would require the government to provide due process of law. Relying on Murray’s Lessee, Justice Gorsuch argues that “due process of law generally implied and included [a judge], regular allegations, opportunity to answer, and a trial according to come settled course of judicial proceedings.” According to Justice Gorsuch, the amount of due process required was not afforded to Jarkesy and Patriot28 in the SEC’s administrative proceeding.

Lastly, Justice Gorsuch stated that he agreed with the majority’s analysis that the Seventh Amendment was implicated and that the public rights exception did not apply to the case against Jarkesy and Patriot28. For these three reasons, Justice Gorsuch argues that Jarkesy and Patriot28 were entitled to a jury trial.

Dissent

Justice Sotomayor, joined by Justices Kagan and Jackson, issued a dissenting opinion. The dissent argued that the question in this case was not whether the Seventh Amendment was implicated and if it was implicated, whether the public rights exception applied. The dissent argued that the question was if Congress can assign civil penalty claims to a non-Article III judge, and Justice Sotomayor argues that Congress can.

According to Justice Sotomayor, “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 points to two constitutional provisions that support this argument – the Vesting Clause in Article III and the Seventh Amendment. The dissent argued that this case implicates the interplay between these two constitutional provisions.

The dissent states that the Seventh Amendment only applies when the case is in an Article III, or federal, court. Additionally, the dissent argues that the Seventh Amendment only applies to “suits at common law”, which means that the right to a jury trial only applies to judicial proceedings and to suits that are legal in nature, not administrative proceedings.

The dissent disagreed with the majority’s reliance on Tull. The dissent argued that Jarkesy is distinguishable from Tull because in Tull, the government sued the defendant for civil penalties in district court. Justice Sotomayor stated that when a defendant is sued in district court for civil penalties, the Seventh Amendment applies and the defendant is entitled to a jury trial. In Jarkesy, the SEC assessed civil penalties through an administrative proceeding. Therefore, the dissent argued that when determining whether the Seventh Amendment applies, the forum is dispositive, because the Seventh Amendment does not apply to administrative proceedings.

The dissent then argued that even if the Seventh Amendment was implicated, the public rights exception would apply in this case. The dissent argued that public rights arise “between the government and persons subject to its authority in connection with the performance of the constitutional functions of the executive or legislative departments.” In other words, claims that belong to the government are public rights. According to the dissent, Congress can always assign public rights to a non-Article III forum.

The dissent primarily relied on Atlas Roofing Co. v. OSHA, 430 U.S. 442 (1977) to argue that the case against Jarkesy and Patriot28 deals with a public right. The dissent states that in Atlas Roofing, “Congress identified a national problem, concluded that existing legal remedies were inadequate to address it, and then created a new statutory scheme that endorsed Executive in-house enforcement as a solution.” Justice Sotomayor argued that Congress followed the same procedure when it passed the SEC antifraud provisions. The dissent further argued that Congress did not merely “repackage a common law claim under a new label,” it created an entirely new federal enforcement scheme. In the dissent’s view, Article III and the Seventh Amendment do not prevent Congress from assigning enforcement of these new causes of action to non-Article III forums. The dissent also disagreed with the majority’s reliance on Granfinanciera. According to the dissent, the Court in Granfinanciera held that “Congress may fashion causes of action that are closely analogous to common-law claims and still place them beyond the ambit of the Seventh Amendment by assigning their resolution to a non-Article III forum in which jury trials are unavailable.” Therefore, while the dissent argues that the Seventh Amendment is not implicated in the case against Jarkesy and Patriot28, if it was, the public rights exception would apply, and Congress could assign the claim to administrative adjudicator.

Going Forward

While this case directly dealt with an SEC matter, the ruling has broader implications and will likely affect the power of administrative adjudications in other agencies. As the dissent highlights, there are more than two dozen federal agencies that can impose civil penalties on individuals, including the Commodity Futures Trading Commission, Department of Agriculture, Occupational Safety and Health Review Commission, and Environmental Protection Agency.  Additionally, the fraud provision in the Federal Crop Insurance Program has administrative procedures similar to the SEC’s procedures. Lastly, as Justice Sotomayor points out in her dissent, Congress has given some federal agencies only an administrative forum to collect civil penalties, such as the Federal Energy Regulatory Commission and Federal Mine Safety and Health Review Commission. All or some of the administrative proceedings in these agencies could be affected by this decision.

 

To read the Supreme Court’s opinion in SEC v. Jarkesy, click here.

For more NALC resources on Administrative Law, click here.

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