The U.S. Supreme Court’s conservative justices seemed poised to rein in the power of the Securities and Exchange Commission (SEC) to bring enforcement action, in a case that could limit the reach of the administrative state.

During Nov. 29 oral arguments in the case, SEC v. Jarkesy, which involves three big questions about constitutional boundaries for administrative law courts used by federal agencies for enforcement action, the justices’ questions seemed to focus overwhelmingly on how those courts tried individuals without a jury.

SEC v. Jarkesy involves a hedge fund manager, George Jarkesy, whom the agency penalized for violating securities fraud law. More specifically, the SEC imposed a civil penalty of $300,000 on Mr. Jarkesy after bringing an administrative proceeding against him. The agency ultimately agreed with the administrative law judge’s conclusion that Mr. Jarkesy had violated securities law.

The U.S. Court of Appeals for the Fifth Circuit had ruled that the SEC’s use of administrative law courts was unconstitutional not only because they lacked juries but also because Congress improperly delegated its authority to the agency and the administrative law judges were too insulated from accountability.

The Biden administration argued that the Fifth Circuit erred and told the Supreme Court on Nov. 29 that Congress was able to create these types of administrative law courts due to a legal distinction between public and private rights. That distinction, both sides said, hasn’t been fully articulated in the law.

Justices Brett Kavanaugh and Amy Coney Barrett both suggested the distinctions that determined whether someone received a jury trial were somewhat irrelevant.

“It does seem odd from a constitutional perspective,” Justice Kavanaugh said, “to say that a private suit triggers the Article III right to a federal court and a jury … but a government suit against you for money is somehow exempt from those Article III and Seventh Amendment and due process requirements simply because the government attaches a different label, the public rights label to it.”

Justice Barrett, meanwhile, seemed perplexed as to why the right to a jury would depend on whether the defendant was tried in either an administrative court or one outlined in Article III of the Constitution. Congress allowed the SEC to choose whether it wanted to bring a case in an Article III district court or its own administrative court.

“It seems to me if you have an entitlement to a jury if you’re in federal court, I don’t understand then how you [don’t] have that right, how it can go to an agency,” she said.

Justice Samuel Alito similarly asked why a jury trial “simply goes out the window.”

“Justice Kavanaugh’s question was, what sense does it make to say you have this protection when you’re being sued by a private party, whose resources are certainly going to be more limited than the resources of the federal government, but when the same thing happens to you, and the party that’s against you is the federal government, well, this right to a jury trial simply goes out the window,” Justice Alito said.

Justice Clarence Thomas, who has written on the public versus private rights distinction, asked Principal Deputy Solicitor General Brian Fletcher at the beginning of the oral argument: “If I don’t agree with you that we’re talking about public rights here, [and] that private rights are involved, would you then think that it is required that it be adjudicated before an Article III court?”

Justice Sonia Sotomayor eventually pressed Mr. Fletcher to “go directly to Justice Thomas’s question … He’s already written on this issue, and he thinks that a private right is any right that involves property, life, or liberty basically.”

While Mr. Fletcher didn’t offer a clear definition of public rights, he cited a 1977 case, Atlas Roofing v. Occupational Safety and Health Review Commission, in arguing that “when the federal government, an agency, is enforcing a federal statute in its exercise of its sovereign powers, that’s a matter involving public rights.”
Liberal Justices Dismissive in Light of Prior Precedent

That case was a key part of Mr. Fletcher’s argument and seemed to lead Justice Elena Kagan to dismiss Mr. Jarkesy’s case. It involved a roofing company challenging citations from the Labor Department and the constitutionality of the administrative proceedings that followed.

“If you look at the question presented and then you read Atlas Roofing, you wonder why this case is here, in other words, that Atlas Roofing simply resolves the issue,” she told Mr. Fletcher.

She made a similar statement to Michael McColloch, who represented Mr. Jarkesy but argued that his position didn’t conflict with the Atlas Roofing precedent.

“I have to say,” Justice Kagan told Mr. McColloch, “you’re sort of describing a case that I don’t recognize. Atlas Roofing says numerous times, it could not have been clearer, the Seventh Amendment is no bar to the creation of new rights or to their enforcement outside the regular courts of law.”

She added, “I think that just resolves the case.”

During their exchange, she noted that “we’ve never suggested that in a case where Congress has given an agency the power to enforce something and the agency is bringing the charge, if you will, that … that’s settled.”

“Well … it’s settled only to the extent no one’s brought it up and forced this issue since Atlas Roofing,” Mr. McColloch responded.

Justice Kagan said she agreed and prompted laughter by remarking, “Nobody has had the, you know, chutzpah.”

Like Justice Kagan, Justice Ketanji Brown Jackson told Mr. Fletcher: “I agree that Atlas Roofing resolves this case, but like many of my colleagues, I guess I don’t understand your reading of Atlas Roofing as suggesting there’s no Seventh Amendment issue at all if the fact-finding function is assigned to the agency.”

Justice Jackson instead read that case as saying that the right to a jury was dependent on the type of claim involved in the lawsuit. While the Seventh Amendment required common law claims be tried by a jury, she suggested that Congress had created a new statutory duty that didn’t implicate the Seventh Amendment.

The case could have far-reaching implications for the administrative state, which is facing several challenges in the current Supreme Court term.

“The dramatic change that you’re proposing in our approach and jurisdiction is going to have consequences across the board,” Justice Sotomayor told Mr. McColloch.

She added, “we have a series of other agencies with very big responsibilities, start with the EPA, start with the Commodities Commission, the Postal Service, that can assess penalties for transporting hazardous materials in interstate traffic. All of those agencies will have to — will have to go to court, correct?”

She further asked whether “all of their proceedings are now nullified under your theory.”

Mr. McColloch countered that he didn’t think he and his client were “asking for a big change in the law.”

His position was that a lawsuit seeking civil penalties should go to an Article III court if the agency’s enforcement action had an analog in federal law.

“There are certain things that have been deemed exempt from that under, again, another long strain of cases such as immigration, tax, et cetera … and Social Security is like the easiest example.”

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