A groundbreaking decision released by the Fifth Circuit on May 18 signals a changing landscape for federal administrative law and the separation of powers. In Jarkesy v. Securities and Exchange Commission, 34 F.4th 446 (5th Cir. 2022), the Court revisited the longstanding nondelegation doctrine, a constitutional principle that delineates the circumstances in which Congress can delegate its legislative powers to administrative agencies.
The case involved a lawsuit against the Securities and Exchange Commission (“SEC”), to whom Congress had given the authority to enforce securities fraud violations at its discretion in either its own tribunals or in federal court. After the SEC affirmed a civil penalty against Petitioner Jarkesy and his business partner in a hearing held in front of an SEC Administrative Law Judge, Petitioner appealed to the Fifth Circuit alleging that this proceeding violated the constitution.
In appealing to the fundamental values of individual liberty and government accountability, the Fifth Circuit criticized the SEC’s imparted role as prosecutor, judge, and jury, holding that the SEC had denied Mr. Jarkesy’s Seventh Amendment right to a jury by electing to prosecute cases in its own tribunal and that the two-layer for-cause removal structure for administrative law judges violated the constitutional imperative that the President “take care that the laws be faithfully executed.”
But perhaps most notable was the Fifth Circuit’s finding that Congress had improperly delegated its legislative powers to the SEC. While Congress may delegate its regulatory power to an administrative agency, it must provide an “intelligible principle,” or a standard by which the agency must exercise its quasi-legislative powers. Agencies have traditionally met this standard with ease. However, in an unexpected re-recognition of the lines separating the functions of the three branches, no intelligible principle was found due to the SEC’s open-ended and virtually unlimited discretion to decide whether a defendant would receive the “fundamental” process of trial by jury.
Whereas this new decision impacts only the SEC for now, the reinforcement of the nondelegation doctrine may signal imminent ripple effects into other administrative agencies and could even revisit the Supreme Court, where Justice Gorsuch has already indicated a willingness to reconsider the Court’s long-standing broad approval of executive legislation.
In the face of this changing framework, businesses and individuals before administrative agencies may want to work with legal counsel to determine whether an agency is, in fact, acting improperly as prosecutor, judge, and jury or is otherwise operating outside the bounds of a guiding intelligible principle. Similarly, state and federal agencies, and the counsel that represent them, should be prepared for the potential challenges and functional changes that are likely to arise in Jarkesy’s wake.