Friday, May 20, 2022: Fifth Circuit Case Decision Struck Down the U.S. Securities and Exchange Commission’s Entire Administrative Law Judicial System
The Decision Also Foreshadows Doom for OFCCP’s Administrative Law Judges Office and All OFCCP Administrative Court Prosecutions
The Case Is: Jarkesy, Jr.; Patriot28, L.L.C. v. U.S. Securities and Exchange Commission, No.20-61007 (May 18, 2022) U.S. Court of Appeals for the Fifth Circuit (New Orleans).
The Legal Issue: Seventh Amendment to the United States Constitution Right to Jury Trial: While the SCOTUS has previously upheld the Congress’ creation and the subsequent wild growth of federal administrative law courts within many federal Departments, it has previously declined to approve those federal administrative court prosecutions which the Congress established to litigate “non-public” rights. Rather, the SCOTUS has approved only those administrative court prosecutions lacking jury trials which disposed of rights the federal agency asserted on behalf of the public (i.e., “public rights” claims). “[W]hen Congress properly assigns a matter to adjudication in a non-Article III tribunal, the Seventh Amendment poses no independent bar to the adjudication of that action by a nonjury factfinder.” Atlas Roofing Co. v. Occupational Safety & Health Rev. Comm’n, 430 U.S. 442, 455 (1977). So, now the issue converts to the issue of when does Congress “properly assign a matter to adjudication in a non-Article III tribunal”? [An “Article III tribunal”, by the way, is a federal court that operates pursuant to the Rules of Article III of the U.S. Constitution which established the federal courts. Federal agency administrative courts are established pursuant to Congressional statutes.]
In the Jarkesy and Patriot28 case, the U.S. Securities and Exchange Commission (“SEC”) sought to prosecute an enforcement action within the agency for “securities fraud against George R. Jarkesy (a “hedge fund” manager) and Patriot28 (a corporation which served as the investment advisor for Mr. Jarkesy’s two hedge funds).” An SEC administrative law judge (“ALJ”) conducted a bench trial (no jury), found both Mr. Jarkesy and Patriot28 liable and ordered various remedies. An appellate court within the SEC later affirmed the ALJ’s Order and rejected several constitutional arguments Mr. Jarkesy and Patriot28 put forward to oppose the Order.
Mr. Jarkesy and Patriot28 then filed an appeal to the Fifth Circuit Court of Appeals and raised the same constitutional arguments before the Court. This time Mr. Jarkesy won. The Fifth Circuit held the SEC’s administrative proceedings before an SEC ALJ suffered from three independent constitutional defects:
“(1) the SEC’s in-house adjudication of Petitioners’ case violated their Seventh Amendment right to a jury trial;
(2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle by which the SEC would exercise the delegated power, in violation of Article I’s vesting of “all” legislative power in Congress; and
(3) statutory removal restrictions on SEC ALJs violate the Take Care Clause of Article II.”
Because the agency proceedings below were unconstitutional, we GRANT the petition for review, VACATE the decision of the SEC, and REMAND for further proceedings consistent with this opinion.”
Here is What the Seventh Amendment Says:
“In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.”
The “Public Rights”/ “Non-Public Rights” Constitutional Law Line-Drawing Exercise:
Here is how the Fifth Circuit explained it in the Jarkesy case:
“Whether Congress may properly assign an action to administrative adjudication depends on whether the proceedings center on “public rights.” Atlas Roofing, 430 U.S. at 450. “[I]n cases in which ‘public rights’ are being litigated[,] e.g., cases in which the Government sues in its sovereign capacity to enforce public rights created by statutes within the power of Congress to enact[,] the Seventh Amendment does not prohibit Congress from assigning the factfinding function and initial adjudication to an administrative forum with which the jury would be incompatible.” Id. Describing proper assignments, the Supreme Court identified situations “where the Government is involved in its sovereign capacity under an otherwise valid statute creating enforceable public rights. Wholly private tort, contract, and property cases, [and] a vast range of other cases as well are not at all implicated.” Id. at 458.
The Supreme Court refined the public-right concept as it relates to the Seventh Amendment in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989). There, the Court clarified that Congress cannot circumvent the Seventh Amendment jury-trial right simply by passing a statute that assigns “traditional legal claims” to an administrative tribunal. Id. at 52. Public rights, the Court explained, arise when Congress passes a statute under its constitutional authority that creates a right so closely integrated with a comprehensive regulatory scheme that the right is appropriate for agency resolution. Id. at 54.
The analysis thus moves in two stages. First, a court must determine whether an action’s claims arise “at common law” under the Seventh Amendment. See Tull, 481 U.S. at 417. Second, if the action involves common-law claims, a court must determine whether the Supreme Court’s public-rights cases nonetheless permit Congress to assign it to agency adjudication without a jury trial. See Granfinanciera, 492 U.S. at 54; Atlas Roofing, 430 U.S. at 455. Here, the relevant considerations include (1) whether “Congress ‘creat[ed] a new cause of action, and remedies therefor, unknown to the common law,’ because traditional rights and remedies were inadequate to cope with a manifest public problem”; and (2) whether jury trials would “go far to dismantle the statutory scheme” or “impede swift resolution” of the claims created by statute. Granfinanciera, 492 U.S. at 60–63 (quoting Atlas Roofing, 430 U.S. at 454 n.11, 461 (first and second quotations)).” [Slip Op at pp. 8-9]
Applying this legal standard, the Fifth Circuit in the Jarkesy case held that “…the agency proceedings below (before the SEC administrative tribunals) violated Petitioners’ Seventh Amendment rights, and the SEC’s decision must be vacated.” [Slip Op at p. 18]. The Court predicated its holding on these two subsidiary holdings:
- “The rights that the SEC sought to vindicate in its enforcement action here arise ‘at common law’ under the Seventh Amendment.” {Slip Op. at p.9]; and
- Next, the action the SEC brought against Petitioners is not the sort that may be properly assigned to agency adjudication under the public-rights doctrine. Securities fraud actions are not new actions unknown to the common law. [Slip Op. at p. 11]
What About the OFCCP’s Administrative Enforcement Scheme before USDOL’s Office of Administrative Law Judges (OALJ)?
The Atlas Roofing, Granfunanciera and Jarkesy case decisions would seem to quickly doom OFCCP’s OALJ enforcement scheme since OFCCP:
- prosecutes only contract breach cases (i.e., the federal contractor allegedly breached the duties contained in its federal contract) and the common law started and centered its work on enforcing contracts;
- OFCCP prosecutes cases against contractors NOT for the Public Good or to enforce “Public Rights,” but rather to merely ensure compliance with federal government contract requirements. Indeed, members of the public have no private rights of action under ANY of the three statutes OFCCP is entrusted to prosecute and OFCCP does not sue on behalf of members of the public (who are not “victims” of unlawful discrimination, as they are under Title VII), but are rather only “third party beneficiaries” to the federal Government contract OFCCP is enforcing); and
- the federal courts have vast experience with contract enforcement actions and jury trials of discrimination claims (with far greater expertise than available as to either vein of law in the OALJ courts).
Note: Thus far, no OFCCP litigant has raised the legal infirmity of OFCCP’s reliance on the OALJ enforcement process to dismiss an OFCCP administrative complaint. That will end soon, however.