On November 29, 2023, the Supreme Court heard oral argument in a critically important administrative law case, Securities and Exchange Commission v. Jarkesy, No. 22-859. This case carries enormous potential consequences for agencies beyond the Securities and Exchange Commission (“SEC”). As the parties and Justices discussed during the oral argument, numerous other federal agencies use in-house enforcement proceedings to seek civil penalties. For example, the Federal Energy Regulatory Commission (“FERC”) has collected nearly $860 million in civil penalties, and nearly $584 million in disgorgement since 2007, including $19.3 million in civil penalties, and $4.7 million in disgorgement in fiscal year 2023.

Background on Jarkesy

In 2013, the SEC initiated an in-house enforcement proceeding against George Jarkesy. Seven years later, the SEC issued an order finding that Mr. Jarkesy had committed securities fraud. The agency ordered Mr. Jarkesy to pay civil monetary penalties, to disgorge certain gains, and to cease involvement with securities-related activities. Mr. Jarkesy filed a petition for review of the SEC’s order in the U.S. Court of Appeals for the Fifth Circuit. In May 2022, the Fifth Circuit issued an opinion with three holdings:

1. the SEC proceeding violated the Seventh Amendment because the agency was seeking civil monetary penalties for fraud claims in a forum where the respondent did not have a right to a jury;
2. Congress unconstitutionally delegated legislative power to the SEC when it gave the agency unconstrained power to choose whether to bring enforcement proceedings in federal court or in an administrative proceeding; and
3. the multiple “for cause” removal protections enjoyed by the SEC’s Administrative Law Judges (“ALJs”) violated Article II of the Constitution.

Questions Presented

The Supreme Court granted the petition for review filed by the U.S. Solicitor General, on all three questions presented, which paralleled the Fifth Circuit’s three holdings:

1. Whether statutory provisions that empower the Securities and Exchange Commission (SEC) to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment.
2. 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.
3. Whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.

Oral Argument

At the outset, caution should always be taken in trying to discern the outcome of cases from oral arguments. That being said, during oral argument, the focus, save a few passing remarks on the ALJ removal issues, was on the Seventh Amendment jury trial right.

While the text of the Seventh Amendment — “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved” — played a prominent role in the questioning, the Justices probed far and wide beyond the text of the Constitution, including:

• The ongoing and precedential value, and correct interpretation, of Atlas Roofing Co. v. Occupational Safety & Health Review Comm’n, 430 U.S. 442 (1977), a Supreme Court decision holding that Congress can create and entrust new causes of action (e., not common law claims) to agency adjudication without running afoul of the Seventh Amendment;
• the intersection between the Seventh Amendment’s preservation of the jury trial right and limitations on agency adjudication created by Article III and separation of powers principles, and whether the Court should dis-entangle their analysis;
• the outer contours of the Supreme Court’s public rights/private rights case law, and whether the Court’s subsequent Seventh Amendment cases involving only private parties had eroded or narrowed Atlas Roofing;
• The degree to which a newly created federal statute must be analogous or close to a traditional common law claim to implicate the Seventh Amendment right to a jury trial;
• Whether the Court should be concerned about the government’s arguments that the jury trial right should afford more protections for litigation between private parties than it does when the government seeks to deprive its citizens of private property; and
• Whether the Seventh Amendment’s application depends on the forum in which a suit takes place, or on the remedy sought.

Several of the Justices expressed concern with the increasing scope, powers, and role that federal agencies play in the U.S. today, as compared to at the time Atlas Roofing was decided in 1977. Chief Justice Roberts, and Justices Alito and Gorsuch, expressed concerns with the current way agencies run their in-house enforcement schemes, and the implications of the government’s argument that the federal government could simply relabel many different types of “offenses” as civil penalties and adjudicate all types of wrongdoing in executive courts without juries. Justice Kavanaugh referenced both the Commodity Futures Trading Commission (“CFTC”) and FERC as agencies that routinely bring in-house enforcement cases for civil penalties. In fact, after specifically mentioning FERC, Justice Kavanaugh also expressly raised concerns with the current in-house enforcement proceedings that will resonate with current and former targets of FERC enforcement actions:

[T]hat seems problematic to say the government can deprive you of your property, your money, substantial sums, in a tribunal that is at least perceived as not being impartial in the sense that it’s an in-house executive agency where the commissioners start the enforcement process, oversee the enforcers, and then appoint the adjudicators and review the adjudication. That doesn’t seem like a neutral process.

The Justices’ focus on the Seventh Amendment, and near-total silence on the non-delegation and removal issues, can be interpreted in different ways. For various reasons, each Justice may have concluded that these issues can be decided solely based on the briefing on the non-delegation and removal questions. The questioning could also signal that the Court’s conservative wing intends to affirm the Fifth Circuit’s holding on the Seventh Amendment, and that they need not make any findings on the non-delegation or removal issues. However, given that the Fifth Circuit’s ruling on the non-delegation and removal issues effectively struck down several federal statutes as unconstitutional, given the federal government’s need for uniformity on the operation of executive-branch agencies, and given that the Court granted certiorari on all three questions, the Justices may see benefits in reaching all three questions. But again, we counsel caution in reading too much into the lack of questions on an issue; instead, we focus here on what the questions actually asked may reveal.

What Comes Next

If the Supreme Court affirms the Fifth Circuit’s judgment on the Seventh Amendment issue, that could mean that any enforcement action for civil penalties based on common law fraud-type claims would need to be brought in federal court, and could not be adjudicated entirely in-house at agencies. For FERC cases, that would mean that FERC would need to file cases alleging market manipulation and other fraud-based claims in federal court, rather than setting them for hearing before one of its ALJs. Of course, FERC could do that today without waiting for any Supreme Court decision. The same could be true for other federal agencies, depending on the statutes that they implement, whether the agency currently has statutory authority to proceed in court, and the types of claims under which they seek civil penalties.

For a defendant, the advantages of a federal district court forum are legion. Unlike agency courts, federal district courts provide access to a jury trial, protections under the Federal Rules of Civil Procedure and Evidence, robust discovery rights, equitable time schedules, and prohibitions on hearsay, and do not possess the inherent due process problems that exist when a single agency acts as investigator, prosecutor, judge, and jury.

We expect a Supreme Court decision no later than June 2024.