Last week, the Fifth Circuit Court of Appeals dealt a blow to the SEC’s system of administrative-law judges that could have farther-reaching consequences.
Last week, the Fifth Circuit Court of Appeals dealt a blow to the SEC’s system of administrative-law judges that could have farther-reaching consequences.
T he National Labor Relations Board’s (NLRB’s) humiliating loss in the Third Circuit was not the past week’s only high-profile defeat for the administrative state. Last Wednesday, the New Orleans–based United States Court of Appeals for the Fifth Circuit ruled, in Jarkesy v. SEC, that certain cases in which the Securities and Exchange Commission seeks civil monetary penalties cannot be heard by the SEC’s own administrative-law judges (ALJs), and must instead be filed in federal court and tried by a jury. Jarkesy does not justify some of the sky-is-falling rhetoric of defenders of the administrative state, but it does strike a real blow for due process of the law and the right to a jury.
The Seventh Amendment Jury-Trial Right
The Jarkesy decision was issued by a divided appeals panel, with a majority opinion written by George W. Bush appointee Jennifer Walker Elrod and joined by Trump appointee Andrew Oldham, and a dissent written by Reagan appointee W. Eugene Davis. The core of Jarkesy is its conclusion that certain SEC charges trigger a defendant’s Seventh Amendment right to a jury trial. That right means that a charge must be filed in court rather than before an ALJ, because ALJs decide the cases brought before them without a jury. Jarkesy is limited to charges seeking specific remedies (civil monetary penalties) for specific offenses (forms of fraud, misrepresentation, or nondisclosure), so this is not as sweeping a ruling against such administrative tribunals as it might seem. But it is still a big deal.
The Seventh Amendment provides that, “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.” Since 1830, the Supreme Court has held that this preserves a right to a jury trial in any civil suit where there would have been a right to a jury under English common law at the time of the Founding. So, for example, a suit for breach of contract, fraud, or personal injury must be tried by a jury, but a suit that would have been handled by a chancellor in a court of equity (for example, probate of a will) would not.
Lots of federal laws, however, create new lawsuits and new governmental powers that didn’t exist in 1791. How to decide if a legal action resembles a “Suit at common law?” That can be a tricky question, but it is not unanswerable. In Jarkesy, the SEC sued the founder and investment adviser of two hedge funds for misrepresentations and overvaluations relating to the funds. Some of the SEC’s legal theories under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940 require proof of intentional fraud; others refer to misrepresentations, required disclosures, or a practice that “operates as a fraud or deceit upon any client or prospective client.” Some of these laws reach beyond traditional common-law fraud to reach statutorily compelled disclosures or practices that do not require proof of fraudulent intent. Are these genuinely new legal rights, or just variations on old common-law remedies? The Jarkesy majority concluded that claims based on fraud or misrepresentation bore enough of a family resemblance to common-law fraud — the Supreme Court’s repeated use of common-law precedents to shape statutorily undefined elements of those claims played a big role here — to treat them as “Suits at common law,” and the dissent did not disagree.
There’s a catch, though: Even if the legal elements suggest a common-law suit such as fraud, the case is still equitable — meaning the right to a jury trial doesn’t apply to it — if the only remedy sought is equitable. Disgorgement of ill-gotten profits is an equitable remedy, as the Court held in Liu v. SEC (2020). A bar on working in the industry — one frequently deployed nuclear weapon in the SEC’s arsenal — is also equitable. Pursuing both of those didn’t save the SEC in Jarkesy, because the Commission was also seeking a civil penalty, which is a legal remedy. But in future cases, the SEC may decide to limit the relief it seeks in order to ensure that cases are heard before its own ALJs. There are also other powers the SEC exercises — such as regulating professionals who practice before the agency — that are considered purely administrative or that the Commission isn’t even authorized by Congress to use in federal-court suits.
Public Rights
The legal/equitable distinction is only half of the question under the Supreme Court’s Seventh Amendment cases. Going all the way back to 1856, the Court has ruled that the Seventh Amendment jury-trial right does not apply to cases “involving public rights,” which it has described as those that “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.” This is contrasted with “private rights” that apply in conflicts between individuals.
Therein lies the real heart of the dispute in Jarkesy. The dissent argues that basically any case brought by the government under a federal statute involves “public rights” — as the majority notes, the dissent does not even attempt to offer a limit to the government’s ability to deprive civil defendants of a jury trial when they are sued by the government itself. Judge Elrod’s majority opinion finds this to be a claim of power that would have alarmed the Framers: “Civil juries in particular have long served as a critical check on government power. So precious were civil juries at the time of the Founding that the Constitution likely would not have been ratified absent assurance that the institution would be protected expressly by amendment.” As she notes, “King George III’s attempts to strip colonists of their right to trial by jury was one of the chief grievances aired against him and was a catalyst for declaring independence.” Thus, the idea that, “when the federal government sues, no jury is required . . . is perhaps a runner-up in the competition for the ‘Nine Most Terrifying Words in the English Language.’”
In the majority’s view, a government suit that seeks to vindicate injuries to defrauded investors is not asserting a “public right,” because it addresses particular harm to particular individuals or a particular class of individuals. It is not analogous to prior cases that allowed administrative agencies to revoke patents or veterans’ benefits, which were treated as executive functions. Nor is it similar to administrative orders that regulate workplace-safety conditions in general. It is fundamentally a judicial function, not an executive or legislative one. The majority’s theory is itself not entirely developed, but it would likely get a fresh look from the Supreme Court, which admitted as recently as 2018 that its own cases had not fully explained the concept, if and when Jarkesy gets that far.
As a result, Jarkesy may well prod the Court to decide the limits of the public-right doctrine and resolve the conflict between the rhetoric of public rights as any rights advanced by the government and the explanation of public rights as those that are really more in the nature of executive or legislative than judicial decisions. There are signs from past cases that at least three of the justices — Clarence Thomas, Neil Gorsuch, and Chief Justice John Roberts — have been uncomfortable with how the public-rights doctrine is deployed to deprive citizens of having their rights adjudicated by an independent Article III federal judge and a jury. But unless the Court significantly limits how it characterizes “public rights,” Jarkesy is unlikely to dramatically change the jurisdiction of the administrative state.
Non-Delegation
The second ground cited by Jarkesy is the non-delegation doctrine. The concept behind the non-delegation doctrine comes from the very first sentence of Article I: “All legislative powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.” Only Congress can make rules binding on the citizens. Congress can create administrative agencies and empower them to issue regulations fleshing out the laws, but can’t just delegate to them the power to make law.
Non-delegation is a hot topic in administrative law, and Jarkesy deployed it in a novel, yet narrow, way. When an executive agency is filing a lawsuit, Congress often (but not always) gives it some discretion in deciding which court to file in. Some statutes even allow cases to be brought either in state or federal court. If Congress doesn’t restrict the decision, this is a matter of executive prosecutorial discretion.
Critics of the SEC have long complained that Congress gives the Commission carte blanche to bring some cases before a jury and others before an ALJ — and that these two options are too different to be analogized to picking between judicial districts. What the Fifth Circuit concluded was that the decision to have some cases brought in court and others before an ALJ is, fundamentally, a matter of the rule of law, not just of prosecutorial discretion — and that by giving the decision over entirely to the SEC, Congress delegated a legislative power.
This was a question of first impression: the court and the parties could not find a Supreme Court case or a federal appeals decision that had previously addressed it. It would affect other agencies besides the SEC. But even if the Supreme Court takes the case and agrees with the Jarkesy majority, the specific application of the non-delegation doctrine in this context won’t tell anyone much about the limits of delegation in other areas of law.
Non-Independent Judges
The final of the three grounds cited in Jarkesy is a new wrinkle on a previous problem, and raises more serious questions about the wider ALJ system, which spans multiple agencies: the fact that the ALJs are inside the executive branch, but well outside the direct control of the president. SEC commissioners, appointed by the president, can be removed only for cause. SEC ALJs, who are now appointed by the Commission, can be removed by the commissioners only if the Merit Systems Protection Board (MSPB) finds that the commissioners have good cause to remove them.
The Supreme Court, in SEC v. Lucia (2018), already once held that the SEC’s ALJs were unconstitutionally exercising power, because at the time, they were appointed by SEC staff rather than the full Commission. Lucia held, in a 7–2 decision written by Justice Elena Kagan, that the ALJs were “officers of the United States” within the meaning of the Constitution’s appointments clause, and thus had to be appointed either by the president or by the heads of their respective agencies. (Principal executive-branch officers must be appointed by the president and confirmed by the Senate; inferior officers may be appointed without the president or the Senate, but only by a principal officer.)
Jarkesy takes the next step: It holds that ALJs, being executive officers rather than independent federal judges, must also remain removable at will either by the president or, at least, by the officer who appointed them. Because the MSPB has an effective veto on the removal power, the ALJs are, yet again, acting unconstitutionally.
Taken together with the Seventh Amendment ruling, Jarkesy is a two-pronged attack on the system of executive-branch ALJs, who are in truth neither fish nor fowl: They don’t run real courts, with an independent judge and jury and traditional rules of evidence, and they’re also not politically accountable representatives of the executive branch. Unlike the limited Seventh Amendment ruling, this calls into question all SEC ALJ decisions.
Observers have noted that, because Jarkesy cited three independent grounds for its decision, the likelihood that the Supreme Court will eventually get involved is lower than it otherwise would be. But the status of the SEC’s administrative courts is important enough to demand review, and the Supreme Court can easily hear all three questions — especially given that the Seventh Amendment and non-delegation questions are so intricately inter-related. So stay tuned.