Introduction
The U.S. Supreme Court took aim at the administrative state in its most recent term, especially in its 6-3 SEC v. Jarkesy decision where the Court ruled that the Securities and Exchange Commission’s (SEC’s) in-house tribunals cannot issue civil penalties because it violates the accused’s constitutional right to a jury trial.
Experts disagree over the extent to which the decision will permeate or even unravel the administrative state; however, Jarkesy could profoundly influence agency adjudications at the SEC and beyond. This memorandum analyzes those concerns by examining the Jarkesy decision and its potential implications for future administrative enforcement across the federal government.
Background of Jarkesy
Jarkesy centers on the SEC’s administrative law judges (ALJs) and their authority to issue civil penalties outside of the judicial system. It began in 2010 following the financial crisis when Congress passed the Dodd-Frank Act, which gave the SEC the authority to empanel ALJs and pursue civil fraud penalties in-house rather than go to federal court where the defendant could seek a jury trial.
In 2011, the SEC utilized this new authority by initiating cease-and-desist proceedings against George Jarkesy, manager of Patriot28 LLC, alleging several federal anti-fraud violations. According to the SEC, Jarkesy and Patriot28 misled or outright lied to investors regarding utilized investment strategies and both the identity and value of investment funds.
By 2020, the SEC had ruled against Jarkesy and Patriot28 LLC, resulting in a cease-and-desist order, a $300,000 penalty, and a ban on future involvement in the securities industry against both Jarkesy and Patriot28.
Jarkesy and Patriot28 then sought judicial review. The Fifth Circuit Court of Appeals ultimately vacated the SEC’s order on several grounds, including a violation of Jarkesy’s Seventh Amendment right to a jury trial, contending that Jarkesy’s rights at issue were best adjudicated in federal court rather than an agency. The Supreme Court agreed to hear the case on the Seventh Amendment issue and affirmed the Fifth Circuit’s ruling.
Potential Impacts of Jarkesy
I. Federal Courts v. In-House Agency Tribunals
The significance of Jarkesy lies in the procedural distinctions between ALJs and jury trials in Article III courts, and their profound implications for litigants’ rights. For instance, in federal jury trials, a neutral Article III judge oversees proceedings and makes legal rulings while a jury evaluates crucial evidence, all of which are subject to federal procedural and evidentiary rules and can largely be appealed.
By contrast, during in-house SEC adjudications, such as Jarkesy’s, the agency’s own personnel oversee the proceedings with the it’s Division of Enforcement acting as the prosecutor. No juries are involved. Instead, decisions are made by the Commission or an SEC-appointed ALJ, who has broad discretion in admitting evidence under SEC Rules of Practice. Judicial review is available, but the SEC’s factual findings are often binding, even if they are based on evidence that would be inadmissible in federal court.
With that distinction in play, the central issue in Jarkesy was whether the Seventh Amendment’s right to a jury trial allows the SEC to subject defendants to civil penalties solely through internal agency proceedings. Deciding this required the Court to identify the nature of Jarkesy’s rights impacted by the SEC’s actions: were those rights specific to him and traceable to common law (Seventh Amendment-covered “private rights”) or did they merely concern matters of public administration (exempted “public rights”)?
Ultimately, the Court found that private rights were at play because the SEC’s antifraud allegations closely resembled common law fraud, meaning the SEC violated Jarskey’s Seventh Amendment right to a jury trial by not bringing an action in federal court.
Notably, the Court found that the Seventh Amendment’s “public rights” exception did not apply to Jarkesy’s case. This exception typically allows certain matters such as revenue collection or public benefit administration to be resolved outside of traditional courts without a jury. Here, the Court found that the SEC’s civil penalties were punitive and “legal in nature” rather than solely remedial, which triggered Jarskey’s Seventh Amendment right to a jury trial. Therefore, since the SEC circumvented courts to seek penalties as a form of punishment (rather than mere restitution), the Court found that the SEC violated Jarskey’s Seventh Amendment jury trial right.
II. Implications for the Federal Government
Jarkesy raises fundamental questions about the structure, efficiency, and fairness of future agency proceedings – and even the constitutionality of ALJs themselves. However, the decision is likely to have a more immediate impact on federal agencies beyond the SEC, which (apart from Jarskey’s case) has largely gone to federal court to resolve disputes following the Supreme Court’s 2018 Lucia v. SEC decision, which questioned the authority of its ALJs.
To highlight ALJs’ vast presence in the federal government, Justice Sotomayor noted in her Jarkesy dissent that “more than two dozen” federal agencies use in-house tribunals to impose civil penalties for statutory violations. These agencies include the Commodity Futures Trading Commission, the Consumer Financial Protection Bureau, the Department of Justice, the Environmental Protection Agency (EPA), the Food and Drug Administration, the Federal Trade Commission, the Immigration and Naturalization Service, and the Office of Foreign Assets Control. In the wake of Jarkesy, these agencies may reassess their use of ALJs for cases involving penalties resembling common law claims or seeking punitive remedies.
In practice, agencies like the EPA have relied on administrative proceedings to enforce environmental laws such as the Clean Air Act and Clean Water Act, which were considered more efficient and cost-effective than federal court litigation. However, if future EPA cases fall under Jarkesy’s rationale, it could curtail the agency’s ability to impose civil penalties without specific authorization from Congress or suing in federal court.
Despite Jarkesy’s potential to complicate internal agency adjudication, some experts contend that the decision might not be all that impactful. For example, Jarkesy‘s protection of jury trial rights could enhance procedural safeguards while still allowing defendants to waive this right to keep adjudications out of court and avoid costly litigation. Doing so could facilitate streamlined settlements and address efficiency concerns through the use of administrative consent agreements, which are less burdensome than consent decrees overseen by federal district judges.
Furthermore, Jarkesy‘s implications may be limited because the Court did not explicitly state that the decision would apply retroactivity to past agency adjudications. While future cases could change this, the retroactive application of constitutional rulings is generally restricted, especially in administrative law contexts.
Ultimately, Jarkesy underscores ongoing uncertainties in administrative law and could prompt broader discussions about the balance between agency authority and judicial oversight in enforcement actions.
III. Implications for State Administrative Proceedings
Since many states administer their own regulations through state agencies, Jarkesy could raise scrutiny over these agencies’ authority to impose civil penalties. While the Seventh Amendment’s right to a jury trial historically hasn’t been extended to state proceedings, Minneapolis & St. Louis R. Co. v. Bombolis, the Supreme Court’s key case on this issue, is over a century old. Therefore, given the recent judicial trend of restricting the administrative state, the Court may be inclined to reconsider it.
Moreover, many state constitutions include their own right to a jury trial, and several state courts have interpreted them to have similar or even broader protections than the federal right. Depending on the circumstances, this could also impact the authority of state administrative proceedings to issue civil penalties.
This evolving landscape underscores the complex interplay between federal and state jurisdictions in administrative regulation and enforcement, with implications for both regulatory agencies and regulated parties navigating compliance and litigation strategies.
Conclusion
Ultimately, the Jarkesy ruling could have profound implications for the structure and fairness of administrative proceedings across federal agencies. By reaffirming the Seventh Amendment right to a jury trial in cases involving punitive civil penalties, the Court’s decision challenges the status quo of the administrative state and may prompt agencies to reconsider their use of ALJs. It also raises broader questions about litigants’ procedural rights, bureaucratic efficiency, and the balance between administrative expertise and judicial oversight. As agencies and courts navigate these implications, the future of administrative law and enforcement actions will undoubtedly continue to evolve, shaping both federal and state regulatory landscapes in significant ways.