The Supreme Court’s June 27 decision in Securities and Exchange Commission v. Jarkesy marks ‎a pivotal shift in administrative law, potentially limiting administrative adjudication of agency ‎enforcement across the federal regulatory state. In Jarkesy, the Supreme Court held that the ‎Seventh Amendment entitles defendants to a jury trial when the SEC seeks civil penalties for ‎securities fraud. The holding broadly suggests that only federal courts, not administrative ‎agencies, have the ability to enforce a remedy, such as civil fines or sanctions, for violations ‎arising “at common law.” This article provides an overview of Jarkesy, its implications, and its ‎potential impacts on businesses and individuals operating in heavily regulated industries.‎

In 2013, the SEC initiated an enforcement action for civil penalties against George Jarkesy and ‎his firm for alleged securities fraud. The SEC had two options for bringing its enforcement ‎action to obtain civil penalties: file a case in federal court to be tried by jury, or adjudicate the ‎matter through its own in-house system before an administrative law judge (ALJ) (instead of a ‎jury). The SEC chose the latter option. An in-house evidentiary hearing was held. In 2014, the ‎SEC’s ALJ issued an order determining that Jarkesy had committed fraud and violated securities ‎laws. Various remedies were ordered, including a $300,000 civil penalty levied against Jarkesy, ‎and the disgorgement of $685,000 of illicit profits.‎

Jarkesy petitioned for review in the Fifth Circuit. The Fifth Circuit vacated the SEC order, ‎holding that the SEC in-house proceeding was unconstitutional under the Seventh Amendment. ‎The SEC filed a petition for a writ of certiorari, which was granted.‎

In a 6-3 decision, Chief Justice Roberts delivered the majority opinion, with Justices Thomas, ‎Alito, Gorsuch, Kavanaugh, and Barrett joining. A concurring opinion was filed by Justice ‎Gorsuch, in which Justice Thomas joined. Justice Sotomayor filed a dissenting opinion, in which ‎Justices Kagan and Jackson joined.‎

The Court held: “When the SEC seeks civil penalties against a defendant for securities fraud, the ‎Seventh Amendment entitles the defendant to a jury trial.” The central legal issue was whether ‎a civil penalty action brought by the SEC implicates the Seventh Amendment. The Court ‎concluded it does.‎

The Court’s decision was grounded in the historical context of the Seventh Amendment, which ‎provides:‎

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. ‎

U.S. CONST. amend. VII (emphasis added). Common law claims “must be heard” by a jury. The ‎Court concluded that the SEC’s civil penalty actions are akin to common law fraud actions, and ‎therefore implicate the Seventh Amendment. Common law claims include “statutory” claims ‎that are legal in nature. Factors to consider in determining whether a statutory claim is legal in ‎nature include: ‎

  • The cause of action resembles “common law” causes of action, which are presumptively ‎private rights.‎
  • The remedy is the type that was traditionally obtained in a court of law.‎

Between the two, the remedy is the “more important” factor. Noting the remedy was ‎dispositive in Jarkesy’s case, the Court recited “Actions by the government to recover civil ‎penalties under statutory provisions” historically have been a “type of action in debt requiring ‎trial by jury.” Civil penalties that are designed to punish and deter, rather than to compensate, ‎are a type of remedy at common law that can only be enforced in courts of law. After ‎concluding the Seventh Amendment was implicated, the Court then analyzed the Public Rights ‎exception.‎

A.‎ Public Rights Exception ‎

Under the Public Rights exception, “Congress may assign the matter for decision to an agency ‎without a jury, consistent with the Seventh Amendment.” The Court determined that the ‎exception did not apply here for two main reasons: ‎

  • Separation of powers. Based on separation of powers, for matters involving common ‎law (i.e., private rights), Congress may not remove such matters from the Article III ‎federal courts. Congress’s delegation of agency adjudicatory powers outside of the ‎Article III courts violates the nondelegation doctrine.‎
  • Historical context dictates adjudication outside of federal courts. Certain categories ‎of adjudication, such as relations with Indian tribes, administration of public lands, ‎pensions, patent rights, and immigration, fall within the public rights exception.‎

Beyond the SEC, the holding in Jarkesy has broad implications for other federal agencies that ‎utilize administrative law judges for civil penalties sought by federal agencies. Jarkesy has the ‎potential to significantly curtail an agency’s ability to use its in-house adjudicative process for ‎seeking civil penalties, and may alter agency enforcement. Initially, we can expect to see ‎litigation arguing that an ALJ lacks the authority to preside over a dispute in any administrative ‎proceeding involving the imposition of a penalty, with a case-by-case evaluation of whether an ‎agency’s claim has roots in the common law. The ruling may increase federal court litigation by ‎shifting certain agency civil penalty enforcement actions away from agency administrative ‎adjudication.‎

According to the dissent, the decision in Jarkesy is a “massive sea change” in administrative ‎adjudication. The dissent opined that the administrative adjudication process serves important ‎public interests, such as “greater efficiency and expertise, transparency and reasoned decision ‎making, as well as uniformity, predictability, and greater political accountability.”‎

A.‎ Impact on Highly Regulated Industries

SEC v. Jarkesy could potentially impact civil penalty cases in administrative proceedings, ‎including enforcement matters involving the Consumer Financial Protection Bureau and the ‎Environmental Protection Agency. Although the specific impact of Jarkesy on highly regulated ‎industries is unclear, the decision likely means increased litigation costs and longer resolution ‎times for enforcement actions. Federal court proceedings are generally more expensive and ‎time-consuming compared to administrative adjudications. Businesses and individuals who are ‎accustomed to operating within regulatory frameworks, may have to prepare for more ‎resource-intensive legal cases before federal courts.‎

Additionally, different courts and juries may interpret complex regulatory issues differently, ‎leading to a lack of uniformity in enforcement. This inconsistency could create uncertainty for ‎regulated industries that rely on predictable and consistent applications of the law.‎

Finally, Jarkesy reduces an agency’s ability to adjudicate penalty matters internally, which may ‎diminish the role of expert agency judgment in resolving regulatory issues. Agencies may find it ‎challenging to maintain the same level of specialized focus and understanding in federal court, ‎which is typically more generalist in nature.‎

Jarkesy marks a pivotal shift in administrative law, emphasizing the importance of the Seventh ‎Amendment’s jury trial right in the realm of civil penalties. Although it may pose challenges for ‎regulatory agencies and increase litigation in federal courts, it also highlights the fundamental ‎constitutional protections afforded to defendants in enforcement actions. ‎

This article summarizes aspects of the law and does not constitute legal advice. For legal advice ‎for your situation, you should contact an attorney.‎

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