SCOTUS Jarkesy Opinion Against SEC Could Affect FCC Enforcement

Current rules allowing the SEC to bring fraud charges and try them before its administrative law judge instead of a jury “permit Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the Executive Branch,” Chief Justice John Roberts wrote for the majority, ruling against the SEC. “That is the very opposite of the separation of powers that the Constitution demands.” In her dissent, Justice Sonia Sotomayor wrote, “Litigants seeking further dismantling the ‘administrative state’ have reason to rejoice in their win today, but those of us who cherish the rule of law have nothing to celebrate.” Justices Elena Kagan and Ketanji Brown Jackson joined her.

The case concerns an SEC enforcement action against George Jarkesy and investment firm Patriot28 over securities violations charged against their hedge funds. The U.S. 5th Circuit Court of Appeals vacated an SEC administrative proceeding against Jarkesy that an SEC administrative law judge heard. The 5th Circuit ruled that it was unconstitutional for the SEC to have discretion over whether enforcement matters are adjudicated in front of its ALJ, that imposing civil penalties in agency hearings without a jury violated the Seventh Amendment, and that ALJs are unconstitutionally difficult for the president to remove. Thursday’s SCOTUS ruling affirmed the lower court on the Seventh Amendment right, and didn’t reach the other two matters.

“We are reviewing today’s ruling and its impact on the SEC’s administrative proceedings,” SEC Enforcement Division Director Gurbir Grewal said in a news release. In a statement, Jarkesy said, “The ramifications of this case are so much bigger than one person.” The FCC declined to comment.

The majority opinion narrowly frames the decision as applying to administrative agency enforcement actions that involve fraud and other matters that juries traditionally handle, and that impose punitive monetary penalties. “The civil penalties in this case are designed to punish and deter, not to compensate. They are therefore 'a type of remedy'” that could “only be enforced in courts of law,” the majority opinion said. However, the practical scope of the decision is unclear and likely will be battled out in court for years, said Jeff Lubbers, American University administrative law professor. Any attorney representing a client facing a federal agency enforcement action is likely to argue that a jury must hear the case, he said. “Why wouldn’t you?” Lubbers said. Former FCC General Counsel Tom Johnson said, “There is enough ambiguity there that we are gonna see a lot of litigation.” Now a partner at Wiley, Johnson said litigation over the concepts in SEC v. Jarkesy will “percolate” in the lower courts for years before the line of what does and doesn’t require a jury is eventually finalized, possibly by another SCOTUS decision.

The majority opinion distinguishes between cases involving punitive penalties or fraud and other matters traditionally heard by juries and regulations that a previous SCOTUS case on administrative hearings covered: Atlas Roofing Co. v. Occupational Safety and Health Review Commission. The rules involved in Atlas Roofing “resemble a detailed building code,” such as OSHA rules for gravel walls, the majority said. Future litigation citing SEC v. Jarkesy when challenging FCC enforcement actions is likely to turn on whether the violations involved can be made to appear close to a fraud charge or more like the detailed OSHA regulations, Lubbers and a former member of the FCC’s Office of General Counsel told us. Agency rulings on candor or concerning real parties of interest in broadcast ownership matters could be argued to involve fraud and thus require jury trials, while technical violations of agency antenna siting rules or spectrum use might be seen as closer to OSHA regulations, the former FCC official said. That distinction may not last long -- language in the majority opinion appears to indicate that the justices could also be open to overturning the Atlas Roofing decision, Johnson said.

A white paper Johnson released earlier this year also predicted a SCOTUS finding that the SEC hearings violated the Seventh Amendment would lead to increased litigation. “I think there's going to be all this collateral wrangling over what types of claims need to be brought in court or not,” Johnson said in May (see 2405030066).

A narrow decision, Jarkesy didn’t address some constitutional questions that could have disrupted regulatory agencies even more, said Chris Walker, University of Michigan law professor. But the decision has implications for agencies beyond the SEC, leaving the door open for legal challenges to civil penalty statutes at all regulatory agencies, he said. In addition, Walker said it’s likely there will be numerous litigants who challenge similar civil penalty statutes at other agencies. But Jarkesy might not mean parties facing fines by a regulatory agency automatically opt for court, Walker said. A lot of entities prefer handling such issues directly with the agencies, as administrative law judges are experienced, and they also can avoid “airing their dirty laundry for a jury.”

Thursday’s dissenting opinion also predicts wide-reaching effects from the Jarkesy decision, calling it a “power grab” by the court and a “seismic shift in this court’s jurisprudence.” Congress has enacted numerous statutes that empower federal agencies to impose civil penalties for statutory violations, the dissent said. It lists dozens of agencies, including the FCC, that impose civil penalties in administrative proceedings. As such, the Jarkesy decision could affect them. The majority’s “incredible assertion” that the opinion narrowly applies to fraud cases at the SEC “should fool no one,” the dissent said. “Today’s decision is a massive sea change,” it added. Justice Neil Gorsuch's concurring opinion said the dissent’s “approach to our precedents is like a picky child at the dinner table.” Justice Clarence Thomas joined Gorsuch.

Not everyone sees the Jarkesy decision having broad repercussions. While the dissent indicates the majority opinion is a big win for dismantling the regulatory state, it “may be overstating how broadly this will sweep,” said Alex Platt, University of Kansas associate law professor. The majority opinion doesn’t declare civil monetary penalties by agencies unconstitutional, only that civil monetary penalties can't be imposed in an administrative setting where the cause of action has deep roots in common law, Platt said. That common law piece limits what kind of aftershocks agencies would see otherwise, he said. Regulatory actions and fines in matters without a common law “can continue just like they were being brought yesterday,” he said. The majority opinion also overstates things when it says it is limited to the SEC and its Dodd-Frank Act authority -- Dodd-Frank being the legislation that gave the SEC the power to bring civil penalties in-house, Platt said. With the decision centering on civil penalties in fraud actions tied to common law, it’s unclear FCC actions like fining illegal robocallers would be affected, said Alison Somin, senior legal fellow at Pacific Legal Foundation, a small-government public interest law firm.

While Thursday’s decision didn’t reach the constitutionality of ALJs, Lubbers said it doesn’t forestall future challenges, and he expects them. In the concurring opinion, Gorsuch questioned ALJ independence. “The title ‘judge’ in this context is not quite what it might seem. Yes, ALJs enjoy some measure of independence as a matter of regulation and statute from the lawyers who pursue charges on behalf of the agency. But they remain servants of the same master -- the very agency tasked with prosecuting individuals like Mr. Jarkesy,” the concurring opinion said. Lubbers said a shift toward jury trials in agency enforcement could leave ALJs with little work. Former FCC Commissioner Michael O’Rielly posted on X that it's “just a matter of time before FCC’s broken ALJ process is similarly and rightfully struck down. It’s process abuse of the highest order.” In an email, FCC ALJ Jane Halprin wrote, “Time will tell whether the decision will have a significant impact on FCC adjudications.” Halprin added, "Agency leadership has been extremely respectful of my independence. I have never felt pressured to decide any case in a certain way.”