SEC v. Jarkesy: The Radical Reworking of the Administrative State.

In SEC v. Jarkesy, 603 U.S. ___ (2024), No. 22-859 (June 27, 2024), the Supreme Court held that the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties for securities fraud. As authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC had the discretion to choose whether to file its enforcement action in federal court or have it adjudicated in-house before its administrative law judge. Here, the SEC decided to have the matter adjudicated in-house.

Holding and Rationale

The Court rooted its decision in the principle that matters that are historically and traditionally within the purview of common law must be adjudicated in jury trials before Article III courts. In interpreting the text of the Seventh Amendment which guarantees that in “[s]uits at common law, . . . the right of trial by jury shall be preserved”, the majority opinion emphasized that the constitutional right to a jury trial must be preserved unless the matter falls within a specific and historically grounded public rights exception. However, because the penalties sought in this case, including monetary damages, were “designed to punish and deter, not to compensate” and “a type of remedy at common law that could only be enforced in courts of law”, the Court held that the public rights exception was not applicable in this case.

Distinguishing between private and public rights, the Court stated that enforcement actions involving common-law-like causes of actions and remedies, even when pursued by a governmental entity under a regulatory scheme authorized by Congress, typically require adjudication in Article III courts with the right to a jury trial. As the majority stated, “Congress cannot conjure away the Seventh Amendment by mandating that traditional legal claims be . . . taken to an administrative tribunal. Nor does the fact that the SEC action originate[d] in a newly fashioned regulatory scheme permit Congress to siphon this action away from an Article III court.” (internal quotations omitted)

The SEC's pursuit of civil penalties against Jarkesy for alleged securities fraud was determined to be akin to common law fraud claims and remedies, which are traditionally entitled to a jury trial.

Dissenting Opinion

The dissent, penned by Justice Sotomayor, argued that the majority's decision represents a significant departure from established precedent regarding the public rights doctrine. The dissent contended that the majority failed to properly recognize the government's sovereign capacity to enforce public rights through administrative adjudications. Justice Sotomayor highlighted that Congress has historically been permitted to assign adjudication of new statutory rights and obligations, including civil penalties, to administrative agencies without necessitating a jury trial.

Justice Sotomayor accused the majority of engaging in judicial overreach by imposing artificial constraints on Congress's ability to design regulatory enforcement mechanisms. The dissent underscored the practical benefits of administrative adjudication, such as efficiency, expertise, and uniformity, which Congress might seek to preserve through legislation like Dodd-Frank. By limiting these capabilities, the dissent argued, the Court hampers modern regulatory governance and oversteps its role, encroaching on legislative authority.

The dissent also raised concerns about the majority's application of historical precedent, particularly the misinterpretation and selective reading of cases such as Atlas Roofing Co. v. Occupational Safety and Health Review Commission, 430 U. S. 442 (1977).

In Atlas Roofing, a unanimous Court held that the Seventh Amendment allows Congress to commit the adjudication of a new cause of action for civil penalties to an administrative agency. Justice Sotomayor sharply criticized the majority’s opinion, stating that by “burying Atlas Roofing at the end of its opinion and minimizing the unbroken line of cases on which Atlas Roofing relied,” and by “advancing distinctions created from whole cloth”, it took “a wrecking ball to this settled law and stable government practice.”

Justice Sotomayor also asserted that the majority's narrow reading of the public rights doctrine fails to accommodate the evolution of administrative law and the practical necessities of contemporary regulatory frameworks.

Potential Impact on SEC Enforcement Actions

The Supreme Court's decision in SEC v. Jarkesy has significant implications for the SEC's enforcement actions. The ruling restricts the SEC's ability to adjudicate civil penalties in-house, compelling the agency to bring such cases before a federal court where defendants are entitled to a jury trial. This shift could substantially increase the SEC's litigation costs and litigation resolution times, as federal court proceedings are typically more resource-intensive and slower than administrative adjudications. The requirement for jury trials could also introduce greater variability in outcomes, as jury decisions can be less predictable than those of administrative law judges who specialize in securities law.

Moreover, the decision may deter the SEC from pursuing certain enforcement actions due to the increased burden of litigating in federal court. The agency might prioritize cases with clear-cut evidence or those involving substantial penalties to justify the expenditure of resources. Consequently, smaller or more complex cases might receive less attention, potentially leaving certain fraudulent activities unaddressed. This could lead to a perceived weakening of the SEC's deterrent effect, as the risk and cost of enforcement actions could be seen as reduced.

Wider Implications

Beyond the SEC, the Jarkesy decision could influence the operations of other federal agencies that utilize administrative adjudications to enforce regulatory compliance. Agencies such as the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) might face similar challenges if their enforcement mechanisms are called into question under the rationale applied in this case. The requirement to bring enforcement actions involving civil penalties in federal courts could lead to a re-evaluation of these agencies' enforcement strategies and resource allocations.

The ruling also has broader implications for the administrative state and the balance of power between the judiciary and executive branches. By reinforcing the necessity of jury trials for actions resembling common law claims, the decision underscores the judiciary's role in preserving individual rights against administrative overreach. This could prompt and even require legislative and executive branches to rethink how they structure regulatory enforcement mechanisms, possibly leading to reforms aimed at ensuring compliance with constitutional protections while maintaining effective oversight and enforcement capabilities.

Furthermore, the decision may embolden litigants to challenge the jurisdiction of administrative agencies in other contexts, potentially leading to a wave of litigation aimed at limiting the scope of administrative adjudications. This could result in a more prominent role for federal courts in resolving disputes traditionally handled by agencies, thereby reshaping the landscape of administrative law and regulatory enforcement in the United States.

Conclusion

The SEC v. Jarkesy decision represents a pivotal moment in the interpretation of the Seventh Amendment and the scope of the public rights doctrine. The Court's holding reaffirms the importance of jury trials in adjudicating common law-like disputes, even when they are framed within modern statutory contexts. This decision underscores the constitutional limits on Congress's ability to reassign traditional judicial functions to administrative agencies.

This case highlights the ongoing tension between preserving constitutional protections and accommodating the practicalities of modern governance. The decision reiterates the judiciary's role in safeguarding individual rights while also prompting a reconsideration of how administrative agencies are empowered to enforce federal regulations.