The US Supreme Court’s ruling in Securities and Exchange Commission v. Jarkesy significantly shifts power from agencies to courts. It foreshadows a revolution in the structure of federal enforcement in the coming decade.
For many regulatory programs, this change will mean no enforcement at all for statutes that don’t allow the agencies to sue in court. Some people will applaud this change, because an Article III judge presumably has no policy agenda like the administrative adjudicators do.
Yet the decision also brings real costs. Litigation takes longer and is more expensive than administrative adjudication, so there will inevitably be fewer cases—and that is for the agencies that can bring enforcement lawsuits in courts, an authority Congress hasn’t granted across the board.
The SEC accused George Jarkesy of securities fraud and sought to impose a civil money penalty. The commission could have sued Jarkesy in court, but it also had the option to use “administrative adjudication.” In that process, an adjudicator with a certain level of independence holds a hearing to find the facts.
The respondent can ultimately appeal to the agency heads (here, the five Commissioners). The procedural and evidence rules from court don’t generally apply in these proceedings, and discovery is limited. Many people complain that administrative adjudication is a stacked deck, particularly because there is no way to insulate the agency leaders, in their role deciding the “administrative appeal,” from the decision to bring the charges in the first place.
Despite those objections, it has long been accepted that Congress can authorize administrative adjudication. Jarkesy upends that settled understanding.
Jarkesy demanded a jury under the Seventh Amendment. Four cases frame the argument. In 1987, Tull v. United States held that when the government sues for civil money penalties under the Clean Water Act, the defendant gets a jury, because the civil penalties are similar enough to a traditional common-law claim.
But administrative adjudication is still permissible. In 1977, Atlas Roofing v. OSHRC said Congress can establish administrative adjudication for a regulatory enforcement matter, imposing civil penalties, even if the Seventh Amendment would entitle the respondent to a jury were the matter in court.
By contrast, in 1989, Granfinanciera v. Nordberg held that when two parties are disputing a fraudulent conveyance claim in bankruptcy, they have a right to a jury even though the case is in a bankruptcy court (rather than an Article III court).
The difference between these two was rooted in a 1932 case, Crowell v. Benson, which explained that while Article III mandates a court for a dispute between two private parties over a private claim, a court isn’t required for cases of “public rights,” including those “between the Government and persons subject to its authority.” Atlas Roofing elaborated the latter as cases “where the Government is involved in its sovereign capacity.”
Jarkesy decided that the SEC’s claim for civil penalties against securities fraud carries a jury trial right. But the Supreme Court said far more than that: It held the SEC must go to an Article III court. This holding is in the middle of the opinion, potentially obfuscating it from notice. But it’s necessary for the outcome, and is a striking repudiation of Atlas Roofing.
To reach this conclusion, the Supreme Court rewrote the concept of “public rights.” Under Atlas Roofing, Crowell v. Benson, and multiple other precedents, it was understood that an enforcement proceeding by a federal agency is a matter of “public rights.”
Instead, Jarkesy says the concept of “public rights” is an exception to Article III that applies only in specific areas that in historical tradition had administrative proceedings, such as immigration and tax. Aside from those narrow exceptions, everything that is similar to a claim in law or equity must go (if either party demands it) to an Article III court. The court said Atlas Roofing is different because occupational safety standards are a novelty such as a building code, unlike a traditional legal matter.
This rationale goes far beyond the SEC. Now, the question must be asked about every regulatory program—whether the enforcement matters are similar to claims at law or equity. The answer likely will be yes for many areas of regulation: unfair or deceptive trade practices (the Federal Trade Commission), hazardous materials pollution (similar to nuisance claims), market manipulation (the Federal Energy Regulatory Commission, the Commodity Futures Trading Commission), and many more.
The case is SEC v. Jarkesy, U.S., No. 22-859, 6/27/24.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Keith Bradley is partner and co-chair of the appellate and Supreme Court practice at Squire Patton Boggs, specializing in challenges to regulatory policy.
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