The Supreme Court of the United States has issued a decision that further limits the Securities and Exchange Commission's internal enforcement authority. On June 27, 2024, in SEC v. Jarkesy, the Court held that the SEC could not obtain civil penalties via an enforcement action brought under the SEC's internal adjudicative procedures because it deprived the defendant of his Seventh Amendment right to a trial by jury.
The Jarkesy case represents the latest and most aggressive in a series of challenges to the "administrative state." The Supreme Court has ratcheted up scrutiny of agency authority in recent years. On the morning following the Jarkesy decision, the Court overturned the landmark 1984 Chevron decision, limiting deference to an agency's interpretation of an ambiguous statute. In recent years, the Court held that federal courts have original jurisdiction to hear constitutional challenges to agency administrative procedures; therefore, challengers need not exhaust administrative remedies before seeking judicial review.1 The Court has also invalidated the SEC's process for selecting administrative law judges,2 rejected the FTC's ability to obtain restitution or disgorgement on top of injunctive relief,3 and overruled the EPA's claim of authority to impose emissions caps through a pollution-shifting scheme.4
When bringing an enforcement action, the SEC has two choices. It can bring the case in federal district court or it can adjudicate the case in its own administrative forum. Agencies like the SEC and Federal Trade Commission purport to maintain internal separation between their investigative, enforcement and adjudicatory functions, but recent disclosures call this separation into question.5 In federal court, an Article III judge with lifetime tenure presides, the Federal Rules of Evidence apply and a jury finds the facts. In administrative court, there are no juries. Instead, SEC staff investigate the matter, the commission approves the enforcement action, SEC staff prosecute the case and an administrative law judge (also an SEC insider) makes an initial decision. The commission then decides any appeal of that initial decision―the same individuals who approved filing the action at the outset. In addition, different rules of discovery and evidence apply, which themselves may present additional due process concerns. Although adjudications are subject to review by the federal courts, the standards of review are deferential, especially with regard to agency factual findings.
Jarkesy presented the question of whether the SEC's fact-finding and assessment of civil penalties in a fraud case deprive the defendant of the constitutional right to a jury trial. In a 6-3 opinion, the Court held that it did. Chief Justice John Roberts authored the majority opinion, calling the issue a "straightforward question."6 The Seventh Amendment guarantees defendants the right to a jury trial in suits at common law. The Court focused primarily on the remedy sought, contrasting monetary penalties to an equitable remedy that would preserve or restore the status quo (i.e., an injunction). A suit seeking an equitable remedy is not traditionally considered a "suit at common law." The Court found that the SEC's case also did not present a so-called public right―a matter typically reserved to the executive or legislative function. Because the SEC sought monetary penalties and did not seek to enforce a "public right," the denial of Jarkesy's right to a jury trial was unconstitutional.
Justice Neil Gorsuch wrote a concurring opinion, joined by Justice Clarence Thomas. The concurrence is based on more than just the Seventh Amendment, holding that SEC internal adjudication also violated Article III and the due process clause. As a result, its reasoning was not as dependent on the remedy sought by the agency. If adopted more widely by the Court in the future, Justice Gorsuch's opinion could provide an avenue to curtail agency adjudicative powers even further. For example, it could apply to industry bars or other "punitive" type remedies.
Justice Sonia Sotomayor's dissent, joined by Justice Elena Kagan and Justice Ketanji Brown Jackson, accused the majority of violating key separation of powers principles by overriding Congress' clear intent to allow the SEC's adjudicatory authority in cases such as this.
This decision has important implications for all agencies that have an internal adjudicative function. Congress has enacted "more than 200 statutes authorizing dozens of agencies to impose civil penalties for violations of statutory obligations." The Court's ruling may encourage agencies to pursue their claims in federal court even if not identical to those in Jarkesy, rather than risk further challenges and adverse decisions. Further, Jarkesy and the subsequent decision overturning Chevron represent a significant extension of the trend of federal courts reining in agency authority. Therefore, it is likely we will see litigants continue to challenge agency decisions across the gamut of the federal administrative state. This ruling is also discussed in a separate Alert,
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Footnotes
1 Axon Enterprise, Inc. v. FTC, 143 S. Ct. 890 (2023).
2 Lucia v. SEC, 138 S. Ct. 2044 (2018).
3 AMG Capital Management, LLC v. FTC, 141 S. Ct. 1341 (2021).
4 West Virginia v. EPA, 142 S. Ct. 2587 (2022).
5 See, e.g., Press Release, U.S. Securities and Exchange Commission, Second Commission Statement Relating to Certain Administrative Adjudications (June 2, 2023) ("As the April 5 Statement explained, for a period of time, certain databases maintained by our Office of the Secretary ("OS") were not configured to restrict access by staff from our Division of Enforcement ("Enforcement") to memoranda drafted by staff from the Adjudication Group ("Adjudication") in our Office of the General Counsel ("OGC").").
6 Jarkesy, 603 U.S. at __, slip op. 6 (2024).
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