The Court struck another blow for the right to a jury and exposed the intellectual bankruptcy of the liberal dissenters.
The Court struck another blow for the right to a jury and exposed the intellectual bankruptcy of the liberal dissenters.
T he administrative state had a tough day at the Supreme Court, including a rout for the Environmental Protection Agency in Ohio v. EPA. It may have a tougher one to come.
This morning’s decision in Securities and Exchange Comm’n v. Jarkesy raised a trio of consequential issues. The Court only needed to reach one of them. In a 6–3 opinion by Chief Justice John Roberts, divided along conventional ideological lines, the Court found that the Seventh Amendment’s guarantee of a jury trial means that administrative agency courts such as those run by the Securities and Exchange Commission cannot hear traditional legal offenses — such as fraud claims — that belong before a jury.
The Court did not decide today the two cases challenging Chevron deference, the doctrine under which courts defer to the agencies’ interpretation of laws passed by Congress. But that could come as soon as tomorrow, as may another case on the statute of limitations for challenging agency actions. With six cases left on the docket, the Court will probably hand down some further blockbusters tomorrow, but it may not finish its work until early next week.
The separation of powers is at the core of our American constitutional system. Dividing the lawmaking, law-enforcing, and law-applying branches protects civil liberties, prevents the accumulation of tyrannical (or petty-tyrannical) powers, and compels political consensus and compromise. The Wilsonian administrative state deliberately undermines that design by diluting the distinct powers of each of the three branches. Rulemaking by agencies saps the powers of Congress. Agencies whose staff can’t be hired or fired by the president saps the powers of the executive. Citizens lose the protections of an independent judicial branch (including trials by a jury drawn from citizens outside the government) when agencies bring charges and then try them without a jury before administrative law judges (ALJs) who work for the agency.
Jarkesy featured challenges to administrative courts on all three grounds. The Court’s decision is a ringing victory for the traditional right to a civil jury and a defeat for government star chambers.
Jarkesy’s Case and the Commission
In 2013, the SEC charged George Jarkesy and his investment advisory firm, Patriot28 LLC, with fraud and misrepresentation under various provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940. Specifically, the agency charged that Jarkesy and his hedge funds (1) misrepresented to investors the identity of the funds’ auditor and prime broker, (2) misrepresented to investors the funds’ investment parameters and safeguards, and (3) overvalued the funds’ assets to increase the fees that they could charge investors. These are all the kinds of misrepresentations that form the heartland of traditional investor fraud claims. The charges were not about Jarkesy and Patriot28 failing to comply with some technical regulatory rule.
The SEC could have brought these charges in federal court and tried them before a jury, but its statute allowed it a choice. It instead elected to charge Jarkesy and Patriot28 in the SEC’s own in-house courts. The case would be heard by an ALJ appointed by the SEC and removable only after a finding of good cause by a different agency, the Merit Systems Protection Board (MSPB). Trial before an ALJ means that the rules of evidence are largely out the window, with the same person acting as both judge and jury. It limits other procedural rights commonly found in court, such as pretrial discovery — and the discovery disputes, too, are all decided by the same ALJ. Even on appeal, as Roberts noted, “review is deferential. By law, a reviewing court must treat the agency’s factual findings as conclusive if sufficiently supported by the record even when they rest on evidence that could not have been admitted in federal court.” (Citations omitted.)
As the New Civil Liberties Alliance noted in a statement on today’s decision, in “the SEC’s notoriously biased in-house courts . . . agencies prevail 90-100% of the time.” ALJs can also develop precedents that collectively form a body of law that tends to evade review by the courts — and that often does not stand up very well when challenged there. For good reasons, when the SEC takes a case into the courts that might make precedent, it is usually to beat up on some tomato can with bad facts who can’t afford a good lawyer. Its win–loss record there is still not that inspiring.
In 2014, the ALJ found that Jarkesy had acted with “at least a reckless degree of scienter” — a fraudulent state of mind — and drew conclusions about what he “had to have been aware” of and what he “knew the truth” of. The ALJ found that Jarkesy had acted “willfully,” and that the misrepresented and omitted facts would be material to investors. These are classic state-of-mind questions of the types that juries customarily resolve, tracking the traditional elements of common-law fraud, yet they were all made by a single SEC bureaucrat. Some of Jarkesy’s co-defendants settled a decade ago, but he fought on for years. In 2020, the SEC upheld the ALJ’s decision and barred Jarkesy from the securities industry. He and Patriot28 were jointly fined $300,000.
The SEC also pursued civil penalties against Jarkesy. Until the Dodd-Frank Act in 2010, the commission was required to go to federal court if it was suing for civil penalties. Dodd-Frank expanded the jurisdiction of the ALJs to cases seeking monetary penalties, thus expanding the SEC’s menu of choices of where to sue. The amounts of money involved can be significant — fines of up to $725,000 per violation.
The Fifth Circuit Rules
In 2022, a divided panel of the Fifth Circuit ruled that the SEC had violated the Constitution in three ways. First, the SEC invaded the judicial power. Because the charges brought against Jarkesy and his firm would qualify as “Suits at common law” under the Seventh Amendment, a jury is required. That, the Fifth Circuit concluded, meant the case would have to be brought in court, not in a hearing room before a member of the same agency that brought the charges.
Second, the SEC invaded the legislative power. The decision whether certain claims should be heard in court or before an agency is legislative. Congress, the court ruled, violated the nondelegation doctrine by allowing the SEC on a case-by-case basis the discretion to file cases in one forum or the other, rather than providing a law to guide which cases belong before an Article III judge and a jury and which belong before an ALJ.
Third, the SEC invaded the executive power. Because the ALJs cannot be removed at will, but are protected from removal without the consent of the MSPB, they do not answer to the president.
The Court’s decision today on the Seventh Amendment issue made it unnecessary to reach the nondelegation and appointments-clause issues. But because its resolution sharply limits the kinds of cases where the SEC can choose between a court and an ALJ, it sharply reduces the Commission’s discretion in that regard.
Juries and Public Rights
What complicates the jury-trial question is that there are two different doctrines at issue — an individual right and an exception to the judicial power. The right is the Seventh Amendment’s rule for when a civil court case requires a jury. The exception to the judicial power is the “public rights” doctrine, which addresses what cases can be decided by an agency, as opposed to private rights that must be decided in an Article III court with a life-tenured judge. The public-/private-rights distinction has typically been thought of as a due-process or Article III question rather than a Seventh Amendment question. But which comes first? Are there situations where a jury would be required if the case were in court, but the government can evade that constitutional guarantee by bringing the case before an ALJ on the theory that it’s a public-rights case? Or does the government automatically have to bring the case in court if the Seventh Amendment would provide a jury there, regardless of whether it might otherwise be classed as a public-rights case? In Atlas Roofing Co. v. Occupational Safety and Health Review Commission (1977), the Court put the public-rights question first:
When Congress creates new statutory public rights, it may assign their adjudication to an administrative agency with which a jury trial would be incompatible, without violating the Seventh Amendment. . . . This is the case even if the Seventh Amendment would have required a jury where the adjudication of those rights is assigned to a federal court of law instead of an administrative agency.
The Court, while not overruling Atlas Roofing as to the particular statutory scheme at issue in that case, reversed that priority here by harmonizing the two standards. Roberts addressed the question by first finding that the jury-trial right applied, and then that the public-rights exception did not. He also opened the public-rights discussion in the majority opinion by quoting from the case that first defined public rights, Murray’s Lessee v. Hoboken Land & Improvement Co. (1856): “The Constitution prohibits Congress from ‘withdrawing from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law.’” Thus, if the Seventh Amendment applies, the case will by definition fall outside the public-rights category of cases that could be decided by an ALJ or similar executive officer. As Roberts continued:
The public rights exception is, after all, an exception. It has no textual basis in the Constitution and must therefore derive instead from background legal principles. . . . Without . . . close attention to the basis for each asserted application of the doctrine, the exception would swallow the rule.
For Justice Sonia Sotomayor’s dissent (joined by Justices Elena Kagan and Ketanji Brown Jackson), by contrast, the public-rights question comes first: If a public right is involved, that’s the end of the question, and your Seventh Amendment rights don’t matter. Coupled with Sotomayor’s staggeringly broad definition of public rights, it almost wholly swallows the Seventh Amendment jury trial right when the government is the one filing the case.
The Seventh Amendment
When lawsuits are brought in federal court, there’s a traditional and fairly well-accepted test for when the Seventh Amendment guarantees a jury. The amendment states that, “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.” The key question in each case is whether it would qualify as a “suit at common law.”
English courts at the time of the Founding, and therefore early American courts as well, were divided between the courts of law and the courts of equity. Courts of law handled things like breaches of contract, fraud, and tort claims for causing injury. They had juries, and the Founders jealously guarded the right to trial by jury, violations of which were one of the grievances cited in the Declaration of Independence. Courts of equity, like their successors in family and surrogate’s courts, dealt with matters such as estate and family law. Derived from ecclesiastical courts, they were run by a chancellor or other judicial officer, without a jury. The Court has long held that the Seventh Amendment guarantees a jury if the case is “legal in nature” — if it resembles one that would have been brought in the law courts at common law. The chief dividing line is typically between suits for money damages and suits seeking injunctions and other orders. That’s a simplified distinction for a more complicated body of law, but it’s a handy one to understand where the line is.
For the majority, “the remedy is all but dispositive. . . . The SEC seeks civil penalties, a form of monetary relief. While monetary relief can be legal or equitable, money damages are the prototypical common-law remedy.” Roberts noted that fines “designed to punish or deter the wrongdoer” rather than “solely to restore the status quo” were a classic function of the law courts, requiring a jury. As the Court observed, because the statutes at issue consider factors such as “culpability, deterrence, and recidivism” in awarding penalties — for example, whether “the violation involved fraud, deceit, manipulation, or deliberate or reckless disregard for regulatory requirements” — these were legal rather than equitable remedies.
The Court also considered “the close relationship between the causes of action in this case and common law fraud.” As the Court explained:
Both [common law fraud and these statutes] target the same basic conduct: misrepresenting or concealing material facts. That is no accident. Congress deliberately used “fraud” and other common law terms of art in [each statute]. In so doing, Congress incorporated prohibitions from common law fraud into federal securities law. The SEC has followed suit in rulemakings. . . . Congress’s decision to draw upon common law fraud created an enduring link between federal securities fraud and its common law ancestor. When Congress transplants a common-law term, the old soil comes with it. Our precedents therefore often consider common law fraud principles when interpreting federal securities law. [Quotations, citations, and alterations omitted.]
The government argued, in effect, that because the elements of the securities laws wielded against Jarkesy were not exactly identical to those of common-law fraud claims, the SEC’s case was not a “suit at common law.” The various statutes involved cover a narrower subject matter than common-law fraud but are also broader because they sometimes dispense with particular elements of a common-law-fraud claim. For example, the SEC does not need to prove loss to a particular victim (as would be required even for civil suits under these same laws). Some of the subparts of Section 17(a) of the Securities Act and Section 206 of the Advisers Act can be violated without intentional fraud. But “the close relationship between federal securities fraud and common law fraud confirms that this action is legal in nature.” Sotomayor’s dissent did not meaningfully dispute the conclusion that, if this case had been brought in court, it would have required a jury. The real action was on the public-rights question.
Public Rights
Don’t courts get to decide any question of your rights? Not necessarily. What is a “public right” that can be adjudicated by the executive branch, rather than by a court? The theory of public rights begins with either government permissions (such as immigration), benefits the government creates (such as patents and veterans’ benefits), or obligations owed only to the government and not affecting fellow citizens (such as taxes and customs duties). Murray’s Lessee, for example, involved the government seizing the land of a tax collector who hadn’t delivered the taxes to the government.
Justice Clarence Thomas, who has been crusading for a narrow understanding of public rights for the past decade, has described these as rights “belonging to the public as a whole” that only the government could grant or deny. Some government benefits, such as trademarks or land grants, may be “quasi-private” rights, because they are created by the government but can have direct effects on other people that may be contested in civil lawsuits. While the line has never been entirely clear, if something is categorized as a public or quasi-private right, it can be adjudicated by an executive agency rather than litigated in court.
These are contrasted with private rights, the resolution of which between citizens is an act of the judicial power. The existence of a contract, or a dispute over title to land, would be a textbook example of a private right. So, typically, is whether one person was defrauded by another in a commercial transaction.
The Court defined private rights as being effectively identical to those that require a jury trial under the Seventh Amendment: “A hallmark that we have looked to in determining if a suit concerns private rights is whether it ‘is made of the stuff of the traditional actions at common law tried by the courts at Westminster in 1789.’ If a suit is in the nature of an action at common law, then the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory.” (Quotations and citations omitted.) As Roberts explained, the same rule applies regardless of whether the case is brought under a statute or under common law, and regardless of whether the government is the plaintiff:
What matters is the substance of the suit, not where it is brought, who brings it, or how it is labeled. The object of this SEC action is to regulate transactions between private individuals interacting in a pre-existing market. To do so, the Government has created claims whose causes of action are modeled on common law fraud and that provide a type of remedy available only in law courts. This is a common law suit in all but name. [Citation and alteration omitted.]
The main fireworks were over Atlas Roofing, which found that charges of workplace-safety violations under the Occupational Safety and Health Act (OSHA) involved public rights. But OSHA did not create a general claim for fraud or negligence; it empowered a regulatory agency to write specific rules, which “bring no common law soil with them. . . . Rather than reiterate common law terms of art, they instead resembled a detailed building code.”
The broad language of Atlas Roofing could be read to say a good deal more than that, but the Court effectively limited it to statutory schemes that look more like OSHA, concluding that a more expansive reading of public rights would be inconsistent with how many of its other precedents had handled the question (this would hardly be the first time the Burger Court dealt too casually with precedent). As Roberts observed, “even as Atlas Roofing invoked the public rights exception, the definition it offered of the exception was circular. The exception applied, the Court said, ‘in cases in which public rights are being litigated — e. g., cases in which the Government sues in its sovereign capacity to enforce public rights created by statutes.’” There are few things that get John Roberts’s dander up quite like saying a rule is a rule just because the government says so.
The Dissent and Its Critics
Sotomayor’s dissent proposed a rule that gave the government carte blanche to take cases away from the jury whenever it’s Uncle Sam going after the little guy. “Agency adjudications of statutory claims for civil penalties brought by the Government in its sovereign capacity” can be pursued without an Article III judge or a jury:
When a claim belongs to the Government as sovereign, the Constitution permits Congress to enact new statutory obligations, prescribe consequences for the breach of those obligations, and then empower federal agencies to adjudicate such violations and impose the appropriate penalty. . . . Both [this case and Atlas Roofing] arise between the Government and others in connection with the performance of the Government’s constitutional functions, and involve the Government acting in its sovereign capacity to bring a statutory claim on behalf of the United States in order to vindicate the public interest.
As Dominic Pino details, Sotomayor’s opinion oozes with devotion to administrative “efficiency” and fails to grasp what separation of powers means. In one passage bizarrely disconnected from the actual case before her, Sotomayor wrote:
The relationship between the federal-securities laws (including their antifraud provisions) and common-law fraud is materially indistinguishable from the relationship between OSHA and the common-law torts of wrongful death and negligence. . . . In arguing that OSHA’s scheme was “self-consciously” novel in ways unknown to the common law, the majority points to the granularity of OSHA standards. . . . Yet lawyers and regulated parties in the securities industry would be surprised to hear that this could be a distinguishing feature. Anyone familiar with the industry knows securities laws are replete with specific and exceedingly detailed requirements implementing the statute’s disclosure and antifraud provisions [such as regulations] prohibiting testimonials and endorsements that do not satisfy requirements without meeting complex disclosure requirements [or] prohibiting investment advisers from having custody of client funds or securities unless specific requirements are met, including qualifications, notices, and account statements.
That’s all well and good, but Jarkesy was charged with fraud. I can assure Justice Sotomayor, as someone who practiced securities law for two decades, that there is a difference. Sotomayor herself understood that difference as recently as April, when she wrote the opinion for a unanimous Court in Macquarie Infrastructure Corp. v. MOAB Partners, L.P. ruling that a failure to comply with SEC disclosure regulations does not violate the very same antifraud laws that were at issue in Jarkesy. The SEC may well be able to argue that it can still bring cases before ALJs when it alleges a violation of, say, the net capital rules or the registration requirements — although it typically needs to show a “willful” violation to get civil penalties, and courts have cracked down on the commission’s efforts to impose those penalties without proving a level of intent that goes beyond mere negligent failure to follow rules. In any event, those outer limits have nothing to do with today’s decision.
The customarily courtly Roberts was brutal in describing Sotomayor’s analysis, under which “the Seventh Amendment would become nothing more than a game, where the Government need only identify some slight advantage to the public from agency adjudication to strip its target of the protections of the Seventh Amendment.” He sniped that “the dissent chants ‘Atlas Roofing’ like a mantra” and that “reading the dissent, one might also think that Atlas Roofing is among this Court’s most celebrated cases.” In one footnote, Roberts snarked that the dissent “must be reading from a different case than we are” by confusing a 1909 opinion on the federal government’s broad powers over foreign commerce (such as immigration and customs) with a plenary power to oust the judicial branch from any case involving interstate commerce. He observed that the dissent
bases [its] rule not in the constitutional text (where it would find no foothold), nor in the ratification history (where again it would find no support), nor in a careful, category-by-category analysis of underlying legal principles of the sort performed by Murray’s Lessee (which it does not attempt), nor even in a case-specific functional analysis (also not attempted). . . . The result is to blur the distinctions our cases have drawn in favor of the legally unsound principle that just because the Government may extract civil penalties in administrative tribunals in some contexts, it must always be able to do so in all contexts. . . . The dissent also appeals to practice, ignoring that the statute Jarkesy and Patriot28 have been prosecuted under is barely over a decade old.
Indeed, the SEC charged Jarkesy just three years after Dodd-Frank, so this case is still part of the first generation of challenges to its administrative processes.
Justice Neil Gorsuch, joined by Thomas, added a sprawling 28-page concurring opinion that deserves its own treatment, but it was likewise scathing in blasting both the government and the dissenters: “The dissent’s approach to our precedents is like a picky child at the dinner table. It selects only a small handful while leaving much else untouched. . . . That my dissenting colleagues plow ahead anyway with their remarkable conception of public rights is all the more puzzling considering how regularly they have argued against that sort of sweeping concentration of governmental power” in various opinions he cited by who wrote and joined them. He added:
We have no license to deprive the American people of their constitutional right to an independent judge, to a jury of their peers, or to the procedural protections at trial that due process normally demands. Let alone do so whenever the government wishes to dispense with them. This Court does not subject other constitutional rights to such shabby treatment. . . .
The dissent’s competing account of public rights is astonishing. On its telling, the Constitution might impose some (undescribed) limits on the power of the government to send cases “involving the liability of one individual to another” to executive tribunals for resolution. . . . But, thanks to public rights doctrine, the dissent insists, the Constitution imposes no limits on the government’s power to seek civil penalties “outside the regular courts of law where there are no juries.” . . . In that field, the Constitution falls silent. The dissent does not even attempt to deploy any of the contrived balancing tests that emerged in Atlas Roofing’s aftermath to rein in the government’s power. But where in Article III, the Seventh Amendment, and due process can the dissent find this new rule? What about founding-era practice or original meaning? And why would a Constitution drawn up to protect against arbitrary government action make it easier for the government than for private parties to escape its dictates? The dissent offers no answers.
The intellectual bankruptcy of the Court’s liberal wing, and its devotion instead to the cult of the “efficient” administrative state, has rarely been so harshly exposed.