US Supreme Court declares SEC’s civil fines lawsuit unconstitutional, thereby interfering with administrative authority

In an analysis that the majority opinion called “straightforward,” the court reasoned that (a) the SEC’s antifraud provisions are very similar to common law fraud and (b) monetary penalties are the type of damages traditionally imposed in court, so the defendant is entitled to a jury trial. Thus, if the SEC seeks to impose civil monetary penalties for fraudulent conduct, it cannot bring an internal administrative action but must instead file a civil action in federal court.

As noted in the dissenting opinion, Jarkesy The opinion “overturns a long-standing precedent” that allows various executive branch agencies to seek CMPs through internal administrative actions for violations of law, including fraud-based violations. Jarkesy This decision will undoubtedly have long-term implications for all federal agencies beyond the SEC and will impact the laws upon which those agencies have operated and administered law for decades.

The regulation

The specific question was whether the SEC can subject a defendant to internal administrative enforcement proceedings when seeking civil penalties for statutory fraud. Chief Justice Roberts (joined by Justices Thomas, Alito, Gorsuch, Kavanaugh, and Barrett) relied on the reasoning in Granfinanciera, SA v Nordberg492 US 33 (1989) and Tull v. United States481 U.S. 412 (1987) to limit the “public rights” doctrine in finding that the SEC violated Mr. Jarkesy’s right to a jury trial under the Seventh Amendment to the U.S. Constitution.

Under the “public rights” doctrine, which dates back to the mid-19th century, Congress may delegate certain matters by law to a federal administrative agency for adjudication before an ALJ without violating the Seventh Amendment. The majority opinion in Jarkesy interprets such a precedent narrowly (as in Atlas Roofing Co. vs. Workplace Safety And Health Review Commission430 U.S. 442 (1977)), Conclusion that the “public rights” doctrine applies only when Congress delegates actions that are not based on common law and/or do not seek remedies traditionally available in court. Jarkesy The opinion emphasizes that the “more important” consideration is the nature of the relief sought by the government, and that the fact that the SEC sought CMPs as a penalty was “almost decisive” because traditionally only courts have the power to punish guilty parties. Accordingly, the “public rights” exception did not apply and the SEC violated the Seventh Amendment when it initiated administrative enforcement proceedings against Mr. Jarkesy rather than filing a civil action in federal court.

In a party-line dissent, Justice Sotomayor (joined by Justices Kagan and Jackson) holds that the applicability of the “public rights” doctrine should focus on whether Congress has granted a federal agency jurisdiction over a right that belongs to the government as a sovereign. As a practical matter, Congress has enacted hundreds of laws based on its ability to assign certain cases to ALJs that may now be inapplicable and/or unenforceable. In addition, the dissent points out that many federal agencies (including the Occupational Safety and Health Review Commission, the Federal Energy Regulatory Commission, the Federal Mine Safety and Health Review Commission, the Department of Agriculture, and many others) could apply for CMPs. solely through administrative procedures authorized by Congress. Therefore, Congress may need to enact countless statutory and regulatory provisions in light of the Jarkesy Decision.

The implications

At the start Jarkesy Decision clearly prohibits the SEC from seeking CMPs through internal enforcement actions in the future. While the SEC can still seek monetary relief through civil suits in federal court, pressure may increase to settle its enforcement actions in the future to maintain the steady stream of revenue to which the SEC’s Enforcement Division has become accustomed. For example, the SEC collected $4,949 in fiscal year 2023 alone. billion in financial compensation from its enforcement actions.

The SEC is far from the only agency that has sought CMPs or other punitive measures in the past as part of its quasi-judicial internal enforcement actions under its applicable statutory authority. The Department of Health and Human Services (HHS)—which includes the Food & Drug Administration (FDA), the Centers for Medicare & Medicaid Services (CMS), and other departments, offices, and agencies—has sought CMPs or other punitive measures as part of its statutory enforcement proceedings. Similarly, the Environmental Protection Agency (EPA), the Federal Trade Commission (FTC), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) are federal agencies with applicable—if potentially unconstitutional—legislative authority to adjudicate “traditional legal claims” as part of an internal administrative law proceeding.

The recent Jarkesy The decision and reasoning make a compelling case against the use of internal enforcement actions by these departments to impose punitive measures – particularly when the act to be punished is based on common law, such as fraud. The current statutory authority to do so is likely to encounter difficulties in future internal administrative enforcement of “traditional legal claims”.

***

With extensive experience in government enforcement and investigations, Baker Donelson has the tools to help clients navigate the ever-changing landscape of government enforcement actions. If you have any questions, please contact a member of Baker Donelson’s Government Enforcement and Investigations team.