In Case You Missed It: Will the U.S. Supreme Court’s Jarkesy decision be a game changer for administrative law?

Originally published by Yellowhammer News.

In “Case” You Missed It is a new column by Balch & Bingham attorney Tripp DeMoss that briefly summarizes a recently issued decision by higher courts like the U.S. Supreme Court and Alabama Supreme Court in cases of interest to Alabamians that they might not have otherwise heard about. 

Much attention has been devoted to the U.S. Supreme Court’s landmark decision a few weeks ago in Loper Bright Enterprises v. Raimondo to do away with so-called “Chevron deference” given to administrative agencies. Interestingly, the Court recently issued another administrative law decision that could be considered just as important and groundbreaking of a decision as Loper Bright. 

On June 27, 2024, the U.S. Supreme Court ruled in Securities and Exchange Commission v. Jarksey that the U.S. Securities and Exchange Commission (“SEC”) could not bring a civil (i.e., non-criminal) enforcement action seeking monetary penalties against an investment fund manager who the SEC accused of defrauding investors in a proceeding before a SEC administrative law judge (“ALJ”). Instead, the Court found that such a case must be brought in a court of law where the defendant could request a trial by jury.

The upshot of Jarkesy is broader than securities regulation however — persons or businesses who are regulated by many federal agencies, even besides the SEC, may be able to demand a jury trial rather than engage in an administrative proceeding before an agency ALJ when the agency initiates an enforcement action that seeks monetary penalties.

In a 6-3 decision written by Chief Justice Roberts and joined by Justices Alito, Thomas, Kavanaugh, Barrett, and Gorsuch, the Court held that this type of enforcement action had to be brought in a court of law established under Article III of the Constitution, because it implicated the defendant’s right to a jury trial under the Seventh Amendment. In relevant part, the Seventh Amendment states that in “[s]uits at common law, … the right of trial by jury shall be preserved.”

Here, the Court held that in the context of civil enforcement proceedings by federal agencies, the case cannot be brought before the agency’s in-house ALJ if it involves a person’s “private” rights, meaning those rights which would have been known to British subjects and colonial-era Americans as common law rights to be adjudicated by a jury of one’s peers. So, in a civil enforcement proceeding involving a common law claim like this one (i.e., a fraud action seeking a monetary penalty), the Court held that the party who the government seeks to penalize via monetary penalties must be able to mount a defense in a court of law established under the Constitution’s Article III and before a jury pursuant to the Seventh Amendment. 

In his opinion, Chief Justice Roberts discussed the history of the Seventh Amendment at the time of the American founding. He noted that the Constitution’s framers wished to curb British encroachments of the jury trial right through ALJ-like admiralty, vice admiralty, and chancery courts by enshrining the right in the Constitution.

In a concurring opinion joined by Justice Thomas, Justice Gorsuch elaborated on the historical pedigree of the American jury trial right in actions involving government enforcement, and emphasized that the right is linked to the right to due process under the Fifth Amendment as well.

Justice Sotomayor, joined by Justice Kagan and Justice Jackson, dissented. Justice Sotomayor contended that the Seventh Amendment did not apply here because this was actually a “public rights” proceeding, meaning one that centered only on the implementation of statutes passed by Congress (here, federal statutes governing securities and investments) not having to do with a traditional common law claim implicating “private” rights. Justice Sotomayor also noted that many other federal agencies utilize similar ALJ-driven enforcement proceedings to carry out their regulatory mandate, which could be called into question by the Court’s decision.

Moving forward, and perhaps even as specifically identified by Justice Sotomayor’s dissent, a variety of federal agency enforcement actions brought before agency ALJs may be subject to constitutional challenge, unless those actions are instead brought in an Article III federal court instead where the defendant can request a trial by jury.

Agencies besides the SEC that utilize these types of ALJ-driven enforcement proceedings include the Federal Trade Commission, National Labor Relations Board, the Consumer Financial Protection Bureau, and the Environmental Protection Agency. 

Businesses would be wise to contact legal counsel about the implications of this case on future federal agency regulatory enforcement in their industry. You can read the U.S. Supreme Court’s decision in full here.