Written by Bradford Dudley, L’26
Last summer in SEC v. Jarkesy, the Supreme Court held that the Securities and Exchange Commission violated the Seventh Amendment by adjudicating civil penalties by in-house judges, called administrative law judges, because the SEC’s antifraud provisions replicate common law fraud.[1] Instead, the Court held that defendants are entitled to a jury trial in federal court.[2] The Court also held that the SEC’s action fell outside of the public rights exception, which covers areas such as tax evasion, immigration, and government benefits, that would have allowed the action to be heard outside a court established by Article III of the Constitution.[3] This decision may have many negative implications for administrative effectiveness; however, proponents of the Jarkesy decision have likened these complaints against the ruling to “Chicken Little prophesying about the end of government.”[4] This argument places greater significance on protecting citizen’s Constitutional rights at the expense of government efficiency by undue means.[5]
First, it is important to know what the Court includes in the Seventh Amendment’s protections. The Seventh Amendment preserves the right to a trial by jury for common law suits and establishes that only juries are the triers of fact.[6] In Jarkesy, the majority clarifies that the common law is not restricted to its historical state when the Seventh Amendment was ratified; rather, common law extends to even statutory claims that are “legal in nature,” seek legal remedies such as monetary penalties instead of equity, and are designed to punish or deter the guilty.[7]
This decision may threaten the efficiency of federal agencies, as it restricts the categories of cases that can be heard by administrative law judges and transfers such cases into the federal court system.[8] In turn, costs increase and efficiency is diminished when these actions are shifted into federal courts.[9] This decision impacts a significant amount of the SEC’s enforcement actions, as more than 40%of the SEC’s 2023 matters were filed at least in part as litigated actions.[10] Consequently, the SEC has already decided to drop misconduct charges against several auditors.[11] Thus, Jarkesy can be seen as another case where the judiciary “aggrandizes” itself at the expense of agencies and the status quo.[12]
Moreover, similar Constitutional challenges against other agencies can be expected to increase, potentially limiting other enforcement claims that replicate common law.[13] For example, the Jarkesy decision’s reasoning could likely be used to restrict the Federal Energy Regulatory Commission’s use of administrative hearings to adjudicate market-manipulation and other fraud-like claims.[14] Commenting in her dissent, Justice Sotomayor emphasized the ramifications for administrative enforcement by highlighting that Congress “has enacted more than 200 statutes authorizing dozens of agencies to impose civil penalties for violations of statutory obligations. Congress had no reason to anticipate the chaos [Jarkesy]’s majority would unleash after all these years.”[15] A potential torrent of litigation shifting could threaten to overwhelm the federal court system with cases requiring subject matter expertise.[16] Without an increase in capacity or resources, which has not occurred since 1990, the courts likely lack the capacity to manage the additional workload.[17]
Conversely, Jarkesy itself may have little practical impact despite the doomsday forecasts predicted by some legal commentators.[18] The SEC was already sharply curtailing its use of administrative law judges for litigated enforcement options due to earlier attacks on its use.[19] And while Jarkesy may provide a roadmap, challenges to other agencies are not guaranteed victories; Jarkesy only directly implicates the Seventh Amendment’s right to a jury trial for administrative proceedings seeking civil monetary penalties for claims rooted in common law that, additionally, are not excused by a public rights exception.[20]
Furthermore, Jarkesy’s potential negative implications for administrative efficiency should be evaluated against the value of protecting Seventh Amendment rights. The majority asserted that the right to trial by jury is “of such importance and occupies a firm place in our history and jurisprudence that any seeming curtailment of the right [has always been and] should be scrutinized with the utmost care.”[21] Proponents of Jarkesy argue that agencies such as the SEC are too susceptible to bias, as the administrative law judges and commissioners are employees of their agency and have already approved the case in the first place.[22] This is a valid concern; statistically, the SEC won 90% of contested cases before an administrative law judge, compared to its 69% percent success rate in federal court over the same time frame.[23]
Some in favor of Jarkesy’s Seventh Amendment protections emphasize one culprit in particular for the shift to in-house adjudication: the public rights doctrine.[24] A public right is a government action related to an executive or legislative power that allows the government to litigate matters in order to enforce the laws.[25] The public rights exception was first recognized in Murray’s Lessee, where the federal government properly issued a “warrant of distress” and seized and sold a plot of land from a federal customs collector who refused to deliver public funds to the Treasury.[26] The Supreme Court held that this action did not have to go through an Article III court because it was within the federal government’s traditional purview to hold such proceedings to enforce their actions.[27]
Over time, the public rights exception expanded to include Congressional statutory rights, which could then be adjudicated by the assigned administrative agency as held in Atlas Roofing Co. v. OSHRC.[28] However, Atlas perhaps provides a circular definition of public rights cases—“cases in which the Government sues in its sovereign capacity to enforce public rights created by statutes within the power of Congress to enact”—which bestows Congress immense deference to legislate what is a public right and which agency should be able to enforce it.[29] So, a matter becomes a public right when it concerns an exercise of legislative or executive power, and when a matter becomes a public right, it can be adjudicated by administrative judges.[30] This doctrine seemingly grants an unlimited and undefined scope to Congress.
Jarkesy distinguishes itself from Atlas by stating that the occupational and safety health standards contested in Atlas were entirely new, while the SEC’s anti-fraud provisions were traditionally in common law.[31] “Anti-novelty” now shapes the public rights doctrine.[32] If an Article III court has historically adjudicated an issue, then the less likely it can be assigned as a public right to an administrative agency.[33] However, the Court in Jarkesy refrained from giving precise terms to the public rights exception and acknowledged that it had not done so in the past.[34]
Overall, Jarkesy stands as the next step in clarifying the public rights exception in order to protect important Seventh Amendment rights. The decision might cause some growing pains, leading Congress to pivot from relying upon administrative agencies and their expertise to expanding the capabilities of the federal court system. Congress thus will have to strike a new balance to ensure that fundamental Constitutional rights are protected while enabling efficient enforcement.
Andrew Harnik, The seal of the U.S. Securities and Exchange Commission is affixed on a wall at SEC headquarters, Washington D.C., in Ray Lewis, SEC pauses rules oreding companies to disclose climate risks: ‘Extremist climate mandate,’ The National Desk (Apr. 5, 2024), https://cbsaustin.com/news/nation-world/sec-pauses-rules-ordering-companies-to-disclose-climate-risks-extremist-climate-mandate-securities-and-exchange-commission-federal-government-woke-green-new-deal-energy-gas-fossil-fuel-esg-global-warming.
[1] SEC v. Jarkesy, 144 S. Ct. 2117, 2130 (2024).
[2] Id.
[3] Id. at 2136-37.
[4] Robert Robertson & Kimberley Church, SEC and Administrative Enforcement: Post-Jarkesy Implications, LexisNexis (Oct. 30, 2024), https://plus.lexis.com/api/permalink/47a89696-fc9a-4784-96c0-8df6c4e520c2/?context=153067.; Oliver Dunford & Adi Dynar, Discourse: In SEC v. Jarkesy, the Supreme Court Restored Core 7th Amendment Protections, Pac. Legal Found. (Sept. 5, 2024), https://pacificlegal.org/discourse-in-sec-v-jarkesy-the-supreme-court-restored-core-7th-amendment-protections/#:~:text=In%20the%20end%2C%20the%20Supreme,liberty%20against%20arbitrary%20government%20actions.
[5] Id.
[6] U.S. Const. amend. VII.
[7] Jarkesy at 2128-29.
[8] Robertson, supra note 4.
[9] Id.
[10] Press Release, SEC, SEC Announces Enforcement Results for Fiscal Year 2023, No. 2023-234 (Nov. 14, 2023).
[11] Jake Castonguay, SEC’s Dropped Auditing Charges Shows Damage of Jarkesy Decision, Bloomberg Tax (Oct. 15, 2024), https://news.bloombergtax.com/tax-insights-and-commentary/secs-dropped-auditing-charges-shows-damage-of-jarkesy-decision.
[12] Leading Case: Federal Statutes and Regulation: Administrative Law Separation of Powers Public Rights Doctrine SEC v. Jarkesy, 138 Harv. L. Rev. 405, 412 (2024).
[13] Castonguay, supra note 11.
[14] Kenneth W. Irvin et al., U.S. Supreme Court’s Jarkesy Decision Imperils Federal Energy Regulatory Commission’s Use of In-House Hearings to Impose Civil Penalties, 24 Pratt’s Energy L. Rep. 9.01(2024).
[15] Jarkesy, 114 S. Ct. at 2155 (Sotomayor, J., dissenting).
[16] Samidh Guha & Kelly McGee, In Loper Bright’s Shadow: An Overworked Judiciary Becomes Further Burdened, Thomson Reuters (Oct. 3, 2024).
[17] Id.
[18] Britt Whitesell Biles et al., SEC v. Jarkesy: How Impactful Is It Really on the SEC’s Enforcement Program, Womble Bond Dickinson (Jul. 9, 2024).
[19] Id.
[20] Id.
[21] Jarkesy, 114 S. Ct. at 2128 (quoting Dimick v. Schiedt, 293 U.S. 474, 486 (1935)).
[22] Dunford, supra note 4.
[23] Jean Eaglesham, SEC Wins with In-house Judges, Wall St. J. (May 6, 2015), https://www.wsj.com/articles/sec-wins-with-in-house-judges-1430965803.
[24] Dunford, supra note 4.
[25] C. Isaac Hopkin, SEC v. Jarkesy: How the Supreme Court Can Have Its Cake and Eat It Too, 14 Wake Forest L. Rev. Online 20, 31 (2024).
[26] Den Ex Dem. Murray v. Hoboken Land & Improv. Co, 59 U.S. 272, 274-275 (1855).
[27] Id. at 278.
[28] Atlas Roofing Co. v. OSHRC, U.S.442, 455 (1977).
[29] See id. at 450.
[30] Hopkin, supra note 24 at 35.
[31] Leading Case, supra note 12, at 411.
[32] Id. at 412.
[33] Id.
[34] Jarkesy, 114 S. Ct. at 2133.