SEC In-House Judges Ruling Will Ripple to Other Agencies (1)

The impact of the US Supreme Court’s decision curbing the Securities and Exchange Commission’s in-house courts will go beyond the Wall Street regulator, inviting challenges to other agencies seeking to impose financial penalties.

Defendants are entitled to jury trials when the SEC seeks civil penalties for securities fraud, the justices ruled. The SEC’s anti-fraud provisions “replicate common law fraud” and it was “well established” those types of claims should be heard by a jury, the court said.

Many agencies use in-house proceedings to adjudicate some of their enforcement actions. The US Department of Labor and the Environmental Protection Agency, among others, are likely to face more challenges after the ruling, inviting disputes about how closely federal provisions resemble common law claims and whether the penalties are designed to punish.

“There are pretty clearly a class of cases that can still be adjudicated in front of administrative law judges,” David Petron, a Sidley Austin LLP securities and regulatory lawyer, said. “On the other hand, any time an agency is looking to impose penalties, I think the better reading” is that penalties designed to punish someone implicate the Seventh Amendment.

The 6-3 decision is part of a series of high court rulings under Chief Justice John Roberts chipping away at the power of administrative agencies. A divided court on Friday overturned precedent that empowered federal regulators to interpret unclear laws. It’s also preparing to rule on how long agency actions can be challenged under the Administrative Procedure Act.

“This is part of a much broader fight in the court about the administrative state,” said Ropes & Gray LLP lawyer Jeremiah Williams, a former SEC enforcement attorney.

Program Threat

More than two dozen agencies impose civil penalties through administrative proceedings, a Justice Department lawyer said during arguments in SEC v. Jarkesy. That includes the EPA, which now faces uncertainties about its docket, attorneys said.

“While the opinion purports to be limited to civil penalties for fraud, and fraud has a long common law lineage, it threatens a host of other administrative programs, including that by the EPA,” said University of Wyoming law professor Sam Kalen, who focused on environmental and administrative law.

Courts will have to decide if the regulatory regime being enforced by the EPA is more akin to common law, or whether it’s entirely new, said Susan Bodine, former EPA administrator for the Office of Enforcement and Compliance Assurance during the Trump administration.

Litigation arguing that an administrative judge doesn’t have the authority to preside over a dispute will be brought in any penalty proceedings before the Labor Department’s in-house judges, Anthony Rainone, a co-chair of the labor and employment practice at Brach Eichler LLC, predicted.

Challenges could also creep into state labor agencies that use similarly modeled in-house enforcement and appeals process, attorneys said.

“I think Jarkesy’s application to those kinds of situations is going to be something that is going to get a really, really serious look. And there are lots of them,” said Michael Lotito, who co-chairs the management-side firm Littler Mendelson PC’s Workplace Policy Institute.

Generating Law

Other agencies with administrative law judges may be less directly impacted, given that the justices ruled more narrowly than they might have.

The ruling won’t touch the Federal Trade Commission’s authority to seek injunctive relief through its administrative court, said Ron Levin, an administrative law expert at the University of Washington in St. Louis. The FTC cannot seek civil penalties in its in-house proceedings.

Still, David Vladeck, a law professor at Georgetown University and former FTC official, said the ruling will make it “much more difficult” for agencies to create legal norms through adjudication.

Unlike some other agencies, the Federal Communications Commission doesn’t have any mechanism to pursue civil penalties in court, and instead often imposes penalties through in-house proceedings, which could make any ripple effects especially impactful for the agency.

The decision opens the door for legal scrutiny over which FCC civil penalties require a trial by jury.

“I think there will be a lot of litigation after this case about where exactly that line is and what factors will be dispositive,” said Tom Johnson, co-chair of the issues and appeals practice at Wiley Rein LLP and former general counsel at the FCC. “I think part of that will be a case-by-case evaluation of whether a particular agency’s claim has roots in the common law.”

The court’s decision also carries no immediate implications for immigration law, said Stephen W. Yale-Loehr, a professor of immigration law at Cornell Law School. Roberts’ opinion identified immigration as an area where a public rights exception to the jury trial right comes into play.

Court of Choice

The Thursday decision is part of a long-running fight involving George Jarkesy, a former hedge fund manager and conservative radio host the SEC sued in 2013, accusing him of misleading investors. A SEC administrative judge ordered Jarkesy to pay almost $1 million.

The SEC itself has shifted away from using its in-house courts in recent years, after questions about the constitutionality of its in-house system. The SEC’s administrative judges had just two pending cases at the end of March, according to an agency report.

“The SEC has been operating for years as if Jarkesy was the law,” said Alston & Bird LLP attorney Susan Hurd, who has represented companies hit by SEC probes. “It is a very important decision in the sense that it is protective of anybody who becomes a target of a very powerful government agency,” she added.

The Supreme Court didn’t decide whether Congress had violated the nondelegation doctrine by allowing the SEC in broad terms to decide whether to litigate in a federal court or agency tribunal. The US Court of Appeals for the Fifth Circuit held that it did.

A decision on that doctrine would’ve had much wider consequences because of its potential to block any policy that depends on an agency’s discretion. Still, the ruling affirms the Fifth Circuit as the venue of choice for litigants taking on the government.

“It will continue to be the case that anybody challenging an administrative agency that has any plausible basis to get into the Fifth Circuit is going to go to the Fifth Circuit,” said Petron. “We’re going to continue to see a lot of action in this area go to the Fifth Circuit and then come up to the Supreme Court.”

The case is Securities and Exchange Commission v. Jarkesy, U.S., No. 22-859, 6/27/24.