An Epic Victory For Your Right To A Trial By Jury
Supreme Court Wrap-Up for SEC v. Jarkesy
Description
Episode #98
Today the Supreme Court dropped two massive bombshell cases that are absolutely the most important cases of this term. Yesterday, when I said that Murthy v Missouri was the most important case this term so far, I had not actually had time to read Jarkesy and Loper Bright and I stand corrected! It would be hard to overstate just how big of a deal these two cases are. Not just for the merits of their respective case, but also for the Court’s decision in this cases. However, two bombshell landmark decision released by the Court are By far the most important cases of this term. In fact, this may sound hyperbolic, but I believe these may truly be two of the most important cases the Supreme Court has ever issued. Why? While every case I picked for my Supreme Court Roundup are important case with huge implications for constitutional law, there were two cases that always stuck out to me as true landmarks, which could drastically shape the entire form and procedure in administrative law. This is a big deal, because the proliferation of administrative law has become a much greater danger to our individual liberties than cases involving more fundamental civil liberties concerns such as our first and second amendment rights. So let’s dive on into an in-depth examination of the Supreme Court’s decision in SEC v. Jarkesy
Jarkesy is a case that challenges the dual-court system that has been created by administrative law. When administrative agencies want to enforce an act of Congress, they can bring an enforcement action in one of two forums. It can file suit in federal court or it can adjudicate the matter itself. The forum which that agency selects will dictate the procedural protections enjoyed by the defendant and the remedies available to the SEC.
When a case is heard before a federal court, a jury acts as the finder of facts and an Article III judge presides over the case. Additionally, the Federal Rules of Evidence and the ordinary rules of discovery govern the litigation. But when an administrative agency, such as the SEC in this case, adjudicates the matter internally there is no jury, the Sec presides over the case. The agency’s internal Division of Enforcement prosecutes the case. And the agency or its delegee—typically an Administrative Law Judge (Commonly referred to as an ALJ)—also finds facts and decides discovery disputes, and it is the SEC’s own Rules of Practice which govern the proceeding.
The SEC opted to adjudicate the matter in-house. As relevant, the final order determined that Jarkesy and Patriot28 had committed securities violations and levied a civil penalty of $300,000. Jarkesy and his company, Patriot28 petitioned for judicial review. The Fifth Circuit vacated the order on the ground that adjudicating the matter in-house violated the defendants’ Seventh Amendment right to a jury trial.
In a 6-3 decision, The majority would affirm the holding in the Fifth Circuit that the SEC's in-house adjudication of Petitioners' case violated their Seventh Amendment right to a jury trial
The majority opinion, authored by Chief Justice Roberts and joined by Justices Thomas, Gorsuch, Barrett, Alito and Kavanaugh the Court would hold:
Held: When the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial. Pp. 6–27.
The Chief goes on to say that the question presented in this case—whether the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties for Securities Fraud—is straightforward. Chief Justice Roberts' opinion examined originalist, textualist, and doctrinal sources of law.
Following the precedent sets forth in Granfinanciera, S. A. v. Nordberg, 492 U. S. 33, and Tull v. United States, 481 U. S. 412, this action implicates the Seventh Amendment because the SEC’s antifraud provisions replicate common law fraud. And the “public rights” exception to Article III jurisdiction does not apply, because the present action does not fall within any of the distinctive areas involving governmental prerogatives where the Court has concluded that a matter may be resolved outside of an Article III court, without a jury.
The Chief goes on to explain why this action implicates the seventh amendment:
The right to trial by jury is “of such importance and occupies so firm a place in our history and jurisprudence that any seeming curtailment of the right” has always been and “should be scrutinized with the utmost care.” Dimick v. Schiedt, 293 U. S. 474, 486. When the British attempted to evade American juries by siphoning adjudications to juryless admiralty, vice admiralty, and chancery courts, the Americans protested and eventually cited the British practice as a justification for declaring Independence.
In the Revolution’s aftermath, concerns that the proposed Constitution lacked a provision guaranteeing a jury trial right in civil cases was perhaps the “most success[ful]” critique leveled against the document during the ratification debates. The Federalist No. 83, p. 495. To fix that flaw, the Framers promptly adopted the Seventh Amendment. Ever since, “every encroachment upon [the jury trial right] has been watched with great jealousy.” Parsons v. Bedford, 3 Pet. 433, 446. Pp. 7–8.
The Seventh Amendment guarantees that in “[s]uits at common law . . . the right of trial by jury shall be preserved.”
The first question in the case is whether the claim that the SEC brought against hedge fund founder and investment adviser George Jarkesy — seeking penalties for misleading statements he made to investors — is a “suit at common law” to which the Seventh Amendment applies. After all, like most administrative claims, it rests on a federal statute, not the common law, and it requires the agency to establish facts that do not match any cause of action known to the common law in 1791 (when the states ratified the Seventh Amendment). Roberts explained, though, that the “right is not limited to the ‘common-law forms of action recognized’ when the Seventh Amendment was ratified,” but rather extends to any “statutory claim if the claim is ‘legal in nature.’”
Of these factors, the remedy is the more important. And in this case, the remedy is all but dispositive.
In much of the opinion, Chief Justice Roberts makes an overwhelmingly powerful argument that S.E.C. fraud cases are in the words of the Seventh Amendment "[s]uits at common law" which can only be tried by a jury and not suits in equity or admiralty where the right to jury trial has not historically been available.
Justice Sonia Sotomayor, joined by Justices Elena Kagan and Ketanji Brown Jackson, dissented. Reading from the bench on Thursday, Sotomayor called the majority’s decision “a devastating blow to the manner in which our government functions.” Though they really seemed to have no issue with the courts analysis of whether Jarkesy’s suit is a “suit at common law” to which the Seventh Amendment applied.
The Chief would elaborate that “because the SEC seeks civil penalties, a form of monetary relief, [because] money damages are the prototypical common law remedy.” In particular, he explained that “only courts of law issued monetary penalties to ‘punish culpable individuals,” which means that “civil penalties are a type of remedy at common law that could only be enforced in courts of law.” Most importantly here, because “the SEC is not obligated to return any money to victims,” its civil penalties by definition “are designed to punish and deter, not to compensate.” That “effectively decides that … a defendant would be entitled to a jury on these claims.”
Where the Justices would divide on this case came in the second step, which would analyze the “public rights” doctrine. So what exactly is the Public/Private Rights distinction that split the Court?
The Supreme Court has held that Article I courts can adjudicate cases involving “public rights” —cases that arise between a private actor and the government. The public rights theory can be traced back to the Court’s 1855 ruling in Murray’s Lessee v. Hoboken Land & Improvement Co. In that case, Justice Joseph Story explained that:
“…Although Congress cannot withdraw from federal courts the jurisdiction to hear suits at common law, equity, or admiralty, “there are matters, involving public rights, which may be presented in such form that the judicial power is capable of acting on them, and which are susceptible of judicial determination, but which Congress may or may not bring within the cognizance of the courts of the United States, as it may deem proper.”
In essence, the Court distinguished between matters that historically had been decided by courts and matters that arose between the government and others and had been historically resolved by executive or legislative acts.
The “public rights exception” to the Seventh Amendment recognizes, and has recognized for centuries, that when Congress creates a “public right” it freely can “assign the matter for decision to an agency without a jury, consistent with the Seventh Amendment.” The controversial question in this case is how to decide whether the SEC’s claim for civil penalties involves a public right.
For the majority, everything about the doctrine depends on the nature of the SEC’s claim for relief. Thus, Roberts wrote that:
[T]he “hallmark” of public 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 that is so, “then the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory.”
When Roberts turned to explaining why this particular matter does not involve a public right, he relied heavily on Granfinanciera v. Nordberg, a 1989 decision holding that the public rights exception did not protect a claim in a bankruptcy proceeding to recover a fraudulent conveyance. For Roberts, that “statutory action for fraudulent conveyance” was so similar to the statutory action here that it “effectively decides this case.” For the majority, he wrote:
“[W]hat matters is the substance of the action, not where Congress has assigned it.” Thus, it cannot matter that Congress put this right in a novel regulatory regime, lest the court “permit Congress to siphon this action away from an Article III court.” Because the “fraud claim in Granfinanciera was also statutory,” the same result should apply here.
Sotomayor’s lengthy dissent proceeded from an entirely different conception of the public rights doctrine. For her the key point was that the right in question is one that Congress gave to the government:
“Today, for the very first time, this Court holds that Congress violated the Constitution by authorizing a federal agency to adjudicate a statutory right that inheres in the Government in its sovereign capacity.”
For Sotomayor, cases where the government itself is the claimant were the easy cases, the very definition of public rights.
Justice Neil Gorsuch, joined by Justice Clarence Thomas filed a substantial concurrence. Collectively the Seventh Amendment, Article III, and the due process clause, Gorsuch explained, should require a jury trial and conventional civil litigation before the government can deprive a citizen of money. Doctrinally, they seem to reach the question the majority avoided, suggesting that the public-rights exception applies only to “the collection of revenue, customs enforcement, immigration, and the grant of public benefits.”
Gorsuch’s powerful and persuasive concurrence would emphasize the Jarkesy case’s implication of Article III's promise of a life tenured judge to hear suits in common law, as well as implicating the Seventh Amendment. Justice Gorsuch also observed that the Fifth Amendment's Due Process Clause was implicated as well, because the S.E.C. was arguing that it could violate the separation of powers by combining legislative, executive, and judicial power—all in one administrative agency.
The majority opinion is likely to have an immediate and notable effect on the federal administrative state. Sotomayor discussed two dozen agencies that impose civil penalties in administrative proceedings, and few if any of them fall within the categories that the majority validates: among the most prominent I would mention the FDA, EPA, FCC, and CFPB. I doubt if any of those agencies will be able to enforce civil penalties reliably in the immediate future. The hit will be especially hard for agencies that depend on revenues from penalties to support their budget – as Congress seems little minded in recent years to offer agencies large new fundings.
The most surprising thing about the decision to me is the consensus Roberts marshaled for his majority. Previous cases in the area in the last few decades have involved fractured and splintered plurality opinions with multiple partial concurrences. Roberts wrote for six of the nine justices and had all six joining every single word of his opinion. That signals, in a powerful way, that the blow Jarkesy strikes at the administrative state is not temporary or lightly considered, and not something from which litigants should hope for any relief or ameliorative clarification any time in the foreseeable future.
Overall, S.E.C. v. Jarkesy is a correct and persuasive six justice majority opinion, which holds that in civil fraud suits, at least, the S.E.C. must bring its cases before an Article III judge and afford the defendant, who it is prosecuting, the right to a civil jury trial. It cannot prosecute such a suit before one of its own internal administrative law judges. Jarkesy is thus an important victory for both the rule of law and for common sense.
That’s really all I have for you guys here today. But you will want to stay tuned because I have one more video coming out today and I have absolutely saved the very best for last. We will be talking about the Bombshell decision in Loper that has straight up murdered Chevron Deference.
Case Brief
Docket No. 22-859
Lower Court: United States Court of Appeals for the Fifth Circuit
Question Presented:
Whether statutory provisions that empower the Securities and Exchange Commission (SEC) to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment.
Whether statutory provisions that authorize the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine.
Whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.
Holding: When the Securities and Exchange Commission seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial.
Judgment: Affirmed and remanded, 6-3, in an opinion by Chief Justice Roberts on June 27, 2024. Justice Gorsuch filed a concurring opinion, in which Justice Thomas joined. Justice Sotomayor filed a dissenting opinion, in which Justices Kagan and Jackson joined.
Past Episodes & Articles
Links
SEC v Jarkesy – Supreme Court Case
SEC v Jarkesy - Fifth Circuit
Jarkesy v. Sec. & Exch. Comm'n, 34 F.4th 446 (5th Cir. 2022) on Casetext
Jarkesy v. Sec. & Exch. Comm'n, 34 F.4th 446 (5th Cir. 2022) Supreme Justia Case Brief
Jarkesy v. Sec. & Exch. Comm'n, 34 F.4th 446 (5th Cir. 2022) Oral Arguments
Related Case Precedent
“Justice GORSUCH, with whom THE CHIEF JUSTICE and Justice THOMAS join, dissenting.” Gundy v. United States, 139 S. Ct. 2116, 2131 (2019)
Statutes
Securities Exchange Act of 1934
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