Supreme Court Rules that SEC and Potentially Other Agencies Cannot Impose Civil Penalties in Administrative Proceedings

July 9, 2024By Riëtte van Laack & JP Ellison

On Thursday, the 27th of June, the Supreme Court issued its decision in Securities and Exchange Commission v. Jarkesy.  The court ruled that the Securities and Exchange Commission (SEC) may not impose fines to penalize securities in its administrative proceedings because that practice violates the Seventh Amendment “right of trial by jury” in all “suits at common law.” This decision likely will impact other federal administrative agencies, including those relevant to our practice.

Here are some brief facts of the case.  SEC charged George Jarkesy Jr. with securities fraud for alleged improper reporting regarding two investment funds that he ran.  An internal SEC process found him guilty and imposed a penalty of $300,000 and disgorgement of $685,000 in illicit profits.  In response, Jarkesy sued, claiming that the agency’s ability to both charge him civil penalties and conduct an administrative judicial proceeding violated his Seventh Amendment right to a trial by jury.

The Seventh amendment provides that in “suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise reexamined in any court of the United States.”

The first question in the Court’s analysis was whether the claim that the SEC brought is a “suit at common law,” i.e., if the case is legal in nature.  That the claim rested on a federal statute and required the SEC to establish facts that do not match any cause of action known to the common law in 1791 was not dispositive.  Rather the analysis must consider whether the cause of action resembles a common law cause of action and whether the remedy is the sort that traditionally was obtained in a court of law.  According to the Court, the remedy is considered the more important factor.  In fact, the Court asserted that it “is all but dispositive [that] the SEC seeks civil penalties, a form of monetary relief, [because] money damages are the prototypical common law remedy” that could only be enforced in courts of law.

This did not end the analysis, however.  Even if the claim is legal in nature, agencies may avoid a trial by jury when the public rights exception applies.  As described by the Court, this “public rights exception” recognizes that when Congress creates a “public right” it may “assign the matter for decision to an agency without a jury.”  Therefore, the critical question in the Court’s analysis was whether this case involved a public right.

This is where the majority and dissent differ.  The majority answered this question by looking, again, at the nature of the claim for relief.  According to the Court, the matter is presumed to concern a private right if it is “made of the stuff of the traditional actions at common law.”  In other words, the civil penalties did not only determine that the suit was legal in nature, it also determined that the suit did not concern a public right.  The Court acknowledged that the determination as to whether it concerns a public or private right has not been “definitively explained” but stressed that the public right is an exception and should be interpreted narrowly.

The dissent agreed that the critical question is whether the matter concerns a private or public right.  However, it strongly disagreed with the majority on the conclusion.  According to the dissent, where the government is the claimant, it concerns a public right.

Justice Sotomayor’s lengthy dissent discusses the consequences of the Court’s analysis; “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.”  As the dissent points out, the federal government has operated for decades on the assumption that many disputes can be adjudicated by ALJs. According to a review of federal law she cited, by 1986 there already were more than 200 federal statutes calling for trials before ALJs.

Some of these laws, including the one allowing the SEC to bring enforcement actions against people like Jarkesy, give the government a choice. That is, they allow federal agencies to bring a proceeding either before an ALJ or before a federal district court that may conduct a jury trial.  So the SEC has the option of retrying Jarkesy in a district court. But, Justice Sotomayor warns that some agencies may not be able to collect certain civil penalties at all because the statutory and regulatory provisions governing those penalties specify that they must proceed administratively, which the Court has now said is unconstitutional.

We note that questions remain, such as whether there are statutes providing for civil penalties that are of a kind that did not already exist under the common law, and how much, if any, of the public rights doctrine remains.  The Court asserts that its ruling is limited to civil penalty suits for fraud.  For an example, the Court points to the Occupational Safety and Health Act of 1970 (OSH Act), a statute that created a federal regulatory regime to promote safe working conditions which created a cause of action not existing under common law.  However, the dissent does not buy this, stating that “the incredible assertion [that the ruling is limited to civil penalty suits for fraud] should fool no one,” and concludes that the Court’s decision “is a massive sea change.”

There is no question that the Jarkesey decision has created significant uncertainty as to the authority of many agencies imposing civil penalties administratively.  The decision likely will have minimal impact on FTC or CPSC cases because Congress or court decisions previously determined that both commissions could only seek civil penalties in court.  The impact on FDA matters could be significant.  FDA has civil money penalty authority relating to clinical trials, devices, foods, drugs, and tobacco; although with the exception of tobacco, FDA has not recently exercised that authority with regularity.  If FDA is prohibited from pursuing the relatively small dollar value tobacco penalty cases administratively, it could affect enforcement.  Bringing an administrative claim is typically much less demanding in time and resources than litigating a jury trial.  The impact on USDA and DEA could be similarly significant.  It should be noted, that the Jarkesy decision does not affect an administrative tribunal’s right to adjudicate equitable (non-monetary damages) issues.

We will be monitoring the effect of this decision on federal agencies and the regulated industry.

Categories: Enforcement