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What’s Next after Supreme Court Opinion in SEC v. Jarkesy?

Public Protections Responsive Government Courts Defending Safeguards

I am appalled by U.S. Supreme Court Chief Justice John Roberts’ opinion in SEC v. Jarkesy because it is so dishonest in its use of precedent. Put aside for the moment whether fraud under the Securities and Exchange Commission’s (SEC) statutes is the equivalent of common law fraud, despite the clear differences between the two. The Chief Justice’s description of the law regarding “public” versus “private” rights as a basis for placing enforcement actions in an agency rather than a court is itself a fraud.

As Justice Sonia Sotomayor notes in dissent, for years, there has been agreement that Article III’s vesting of “judicial power” in courts and the Seventh Amendment’s right to a jury trial were not offended by federal statutes placing civil enforcement adjudication in federal agencies, rather than in courts. According to numerous cases, these actions involved the enforcement of “public rights,” that is, the enforcement on behalf of the public of statutory requirements and prohibitions designed to protect and benefit the public. These could be adjudicated by agencies, subject to de novo review of the law and substantial evidence review of the facts by courts.

What there was not clear agreement about was when “private rights,” disputes between private parties, could be adjudicated outside of courts. In Roberts’ opinion, the distinction between these two lines of cases disappears. All his citations suggesting that the SEC’s adjudication of statutory fraud must be in a court are to cases involving disputes between private parties.

He had to acknowledge the numerous cases upholding civil penalties assessed and adjudicated by agencies, rather than courts, but rather than seeing a principle behind those cases, he sees one-offs. Customs cases from the founding period — governs imports. Tax cases – well, it’s taxes. Immigration cases — Congress has plenary authority over immigration. Indian cases — the special relationship with Indians. Administration of public lands — Congress has plenary authority over public lands. Granting of public benefits — no explanation. Patent rights — again no explanation.

In fact, they all have something in common. They all involve congressional exercise of its constitutional powers to create a statutory scheme that Congress believed an agency should be able to enforce through agency adjudication, including the assessment of civil penalties. And before Jarkesy, the Court had never found such an exercise a violation of Article III or the Seventh Amendment of the Constitution.

Jarkesy and Atlas Roofing

And then, of course, there is the Chief Justice’s discussion of Atlas Roofing Co. v. OSHRC, the case directly on point to Jarkesy — a statutory system of regulation able to be enforced by administrative penalties assessed and adjudicated by a federal agency, rather than a court. He begins by saying that the Court need not reach the question of overruling Atlas Roofing because it is distinguishable. Nevertheless, he drops an extended footnote (obviously in response to the dissent) trashing Atlas Roofing — “a departure from our legal traditions” and criticized by scholars. Surely, this would come as a surprise to the eight justices who signed onto Atlas Roofing (Justice Harry Blackmun took no part in the decision), as well as the justices in subsequent cases citing and relying upon the case.

Consider this non-exhaustive list:

  • Stern v. Marshall (2011) (“Subsequent decisions from this Court contrasted cases within the reach of the public rights exception—those arising ‘between the Government and persons subject to its authority in connection with the performance of the constitutional functions of the executive or legislative departments’—and those that were instead matters ‘of private right, that is, of the liability of one individual to another under the law as defined.’ See Atlas Roofing Co. v. Occupational Safety and Health Review Comm’n (exception extends to cases ‘where the Government is involved in its sovereign capacity under … [a] statute creating enforceable public rights,’ while ‘[w]holly private tort, contract, and property cases, as well as a vast range of other cases … are not at all implicated’)).”
  • Granfinanciera v. Nordberg (1989) (“In Atlas Roofing, we noted that ‘when Congress creates new statutory ‘public rights,’ it may assign their adjudication to an administrative agency with which a jury trial would be incompatible, without violating the Seventh Amendment’s injunction that jury trial is to be ‘preserved’ in ‘suits at common law.’ . . . Congress may fashion causes of action that are closely analogous to common-law claims and place them beyond the ambit of the Seventh Amendment by assigning their resolution to a forum in which jury trials are unavailable. See, e.g., Atlas Roofing”) (emphasis added).
  • Northern Pipeline Const. Co. v. Marathon Pipe Line Co. (1982) “[I]t suffices to observe that a matter of public rights must at a minimum arise ‘between the government and others.’ In contrast, ‘the liability of one individual to another under the law as defined,’ is a matter of private rights. Our precedents clearly establish that only controversies in the former category may be removed from Art. III courts and delegated to legislative courts or administrative agencies for their determination. See Atlas Roofing Co. v. Occupational Safety and Health Review Comm’n.”).

In short, there was no criticism of Atlas Roofing by the Court before Jarkesy. Quite the opposite: the very cases the Chief Justice uses to cherry pick citations actually contain language restating the holding of Atlas Roofing, a holding that should have applied to Jarkesy,as well.

But how is Jarkesy supposedly distinguishable from Atlas Roofing? The Chief Justice says that the “fraud” action in Jarkesy “borrow[s] its cause of action from the common law,” whereas in Atlas Roofing, the Occupational Safety and Health Act required employers to comply with occupational and safety health standards promulgated by the agency. Of course, and as Roberts admits, there are not insignificant differences between common law fraud and fraud under securities laws, even if there are substantial similarities. Nevertheless, unlike a fraud action between two private parties seeking to recover damages incurred, a fraud action under securities laws does not seek to recover damages, nor does it seek to vindicate the private interest. It seeks to vindicate the public interest by enforcing a fair public market for securities — the very essence of a “public right” as the Court had previously held.

Indeed, in Atlas Roofing itself, the Court began its opinion by noting that because “common-law actions for negligence and wrongful death [were] inadequate to protect the employee population from death and injury due to unsafe working conditions, Congress enacted the Occupational Safety and Health Act” in order to protect employees from death and injury. That is, just as common law fraud was not sufficient to protect the securities markets, requiring a statutory and regulatory system of protection, so was it necessary to enact a statutory and regulatory system to protect employees. And recall that in Granfinanciera,the Court had explicitly stated that “Congress may fashion causes of action that are closely analogous to common-law claims and place them beyond the ambit of the Seventh Amendment by assigning their resolution to a forum in which jury trials are unavailable.”

Finally, there is Tull v. United States, which the Chief Justice cites as further support for his conclusion that the SEC’s fraud claim must be tried in court before a jury. But Tull involved a case brought in a federal court where the U.S. Environmental Protection Agency (EPA) sought a civil penalty, and the issue was whether a jury was required. The Court held that civil penalty actions were actions “at law” and therefore there was a right to a jury trial. That’s not the issue in Jarkesy; everyone agrees that if the SEC brought the case in court, the right to a jury trial ensued. But Tull did not question the settled law that had Congress provided for an administrative adjudication of the civil penalty by EPA to enforce the Clean Water Act, such an adjudication would require neither a federal court nor a jury.

What’s next for agencies?

On its face, Jarkesy only reaches administrative adjudications involving legal actions that are like historic common law actions. According to the Chief Justice, this would exclude OSHA cases per Atlas Roofing, at least until it is overruled. But what of EPA penalty actions and the some 200-plus other statutes providing for administrative imposition of civil penalties? If in Tull, the Court could declare that civil penalty actions as a class are actions “at law” providing a right to a jury trial in a case brought in court, does this also mean the case must be brought in court?

The answer to that question may be found in the Chief Justice’s statement of the Court’s conclusion in Jarkesy: “When a matter, from its nature, is the subject of suit at ‘common law,’ Congress may not ‘withdraw it from judicial cognizance.’” If so, it is the end of all administrative penalty actions.

Public Protections Responsive Government Courts Defending Safeguards

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