“Administrative law is not for sissies,” Justice Scalia famously quipped. It’s complex. And that’s no less true of the administrative-law cases pending before the Supreme Court this term. However, in the case of SEC v. Jarkesy, the Supreme Court has a simple (if elusive) doctrine to resolve the case—the private-rights/public-rights distinction. And with it, a rule: the deprivation of private rights requires an exercise of the judicial power—an Article III court with judicial process—and, if the deprivation involves a civil monetary penalty, then the right to trial by jury is required. Jarkesy provides the Court with an opportunity to clarify the private-rights/public-rights distinction, which will set each claim in place and put administrative law and the separation of powers on sound doctrinal footing moving forward.
The Jarkesy Case and Arguments
In recent decades, Congress has drastically expanded the SEC’s power. For most of the agency’s history, it could pursue regulated entities administratively, including for fraud, but it could not seek monetary penalties. In 2010, Congress empowered the SEC to seek civil monetary penalties against any person for violating the securities laws, including traditional fraud claims. This vested SEC’s administrative law judges (ALJs) with “coextensive” or “dual” jurisdiction with the federal courts in securities fraud actions, giving the agency the option to pursue civil money penalties in its in-house tribunals. Although agencies had always litigated these actions in Article III courts, the SEC began diverting fraud actions into its administrative courts.
Enter George Jarkesy. Mr. Jarkesy is an investment advisor who launched two hedge funds with his advisory firm, Patriot28, LLC. The SEC brought administrative proceedings against Mr. Jarkesy, alleging fraud on the ground that he made “an untrue statement of material fact or omitt[ed] to state a material fact.” The SEC sought a lifetime industry bar on Mr. Jarkesy and over $100 million in punitive civil monetary penalties.
Mr. Jarkesy sued in district court to challenge the constitutionality of the administrative proceeding. He raised three arguments. First, the SEC’s imposition of civil penalties in an agency adjudication violated the Seventh Amendment, Article III, and the due process of law. Second, the SEC’s authority to choose between judicial and administrative enforcement violated the nondelegation doctrine. And third, the statutory restrictions on the President’s power to remove ALJs from office violated Article II. The courts rejected his arguments, citing lack of jurisdiction to consider the merits due to his failure to exhaust administrative remedies.
Mr. Jarkesy was then forced into an administrative tribunal. In these hearings, the federal rules of evidence do not apply, and defendants have no right to trial by jury. After admitting copious hearsay evidence and unauthenticated documents (inadmissible in an Article III court), the ALJ ruled against Mr. Jarkesy. His only available option was an appeal to the SEC itself. And, unsurprisingly, the SEC ruled in its own favor. SEC ordered a $300,000 penalty, disgorgement, and an industry bar.
The result in Mr. Jarkesy’s case was predictable, given the SEC’s near 100%-win rate in its home tribunals. At the time of Mr. Jarkesy’s administrative proceeding in 2014, the agency had, over the last 200 contested cases, scored an in-house win rate of 100% before its own ALJs. The agency likewise almost always prevails in its own internal appeals. By contrast, the agency prevailed in just 61% of cases it initiated in Article III courts, where juries are employed.
Because the SEC initiated the case against Mr. Jarkesy in house, he was allowed judicial review only after the agency completed its administrative process. But, unlike in a case initiated in an Article III court, a court reviewing an agency’s decision must defer to the agency’s findings of fact, tipping the scales in the agency’s favor.
Mr. Jarkesy, however, prevailed on his appeal from the agency to an Article III court. Because Mr. Jarkesy had exhausted the administrative process, the Fifth Circuit had jurisdiction to hear his constitutional challenges to that process. The court ruled in Mr. Jarkesy’s favor on all three claims and reversed the SEC’s decision. First, the court held securities fraud is a traditional common-law claim that requires a jury trial because the Seventh Amendment requires “suits at common law” to be tried by a jury. Second, the power to assign cases to agency adjudication or an Article III court is a power uniquely possessed by Congress and, therefore, the court held that Congress’s unbounded delegation to the SEC of the power to make that decision was unlawful. Third, the court held that the two-layer “for cause” removal protections for SEC ALJs are unconstitutional. The United States appealed, and the Supreme Court accepted the case for review.
The government objected to each point. First, on the Article III, due process of law, and Seventh Amendment claims, the government’s lead argument was that the fraud claim against Jarkesy is subject to the public rights exception to Article III and the Seventh Amendment. The government argued that securities fraud was a public right because it was created by statute and therefore can be adjudicated by an agency. Second, on the nondelegation claim, the government argued that the power Congress delegated to the agency was that of prosecutorial discretion, a quintessential executive, not legislative, power. Finally, on the removal-power challenge, the government argued agency adjudicators can be protected by for-cause removal to secure neutrality and independence in adjudication.
A Possible Resolution
The Supreme Court heard oral argument on November 29, 2023. And it will likely issue its opinion at the end of its term in June. Although the case presents a number of thorny issues, the Court has an easy way to resolve the case: clarify and correctly apply the public-rights/private-rights doctrine. Indeed, if the Court gets this distinction right, the rest of the case falls into place.
Under current jurisprudence, the Court has not “definitively explained” the distinction between public and private rights, and its precedents on this subject have “not been entirely consistent.” But, as the Fifth Circuit explained, the rights the SEC sought to vindicate in its enforcement action against Mr. Jarkesy arise “at common law,” involve private rights, and therefore require a jury trial.
The Fifth Circuit got it right. Private rights include life, liberty, and property, as enumerated in the Due Process of Law Clause. And deprivations thereof must receive traditional Article III judicial process, subject to limited exceptions. Indeed, a deprivation of private rights requires an exercise of the judicial power. By contrast, public rights are things owned by the government or not owned by an individual, such as public lands and government benefits. The so-called public-rights doctrine is a limited exception to adjudication inside Article III.
In challenges to agency adjudication, a two-step process is invoked. First, if a private right is at issue, an Article III forum is required. Second, if the case involves a “suit at common law, where the value in controversy shall exceed twenty dollars,” the Seventh Amendment requires a jury trial. Tull v. United States teaches that a suit for civil monetary penalties is a “suit at common law” requiring a jury trial.
This framework resolves Jarkesy. First, because the SEC is seeking civil monetary penalties against Mr. Jarkesy, and because money is property, the SEC’s case involves a private right. The SEC’s case must, therefore, be brought in an Article III court with traditional judicial process. Second, the suit is one traditionally held at common law under Tull, so Jarkesy must receive a jury trial under the Seventh Amendment.
This simple framework could also moot the nondelegation and removal claims if the Court decides not to reach them. That is, if the SEC’s case must be brought in an Article III court, then the SEC need not decide where to bring the case, mooting Jarkesy’s nondelegation claim. Similarly, the SEC’s ALJs would not hear the case, mooting Jarkesy’s removal-protection challenges.
Ultimately, one simple rule should resolve Jarkesy: government deprivations of an individual’s private rights require an exercise of the judicial power, an Article III court, due process of law, and, for suits involving civil monetary penalties, a jury trial. Here, the SEC tried to deprive Mr. Jarkesy of his livelihood through administrative process, not constitutional process. But under our Constitution, the independent judiciary must act before government deprives an individual of his life, liberty or property.
Restoring the framework created by this simple rule protects individual liberty, ensures democratic accountability, and protects the independence of the judiciary. The Court should take the opportunity in Jarkesy to clarify the private-rights/public-rights doctrine and fix the adjudication of private rights firmly in the seat of Article III.
Note from the Editor: The Federalist Society takes no positions on particular legal and public policy matters. Any expressions of opinion are those of the author. We welcome responses to the views presented here. To join the debate, please email us at [email protected].