SEC v. Jarkesy, 603 U.S. 109 (2024)
In SEC v. Jarkesy, 603 U.S. 109 (2024), the United States Supreme Court held that it is a violation of the Seventh Amendment right to a jury trial for the Securities and Exchange Commission (“SEC”) to bring enforcement actions against parties for securities violations in in-house administrative proceedings.
Congress enacted the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940 (“the Antifraud Provisions”) to combat securities fraud and increase market transparency. The SEC is charged with enforcing the provisions and can bring enforcement actions either (1) in federal court, where a jury finds the facts, and an Article III judge presides; or (2) in-house, where there are no juries, and either the SEC or an Administrative Law Judge finds the facts and adjudicates the matter.
Following an in-house enforcement action the SEC determined that George Jarkesy, Jr., and his firm, Patriot28, LLC, had violated the antitrust provisions, and levied a penalty of $300,000. Jarkesy and Patriot28 petitioned for judicial review, whereupon the Fifth Circuit Court of Appeal held that adjudicating the matter in-house violated the defendants’ Seventh Amendment right to a jury trial. The United States Supreme Court subsequently granted the SEC’s petition for certiorari.
The Majority Held that the SEC Adjudicating the Matter In-House Violated the Seventh Amendment Right to a Jury
a) The Seventh Amendment is Implicated When Suits are Legal in Nature
The Court held that the Seventh Amendment “embrace[s] all suits which are not of equity or admiralty jurisdiction.” The majority explained that this means statutory claims which are “legal in nature” implicate the Seventh Amendment. To determine whether an action is legal in nature, the majority, relying on Tull v. United States ,481 U.S. 412 (1987), explained that a court must consider “whether the cause of action resembles common law causes of action, and whether the remedy is the sort that was traditionally obtained in a court of law.” Of these two factors, the majority believed the remedy is the more important, and, in this case, was all but dispositive.
The SEC sought civil penalties, which are a form of monetary relief. According to the majority, such relief is legal in nature when it is designed to “punish or deter the wrongdoer rather than solely to ‘restore the status quo.’” The majority concluded the penalties go beyond restoring the status quo, and are “a type of remedy…that could only be enforced in courts of law,” because (1) the Antifraud Provisions condition the availability and size of civil penalties on considerations including culpability, deterrence, and recidivism; (2) the SEC is not obligated to use the penalties to compensate victims; and (3) the SEC is allowed to collect penalties even when no one is injured.
Also, the majority found that, though federal securities fraud and common law fraud are not identical, they are similar enough that federal securities fraud “resembles [a] common law cause[] of action,” confirming the action is “legal in nature.”
b) If a Claim Implicates the Seventh Amendment, a Jury Trial is Required Unless the “Public Rights” Exception Applies
Under the “public rights” exception, Congress may properly assign certain matters for decision to an agency without a jury trial. The SEC, relying on Atlas Roofing Co. v. Occupational Safety and Health Review Comm’n, 430 U.S. 442 (1977), argued that the public rights exception applied here because (1) Congress created “new statutory obligations, impose[d] civil penalties for their violation, and then commit[ted] to an administrative agency the function of deciding whether a violation ha[d] in fact occurred”; and (2) the Government was the party bringing the action. But the majority held Atlas Roofing inapplicable because the claim in that case was not akin to a common law claim. The majority clarified that, per Tull, the Seventh Amendment applies to novel statutory claims so long as they are akin to common law claims. The public rights exception does not “apply automatically whenever Congress assigns a matter to an agency for adjudication.”
Relying on Granfinanciera, S.A. v. Nordberg ,492 U.S. 33 (1989), the majority further explained that what matters “is the substance of the suit, not where it is brought, who brings it, or how it is labeled.” Congress may not “withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at common law.” If a suit is in the nature of an action at common law, the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory, regardless of whether the Government is a party. Here, the antifraud provisions target the same basic conduct as common law fraud, operate pursuant to the same basic legal principles, and provide for civil penalties. In the majority’s view, this means the action in question involves private, rather than public, rights. The fact that Congress had statutorily created the cause of action, and the fact that the Government was a party to the suit, did not change the type of right implicated, and so the public rights doctrine did not obviate the need for a jury.
The Dissent, Asserted That the Public Rights Doctrine is Much Broader Than the Majority Believes
In dissent, Justice Sotomayor (joined by Justices Kagan and Justice Jackson) agreed that a Seventh Amendment challenge was at issue. They explained that the Seventh Amendment question only arises after addressing a threshold Article III question. Per the dissent, if an action is properly in a non-Article III forum, then the Seventh Amendment does not apply.
The dissent treats the public rights doctrine not as an exception to the Seventh Amendment, but rather the first step in answering the Article III question. If a cause of action involves a public right, then it need not be adjudicated in an Article III court. Relying on Granfinanciera, the dissent explained that (1) if Congress enacts a statutory cause of action that “inheres in, or lies against, the Federal Government in its sovereign capacity” then it is a public right; and (2) if a case involves a dispute “to which the Federal Government is not a party in its sovereign capacity” (i.e. a case between two private parties) then it is a public right if “Congress…has created a seemingly ‘private’ right that is so closely integrated into a public regulatory scheme as to be a matter appropriate for agency resolution.” Because the government was a party and sought to enforce rights for the benefit of the public, the dissent believed the public rights doctrine clearly applied here.
Also, the dissent criticized the majority’s reliance on Granfinanciera. According to the dissent, Granfinanciera is distinguishable because the action there was between two private parties. Because the government was not a party the dissent believed Granfinanciera is only relevant when addressing the second type of public right outlined above.
In addition, the dissent took issue with the majority’s reliance on Tull for the proposition that the remedy is nearly dispositive of the issue. The dissent distinguished Tull because it took place in a federal district court. According to the dissent, once a case is in an Article III court, the Seventh Amendment analysis outlined by the majority kicks in, but that analysis is inapplicable to determining whether a case need be in an Article III court.
The dissent further agreed that, contrary to the majority’s assertion, the dissent believed the statutory scheme in Atlas Roofing involved civil penalties and resembled the common-law torts of negligence and wrongful death as closely as the antifraud provisions resemble common-law fraud. Because it did not find Atlas Roofing to be distinguishable and found that neither the rule established in Tull nor Granfinanciera apply to a dispute wherein the Government is a party, and in which the dispute is adjudicated in a non-Article III forum, the dissent argued that Atlas Roofing easily settled this case. In the dissent’s opinion Congress acted within its power to create a new statutory scheme, and to allow the SEC to enforce that scheme in-house. Because the dissent found no Article III issue, the Seventh Amendment was not implicated.
Conclusion and Broader Application
There are more than two dozen agencies that can impose civil penalties in administrative proceedings. Though some of those agencies, such as the Consumer Financial Protection Bureau, the Environmental Protection Agency, and the SEC, are authorized to pursue civil penalties in both administrative proceedings and federal court, many others, such as the Occupational Safety and Health Review Commission, the Federal Energy Regulatory Commission, the Federal Mine Safety and Health Review Commission, and the Department of Agriculture, are only authorized to bring enforcement of civil penalties in in-house proceedings. For those that are authorized to do both, the holding in this case may require enforcement actions to be pursued in federal court, which would likely increase the cost of such actions, and reduce consistency as to their outcomes. For those that are required to utilize in-house proceedings, this holding may prove more troublesome still, as the constitutionality of hundreds of statutes may now be in question. Per the words of the dissent, for those agencies “all the majority can say is tough luck; get a new statute from Congress.”
Glen Hansen is Senior Counsel, and Simyllina Chen is a Law Clerk at Abbott & Kindermann, Inc. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, Inc. at (916) 456-9595.
The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, Inc., or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.