One of the Most Complex Cases of the Supreme Court Term Could Also Be the Most Devastating

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On Wednesday, the Supreme Court will hear arguments in Securities and Exchange Commission v. Jarkesy to review a ruling that set aside a decision of the SEC that the hedge fund manager George Jarkesy committed fraud when he misrepresented his financial position to investors. Based on that finding, the agency barred Jarkesy and his company from certain parts of the investment business, imposed $300,000 in penalties on him, and required him to disgorge unlawful profits of nearly $685,000. What makes this case so extraordinary is not that the U.S. Court of Appeals for the 5th Circuit concluded that the SEC’s decision was unconstitutional, but the substance of the three separate grounds it found for doing so. If the lower court ruling is upheld, it would likely make adjudications by most federal agencies (and not just the SEC) a thing of the past. Here’s why.

The legal arguments are complicated, but the consequences of the 5th Circuit’s ruling, if upheld, would be straightforwardly devastating. First, Jarkesy argues that the SEC’s decision must be vacated because the agency sought civil penalties and disgorgement of unlawful gains in an agency proceeding and not in a federal court, where he would be entitled to a jury trial under the Seventh Amendment. The result would be the demise of agency proceedings if any agency―not just the SEC―sought monetary relief except in federal court. Not all agencies have the statutory authority to bring cases in federal court, and if they wanted the right to recover money from a wrongdoer, today’s stalemated Congress would need to act (it won’t). Even agencies that currently have the right to go to court would have to choose between getting full relief in court or settling for an order stopping the unlawful conduct, which they could do in an administrative proceeding. And to the extent that agencies choose the federal court route, those courts would see a significant increase in complex litigation, with no new judges or additional resources.

The court of appeals also ruled for Jarkesy on his claim that because the SEC had a choice to bring an agency proceeding or go to court, and because Congress had not given the agency instructions on how to choose between the two, that was an unconstitutional delegation of legislative power to a federal agency. The SEC is properly defending on the ground that because choices like that are executive, not legislative decisions, they are not subject to claims of excess delegation. Again, if Jarkesy were to prevail, it would stop all adjudications by agencies―in court or before the agency―because there are no existing laws in which Congress has provided for the kind of limitations on forum selection that the 5th Circuit insisted the Constitution requires.

The final blow to administrative adjudications was a ruling that invalidated the provision in the 1946 Administrative Procedure Act that prevents administrative law judges from being fired except for good cause. According to the 5th Circuit, that restriction, which is there to assure that ALJs are not beholden to the agency that employs them, is an unconstitutional limitation on the president’s duty in Article II, section 3 of the Constitution to “take Care that the laws be faithfully executed.” If the Supreme Court agrees, it would mean that ALJs could be fired for any reason, no reason, or for an improper reason, just like Cabinet officers. The 5th Circuit did not spell out the consequences of its invalidation of the for-cause protection for ALJs, but Jarkesy’s brief does. In what must surely rank as one of the top ironies in many years, Jarkesy argues that Congress would not have wanted agency proceedings without independent ALJs, and since ALJ independence is not constitutional, then there should be no proceedings using ALJs at all! Of course, the whole SEC (and other agencies like the National Labor Relations Board or the Federal Trade Commission) could sit together and hear evidence in all these cases, but that would never happen, and so these cases would simply not be brought.

This case is about much more than whether the judgment against Jarkesy should be overturned. The Supreme Court’s decision will determine whether adjudications before agencies can continue as they have for almost 80 years or whether they will go the way of dinosaurs, which is what the 5th Circuit’s ruling and the 23 industry-supporting amicus briefs would like. Coupled with the attacks on rulemaking through the major questions doctrine and the anticipated demise of deference to agencies that is also before the court this term, the challengers would be delighted if federal agencies would continue conferring regulatory benefits to businesses and financial players, but no longer had the power to say no on them.