Two weeks ago, the United States Court of Appeals of the Eleventh Circuit heard oral argument in consolidated appeals by the SEC to overturn two orders preliminarily enjoining its administrative proceedings in unrelated cases, Gray Financial v. SEC, No. 15-13738 (11th Cir.) and Hill v. SEC, No. 15-12831 (11th Cir.).  In both cases, United States District Court Judge Leigh Martin May of the Northern District of Georgia found jurisdiction and declared that the SEC likely violated Article II of the United States Constitution by not appointing its administrative law judges (“ALJs”) as required by the Appointments Clause.  The SEC made the same arguments that it did before Judge May — that the district court did not have jurisdiction to hear a constitutional attack on its in-house courts, and that its ALJs did not need to be constitutionally appointed.

The focus of the Court’s attention was on the thorny question of jurisdiction.  Chief Judge Ed Carnes expressed frustration because the three applicable United States Supreme Court cases at first blush seemed to suggest different results as to whether Congress intended for district courts to have jurisdiction over such challenges.  As Judge Carnes correctly recognized, the Supreme Court in one case held that the statute in question — Section 78y of the securities laws — “does not expressly limit the jurisdiction that other statutes confer on district courts.  Nor does it do so implicitly.”  Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477, 489 (2010).  Since Free Enterprise involved the identical statute at issue in the Gray Financial and Hill cases, there is clear precedent for the 11th Circuit to affirm the lower court.  But the SEC cited two other Supreme Court cases — one that pre-dated and one that post-dated Free Enterprise, in which the Court analyzed other statutes in a manner that could suggest that jurisdiction was not proper.  See Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994); Elgin v. U.S. Dep’t of Treasury, 132 S.Ct. 2126 (2012).  The SEC argued that the Court should just ignore Free Enterprise and apply only the other two cases as precedent.  In fact, with scant explanation, the Seventh and the D.C. Circuits accepted that same argument and did just that in two recent appellate decisions.  See Bebo v. SEC, 799 F.3d 765 (7th Cir. 2015), petition for cert. filed, No. 15-997 (U.S. Feb. 3, 2016);Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. 2015).

That said, Judge Kenneth F. Ripple, sitting by designation, expressed interest in a distinguishing feature of the Gray Financial case, one that was highlighted by both the Beboand Jarkesy courts; namely, that at the time Gray Financial filed its constitutional challenge, there was no pending SEC administrative proceeding, and that the SEC did not file its administrative case for months afterward.  Indeed, in both Bebo and Jarkesy, the courts indicated that jurisdiction may have been proper for a district court challenge had those plaintiffs done what Gray Financial did and filed before the SEC brought administrative charges.

These issues may eventually be resolved by the Supreme Court.  In fact, Bebo has already filed a petition for certiorari, asking the high court to hear her case and taking issue with the Seventh Circuit’s focus on timing of the constitutional challenge.  In that case, former SEC defendant and current billionaire Marc Cuban has inserted himself in the fray, and is seeking to file an amicus brief, asking that the Supreme Court overturn the Seventh Circuit’s decision in Bebo.  And, at the same time, the Second Circuit U.S. Court of Appeals has a pending case before it, Tilton v. SEC, No. 15-2103 (2d Cir.), involving the same issues, and a decision there is expected in the near future.  In the meantime, the Eleventh Circuit’s opinion in theGray Financial and Hill cases is certain to be an important consideration in the chorus of views on this issue.

Terry R. Weiss is a shareholder in the Atlanta office of Greenberg Traurig, LLP and serves as lead counsel in Gray Financial v. SEC.