Quick Hits

• The Supreme Court held that an SEC enforcement action seeking civil penalties violated a defendant’s right to a jury trial under the Seventh Amendment of the U.S. Constitution.
• The Supreme Court found that the civil penalties levied were punitive and that the securities fraud charges resembled common law causes of action for fraud, which were typically adjudicated by courts of law.
• The holding raises questions about the constitutionality of NLRB actions alleging labor law violations, as the NLRB has expanded the types of damages it may seek in such cases.

The 6–3 ruling in Securities and Exchange Commission v. Jarkesy, No. 22-859, affirmed a ruling by the U.S. Court of Appeals for the Fifth Circuit that vacated a $300,000 civil penalty levied by the SEC against George Jarkesy, an investment adviser, for securities violations following an adjudication before an agency administrative law judge (ALJ).

In an opinion authored by Chief Justice John Roberts, the Court found that the issue implicated the Seventh Amendment because the “SEC’s antifraud provisions replicate common law fraud,” and the SEC’s enforcement action did not fall into the “public rights” exception to Article III of the U.S. Constitution.

“The object of this SEC action is to regulate transactions between private individuals interacting in a pre-existing market,” Justice Roberts stated in the Court’s opinion. “To do so,” he wrote, “the [g]overnment has created claims whose causes of action are modeled on common law fraud and that provide a type of remedy available only in law courts. This is a common law suit in all but name. And such suits typically must be adjudicated in Article III courts.”

The Seventh Amendment

The Supreme Court found that the case implicated the right to a jury trial conferred by the Seventh Amendment because the SEC penalties—sought in an enforcement action under the Dodd-Frank Wall Street Reform and Consumer Protection Act—were punitive in nature and “designed to … deter, not to compensate.” The court also found the charges were legal in nature because they were similar to “common law fraud” and the type of claims that would typically be adjudicated and remedied in courts of law, not in an in-house agency proceeding.

“In sum, the civil penalties in this case are designed to punish and deter, not to compensate. They are therefore ‘a type of remedy at common law that could only be enforced in courts of law,’” Justice Roberts stated in the opinion of the Court. “That conclusion effectively decides that this suit implicates the Seventh Amendment right, and that a defendant would be entitled to a jury on these claims,” Justice Roberts wrote.

The Court further found that the SEC’s enforcement actions are not matters of “public rights,” historically determined solely by the executive or legislative branches. The Court stated that regardless of the structure of the regulatory scheme, the substance is what matters. In the SEC’s case, the agency targets the “same basic conduct as common law fraud, employ[s] the same terms of art, and operate[s] pursuant to similar legal principles,” the Court stated.

Justice Neil Gorsuch, in a concurring opinion joined by Justice Clarence Thomas, suggested that proceedings before an ALJ might violate the Due Process Clause of the Fifth Amendment, arguing that agency ALJs are less independent than court judges, as they “remain servants of the same master.” Justice Gorsuch stated that a prosecution in an SEC in-house proceeding deprived Jarkesy not only of the right to a jury trial, but also “many of the procedural protections our courts supply in cases where a person’s life, liberty, or property is at stake.”

However, three justices dissented in an opinion authored by Justice Sonia Sotomayor, arguing that the Supreme Court had universally upheld Congress’s grant of authority to federal agencies to prosecute issues traditionally considered to be a “public right.” Justice Sotomayor further noted that Congress had enacted “more than 200 statutes authorizing dozens of agencies to impose civil penalties for violations of statutory obligations.”

Implications for the NLRB

The impact of Jarkesy on the NLRB remains to be seen, given the limiting language of the opinion. The Court noted that the Seventh Amendment right to a jury trial applies only to “suits” at common law. The Court further noted that the right does not apply to matters that were not cognizable at common law, or to equitable remedies such as restoration of the status quo. The Court observed there is a recognized exception to the Seventh Amendment for matters implicating “public rights.”

The NLRB would likely argue that the Seventh Amendment’s right to a jury trial does not apply to its traditional equitable remedies, such as back pay and reinstatement, which compensate aggrieved parties for harm suffered as a result of a labor violation. The Board would likely further argue that causes of action for discrimination on account of concerted activity do not exist at common law and that such remedies vindicate “public rights.” However, the NLRB is likely on shakier legal ground following Jarkesy as, for example, the Board has claimed authority to seek “consequential damages,” specifically asserting that its make-whole remedy includes compensating employees “for all direct or foreseeable pecuniary harms suffered” as a consequence of labor violations.

Moreover, questions remain as to the constitutionality of ALJs. The Fifth Circuit in the case had found the SEC’s administrative structure and procedures to be unconstitutional because the agency’s ALJs were not subject to summary removal by the president. ALJs for the SEC and NLRB are identical in terms of authority, appointment, and protection from removal. Jarkesy had argued that the ALJ’s removal protections violated the separation of powers. However, the Supreme Court did not expressly address this constitutional claim—and thus, the Fifth Circuit’s ruling remains intact for now, at least in that jurisdiction.

Justice Gorsuch’s further observation in his concurrence that the great degree of emphasis on the constitutional right to a jury trial under the Seventh Amendment applies with equal force to all provisions of the Constitution does not portend well for the NLRB or a host of other administrative agencies. Under that reasoning, when a litigant claims that an agency action violates due process, separation of powers, or any other constitutional guarantee, that claim is entitled to the same rigorous constitutional analysis as applied in Jarkesy.