07/22/2024 | News release | Distributed by Public on 07/22/2024 08:54
As further discussed below, the Jarkesy case is applicable to an SEC administrative enforcement matter. However, the ruling could potentially affect future enforcement authorities for other administrative agencies, including state and federal environmental enforcement matters that seek punitive civil penalties, by giving defendants a right to demand a jury trial. The defendants would still be entitled to waive that right and seek an administrative settlement as an alternative.
In SEC v. Jarkesy, the Supreme Court reviewed the SEC's ability to adjudicate antifraud enforcement actions for civil penalties in house. The SEC brought an enforcement action against Jarkesy and his advisory firm alleging securities fraud in front of an administrative law judge rather than through a judicial proceeding in federal court. Jarkesy argued that this procedure violated his right to a jury trial under the Seventh Amendment of the US Constitution.
The Supreme Court affirmed the Fifth Circuit's holding that Jarkesy's right to a jury trial had been violated by the administrative proceeding. The majority explained that that the Seventh Amendment applies to suits "at common law" or that are legal in nature. They evaluated the cause of action brought against Jarkesy, particularly the remedy sought by the SEC, and held that the SEC's action was legal in nature because it sought civil monetary penalties. The majority particularly focused on the fact that the penalties sought were meant to "punish and deter" the wrongdoer rather than to "restore the status quo."
The majority also held that the "public rights" exception to the Seventh Amendment, which allows Congress to administratively adjudicate certain matters[1] that might otherwise be considered "legal in nature" without a jury, did not apply to Jarkesy's case because the SEC's suit was intended to target "the same basic conduct as common law fraud," which was traditionally a private right. See here for a more in depth discussion of the opinion.
Significantly, the Court arrived at its decision solely based on the concept of a Seventh Amendment right to a jury trial. In affirming the Fifth Circuit's opinion, the Court left intact theFifth Circuit's other holdings: (1) the SEC's administrative process also violated the nondelegation doctrine by giving the SEC discretion to decide to bring an administrative action or a judicial action and (2) the process violated the separation of powers principle of the Take Care Clause due to the administrative scheme's restrictions on removal of SEC Administrative Law Judges (ALJ).
While the opinion was limited to the SEC's enforcement mechanism for securities fraud claims as noted by the dissent, many agencies employ similar administrative enforcement mechanisms to seek civil penalties. These administrative mechanisms are often statutorily mandated. The Court did not answer the question of how or if its reasoning may be applied to administrative proceedings beyond the SEC.
In the environmental sphere, the US Environmental Protection Agency (EPA) can either refer enforcement actions to the US Department of Justice for judicial proceedings or bring administrative enforcement actions in front of an EPA ALJ. In some instances, such as for violations of the Federal Insecticide, Fungicide, and Rodenticide Act, the agency can only pursue civil penalties through agency administrative enforcement proceedings. Either option allows EPA to seek civil penalties. Defendants can also settle both types of enforcement actions through a federal judicial Consent Decree or administrative consent agreements/final orders.
Below are some takeaways regarding the potential impact of Jarkesy on environmental enforcement.
The firm's Environmental team will continue to monitor case law and administrative changes in this area. Stay tuned for further developments.
[1] Other examples falling under the exception include matters relating to revenue collection, immigration, tariffs, relations with Indian tribes, the administration of public lands, and the granting of public benefits such as payment to veterans, pensions, and patent rights.