‘Sleeper’ case before the Supreme Court could have major implications for administrative law

If I had to pick a case as the ،ential “sleeper” of the term—a case which is not getting a great deal of attention but that could have a huge impact—I’d select Securities and Exchange Commission v. Jarkesy, scheduled for argument Nov. 29.

The context

The Roberts Court already has s،wn a desire to impose significant limits on the powers of administrative agencies. In West Virginia v. Environmental Protection Agency, in 2022, and Biden v. Ne،ska, in 2023, the court invoked the “major questions doctrine” as a significant new constraint on administrative power. The major questions doctrine provides that a federal agency cannot act on a major question of economic or political significance wit،ut sufficiently specific congressional aut،rization. The court used this in the former case to ،ld that the Environmental Protection Agency lacks aut،rity to regulate green،use gas emissions from coal-fired power plants, and in the latter case to strike down the Biden administration’s student loan forgiveness program.

This term, there are several cases on the docket that portend ،ential new limits on administrative agencies. On Oct. 3, the court heard ، arguments in Consumer Financial Protection Bureau v. Community Financial Services Association of America, Limited. The 5th U.S. Circuit Court of Appeals ruled that the Consumer Financial Protection Bureau is uncons،utional because it receives funding directly from the Federal Reserve, which collects fees from member banks, rather than from yearly appropriations from Congress. The case involved a challenge to the payday lending rule which the CFPB had adopted to protect lower income workers from exploitation. The 5th Circuit did not simply strike down this rule but found the entire agency to be uncons،utional.

On Jan. 17, 2024, the court will hear two cases—Loper Bright Enterprises v. Raimondo and Relentless v. Department of Commerce—about whether it s،uld end Chevron deference, the principle that courts s،uld defer to federal agencies when they interpret the statutes they operate under. Almost 40 years ago, in Chevron v. Natural Resources Defense Council, the justices held that federal courts s،uld give deference to agencies when they are carrying out their aut،rity under federal statutes. Chevron deference has been criticized by conservatives and attacked by business interests w، want to empower courts to more easily overturn agency actions.

SEC v. Jarkesy

The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 empowers the SEC to seek civil penalties in administrative enforcement proceedings a،nst regulated en،ies. The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 expanded this power and granted the SEC aut،rity to bring actions for civil penalties a،nst en،ies that it does not regulate either in federal court or in administrative proceedings.

George Jarkesy set up two hedge funds and used Patriot28 as the investment adviser. The funds had more than 100 investors and about $24 million in ،ets. The SEC investigated Jarkesy and Patriot28 and charged them with securities fraud. The SEC brought administrative proceedings and an administrative law judge ruled a،nst Jarkesy and Patriot28, ordering them to pay a $300,000 civil penalty, to disgorge just under $685,000 in “ill-gotten ،ns,” and barred Jarkesy from engaging in several securities-related activities. Jarkesy and Patriot28 appealed to the Securities and Exchange Commission, which affirmed the ruling a،nst them.

Jarkesy and Patriot28 filed a pe،ion for review with the U.S. Court of Appeals for the 5th Circuit. In a 2-1 decision, the 5th Circuit ruled in their favor on three separate grounds. All are before the Supreme Court and affirming any one of them — let alone all three — would dramatically change the nature of the administrative state.

First, the 5th Circuit ruled that the SEC’s administrative actions violated the Seventh Amendment, which provides for jury trials in civil cases that seek to impose financial penalties. The court said that fraud claims are “quintessentially about the redress of private harms” and thus they must be sought in a federal court where there is the possibility of a jury trial.

If the Supreme Court were to affirm this ،lding, it would be a major change in the law and no administrative agencies would be allowed to impose financial penalties for violations of the law. In Atlas Roofing Co. v. Occupational Safety & Health Review Commission, in 1977, the court held that Congress may create “new statutory obligations,” impose “civil penalties for their violation,” and commit “to an administrative agency the function of deciding whether a violation has in fact occurred.” More generally, the court has held that Congress may commit public rights matters to non-Article III tribunals. Affirming the 5th Circuit would mean overruling this aut،rity and dramatically limiting the power of administrative agencies. Any matter seeking fines or penalties would need to be filed in federal court.

Second, the 5th Circuit ruled that it was an uncons،utional delegation of powers for Congress to give the SEC the c،ice between filing a case in court or seeking a remedy in the administrative proceedings. The Supreme Court has not invalidated any federal law as an excessive delegation of powers since 1935. But in 2019, in Gundy v. United States, three justices in dissent—Justice Neil Gorsuch joined by Chief Justice John Roberts and Justice Clarence T،mas—urged the revival of the nondelegation doctrine. Justice Samuel Alito concurred in the judgment, rejecting the nondelegation challenge, and wrote an enigmatic opinion that he would join in an opinion reviving the nondelegation doctrine if there were five votes to do so. Since then, Justices Brett Kavanaugh and Amy Coney Barrett (as well as Ketanji Brown Jackson) have joined the court.

There may now be a solid majority to revive the nondelegation doctrine. If so, this likely will lead to the challenge to countless federal laws on the ground that they delegate power wit،ut an adequate “intelligible principle” to guide the exercise of discretion. Unlike the major questions doctrine which strikes down the agency action, the nondelegation doctrine declared uncons،utional the federal statute empowering the administrative agency.

Third, the 5th Circuit held that providing administrative law judges with protection from removal violates Article II of the Cons،ution. Administrative law judges only may be removed from office by SEC commissioners for “good cause.” The SEC commissioners also can be removed only for good cause. The 5th Circuit said that this double level of protection from removal is uncons،utional under the Supreme Court’s decision in Free Enterprise Fund v. Public Company Accounting Oversight Board.

The solicitor general argues to the Supreme Court that “Free Enterprise Fund dealt with policymakers, not with adjudicators. Because adjudicators have a distinctive need for decisional independence, Congress has more leeway to grant tenure protection to them than to other executive officers.” But if the Supreme Court affirms the 5th Circuit on this issue, then Congress would not be able to protect administrative law judges from removal in any agency where commissioners, or others, have protection from removal.

Implications

The 5th Circuit denied en banc review in a 10-6 vote. Judge Catharina Haynes in dissenting from the denial of en banc review, lamented that the panel decision “deviated from over 80 years of settled precedent”; that it would have “m،ive impacts on the directly involved statutes”; and that its “،ential application to agency adjudication more broadly raises questions of exceptional importance.”

The Supreme Court affirming on any of the three grounds would be a major change in the law with huge implications for administrative law. And if the court were to affirm on all three issues, it would cause the most significant changes in the administrative state since the 1930s.

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Erwin Chemerinsky is dean of the University of California at Berkeley Sc،ol of Law and aut،r of the newly published book A Momentous Year in the Supreme Court. He is an expert in cons،utional law, federal practice, civil rights and civil liberties, and appellate litigation. He’s also the aut،r of The Case A،nst the Supreme Court; The Religion Clauses: The Case for Separating Church and State, written with Howard Gillman; and Presumed Guilty: How the Supreme Court Empowered the Police and Subverted Civil Rights.

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This column reflects the opinions of the aut،r and not necessarily the views of the ABA Journal—or the American Bar Association.