The Supreme Court limited the reach of Securities and Exchange Commission administrative courts in a decision Thursday that could impact the federal government’s ability to use internal administrative judges.
The 6-3 decision found that the SEC cannot use those internal administrative judges to seek civil penalties for securities law violations because that violates the constitutional right to a jury trial. The majority opinion, written by Chief Justice John G. Roberts Jr., says civil penalties for securities law violations too closely resemble allegations that would normally have to be brought in federal court.
“This is a common law suit in all but name. And such suits typically must be adjudicated in Article III courts,” the majority opinion stated.
In a dissent, Justice Sonia Sotomayor warned that the decision could reverberate across dozens of agencies with internal courts that adjudicate disputes, including the Environmental Protection Agency, Consumer Financial Protection Bureau and U.S. Postal Service.
“Today’s decision is a massive sea change,” Sotomayor wrote.
The 2010 financial overhaul law gave the SEC the ability to seek civil penalties both in federal courts and through internal administrative judges. The case comes from a challenge to an SEC administrative prosecution of George Jarkesy for securities fraud, which would have resulted in $300,000 in fines and $685,000 in disgorgement.
Jarkesy challenged the constitutionality of the agency’s administrative judge process, and a panel of the U.S. Court of Appeals for the 5th Circuit agreed in a decision issued in 2022.
Roberts wrote that although the SEC is concerned about maintaining “public rights” like a fraud-free market, that doesn’t mean it gets to avoid the jury trial requirement.
Allowing Congress to specify certain public rights for agency adjudication would turn the Constitution’s jury trial guarantee into “nothing more than a game” for Congress to maneuver around, Roberts wrote.
The Biden administration warned the justices during oral arguments that upholding that decision would take a “blunderbuss” to the existing federal administrative structure, where internal agency judges handle thousands of disputes that would otherwise be sent to federal courts.
Roberts wrote that Thursday’s decision was different from cases upholding administrative agencies that handle benefits and debts, such as the Social Security Administration, Internal Revenue Service, customs and immigration decisions.
Sotomayor, joined by Justices Elena Kagan and Ketanji Brown Jackson, wrote in a dissent that the majority shortchanged the federal government’s interest in ensuring public goods, such as fraud-free markets and a pollution-free environment.
Many agencies would not be able to enforce statutes which only contemplate internal administrative judges, leaving them with only the option of seeking new laws passed by Congress, Sotomayor wrote.
“The American People should not mistake judicial hubris with the protection of individual rights,” Sotomayor wrote.
Sotomayor read from a portion of her dissent, noting that hundreds of federal statutes were now in peril because of Thursday’s decision. Her dissent also accused the court’s majority of a “power grab” by the judiciary and weakening Congress’ power.
The decision could impact the ability of dozens of agencies to enforce federal rules, such as the Postal Service and the Federal Energy Regulatory Commission, Sotomayor wrote.
Sotomayor said that although the majority opinion kept the case focused on common-law fraud, it provided a blueprint for litigants to challenge administrative law judges throughout the federal government.
The decision is the latest in a series of cases in which the court, currently controlled by six Republican appointees, has ruled against the reach of federal agencies. That includes a new doctrine stating that Congress must speak clearly for agencies to act on “major questions” of political or economic significance.
The justices are also poised to rule in the coming days on the standard they use for reviewing agency decisions and giving less deference to administrative agencies.
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