In civics class, we learn about three branches of government: legislative, executive, and judicial. We don’t learn much, if anything, about the administrative state: that burgeoning array of politically unaccountable federal and state agencies that increasingly affects our day-to-day lives. The Fifth Circuit’s recent decision in Jarkesey v Securities and Exchange Commission, ___ F4th ___ (May 18, 2022) may result in at least a few constitutional limitations on the way administrative agencies operate.
Petitioner was a hedge fund manager accused of defrauding investors. Respondent SEC undertook an investigation of the allegations and gathered evidence supporting them. The next step was enforcement. The legislation offered two options: filing a complaint before an administrative law judge (ALJ); or, filing a civil action in federal court. The legislation provided the SEC with no guidance about which cases should be filed in which forum. The SEC chose to file before an ALJ. After a hearing, the ALJ concluded Petitioner had committed fraud and, among other things, ordered him to disgorge ill-gotten gains and pay a civil penalty. Petitioner appealed to the Commission itself, which affirmed the ALJ’s decision and entered additional orders enjoining Petitioner for engaging in certain business activities.
Petitioner appealed, advancing several constitutional objections. Pertinent to this article, Petitioner argued the SEC’s decision to bring its enforcement action before an ALJ denied him his constitutional right to a jury trial on the fraud and penalty claims. Second, Petitioner argued Congress had unconstitutionally delegated its legislative power to the SEC by not providing it with any guidance about which cases should be litigated before ALJs rather than in court. The Fifth Circuit agreed in a 2-1 decision.
The Court majority’s reasoning was elaborate, and practitioners should refer to the opinion. Essentially, the Fifth Circuit held that where an administrative agency is seeking a remedy available under the common law, regardless whether the common law remedy has been incorporated into a statute, the responding party (Petitioner in this case) is entitled to a jury trial. Here, the Court reasoned, the SEC was prosecuting Petitioner for fraud, a common law claim carrying with it a constitutional right to a jury trial. Therefore, the SEC violated Petitioner’s constitutional rights by bringing his case before an ALJ where no jury trial was available. Second, the Court held that, by not providing the SEC with guidance about which cases should be brought before ALJs instead of a courts, Congress had unconstitutionally delegated its legislative power to the SEC.
At this point, it is difficult to predict if or how rapidly the Fifth Circuit’s approach will be adopted by other circuits or whether its decision will be appealed to the Supreme Court. Regardless, as things currently stand, Jarkesey opens an important door for asserting constitutional challenges to agency enforcement actions where the underlying cause of action is available under the common law. Jarkesey also renders administrative agencies vulnerable to constitutional challenges where Congress has provided multiple enforcement options (e.g., ALJ v court) without legislative guidance on how to choose among them.