SEC v. Jarkesy and the Future of Agency Adjudication

An important challenge to the use of agency adjudication to enforce federal regulations.

Tomorrow the Supreme Court hears oral argument in Securities Exchange Commission v. Jarkesy, a broad challenge to the SEC's authority to use agency adjudication as a means of enforcing the nation's securities laws. This is one of seveal significant adminsitrative law cases before the Court this term, and (despite the arcane subject matter) may be the case that garners the most attention.

Jarkesy presents three separate questions about the constitutionality of administrative adjudication at the SEC:

(1) Whether statutory provisions that empower the Securities and Exchange Commission to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment;

(2) whether statutory provisions that authorize the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine; and

(3) whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.

All three questions are at issue because the court below -- the U.S. Court of Appeals for the Fifth Circuit -- ruled against the agency on all three grounds. I was not particulary persuaded by two of the Fifth Circuit's conclusions, and explained why here.

By some accounts, Jarkesy threatens the very foundations of the administrative state. In this telling, a victory for the respondents will leave the federal government unable to ensure workplace safety, discourage corporate fraud or protect the environment. Jarkesy is unquestionably an important case, but it's a bit much to suggest it challenges "the legitimacy of the modern federal government." The case is really about the continued viability of agency adjudication as a means of enforcing regulatory schemes. This is a big deal, but is hardly threatens the viability of the administrative state nor "the destruction of the New Deal."

Should Jarkesy win on one or more of his claims (and I think it is likely he will prevail on at least one), this will require significant changes in the operations of some federal agencies. In particular, regulatory agencies that enforce their regulatory edicts before agency adjudicators will have to make changes. What those changes are, and how far-reaching the consequences of these changes will be, depends on which challenges succeed, but little in the case implicates (let alone threatens) the ability of agencies to issue regulations and enforce those regulations in federal court. Indeed, the core of Jarkesy's case is that agencies should be required to enforce their rules in federal court, not that they cannot issue rules or seek to have them enforced.

Although most commentary on Jarkesy has focused on the respondent's claims, and their implications, the more interesting question may be what comes next should Jarkesy prevail. Jarkesy's immediate aim is to prevent enforcement of the SEC's civil penalty order against him, either because the double-for-cause removal of SEC ALJs renders them unconstitutional, or because the SEC should not have been to prevent Jarkesy from defending himself in federal court in the first instance. Going forward, the question would be how to cure these constitutional infirmities (and whether some cures -- such as eliminating for-cause removal protections for ALJs -- would create constitutional problems of their own).

One way to resolve the constitutional questions in Jarkesy, suggested in a forthcoming paper by Christopher Walker and David Zaring, would simply be to allow defendants the option of removing SEC enforcement actions to federal court. This would maintain the current practice of agency adjudications, which can be less costly and time-consuming than the federal court alternative in many cases, but without unduly prejudicing the rights of defendants concerned they will not get a fair shake in front of the SEC's own adjudicators. As Walker summarizes in a post for Notice & Comment:

 In certain circumstances such as here, the regulated party should have a right to remove an enforcement action from an in-house agency adjudication to an Article III federal court. This right to remove would avoid the constitutional issues presented in Jarkesy. It would also, in our view, result in better administrative policy, at least when it comes to the agency adjudications that implicate civil penalties or otherwise get close to the private-rights line. In so doing, the right to remove retains a well-established, effective alternative to federal court litigation—formal adjudication under the Administrative Procedure Act (APA)—if both the government and the regulated entity find that alternative to be preferable, without unilaterally expanding the regulatory authority of the SEC or the workload of the federal courts.

Congress could enact this right to remove by statute. And, we argue, the SEC should adopt it via internal administrative law, even before the Court decides Jarkesy. The SEC could and should certainly explore that option if the Supreme Court invalidates its in-house adjudication scheme on any of the three grounds raised in Jarkesy.

The interesting question is whether this is a resolution the Court could (or should) impose, or whether it is something for Congress or the SEC to do. As they note, the current Court has not been particularly restrained when providing relief in other recent administrative law cases, such as United States v. Arthrex, and some justices might find this to be a suitable remedy. In the alternative, it would be rather easy for Congress to create a presumptive right to remove agency enforcement actions from agency adjudications to federal court provided certain conditions are met (e.g. the agency is seeking certain sorts of penalties). However it is done, allowing a right of removal would leave agency operations largly intact and address the most glaring constitutional concerns Jarkesy is presenting to the Court.