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The SCOTUS Decision That Could Break Federal Agencies and Lead to ‘Low-Level Lawbreaking’

SEC v. Jarkesy could have massive implications for the federal government.

Visitors pose for photographs outside the U.S. Supreme Court.
Visitors pose for photographs outside the U.S. Supreme Court Tuesday, June 18, 2024, in Washington. ( AP Photo/Jose Luis Magana) Jose Luis Magana/AP

It may have seemed like a minor ruling, but the Supreme Court’s decision on Thursday — in a case about whether individuals can dispute civil penalties in a federal court rather than having an in-house legal proceeding — is likely to have massive ripple effects at federal agencies.

It could also have a big impact on taxpayers.

The case, SEC v. Jarkesy, dealt with a hedge fund manager, George Jarkesy, who was fined by the Securities and Exchange Commission for misleading investors. Jarkesy was ordered to pay a civil penalty of about $300,000.

But Jarkesy wanted to bring the case before a federal district court judge — also known as an “Article III judge” — instead of an administrative law judge (ALJ) who specializes in SEC cases.

In a 6-3 ruling pitting the conservative justices against their liberal counterparts, the court said Jarkesy had a right to an Article III judge — and with that ruling, anyone facing a civil penalty from an ALJ could theoretically decide they want a costly and time-consuming federal trial.

A number of legal experts told NOTUS they were surprised — and concerned — by the scope of the decision.

The broadness “seemed a little imprudent of the court, if it in fact wants to avoid cascading effects throughout the administrative state,” said Daniel E. Walters, a law professor at Texas A&M University.

In effect, the court installed new limits on the powers of the SEC, as well as other federal agencies, once again striking at the powers of the so-called “administrative state.”

“The SEC’s antifraud provisions replicate common law fraud, and it is well established that common law claims must be heard by a jury,” Chief Justice John Roberts wrote for the majority.

Defendants facing this type of suit have, Roberts said, “the right to be tried by a jury of his peers before a neutral adjudicator. Rather than recognize that right, the dissent would permit Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the Executive Branch.”

But in her dissent, which she also read from the bench, Justice Sonia Sotomayor warned of a “massive sea change” for federal agencies.

“The constitutionality of hundreds of statutes may now be in peril, and dozens of agencies could be stripped of their power to enforce laws enacted by Congress,” Sotomayor wrote. “Rather than acknowledge the earthshattering nature of its holding, the majority has tried to disguise it.”

Legal professionals “all sort of expected the SEC to lose,” according to Walters. But he was surprised the court “didn’t do much, in my opinion, to really cabin its analysis,” opening the decision up to have ripple effects across other agencies.

Walters saw the decision applying to agencies like, for example, the Environmental Protection Agency.

“I don’t see any real distinguishing factor that would prevent the court from similarly applying this to, say, trying to enforce the Clean Water Act,” Walters said, though he warned that how much agencies could distinguish themselves from this ruling was a “very open question.”

He flagged other agencies, like Occupational Safety and Health Administration and the Federal Communications Commission, that operate with similar administrative proceedings. And he said the broadness of the decision meant agencies would have to look at their enforcement actions and decide if it’s something that could survive a federal district court.

“And that’s going to be profoundly destabilizing,” Walters said.

Thomas H. Lee, a legal professor at Fordham University, co-authored an amicus brief in the case in favor of the SEC. And he didn’t see the decision as sweepingly as Walters.

He noted that many of the SEC’s disputes end up in federal court anyway, and he placed a distinction between some administrative actions — like adjudicating Social Security benefits or immigration status — and civil penalties from the SEC.

“Social Security benefit doesn’t have an analog in common law fraud, and foreigners aren’t entitled to jury trial rights anyways,” Lee said.

But Walters was clear that “agencies that rely heavily on internal adjudication” would be burdened by expensive and time-consuming jury trials.

“They do not have the resources for that,” Walters said. “They would be effectively sidelined if they had to do that, which highlights and underscores the importance of these questions about just how far this really extends to other agencies.”

Devon Ombres, senior director for courts and legal policy at the Center for American Progress, said the decision “could have very far-reaching consequences in the ability of public agencies to protect Americans from lawbreakers.” He’s also concerned about the broader courts system.

“It’s going to bog down enforcement and further overwhelm the courts, and you’re going to see a lot of low-level lawbreaking go unpunished because Congress is constantly defunding agencies and enforcement activities,” Ombres told NOTUS.

“Courts are already quite backlogged, and I don’t think having more jury trials is going to help anything,” Walters said.

More jury trials likely means Congress will need to hand over more money for legal resources for federal agencies — or federal agencies will have to think twice about enforcement actions.

Walters suggested the latter may be the goal of the court’s conservatives justices.

“If you’ve been reading the opinions the last couple of years, the court shifted pretty profoundly in the direction of skepticism of what agencies are doing and skepticism of how Congress has set up the administrative state,” he said. “A good bet would be that that trend will continue.”

Nuha Dolby is a NOTUS reporter and an Allbritton Journalism Institute fellow.