(Note to readers: These Supreme Court reports are now appearing on the day of the hearing of the case being discussed. Information on how to listen to today’s hearing is at the end of the report.)
For more than a century, conservative activists have been waging an energetic campaign to dismantle or at least to seriously weaken the ever-expanding federal government. On Wednesday, the Supreme Court will study their latest strategy: to deploy the almost-forgotten Seventh Amendment of the Constitution.
That’s the awkwardly-worded provision that guarantees a right to a jury trial in civil cases. Americans – and the Supreme Court — are far more engaged with the right to a jury in a criminal trial. Juries in criminal cases were guaranteed in the original Constitution, but the right to a civil jury trial had to await the ratification of the Bill of Rights in 1791. The Seventh is one of the few parts of the Bill of Rights that the Supreme Court has not made binding on the states, although most states observe the civil trial right on their own.
A civil case is almost any legal controversy between two disputing parties, at odds over private relationships or public rights. One side of a civil case can be the government, of course. That’s the kind before the Supreme Court today.
While the Seventh Amendment seldom gets involved in Supreme Court cases, it is the highlight of this one.
Wednesday’s hearing: Securities and Exchange Commission v. Jarkesy
Legal background: In a sense, this case has roots all the way back to 1887. That was when Congress first created a separate regulatory agency linked to the Executive Branch to deal with specialized, technical policy issues (in that instance, it was railroad freight rate policy). Since then, these agencies of the national government (sometimes referred to loosely as the “fourth branch”) have multiplied and grown far more powerful.
But as that process has unfolded, it has been regularly resisted by small-government advocates, often closely aligned with free-market businesses that yearn for less regulation by the bureaucracy. In recent years, they have found the Supreme Court’s new conservative majority quite sympathetic to their cause.
Seldom has that continuing challenge been as potentially disruptive of federal agency operations as in this appeal by an agency that arose out of the Great Depression, and is a powerful monitor of the stock markets and the vast investment industry – the Securities and Exchange Commission.
What is at stake, though, is the future not just of the SEC, but of all of the regulatory bodies that have as an essential part of their functioning an internal system of court-like proceedings — investigations, charges, hearings, judge-style decisions imposing financial and other penalties, and internal agency appeals – all before a disputed case ever has a chance to be reviewed by an actual federal court. The process within an agency can, and often does, take years.
Typically, those kinds of procedures are handled by an “administrative law judge” or an officer with a similar title. The SEC has five of those judges. Across the entire government, there are about 2.000 of them. Congress has given them a considerable degree of independence, ensuring that they will keep their jobs and not be easily dismissed by agency leaders.
In this case, the SEC is defending that approach against a sweeping claim that it violates the promise of the Seventh Amendment that civil trials will be before a jury, not a bureaucrat.
Aside from the Seventh Amendment issue, this case also is a test of Congress’s broad power to authorize agencies to conduct court-like procedures themselves instead of going to courts for enforcement of the laws. The case also challenges Congress’s authority to give job security to judges within the agencies.
Facts of this case: In 2011, the SEC began an investigation of a prominent Houston founder of two hedge funds, George R. Jarkesy, Jr., and the firm acting as the funds’ investment adviser, Pioneer28 LLC. The funds had attracted about 120 investors and managed about $24 million in assets.
Ultimately, the agency charged Jarkesy and some of his financial allies with a variety of securities frauds, including misrepresenting various investment strategies and over-valuing the hedge funds’ assets.
Jarkesy and Pioneer28 tried to block the agency action by suing in a regular federal court, but were rebuffed, leaving the controversy to the SEC to handle initially. An administrative law judge at SEC heard the case, and ruled that fraud had occurred.
The SEC’s commissioners upheld the fraud finding, ordered Jarkesy and Pioneer28 not to commit any further fraud, assessed a civil penalty against both of $300,000, and ordered Pioneer28 to forfeit about $685,000 in investment gains. Jarkesy was limited in the kinds of securities activities he could handle, including a bar to serving on boards or as an investment adviser. The SEC rejected all of the constitutional challenges made in the case.
The case then went to a regular federal appeals court for review. In a split decision, that court ruled that the right to a jury trial under the Seventh Amendment had been violated by the agency’s use of court-like procedures to impose penalties, that Congress had unconstitutionally handed some of its legislative power to the SEC by letting it choose to enforce laws either by internal procedures or by going to court at the outset, and that it was unconstitutional for Congress to insulate the administrative law judge from removal by agency leaders.
The Biden Administration’s Justice Department, representing the SEC, appealed to the Supreme Court, raising those three constitutional issues, and the Justices agreed to review them.
Jarkesy and Pioneer28 filed their own appeal, asking the Justices to put new limits on federal appeals courts’ power to review agency decisions. The Court denied review of that appeal without comment on the same day that it accepted the SEC case.
The SEC’s questions before the Court: Do government agencies violate the right to a civil jury trial by deciding cases and imposing penalties by internal, court-like trials? Did Congress invalidly give SEC too much power to decide on an enforcement mechanism? Did Congress wrongly provide broad job security for agency judges?
Significance: The first of those questions – on the civil jury right – is the most unusual and, if the Court rules that the SEC violated that right, that probably would force a wholesale loss of power by scores of federal agencies that conduct internal enforcement trials and impose penalties. It would thus switch major new powers to the federal courts, to handle issues that are highly technical and require special expertise – the whole idea behind creating special regulatory agencies.
It is not too much to suggest that this could become the most important constitutional ruling on government regulation at least since a conservative Supreme Court in the 1930s struck down much of President Franklin Roosevelt’s New Deal program, and perhaps since the early 1900s when another conservative Supreme Court stunted in its infancy the Progressive Era’s pioneering efforts to curb business abuses.
The part of this appeals court ruling against congressional delegation of power is a rarity since the 1930s, and the current conservative Supreme Court has been reluctant to revive that concept, preferring instead to limit government power by relying on a new “major questions doctrine” that requires Congress to write laws with great specificity if it wants to create broad new programs to be carried out by Executive Branch departments or regulatory agencies.
On the third issue – the protection of agency judges’ tenure – the current Court has been limiting those kinds of laws in several recent decisions, including an earlier one in 2018 over how the SEC’s internal judges are appointed.
The case is already being ranked by Court observers as one of the highest profile and most consequential cases of the Justices’ current term.
The Court’s hearing will begin at 10 a.m. today and is scheduled for one hour. The audio (but not the video) will be broadcast “live” on the Court’s homepage, supremecourt.gov To listen, click on “Live Audio” and follow the prompt when the courtroom scene appears lower on the page. The audio also will be available, under the title of the case, on C-Span TV at this link: cspan.org/supremecourt
The Court’s next hearing will be on Monday.