In SEC v. Jarkesy, the Supreme Court held that a defendant in a securities fraud action involving civil penalties is entitled to a jury trial. The Court found that the public rights doctrine does not apply such that Congress cannot legislate away the defendant’s right to a jury trial. Accordingly, the SEC may no longer be able to exercise the discretion granted by the Dodd Frank Act to litigate such cases through its in-house tribunal. Instead, those subject to SEC fraud actions have a right to defend themselves in an Article III court before independent judges who will apply the Rules of Evidence.
The majority framed the question at issue narrowly: namely, “whether the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties against him for securities fraud.” But the rationale underlying that holding shows the majority had serious concerns with administrative agencies supplanting Article III courts and serving as the prosecutor, judge and jury, at least in actions (like fraud). The Court advocated for limited application of the public rights exception, but the Court did not define the precise contours of the exception or what constitutes a public right, leaving some ambiguity in its application going forward. The majority’s rationale, if broadly applied, could have serious consequences for other in-agency enforcement proceedings.
The SEC instituted an administrative proceeding against Jarkesy in March 2013. The SEC issued its decision in October 2014 and found that Jarkesy had violated the anti-fraud provisions. Jarkesy appealed to the Commission, and the Commission issued a decision in 2020, affirming the prior finding. Jarkesy then appealed to the Fifth Circuit, which vacated the Commission’s final order. The Fifth Circuit found that Jarkesy had a Seventh Amendment right to a jury trial and identified two other constitutional infirmities. The Supreme Court only addressed the Seventh Amendment question.
Chief Justice Roberts delivered the opinion of the Court. The majority’s analysis started with the Seventh Amendment question, asking whether the Seventh Amendment applies to the SEC provisions at issue. The Court found in the affirmative, explaining that “[t]he SEC’s antifraud provisions replicate common law fraud, and it is well established that common law claims must be heard by a jury.” Jarkesy Slip Op. at 6. The majority further determined that the civil penalties the SEC sought are “a type of remedy at common law that could only be enforced in courts of law.” Id. at 11. “That conclusion effectively decides that this suit implicates the Seventh Amendment right, and that a defendant would be entitled to a jury on these claims.” Id.
Both the majority decision and concurrence emphasized the critical import of the right to trial by jury in U.S. jurisprudence. Both liken today’s administrative tribunals to the vice admiralty courts imposed on the colonists. In those courts, colonists were subject trial without jury for wide ranging offenses. The majority went so far as to state that “when the English continued to try Americans without juries, the Founders cited the practice as a justification for severing our ties to England” Jarkesy Slip Op. at 7-8.
Having concluded that the Seventh Amendment applies, the Court turned to the public rights exception. Under the public rights exception, Congress may “assign the matter for decision to an agency without a jury, consistent with the Seventh Amendment.” Jarkesy Slip Op. at 13. However, Congress may not remove “matters concerning private rights” from Article III courts. Id. at 14. The question, as framed by the majority, is whether the antifraud suit against Jarkesy is a public right or a private right.
The Court invoked the 1989 Granfinanciera, S. A. v. Nordberg, decision as “effectively decid[ing] this case” in terms of the public rights doctrine. Jarkesy Slip Op. at 20. According to the Court, “what matters is the substance of the action, not where Congress has assigned it.” Id. at 21. Specifically, “‘[t]raditional legal claims’ must be decided by courts, ‘whether they originate in a newly fashioned regulatory scheme or possess a long line of common-law forebears.’” Id. at 19. Further, “[i]f a suit is in the nature of an action at common law, then the matter presumptively concerns private rights.” Id. at 14. As noted in the Seventh Amendment analysis, the Court found that antifraud provisions are akin to common law fraud, and the SEC seeks a civil penalty. Thus, the Court concluded that this action involves a “matter[] of private rather than public right.” Id. at 21.
The Supreme Court sought to apply the public rights doctrine narrowly, explaining that “even with respect to matters that arguably fall within the scope of the ‘public rights’ doctrine, the presumption is in favor of Article III courts.” Jarkesy Slip Op. at 18. The Court declined to provide a bright line rule for application of the public rights doctrine, nothing that it would not “definitively explain[]” the distinction between public and private rights. Id. at 17. The majority and concurrence recognized certain categories traditionally classified as public rights, with the concurrence summarizing them as follows: “public rights are a narrow class defined and limited by history” and traditionally have “included the collection of revenue, customs enforcement, immigration, and the grant of public benefits.” Id. at 13.
The Court rejected the SEC’s argument that this case concerns a public right because the federal government is party to the litigation, wherease in Granfinanciera (which involved a bankruptcy proceeding), the government was not. The Court explained that “we have never held that ‘the presence of the United States as a proper party to the proceeding is . . . sufficient’ by itself to trigger the” public rights exception. Jarkesy Slip Op. at 27. According to the Court, “what matters is the substance of the suit, not where it is brought, who brings it, or how it is labeled.” Id. at 22. And the substance of the litigation against Jarksey is akin to “common law fraud,” with a remedy “available only in law courts.” Id. The Court thus concluded that “[t] his is a common law suit in all but name.” Id.
The SEC and the dissent relied heavily on the Supreme Court’s decision in Atlas Roofing Co. v. Occupational Safety and Health Review Comm’n. The Atlas Roofing case involved OSHA regulations concerning workplace safety. Congress granted the Occupational Safety and Health Review Commission authority to investigate OSHA violations and levy fines, and in Atlas Roofing the Supreme Court held that this scheme did not violate the Seventh Amendment. The Court in Jarksey distinguished Atlas Roofing on the grounds that the OSHA regulations did “not borrow its cause of action from the common law” and rather “resembled a detailed building code.” Jarkesy Slip Op. at 23. The Court explained that “Atlas Roofing concluded that Congress could assign the OSH Act adjudications to an agency because the claims were ‘unknown to the common law,” and thus “[t]he case therefore does not control here.” Id. at 25.
The majority in Jarksey declined to overrule Atlas Roofing. It did, however, severely criticize Atlas Roofing, stating that it “represents a departure from our legal traditions” that has been “ignored” or criticized. Jarkesy Slip Op. at 25 n.4. The Court also criticized the public rights exception set forth in Atlas Roofing as “circular” and stated in a footnote that “the author of Atlas Roofing certainly thought that Granfinanciera may have” overruled it. Id. at 26, 23 n.3.