Supreme Court deals 'earth-shattering' blow to federal agencies' administrative powers

The Supreme Court on Thursday reversed federal agencies’ longstanding capacity to adjudicate and enforce certain federal laws, dealing the latest in a series of blows to the executive branch’s administrative powers.

In a 6-3 decision, the conservative majority on the court rejected the Biden administration's argument that existing precedent protected agencies as they adjudicated laws written by Congress, instead suggesting individuals and private entities had a right to defend themselves from civil penalties before a jury. The Seventh Amendment to the Constitution, which guarantees a right to a trial before a jury of peers, applies to cases involving administrative penalties, the court ruled. 

“A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator,” Chief Justice John Roberts wrote in the majority opinion. “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. That is the very opposite of the separation of powers that the Constitution demands.”

The case centered on a hedge fund manager George Jarkesy and investment adviser Patriot28 challenging the Securities and Exchange Commission’s decision to charge them with securities fraud. The government challenged the case to the Supreme Court after the U.S. Court of Appeals for the Fifth Circuit last year ruled in a 2-1 decision against the agency. The circuit court’s objections were threefold, namely that the government imposing a civil penalty without a trial by jury is a violation of the Seventh Amendment, it was an improper delegation of authority for Congress to allow the SEC to determine whether to adjudicate a case in-house or before a federal court and SEC’s administrative law judges that decide on civil penalties are not able to be fired at-will.

The majority decided the case on the Seventh Amendment argument alone, providing some relief to SEC and other agencies that decide cases in-house and use ALJs.

Still, the case could have widespread impact for agencies across government. Many government offices rely on in-house “tribunals” to carry out enforcement provisions of federal statute, ranging from the Environmental Protection Agency to the Federal Trade Commission and the Agriculture Department. Taking all of those cases seeking to carry out enforcement to the federal court system would require a massive expenditure of resources those agencies are ill-equipped to absorb. 

The Biden administration had argued that because Jarkesy involved the government and a private entity, rather than two private entities, the “public rights doctrine” dictates the executive branch can adjudicate the matter without violating the Seventh Amendment that would otherwise require a jury trial. It also argued the Seventh Amendment is relevant when a lawsuit arises from a private lawsuit seeking monetary damages that is based in “common law” rather than a specific statute passed by Congress.

In a dissenting opinion joined by all three liberal justices, Associate Justice Sonia Sotomayor said the entire concept of administrative adjudication “empowers executive officials to find the relevant facts and apply the law to those facts like juries do in a courtroom.” She also pointed to a 1976 case, Atlas Roofing Company v. Occupational Safety and Health Commission, in which the Supreme Court found Congress has the power to grant agencies' the authority to adjudicate new public laws. Atlas Roofing made it "obvious" that Jarkesy should have been resolved "under a faithful and straightforward application" of that case's precedent, Sotomayor said. 

She also warned of the “momentous consequences” that will result from the new decision, noting more than two-dozen federal agencies issue civil penalties in administrative proceedings. 

The misplaced view of the majority “means that 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 earth-shattering nature of its holding, the majority has tried to disguise it.”

The majority suggested its ruling applied only to civil penalty suits alleging fraud, but the dissenting justices suggested that was a distinction that should “fool no one” and the decision instead amounted to a “massive sea change.” 

Conservative groups were quick to praise the Supreme Court’s ruling, as well as Jarkesy and his attorneys for pursuing the case. 

“Their perseverance has won a mighty victory against injustice by persuading the Supreme Court to restore jury trial rights to all Americans—even those being hounded by the administrative state,” said Mark Chenoweth, president of the National Civil Liberties Council. 

Jarkesy himself said the decision amounted to a “great day for the Constitution” and suggested it could have widespread ramifications. 

“If this could happen to me it could happen to any citizen of this country and after a decade of gross misconduct and blatantly unconstitutional political attacks from the SEC and their in-house court, today the U.S. Supreme Court ruled that the Constitution still matters,” Jarkesy said. 

The decision was the latest blow to the administrative powers of federal agencies. Last year, the court established a legal theory known as the "major questions doctrine," setting the precedent that agencies have little leeway in creating new regulations with major economic impact or political salience that rely on powers not clearly laid out in statutory text. The court in the coming days is expected to rule on—and likely undermine—Chevron deference, which says broadly that courts must defer to agencies when interpreting ambiguous statutory language.