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Supreme Court raises concerns with federal government agencies’ penalties versus right to jury trial



A number of Supreme Court justices on Wednesday expressed worries over the growth of the administrative state and the federal government’s ability to penalize individuals through agency proceedings without a jury trial.

Several of the GOP appointees told the Justice Department during oral arguments that they’re struggling with how to square executive branch agency proceedings — like those within the Securities and Exchange Commission — with the Constitution’s Seventh Amendment right to a trial by jury.

Chief Justice John G. Roberts Jr., a Bush appointee, said the government’s impact on daily lives has grown “enormously more significant.”



“The government is much more likely to affect you or proceed against you in one of its own agencies than it is in court,” he said. “It does seem to me to be curious that — and unlike most constitutional rights — that you have that right [to a jury trial] until the government decides it doesn’t want you to have it. That doesn’t seem to me the way the Constitution traditionally works.”

Justice Samuel A. Alito Jr. said a jury is set up as “a buffer” between individuals and the government.

“People in this country should have protection against having their liberty or property taken away by officers, who are answerable to a powerful executive,” said Justice Alito, another Bush appointee.

Justice Neil M. Gorsuch, a Trump appointee, said this isn’t “your grandfather’s SEC.”

“A right to trial by jury … is a check on all branches of government,” he said. “An ancient right, too.”

Wednesday’s legal battle, SEC v. Jarkesy, came to the court after the commission asked the justices to overturn a lower court ruling that the federal agency violated the Seventh Amendment when an in-house administrative law judge fined a hedge fund manager $300,000 for a securities violation.

Depending on the extent of the decision, a ruling against the SEC could limit or even end federal agencies’ in-house proceedings and require federal judges to rule in administrative cases.

Article III of the Constitution establishes the federal judiciary, including the Supreme Court. Administrative courts are not part of the judiciary or recognized in the Constitution, and their rulings do not set judicial precedent.

At least 27 federal agencies have employed administrative law judges, according to the Congressional Research Service.

Justice Gorsuch noted that most of the administrative law judges — roughly 80% — are within the Social Security Administration to protect and adjudicate benefits — not impose penalties, like in some of the other executive agencies, such as the SEC.

The Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 gave the SEC authority to seek civil penalties against individuals for violating securities laws.

George Jarkesy, at the heart of the legal battle, managed two hedge funds with roughly $24 million in assets and was charged with violating securities laws. The SEC said he misrepresented investments and strategies to his investors and inflated the funds’ holdings.

Looking to fine Mr. Jarkesy, the SEC started administrative proceedings against him in 2013.

Mr. Jarkesy tried to sue, citing constitutional concerns. He argued that a federal agency’s civil penalties run afoul of the Seventh Amendment, which guarantees a right to a jury trial. He issued the argument in federal court in an effort to avoid adjudication in the SEC proceedings, but his complaint was dismissed.

An administrative law judge ruled that Mr. Jarkesy had violated federal securities law and fined him $300,000, among other penalties. He appealed to the 5th U.S. Circuit Court of Appeals, which ruled that a civil liability from an administrative proceeding violated his Seventh Amendment rights.

The 5th Circuit also said it was unlawful for agencies to initiate proceedings in-house instead of traditional federal courts.

It took at least four of the justices to decide to hear the appeal.

The court’s liberal wing of the court said precedent is on the federal government’s side and that Congress has had to give agencies duties — like the ability to bring administrative proceedings — in order to combat problems that have increased with the nation’s growing society.

“Our problems have only gotten more complicated and difficult,” said Justice Elena Kagan, an Obama appointee.

Justice Sonia Sotomayor, also an Obama appointee, said such an issue as failing to register a property interest has long been allowed under precedent to be penalized by federal agencies.

“If you violate those, you pay a penalty for them,” she said. “We have permitted the public interest to be protected in an administrative proceeding.”

Brian H. Fletcher, principal deputy solicitor general for the Justice Department representing the SEC, said criminal cases involve juries. He differentiated major penalties handed down in Article III courts from small fines involved in administrative proceedings.

“Civil penalties in government enforcement actions are permissible,” he told the justices. “This is an established practice for more than a century.”

But S. Michael McColloch, who represented Mr. Jarkesy, said the founders were concerned about protecting against jury-less courts.

He differentiated penalties against individuals from the Internal Revenue Service from fraud claims imposed by the SEC, saying the fraud claims are similar to those adjudicated in trial courts between private parties — not just from a public interest imposed by the federal government.

“The common law claims that were incorporated into the Securities Act are in fact litigated privately,” he said. “If you look at fraud claims litigated in the 1800s … basic fraud cases … all of these issues … are litigated in state courts today.”

A ruling in the dispute is expected by the end of June.



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