In two noteworthy cases with potentially huge ramifications on regulatory agency power, the US Supreme Court on Thursday and Friday last week ruled that defendants charged with violations of federal agency regulations have the right to a jury trial.

The decisions in SEC v. Jarkesy and in Loper Bright Enterprises v. Raimondo deal a blow to the administrative state and are the culmination of a lengthy fight by the financial sector and conservatives to weaken federal power.

The cases could weaken the ability of a range of federal agencies who use these judges – such as the Environmental Protection Agency and the Department of Health & Human Services, which runs Medicare and Medicaid – to enforce laws in the public interest.

The conservative majority

In Jarkesy, the high court’s conservative majority ruled 6-3 against the SEC in a dispute over the agency’s ability to use in-house tribunals to seek civil penalties against defendants for securities fraud, stripping the agency of a key enforcement tool.

The court said that the Seventh Amendment entitles a defendant to a jury trial, with Chief Justice John Roberts writing for the conservative majority.

“A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator,” Roberts wrote for the court. He said that allowing the executive branch to play the role of prosecutor, judge and jury – as in enforcement proceedings conducted by the SEC internally – is the “very opposite of the separation of powers that the Constitution demands.”

Justice Sonia Sotomayor authored a dissenting opinion, a summary of which she read from the bench. Joined by Justices Elena Kagan and Ketanji Brown Jackson, Sotomayor wrote that, for years, Congress has allowed an agency to impose civil penalties, and warned the majority’s decision would unleash “chaos.” She criticized the ruling as a “power grab.”

“The majority today upends longstanding precedent and the established practice of its coequal partners in our tripartite system of government,” Sotomayor wrote.

The Jarkesy and Loper lawsuits

Let’s look at the cases late last week that have suddenly changed the way US courts will handle challenges to agency guidance.

Jarkesy

The Jarkesy case started with a hedge fund manager and conservative talk radio host named George Jarkesy who, between 2007 and 2010, created two investment funds that managed roughly $24m in assets for around 120 investors.

As it turns out, so as to charge higher fees, he lied to those investors about pretty much everything: who would audit the funds, who would be the funds’ broker, and how much the funds were worth. After an SEC investigation, an administrative law judge at the SEC was assigned the proceeding and found that Jarkesy violated several securities laws.

He was eventually ordered to pay a civil penalty of $300,000 and his advisory firm, Patriot28, also had to repay nearly $685,000 in what the SEC determined were illicit gains. 

But Jarkesy appealed the decision to the US Court of Appeals for the Fifth Circuit, as allowed under the law, which tossed out the SEC’s findings on three different constitutional grounds.

In a divided ruling, the appeals court found that the SEC’s proceedings violated the Seventh Amendment (which guarantees the “right of trial by jury” in civil matters where more than “twenty dollars” is at stake) and held that Congress improperly delegated power to the SEC when it allowed the agency to conduct the internal tribunals in certain matters or bring a case in district court.

The circuit court also ruled that the limits on the removal of the SEC’s administrative law judges were unconstitutional.

And the majority of the Supreme Court agreed last week – calling the SEC’s case a common law one. “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. “This is a common law suit in all but name. And such suits typically must be adjudicated in Article III courts.”

Loper Bright

Loper Bright Enterprises v. Raimondo (which was linked with another dispute, Relentless v. Chamber of Commerce, both brought by fishermen) was premised on the opposition of two herring fishing companies to a federal policy requiring them to pay $710 per day to carry federal monitors on their vessels.

The fishing companies’ had challenged the Magnuson-Stevens Act, which gives the Secretary of Commerce and the National Marine Fisheries Service (NMFS) the power to “implement a comprehensive fishery management program.”

The court must first determine whether Congress has directly addressed the question at the center of the case. If it has not, the court must uphold the agency’s interpretation of the statute as long as it is reasonable.

The Chevron doctrine test

The law says fishery-management plans may require that one or more observers be carried on board a vessel for the purpose of collecting data necessary for the conservation and management of the fishery and that the fishing industry must pay for the costs of these observers, estimated at $710 per day. The fishermen argued the statute was ambiguous about whether the NMFS could require Atlantic herring fishermen to pay for observers, and that it did not have to defer to the agency’s interpretation of the law and seek a remedy solely through the agency tribunals.

The Justices ruled 6-3 to overturn the Chevron case – a precedent explained further below – ruling that courts no longer have to defer to agency interpretations in deciding whether their policies are lawful.

It’s all about the Chevron doctrine

The cases involve the deference that courts should give to federal agencies’ interpretations of the laws they administer, and the Loper Bright decision on Friday definitively diluted that deference.

The doctrine at the center of the cases is known as the Chevron doctrine. It is named after the Supreme Court’s 1984 opinion in Chevron v. Natural Resources Defense Council, upholding a regulation issued by the Environmental Protection Agency (EPA).

In the Chevron decision, Justice John Paul Stevens set out a two-part test for courts to review an agency’s interpretation of a statute it administers. The court must first determine whether Congress has directly addressed the question at the center of the case. If it has not, the court must uphold the agency’s interpretation of the statute as long as it is reasonable.

Certainly not controversial when it was decided, Chevron has been a target for conservatives in the last several years. They contend that courts, rather than federal agencies, should say what the law means.

The Biden administration has urged the Court to leave the Chevron doctrine in place, calling it a “bedrock principle of administrative law” that “only comes into play when a court determines that Congress has not itself clearly answered an interpretive question.” When that is the case, the Biden administration says, “it is entirely sensible to presume that Congress intended courts to give effect to its delegation of power to the agency charged with administering the federal law at issue, as long as the agency’s interpretation of the law is reasonable.”

Implications

The SEC has known the Supreme Court wasn’t thrilled with in-house judges and cases and has been bringing some of its most serious types of fraud cases to the courts for several years now, says James Tierney, a former staff attorney for the agency. This can be an expensive undertaking.

And looking at the time it could take Congress, four Democratic senators (who submitted a friend of the court brief) caution that Congress doesn’t have the time or the ability to respond as quickly as federal agencies. And, now that Chevron has been overturned, the country will face particular difficulty in responding to “emerging environmental dangers and evolving remedial processes.” Indeed, they note, during the first nine months of 2023, Congress passed only 30 bills, “only 13 of which have been signed into law.”  

Highly regulated businesses are likely to challenge US agency interpretations going forward, feeling less hindered by them, and we could see more run-of-the-mill actions fill US courtrooms.

Beyond just burdening Congress and the agencies, the ruling could jeopardize statutes already passed. Justice Sotomayor noted that in the past 50 years, Congress has enacted many statutes that empower federal agencies to impose civil penalties for statutory violations, and there are more than two dozen agencies that can levy such punishments in administrative proceedings.

The majority’s decision, she said, jeopardizes the constitutionality of those statutes and could strip agencies of their power to enforce the laws enacted by Congress. (To be sure, Chief Justice Roberts noted in his ruling Friday that the court’s ruling will not apply to any rulings in the past that have relied on Chevron.)

But it’s likely to have a big impact on the judiciary going forward.

Hundreds of statutes empower dozens of agencies to impose civil penalties for violations of laws that protect the environment, regulate workplace safety, empower workers to organize, establish product safety standards, violate Medicare rules, etc. Forcing enforcement proceedings out of agencies and into the time-consuming and expensive court realm is likely to limit the agencies’ ability to fulfill their statutory mandates.

Had Congress known a century ago that the Supreme Court would someday eliminate its ability to assign certain cases to administrative law judges, it could have have allocated sufficient money to federal agencies to allow them to hire the right number of trial counsel who could bring proceedings in federal district courts.

“The prospect of overruling Chevron is especially concerning in health care policy, where agencies must leverage their expertise to address emergencies, adapt to ever-changing technology, and improve health outcomes,” said Suhasini Ravi of Georgetown’s O’Neill Institute for National and Global Health Law and now director of health policy for the White House.

Regulations weakened

The Court in the last decade has weakened regulations even before expressly overturning Chevron. The court has weakened and overturned environmental regulations, overturned the Biden administration’s student loan forgiveness policy and blocked Covid-19 vaccine mandates, although it recently left intact how the Consumer Financial Protection Bureau is funded.

Taking the cases together, highly regulated businesses are likely to challenge federal agency interpretations and rules going forward, feeling less hindered by them, and we could see more run-of-the-mill actions fill up US courtrooms.

It’s important to note that these Supreme Court’s decisions did not address a challenge to a specific regulation and regulations and guidance from the Equal Employment Opportunity Commission, Occupational Safety and Health Administration, EPA, etc., continue to exist and be in effect. And the decision in Loper Bright does not signify any total and abrupt end to the administrative state.

But under the current Supreme Court majority, agency power is likely to continue eroding, and it is likely we will see ongoing challenges to both the lawfulness of SEC administrative law judge appointments and whether the structure of agencies like the SEC (which often serves as investigator, prosecutor, and judge in enforcements) violates the Due Process Clause of the Fifth Amendment.

It’s not an overstatement to say that administrative governance has been upended.