Last week, SCOTUS heard oral argument in Jarkesy v. SEC (BTW, pronounced Járkəzē, according to his counsel). As you may have heard, that case is about the constitutionality of the SEC’s administrative law judges. There were three questions presented, and Jarkesy had been successful in the appellate court on all three:

“1. Whether statutory provisions that empower the Securities and Exchange Commission (SEC) to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment.

2. Whether statutory provisions that authorize the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine.

3. Whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.”

While, on its face, the case may not have much allure, it has the potential to be enormously important in limiting the power of the SEC and other federal agencies. That’s especially true if SCOTUS broadly decides that the statute granting authority to the SEC to elect to use ALJs violates the nondelegation doctrine. This case, together with the two cases to be heard in January addressing the continued viability of Chevron deference (see this PubCo post), could go far to upend the “administrative state.” And, for those justices with a well-known antipathy to the administrative state, that might be their ultimate goal. (See, for example, the dissent of Chief Justice Roberts in City of Arlington v. FCC (2013), where he worried that “the danger posed by the growing power of the administrative state cannot be dismissed.”) During the over two-hour oral argument, however, the discussion was focused almost entirely on the question of whether the SEC’s use of an ALJ deprived Jarkesy of his Seventh Amendment right to a jury trial—certainly an important issue with possibly far-reaching implications across federal agencies. But what was most conspicuous—and perhaps most consequential—was what was not discussed: the nondelegation doctrine. In case I missed it, I searched the 170-page transcript and found the word “nondelegation” only once and that from the lips of SEC counsel. While, at the end of the day, the Court’s opinion could certainly go in a different direction, the oral argument did not leave the impression that the end of the administrative state is nigh—not as result of this case, at least.

Interestingly, prior to the oral argument, a number of commentators had raised concerns about the potentially enormous impact of this case. A column in the NYT explained that Jarkesy “could have serious implications for particular agencies and for government more broadly.” The argument that the authorizing statute violates the nondelegation doctrine is “closely related to the major questions doctrine [see this PubCo post] but goes even further, not only requiring agencies to identify explicit statutory authorization for major actions but also, in many instances, finding that agencies cannot take major actions at all. If embraced in its entirety, the nondelegation doctrine could spell the end of agency power as we know it, turning the clock back to before the New Deal.” This article in The Atlantic contended that Jarkesy “poses the most direct challenge yet to the legitimacy of the modern federal government.” With many conservatives targeting the “administrative state,” the case “threatens all of that.” The WSJ, quoting a Wharton Professor, said that losing on the nondelegation argument that “Congress had delegated too much legislative power to the SEC by allowing regulators to pick and choose where to file enforcement actions” might “‘create a fertile new field’ for challenging other commission actions, such as new regulations, based on the idea that commissioners wielded too much quasi-legislative power.” And in Bloomberg, Matt Levine wrote that, while the ”nondelegation doctrine has not had a lot of wins in the Supreme Court in the last 90 years….it’s back now: There is revived interest in it at the Supreme Court.” A win for Jarkesy on his Seventh Amendment claim would limit the SEC’s use of ALJs, he said—and maybe even agency proceedings in general—but “a total victory on the nondelegation argument, that’s different. That could mean that all of the SEC’s rulemaking (and every other regulatory agency’s rulemaking) is suspect, that every policy decision that the SEC makes is unconstitutional. Much of US securities law would need to be thrown out, or perhaps rewritten by Congress if they ever got around to it. Stuff like the SEC’s climate rules would be dead forever.” Although that’s not “necessarily a likely outcome here,” he wrote, ”the Supreme Court does have several justices who would love to revive the nondelegation doctrine in a way that really would undermine most of securities regulation, and while this is a silly case to do it in, it is a case to do it in. You never know!” But, as noted above, the Justices did not even give lip service to the nondelegation question.


What is the “nondelegation doctrine”? The nondelegation doctrine addresses the constitutional limits on the extent to which authority may be delegated to the executive branch and its various agencies. As explained in this essay on the Constitution on, the “nondelegation doctrine is rooted in certain separation of powers principles. In limiting Congress’s power to delegate, the nondelegation doctrine exists primarily to prevent Congress from ceding its legislative power to other entities not vested with legislative authority under the Constitution.” Although “the Supreme Court has declared categorically that the legislative power of Congress cannot be delegated,… the categorical statement has never been literally true…The Court has long recognized that administration of the law requires exercise of discretion, and that, in our increasingly complex society, replete with ever changing and more technical problems, Congress simply cannot do its job absent an ability to delegate power under broad general directives. The real issue is where to draw the line.” In a 1928 case, J. W. Hampton, Jr. & Co. v. United States, SCOTUS upheld Congress’s delegation of authority to the President to ensure implementation of legislation where it provided an “intelligible principle” to which the President or other entity must conform. In that way, the President was acting as the agent of the Congress guided by the intelligible principle that Congress set forth, a legal framework that defines or limits the authority of the administrative agency to which authority has been delegated. The intelligible principle standard “remains the Supreme Court’s primary test for assessing whether Congress has unconstitutionally delegated its legislative power to the other branches of the government. Under this lenient standard, the Supreme Court has repeatedly affirmed, without deviation, Congress’s ability to delegate power under broad standards to governmental entities.” The essay observes, however, that the “modern application of the J. W. Hampton Court’s intelligible principle test and the broad deference it affords congressional delegations of authority to the other branches has met with growing skepticism from some members of the Court.”

Background. In Jarkesy, the SEC charged Jarkesy (and his co-defendants) with securities fraud under the Securities Act, the Exchange Act and the Investment Advisers Act, claiming that he “(1) misrepresented who served as the prime broker and as the auditor; (2) misrepresented the funds’ investment parameters and safeguards; and (3) overvalued the funds’ assets to increase the fees that they could charge investors.” The SEC brought the case before one of the SEC’s administrative law judges, who found Jarkesy liable and ordered that he cease and desist, pay a civil penalty of $300,000 and disgorgement of $685,000. The SEC affirmed the decision on appeal and Jarkesy appealed to the Fifth Circuit. By a vote of two to one, the court vacated the SEC’s decision and remanded for further proceedings, holding that the agency’s proceedings were unconstitutional: “(1) Petitioners were deprived of their constitutional right to a jury trial; (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide it with an intelligible principle by which to exercise the delegated power; and (3) statutory removal restrictions on SEC ALJs violate Article II.”

The first question related to the Seventh Amendment, which provides that “[i]n Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved.” According to the court, SCOTUS “has interpreted ‘Suits at common law’ to include all actions akin to those brought at common law as those actions were understood at the time of the Seventh Amendment’s adoption…. The term can include suits brought under a statute as long as the suit seeks common-law-like legal remedies…. And the Court has specifically held that, under this standard, the Seventh Amendment jury-trial right applies to suits brought under a statute seeking civil penalties.” The court acknowledged that Congress may assign matters to agency adjudications that exclude a jury, but that “depends on whether the proceedings center on ‘public rights,’” where the “Government sues in its sovereign capacity to enforce public rights created by statutes within the power of Congress.”

The Fifth Circuit determined that the SEC’s enforcement action violated Jarkesy’s right to a jury trial because the securities statutes echoed actions that were historically brought under the common law: the “rights that the SEC sought to vindicate in its enforcement action here arise ‘at common law’ under the Seventh Amendment.” That’s because “the actions the SEC brought seeking civil penalties under securities statutes are akin to … traditional actions in debt. Under the Seventh Amendment, both as originally understood and as interpreted by the Supreme Court, the jury-trial right applies to the penalties action the SEC brought in this case.”

In addition, the court determined that the action by the SEC did not fall under the public-rights doctrine. (Generally, under the “public rights doctrine,” which is based on the concept of sovereign immunity, non-Article III tribunals, such as the SEC’s ALJs, can adjudicate cases involving “public rights”—cases that arise between a private actor and, typically, the government “in connection with the performance of the constitutional functions of the executive or legislative departments.” Some aspects appear to focus on federal or public benefits. But there’s some haziness around the edges, and cases between private parties can sometimes be deemed public rights when the cause of action is devised by Congress as part of a public regulatory scheme.) According to the court, securities fraud actions are not new actions unknown to the common law, and historically, the SEC has brought many of these cases in Article III courts. Although the SEC had argued that the securities statutes were designed to protect the public at large, the court reasoned that “Congress cannot convert any sort of action into a ‘public right’ simply by finding a public purpose for it and codifying it in federal statutory law.” Rather, the court concluded, the “Seventh Amendment guarantees Petitioners a jury trial because the SEC’s enforcement action [for securities fraud] is akin to traditional actions at law to which the jury-trial right attaches.”

On the second issue, the SEC had argued that the delegation of authority under Dodd-Frank regarding the use of ALJs was constitutional because its choice of whether to bring an action in an agency tribunal rather than an Article III court was merely the exercise of a “form of prosecutorial discretion—an executive, not legislative, power.” The court, however, viewed that position as “a misunderstanding of the nature of the delegated power.” Instead, the court agreed with Jarkesy that “Congress unconstitutionally delegated legislative power to the SEC when it gave the SEC the unfettered authority to choose whether to bring enforcement actions in Article III courts or within the agency.” That is, by providing no guidance on the issue, “Congress has delegated to the SEC what would be legislative power absent a guiding intelligible principle.”

Finally, the court held that statutory removal restrictions for SEC ALJs were unconstitutional because, given the substantial executive functions that they performed, the President “must have sufficient control over the performance of their functions, and, by implication, he must be able to choose who holds the positions.” Here, SEC ALJs were insulated by “two layers of for-cause protection [that] impede that control; Supreme Court precedent forbids such impediment.”

Oral argument. As I mentioned at the outset, during oral argument, the primary focus was on the first question presented: whether Jarkesy had been deprived of his right, under the Seventh Amendment, to a jury trial, which applies to “suits at common law.” An ALJ system, used by many agencies, does not provide for jury trials. The SEC currently has only three ALJs; about 80% are in the Social Security Administration.

The SEC rested much of its argument on Atlas Roofing, a case about the Occupational Safety and Health Act, in which SCOTUS “considered many of the same arguments presented today and reaffirmed that Congress does not violate the Seventh Amendment when it authorizes an agency to impose civil penalties in administrative proceedings to enforce a federal statute.” In Atlas, Congress didn’t just “federalize negligence in workplaces.” The workplace claims in Atlas “could have been the basis for wrongful death or negligence actions evaluated under very similar standards, and yet the Court had no problem saying that they were validly enforced through administrative proceedings because Congress had created a federal statutory scheme. It has done the same thing here. The securities laws serve different purposes than the common law of fraud.” SEC counsel contended that “Congress didn’t just federalize the law of fraud. It adopted a comprehensive regulatory regime with lots of prophylactic registration, disclosure, and other requirements totally unknown to the common law, provided for enforcement by the public, not by private parties, and provided different remedies, including not just things like disgorgement or damages but bars on participation in the industry, deregistration of securities, civil penalties. None of that was found in the common law.” The elements of the action are different “precisely because it’s not trying to right a private wrong. We’re trying to vindicate the public’s right to fair and honest markets.” Even the monetary remedies that the SEC obtains are for “a public wrong and they are therefore properly considered penalties.” The case involved “public rights, not private rights, because it’s enforcement by the government of rights that are held in the public to vindicate a public interest in the securities markets.” In that event, the Seventh Amendment doesn’t apply.

SEC counsel also contended that it “does not offend the separation of powers to assign its enforcement and initial adjudication to executive branch officials [because] it’s a classic exercise of executive power to enforce federal law by applying the law to the facts in a particular case and by imposing the consequences that are specified by law.” Nor does Congress “violate the nondelegation doctrine when it gives an agency the choice of pursuing administrative or judicial proceedings. The decision whether and how to pursue enforcement action is a quintessentially executive power, and Congress doesn’t violate the Constitution when it leaves that decision to executive discretion, as it has traditionally done.”

Counsel for Jarkesy contended that the SEC’s securities fraud claim against Jarkesy was really the same as common law fraud—it was just relabeled—and therefore, Jarkesy was entitled to a jury trial in an Article III court. It was simply a “taxonomic” change. The right to a jury trial “should apply especially when the government is coming after a citizen for penalties on a common law claim.” In addition, Jarkesy counsel argued, the “SEC’s position really fares no better under the public rights doctrine. The basic claims—these basic fraud claims are litigated privately among private parties every day, same claims, same statutes, and they’ve been litigated…for centuries. These underlying claims do not suddenly morph into public rights claims just because the government happens to stand in…as the proxy plaintiff.” Further, the assignment to an ALJ was really “not the SEC’s to make. It’s a quintessential legislative power, as this Court…has held, and it doesn’t convert into executive power just because it’s exercised by the executive, which is essentially their argument.”

In the end, the liberal minority seemed united in their view that, under Atlas, this case should be over and done. Most of the conservative majority, however, seemed to be discomfited by the potential unavailability of the Seventh Amendment right, compounded by the expansion of the administrative state—and its power—over the past 50 years since Atlas Roofing was handed down. But there seemed to be some concern about a ruling with too broad a reach, one that would work a sea change in the system of ALJs that operate throughout the executive branch, such as Social Security, the IRS or customs. The trick seemed to be to find a formula that would work. How the Court draws that line, if at all, remains to be seen.

Below, some highlights from the oral argument.

Discarding the Seventh Amendment. The potential loss of the protection of the Seventh Amendment was a major concern among many of the conservative Justices. For example, Justice Kavanaugh asked the SEC “what sense does it make to say the full constitutional protections apply when a private party is suing you, but we’re going to discard those core constitutional historic protections when the government comes at you for the same money?” He thought that that was a “strong argument” for Jarkesy. He later added that it seemed “problematic to say the government can deprive you of your property, your money, substantial sums, in a tribunal that is at least perceived as not being impartial in the sense that it’s an in-house executive agency where the commissioners start the enforcement process, oversee the enforcers, and then appoint the adjudicators and review the adjudication. That doesn’t seem like a neutral process.” Why would the SEC ever bring claims in court?

Justice Gorsuch strongly agreed, pointing out that “if the government tomorrow decided, well, we don’t like those jury trial[s] that come with that,” we’ll just overrule an earlier case and move to administrative proceedings, and “[t]hen the Seventh Amendment would disappear on your account, wouldn’t it?“ On hearing an objection to “overruling” the Seventh Amendment right, he tried “evaporate it” and then “dissipate it? What verb would you prefer?” He continued, “we don’t usually say the government can avoid a constitutional mandate merely by relabeling or moving things around. It’s…as much a violation to do something indirectly as it is directly we usually say, right?” Similarly, Justice Alito viewed the ability to avoid a jury trial by transferring the matter to a different tribunal to be a “pretty patent evasion of the Seventh Amendment to say this protection which was regarded at the time of the adoption of the Bill of Rights as sufficiently important to merit inclusion in the Constitution can be nullified simply by changing the label that is attached to a tribunal.” SEC counsel responded that, proceedings before an agency are not suits at common law; it wasn’t just “changing the label. It is changing the nature of the power being exercised.” The applicable constraint in this instance was Article III and the due process clause. But Justice Alito continued that he agreed with Justice Kavanaugh that it made no sense “to say you have this protection when you’re being sued by a private party, whose resources are certainly going to be more limited than the resources of the federal government, but when the same thing happens to you and the party that’s against you is the federal government, well, this right to a jury trial simply goes out the window.”

Limit on congressional authority. Justices Kavanaugh and Barrett asked what the limit was on Congress’s ability to shift these adjudications for civil penalties to administrative agencies? SEC counsel responded that “it has to be a federal regulatory scheme. It has to be enforced by the government. That’s the critical public rights distinction. We’re not displacing the courts from adjudicating disputes between private parties and raising that set of separation-of-powers concerns.” This case involves “a comprehensive regulatory scheme like the one the Court had in the OSH Act. And then, in addition, you have the sort of constraints on when Congress can assign something to an administrative agency in the Due Process Clause in the civil/criminal” context.

Forum-dependent or duty-dependent? Justice Barrett questioned why the right to a jury should depend on the forum. Justice Jackson agreed that that that didn’t make sense, instead suggesting that “the initial question is, what is the right or the duty or whatever that is being established? And so Atlas Roofing begins by acknowledging that the Act created a new statutory duty,” not a common law duty. And, she continued, “if it’s a new statutory duty, says Atlas Roofing, we’ve held forever that Congress can assign it to the court, Congress can assign it to the administrative agency.” SEC counsel contended, however, that it might be difficult to go down that road: the question of “how closely analogous the agency’s enforcement action was to some suit at common law or to common law fraud” is difficult to determine because “there’s no real principled yardstick for asking how analogous is too analogous for those purposes.”

Changes in the administrative state. Chief Justice Roberts raised the question of the relevance of Atlas Roofing in light of changes in the administrative state over the last 50 years:

“Atlas Roofing is 50—50 years old. And the extent of impact of government agencies on daily life today is enormously more significant than it was 50 years ago. I mean, does that have any—should that be a concern for us or a consideration when we’re trying to consider what power the government has to take away the jury trial right or, as an antecedent to that, to take away the right to go into court? I mean, the government is much more likely to affect you and proceed against you before one of its own agencies than in court, and that concern and that threat is far greater today than when Atlas Roofing was set up. And—and as a general matter, it does seem to me to be curious that and unlike most constitutional rights that you have that right until the government decides that they don’t want you to have it. That doesn’t seem to me the way the Constitution normally works…. It seems to me that undermines the whole point of the constitutional protection in the first place.”

Nor was this exactly your grandfather’s SEC, Justice Gorsuch subsequently added. At the same time, Justice Kagan later responded, over that 50 years “our problems have only gotten more complicated and difficult. And it’s usually Congress that decides how to solve those problems and whether administrative agencies with the kind of expertise that they have are the appropriate way to solve those problems, not this Court, which decides, oh, well, we really only need common law suits to deal with securities regulation.”

A settled question? Justice Kagan was almost astonished that this case had even reached the High Court. She thought the case was long settled: “I think one of the oddities of this case is, if you look at the question presented and then you read Atlas Roofing, you wonder why this case is here, in other words, that Atlas Roofing simply resolves the issue.” The SEC pointed to similar cases dating back to 1893 and 1909, highlighting that the “understanding from the beginning has been that Congress can legislate, impose civil penalties, and have executive officials impose those penalties in the first instance.” Justice Kagan noted that some of the cases have been complicated and difficult, but that’s when the cases have involved “two private parties in which their dispute is embedded in a federal statutory scheme.” But where one of the parties is the government, SEC counsel continued, that’s “really a through line that…the Court has never questioned.” SEC counsel said that it viewed the matter as “a separation-of-powers matter, and this strand of the public rights doctrine is a reflection of it being a core exercise of executive power sometimes to adjudicate matters and apply the law to the facts and impose consequences. It’s immigration, it’s seizing goods, it’s taxes, it’s customs all throughout our history. It happens all the time.” Those areas have long been addressed in the first instance by administrative officers, SEC counsel continued; to reexamine that issue now could have serious jurisprudential and practical consequences.

Interestingly, counsel for Jarkesy did not think that the Court need “to overrule Atlas Roofing. Atlas Roofing actually, as modified by subsequent decisions, provides a useful template for analyzing at least the public/private rights analysis and leads to the same conclusion that Mr. Jarkesy was entitled to… a jury for these claims.” Asked by Justice Thomas to elaborate, Jarkesy counsel began to describe his take on Atlas, when Justice Kagan interjected that he was “sort of describing a case that I don’t recognize. Atlas Roofing says numerous times, it could not have been clearer, the Seventh Amendment is no bar to the creation of new rights or to their enforcement outside the regular courts of law. That’s one statement. Congress is not required by the Seventh Amendment to choke the already crowded federal courts with new types of litigation or prevent it from committing some new types of litigation to administrative agencies…. But it could not have been clearer that—that what they were saying is that the Seventh Amendment was no bar to Congress making a decision that certain kinds of claims were best adjudicated in administrative agencies.”

New claim or common law claim? Jarkesy counsel responded that “we’re pretty close actually. So maybe the…dispute is over what ‘new’ is.” Justice Kagan’s answer was that “[i]f we’re pretty close, because I think that just resolves the case. [To laughter in the court.] That’s the issue…. The Seventh Amendment is no bar.” Counsel for Jarkesy then responded that “that’s where we very much part—part ways.” Justice Kagan then added, to more laughter in the court, “I thought that that was going to be true.” The difference, according to Jarkesy counsel, was that, in Atlas, Congress saw that traditional negligence claims were insufficient to protect factory workers and created a new regulatory scheme with new duties. Kagan agreed: because the existing remedies were viewed to be inadequate,

“Congress gave power to OSHA under the OSH Act in order to bring claims for all kinds of workplace safety issues before a death took place, before an injury occurred. And that’s exactly what the securities laws do. It says we don’t need an injury. We don’t need reliance. We’re constructing a prophylactic scheme, and we’re constructing it because we understand that the securities markets need to be honest and fair and people need to be able to rely on them. And so it takes a common law suit and says we’re going to throw out some of these elements and we’re going to create a prophylactic way to make the securities markets fair and put it in an administrative agency. Exactly what OSH Act did…We’re going to empower the agency, Congress says, to do things even when there is no harm, to do things that …to adjudicate disputes that you couldn’t adjudicate in a federal court. And Atlas Roofing says the Seventh Amendment poses no barrier to that. The end of this case. ”

Jarkesy counsel had “no problem with those [prophylactic regulations] being declared public rights.” But he added, it’s not the end of this case, because the actual charges against Jarkesy were not just under prophylactic regulation, they “were for traditional fraud with harm, with damages.”

Then Justice Jackson interjected that the charge was not traditional fraud and that makes a difference. The case was brought under Rule 10b-5, a cause of action that Congress created. Jarkesy counsel argued that this was different because actual harm was alleged. But Justice Jackson said that the “allegations may overlap with a fraud claim,” but the actual cause of action was a new one created by Congress, and “per Atlas Roofing, the Court says there’s no Seventh Amendment barrier to them bringing that claim in an administrative agency rather than the court.” And while the particular allegations against Jarkesy might be like a standard common law fraud claim, she later added, the elements of the statutory claim are different. To be a common law analog, shouldn’t the requirement be that it’s the same on all fours? Similarly, Justice Sotomayor emphasized differences in remedies, as well as the elements of the claim. “It’s actually not even fraud in all circumstances,” she said. Jarkesy counsel then argued that the Court had repeatedly held that it was not a new right. It was just a “taxonomic change, taking a common law right, putting it into a…statutory scheme, mixing it in with a bunch of public rights, and it’s maybe changed a little bit.”

Test for common law analogs. Justice Barrett then agreed that the “cases have not been very clear about how to distinguish public from private rights”; what Jarkesy counsel was saying was that “the distinction depends on whether this was a right at common law, and, here, this bears a lot of resemblance to a right at common law, the fraud.” But Justice Jackson, she said, showed that this wasn’t exactly common law fraud. What test would he apply? Counsel for Jarkesy suggested that the test should be that “a claim that serves the same essential function as a traditional common law right is…a private right.” For example, OSHA was prophylactic, he said, and 95% of the “securities acts are not traditional common law claims. The things that the SEC enforces every day, almost all of it is public rights.” But something like insider trading is traditional fraud. In effect, as Justice Sotomayor later confirmed, he contended that any case with a federal common law analog, such as any deprivation of property, belonged in federal court—a shift that she viewed as “[q]uite dramatic.” When pressed further by Justice Alito, Jarkesy counsel responded that a statutory claim would be sufficiently close to a common law action for Seventh Amendment purposes when it “serves the same essential function as a common law action recognized in the courts of England in 1791.” Justice Alito then asked whether they could “decide this case on the narrow ground that the statutory securities fraud claims are sufficiently close to a common law fraud action because the elements of the statutory claim are a logical subset of the latter?” And with regard to public/private rights, he asked, aren’t areas like customs, immigration and taxes all public rights?

Public rights claims v. private rights claims. The Chief Justice raised concerns about the application of the theory beyond the SEC. Jarkesy counsel said that it would not extend to “customs, immigration, benefits, franchises, permissions, debts to the government,” which have historically been adjudicated outside of Article III courts. But the “universe of things that are between an individual and the government” is limited. In Jarkesy counsel’s view, mere taxonomic changes were the problem, “taking a common law claim, throwing it into a statutory scheme like a tossed salad with a bunch of…public rights inserted, most of them prophylactic, and… then claiming, well, as to that…private rights claim, it was private right, now it’s public.” To his contention that “the Court has made crystal-clear that it does not matter who the… parties are,” Justice Kagan disagreed, observing that there hasn’t been another public/private case before the Court “because those have been thought the easy cases.” That is settled. The hard cases involved private/private cases, where the Court still found a public right because their disputes were integrated in federal statutory schemes. Counsel for Jarkesy disagreed, arguing that it was “settled only to the extent no one’s brought it up and forced this issue since Atlas Roofing.” Yes, Justice Kagan said, “[n]obody has had the, you know, chutzpah.” Justice Jackson then added that the reason those cases are not hard is precisely because they are new statutory schemes and don’t look anything like the common law scenario; private cases litigated under the securities acts are just parallel claims. These private claims, Justice Kagan added, always have requirements of reliance, injury and scienter. Not so all of the securities laws, and those are not minor differences.

In addition, Justice Kagan later added, looking at the history of the securities legislation in this country, most of it came into effect after financial crises, such as the Great Depression, the S&L crises and the 2008 Great Recession. And each time, Congress recognized that common law suits were not solving the problem and that the SEC needed additional authority to address these problems. Justice Kagan then asked if “Congress’s judgment that more powers were needed within an administrative agency [was] entitled to no respect?” Jarkesy counsel responded that, in their view, the Dodd-Frank penalty authority is analogous to a private common law claim; it was not the creation of a new statutory public right. Justice Gorsuch pointed out that scienter and loss causation were required for a Rule 10b-5 claim, just like common law fraud. And the common law analog doesn’t have to be perfect. Penalties sought was the most important aspect. In response to questions from Justice Kavanaugh, Jarkesy counsel noted that the SEC had already moved most cases to the federal courts, so the impact, with regard to the SEC, of changing precedent would be very small, but there were also issues of due process, prejudgment, and different rights of discovery and evidence in connection with Article III courts and ALJs.

In conclusion, counsel for the SEC said that, while Jarkesy had raised concerns with past precedent, they hadn’t taken on the burden of asking the Court to overrule precedent. And so the Court shouldn’t take that action here, but instead should overrule the Fifth Circuit.


Thank you, Justice Sandra Day O’Connor, for a being a first who led to a second. Rest in peace.