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Common Law Judgments, Common Sense Justices
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Common Law Judgments, Common Sense Justices

The court’s skepticism of financial regulators’ power may be the prelude to an even bigger case.

People walk past the US Supreme Court in Washington, DC, on November 13, 2023. (Photo by Mandel Ngan/AFP/Getty Images)

Today’s administrative state would be unrecognizable to the Constitution’s founding generation, but today’s agencies also bear an ever-decreasing resemblance to their mid-20th century selves. How should the Supreme Court grapple with precedents and theories built around the smaller and simpler agencies of the 1940s or 1970s?  

That is the question the court faced last week regarding the Securities and Exchange Commission’s enforcement powers, and the answer depends in part on another question: What’s in a name? For more than two hours, justices pondered the SEC’s power to recoup money from defendants through in-house “adjudications”—or, more specifically, whether those adjudications are effectively “suits at common law” under the Seventh Amendment, because they involve the same basic claims that would have been tried before a jury in an ordinary lawsuit among parties.

But SEC v. Jarkesy is not just a pedantic word fight. At oral argument, the justices’ questions reiterated increasingly familiar concerns about the modern administrative state’s immense power and discretion. 

If the court rules against the SEC in this case—as seems the more likely outcome, based on the tenor of the oral arguments—then the real question before the justices is whether this case can be decided by simply clarifying precedents, recalibrating them, or overturning them altogether.

The SEC sued George Jarkesy in 2013 for securities fraud, alleging he defrauded his hedge fund’s investors; the SEC sought (and eventually won) damages and fines totalling nearly $2 million. But the agency did not file that lawsuit in a federal trial court—or any trial court. It didn’t need to. Under Congress’ securities laws, the SEC may choose to either file its case in federal court, or in a tribunal within the SEC itself before an SEC official known as an “administrative law judge.” The SEC does sometimes file its cases before an actual federal court, but for Jarkesy it chose the do-it-yourself approach to adjudication.

To be fair, an administrative law judge—or “ALJ”—is not simply a yes-man within the SEC. ALJs enjoy a significant measure of independence within the agency. (Indeed, the fact that an ALJ has significant power within the agency yet does not answer to the agency’s head raises constitutional problems of its own, as the Supreme Court noted five years ago in Lucia v. SEC.)

And, in fact, agencies have been “adjudicating” cases for longer than a century. From the very start of our constitutional government, executive branch officers have had to make decisions involving people’s rights or interests. Since at least 1856, the Supreme Court has held that litigants are not entitled to the full judicial process when they are asserting “public rights.” That category has bedeviled judges and litigants ever since, but at first it seemed to draw a line between “private rights” under common law and “public rights” that Congress bestows simply as a matter of discretionary grace. 

In the early 20th century, when Congress and presidents enacted laws committing more and more disputes to agency adjudication, the court tried to draw a categorical distinction between “private rights” that must be adjudicated in actual courts versus “public rights”—federal benefits, entitlements, or new regulatory rights, for example—that could be “adjudicated” before administrative tribunals, subject to at least some kind of judicial review at the end of the process.  

But for nearly a century since, the court’s simple pre-New Deal framework has crumbled under the weight of the modern administrative state and the ever-more-novel questions that it presents. 

The basic “public-private” dichotomy often seems ephemeral. If Congress supplants a general common-law right—say, the right against fraud—with a statutory right that seems very similar but with various tweaks—say, the securities fraud statute—then is the new right a “public” or “private” one? And even if that distinction held up, agency adjudications raise myriad other questions. 

When Congress creates a new public right and empowers an agency to adjudicate claims involving that right, can Congress also empower the agency to decide other claims of private rights that are tightly related to the original case? (Often yes, the court ruled in 1986.) And when Congress empowers an agency to adjudicate a claim, how much judicial review must the courts of appeal be authorized to provide? (It’s complicated, the court explained in 1985.)

But agency adjudication, like other aspects of agency power, has received renewed scrutiny from the Roberts Court—either because justices think the old pro-agency precedents simply got the Constitution wrong from the start; or because Congress continues to create new adjudication frameworks that go beyond what the court previously affirmed; or because even longstanding agency adjudication procedures take on a less flattering light when the agencies themselves are wielding ever bigger powers with ever bigger ambitions.

Simply put: Sometimes in majority opinions, sometimes in dissents, the Roberts Court’s conservative justices have raised new questions, and reopened old ones, about the constitutionality of “adjudication” by non-judicial tribunals. So have judges in the lower courts—including in Jarkesy’s challenge to the SEC’s process.

In 2022, the U.S. Court of Appeals for the 5th Circuit ruled that the SEC’s adjudication of Jarkesy’s case is triply unconstitutional. It held that the agency’s power to choose between judicial and in-house adjudication was effectively an unconstitutional “delegation” of legislative power; that the administrative law judge’s assertion of executive power without sufficient control by the agency’s presidentially appointed leaders violated Article II of the Constitution; and that adjudicating the SEC’s claims against Jarkesy without a full trial by jury violated the Seventh Amendment’s “right of jury trial” in “suits at common law.” (I explored that decision, the various issues, and the broader context in a long essay last year for Commentary.) The SEC, in turn, appealed to the Supreme Court to reverse its loss.

At the Supreme Court’s oral arguments, the justices dedicated almost the entire oral arguments to the Seventh Amendment jury issue, spending virtually no time on the nondelegation or Article II questions. And although the justices’ questions are often a poor proxy for their final decision, their questions strongly suggest that the agency’s in-house adjudication powers may soon be much more limited.

The Justice Department’s main argument on behalf of the SEC seemed to give even the non-originalists heartburn. According to the DOJ, the Seventh Amendment’s right to a jury trial simply does not apply at all when an agency brings the case in its own tribunal instead of a court. “The critical point is that the Seventh Amendment right to trial by jury has always depended on the nature of the forum and the nature of the cause of action,” Deputy Solicitor General Brian Fletcher argued. “By its terms, it applies to suits at common law.” And, he added, if “it’s an administrative proceeding,” then “it’s not a suit at common law.”

Not a single justice seemed to agree with the DOJ’s sweeping claim that the SEC can toggle the Seventh Amendment on or off by simply choosing whether to bring the case to a federal judge or an in-house ALJ. “I don’t understand why the forum is the first question,” Justice Ketanji Brown Jackson pressed. “It seems to me that the initial question is, what is the right or the duty or whatever that is being established?”

The conservative justices, such as Brett Kavanaugh, were even more skeptical: “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?”

Justice Samuel Alito pointed out that the government’s theory of the Seventh Amendment seemed to defeat the amendment’s entire purpose. “Isn’t the theory of the Seventh Amendment that people in this country should have protection against having their liberty or property taken away by officials who are answerable to a powerful executive, that the jury should be set up as a buffer[?]”

Chief Justice John Roberts was among the skeptics, too—consistent not only with his longstanding criticism of agency power and discretion generally, but also with his criticism of agency adjudication specifically. Early in the government’s presentation, he interrupted to ask what in the government’s case would stop Congress from moving any area of civil law currently litigated in courts to agency tribunals whenever Congress and the agency claim that a new agency process would more efficiently protect the public interest.

“The government’s involved in the health care sector,” the chief justice observed. “Could an agency”—he seemed to mean Congress—“determine that the cost of medical malpractice claims throughout health care, not just the particular aspect which the government’s participating in, interferes with what they’re trying to accomplish in the health care system, and so the subject of medical malpractice will be handled by a government agency, an expert agency, to reduce the costs of the benefit of health care that the government provides? No court, no jury?” The deputy solicitor general’s answer—“Potentially yes,” he conceded after venturing some initial caveats—may not have reassured the justices.

But Roberts, along with Justices Kavanaugh, Barrett, Gorsuch, Kagan, and others, seemed to grapple with the difficulty of drawing a line between what can and cannot be constitutionally committed to agency adjudication. Barrett pushed back against the government’s sweeping assertion that the agency’s own choice of tribunal would activate or negate a defendant’s Seventh Amendment’s right to jury. But she also pressed Jarkesy’s counsel to provide a reasonably clear rule that judges could apply predictably and evenhandedly. 

“I think part of what your colloquy with Justice Jackson is showing is that this isn’t exactly fraud,” she told counsel. “I mean, it doesn’t have to be an exact match, but how close is this to the common law tort of fraud? So what kind of a test would you propose for deciding whether something represented that common law right? I mean, [the government’s] test has the virtue—it’s very broad, but it has the virtue of being a pretty bright line.”

This seems the crux of the case for a majority of the justices: Congress cannot simply defeat the Seventh Amendment by moving suits involving a traditional common law right from Article III courts (and juries) to administrative agencies, and the test for any given area of law is how closely Congress’ nominally new “public” right resembles the previous “private” right.” 

That may be a very difficult line to draw across all statutes and agencies. Then again, as I noted this past summer, the Roberts Court has recently shown a willingness to draw lines generally separating different parts of government power, even while recognizing that it may be hard to apply that line in some future cases: between legislative and executive power in the Trump-era congressional subpoena cases, for example; or between state legislative and state judicial power in cases over the power to draw electoral district maps. The court may approach Jarkesy similarly: it may be willing to declare a broad rule that Congress cannot simply rephrase a common law claim with a few tweaks and declare federal courts and Seventh Amendment rights inapplicable.

And in any event, the case at hand seems more straightforward given the body of law at issue: civil fraud. As the 5th Circuit observed, “The rights that the SEC sought to vindicate in its enforcement action here arise ‘at common law’ under the Seventh Amendment. Fraud prosecutions were regularly brought in English courts at common law.” A majority of the Supreme Court may well agree.

But in two hours of oral argument, the moment that stood out most starkly to me was Roberts’ sense of recent history. Alluding to the key precedent of Atlas Roofing v. Occupational Safety and Health Administration, a 1977 case affirming OSHA’s power to adjudicate claims of unsafe working conditions without a Seventh Amendment jury, Roberts remarked:

Atlas Roofing is 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?

A decade ago, in perhaps his most pointed rhetorical argument against the modern administrative state’s power and discretion, Roberts pointed to the Founding Fathers: “The Framers could hardly have envisioned today’s ‘vast and varied federal bureaucracy’ and the authority administrative agencies now hold over our economic, social, and political activities,” he wrote in a 2013 dissent, quoting an earlier case. “The administrative state with its reams of regulations would leave them rubbing their eyes.”

Now Roberts is pointing not just to the founding of our constitutional republic but also to the founding of modern administrative law. One need not be a constitutional originalist to recognize that today’s turbocharged and ambitious administrative state bears ever less resemblance to the slower and humbler regulatory commissions of the 1940s, 1960s, and even 1980s. And, accordingly, precedents seemingly sensible for the Occupational Safety and Health Administration of 1977 may seem far less sensible in the hands of, say, today’s Securities and Exchange Commission. That realistic reappraisal of decades-old precedents may well animate the Roberts Court’s simultaneously originalist and realist approach to other areas of administrative law.

And speaking of other cases: A few hours after Chief Justice Roberts adjourned the Jarkesy arguments, one of the nation’s most significant companies filed an across-the-board constitutional challenge to another old agency that, like the SEC, has changed radically since its origins. 

In Meta v. FTC, Facebook’s parent company argues that the Federal Trade Commission is triply unconstitutional: It violates Article I of the Constitution by wielding standardless lawmaking power that cannot be delegated away by Congress; it violates Article II by executing laws independent from the president; and its combination of the prosecutorial and adjudicator roles, in the FTC’s own in-house “adjudication” process, violates the Fifth Amendment’s Due Process Clause. 

SEC v. Jarkesy is a major case. But it may turn out to be simply the prelude to a monumental one.

Adam White is a senior fellow at the American Enterprise Institute and co-director of the Antonin Scalia Law School’s C. Boyden Gray Center for the Study of the Administrative State.