Seventh Amendment requires jury trial when Government seeks punitive civil damages, not adjudication by administrative agencies

By Greg Mermelstein, Deputy Director & General Counsel, Missouri Public Defender

           When the Government seeks punitive civil damages, the Seventh Amendment mandates a jury trial, not an administrative proceeding, the U.S. Supreme Court held June 27 in Securities and Exchange Commission v. Jarkesy.

           Various federal securities laws enforced by the SEC prohibit investment professionals from making fraudulent misrepresentations.

           Until 2010, SEC enforcement actions to seek civil monetary damages against an investment professional for misrepresentation had to be brought in federal court with a right to a jury trial before an Article III judge. 

           But the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 gave the SEC co-extensive authority to impose civil damages through its own in-house, administrative proceedings.  Under Dodd-Frank, the SEC can choose to bring civil fraud charges in-house or in federal court.

           When the SEC adjudicates a matter in-house, the Commission decides facts, or delegates that function to an Administrative Law Judge that it employs, while its Division of Enforcement prosecutes the case.

           Judicial review is available once the administrative proceedings are over, but that review is very deferential.  The federal judge must treat the agency’s factual findings as “conclusive” if sufficiently supported by the record.

           In 2013, the SEC charged George Jarkesy Jr. and the fund he managed with securities fraud and sought civil penalties against them through an in-house administrative proceeding.

           That proceeding ultimately assessed a civil penalty of $300,000.

           Jarkesy petitioned for judicial review, and argued the administrative procedure violated his Seventh Amendment right to a jury trial.

           The Seventh Amendment provides that in “[s]uits at common law … the right to a jury trial shall be preserved.”

           The Fifth Circuit ruled the administrative procedure violated the Seventh Amendment.

Holding

           The Supreme Court affirmed, in a 6-3 opinion by Chief Justice Roberts.

           “The threshold issue is whether this action implicates the Seventh Amendment”, the Court said.  “It does.  The SEC’s antifraud provisions replicate common law fraud, and it well established that common law claims must be heard by a jury.”

           An early critique of the Constitution was its lack of a provision guaranteeing a jury trial in civil cases, the Court said.  “The Framers promptly adopted the Seventh Amendment to fix that flaw.”

           “[W]e have noted that the right is not limited to the ‘common-law forms of action recognized’ when the Seventh Amendment was ratified”, the Court said.

           The Seventh Amendment applies if a claim is “legal in nature”, the Court said.  To determine if a claim is “legal in nature,” as opposed to equitable, the proposed remedy must be considered.

           Government actions seeking civil monetary damages “historically” have been viewed as legal, thus requiring a jury, the Court said. 

           “In this case, the remedy is all but dispositive”, the Court said.  “While monetary damages can be legal or equitable, monetary damages are the prototypical common law remedy.”

           “What determines whether a monetary remedy is legal is if it is designed to punish or deter the wrongdoer, or, on the other hand, solely to ‘restore the status quo.’”

           The anti-fraud provisions which the SEC enforces concern “culpability, deterrence, and recidivism,” the Court said.  “Because they tie the availability of civil penalties to the perceived need to punish the defendant rather than to restore the victim, such considerations are legal rather than equitable.”

           The “final proof” that the SEC’s remedies are “punitive” is that the SEC is “not obligated to return any money to victims”, the Court said.

           “In sum, the civil penalties in this case are designed to punish and deter, not to compensate”, the Court said.  “They are therefore ‘a type of remedy at common law that could only be enforced in courts of law.’”

           “That conclusion effectively decides that this suit implicates the Seventh Amendment right, and that a defendant would be entitled to a jury on these claims.”

           Separation of powers prohibits the executive or legislative branches from withdrawing from the judiciary any matter which, from its nature, is the subject of a suit at common law, the Court said.

           According to The Federalist Papers, “there is no liberty if the power of judging is not separated from the legislative and executive powers”, the Court said.  “On that basis we have repeatedly explained that matters involving private rights may not be removed from Article III courts.”

           The Court rejected the Government’s argument that its enforcement action fell within the “public rights” exception to the Seventh Amendment, which allows the executive or legislative branches to decide certain matters exclusively, including matters effecting revenue, tariffs, or immigration.

           Even when the public rights exception applies, the “presumption” is still in “favor of Article III courts”, the Court said.

           “A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator”, the Court concluded.

Concurrence

           Justice Gorsuch, joined by Justice Thomas, concurred, but wrote separately “to highlight that other constitutional provisions reinforce the correctness of the Court’s course.”

           The Seventh Amendment “operates together with Article III and the Due Process Clause of the Fifth Amendment to limit how the government may go about depriving an individual of life, liberty, or property”, Gorsuch said.

           “Article III entitles individuals to an independent judge who will preside”, Gorsuch said.  “And due process promises that any trial will be held in accord with time honored principles,” such as the rules of evidence.

           “Taken together, all three provisions vindicate the Constitution’s promise of a ‘fair trial in a fair tribunal’”, Gorsuch said.

Dissent Predicts “Chaos”

           Justice Sotomayor, joined by Justices Kagan and Jackson, dissented.

           The Court has “repeatedly” allowed Congress to assign civil penalty enforcement actions to an agency for initial adjudication, subject to judicial review, Sotomayor said.

           More than 200 statutes authorize “dozens” of federal agencies to impose civil penalties for statutory violations, she said.

           “Congress had no reason to anticipate the chaos today’s majority would unleash after all these years”, Sotomayor said.

           “Today, for the very first time, this Court holds that Congress violated the Constitution by authorizing a federal agency to adjudicate a statutory right that inheres in the Government in its sovereign capacity, also known as a public right”, Sotomayor said.

           The majority “threaten[s] the separation of powers” by holding that Congress cannot assign certain public-rights matters to an administrative agency for initial determination because the matter “must come only to the Judiciary”, Sotomayor said.

           “The majority today upends longstanding precedent and the established practice of its coequal partners in our tripartite system of Government”, Sotomayor said.  “Because the Court fails to act as a neutral umpire when it rewrites established rules in the manner it does today, I respectfully dissent.”