SEC v. Jarkesy’s Implications for Environmental Enforcement Actions

As further discussed below, the Jarkesy case is applicable to an SEC administrative enforcement matter. However, the ruling could potentially affect future enforcement authorities for other administrative agencies, including state and federal environmental enforcement matters that seek punitive civil penalties, by giving defendants a right to demand a jury trial. The defendants would still be entitled to waive that right and seek an administrative settlement as an alternative.

The Holding

In SEC v. Jarkesy, the Supreme Court reviewed the SEC’s ability to adjudicate antifraud enforcement actions for civil penalties in house. The SEC brought an enforcement action against Jarkesy and his advisory firm alleging securities fraud in front of an administrative law judge rather than through a judicial proceeding in federal court. Jarkesy argued that this procedure violated his right to a jury trial under the Seventh Amendment of the US Constitution.

The Supreme Court affirmed the Fifth Circuit’s holding that Jarkesy’s right to a jury trial had been violated by the administrative proceeding. The majority explained that that the Seventh Amendment applies to suits “at common law” or that are legal in nature. They evaluated the cause of action brought against Jarkesy, particularly the remedy sought by the SEC, and held that the SEC’s action was legal in nature because it sought civil monetary penalties. The majority particularly focused on the fact that the penalties sought were meant to “punish and deter” the wrongdoer rather than to “restore the status quo.”

The majority also held that the “public rights” exception to the Seventh Amendment, which allows Congress to administratively adjudicate certain matters[1] that might otherwise be considered “legal in nature” without a jury, did not apply to Jarkesy’s case because the SEC’s suit was intended to target “the same basic conduct as common law fraud,” which was traditionally a private right. See here for a more in depth discussion of the opinion.

Significantly, the Court arrived at its decision solely based on the concept of a Seventh Amendment right to a jury trial. In affirming the Fifth Circuit’s opinion, the Court left intact the Fifth Circuit’s other holdings: (1) the SEC’s administrative process also violated the nondelegation doctrine by giving the SEC discretion to decide to bring an administrative action or a judicial action and (2) the process violated the separation of powers principle of the Take Care Clause due to the administrative scheme’s restrictions on removal of SEC Administrative Law Judges (ALJ).

Potential Implications for State and Federal Environmental Enforcement

While the opinion was limited to the SEC’s enforcement mechanism for securities fraud claims as noted by the dissent, many agencies employ similar administrative enforcement mechanisms to seek civil penalties. These administrative mechanisms are often statutorily mandated. The Court did not answer the question of how or if its reasoning may be applied to administrative proceedings beyond the SEC.

In the environmental sphere, the US Environmental Protection Agency (EPA) can either refer enforcement actions to the US Department of Justice for judicial proceedings or bring administrative enforcement actions in front of an EPA ALJ. In some instances, such as for violations of the Federal Insecticide, Fungicide, and Rodenticide Act, the agency can only pursue civil penalties through agency administrative enforcement proceedings. Either option allows EPA to seek civil penalties. Defendants can also settle both types of enforcement actions through a federal judicial Consent Decree or administrative consent agreements/final orders.

Below are some takeaways regarding the potential impact of Jarkesy on environmental enforcement.

• The Court based a lot of its Seventh Amendment analysis on Tull v. United States, in which the Court determined that certain actions for civil penalties under the Clean Water Act implicated a right to a jury trial. In the future, some courts may similarly apply the Seventh Amendment to other environmental statutes.
• The full implications of Jarkesy for EPA enforcement cases will likely be determined on a case-by-case basis in different administrative contexts. The implications will depend on whether the civil penalties being sought are restorative, rather than punitive, and whether the claim is similar to a historical cause of action at common law, such as common law nuisance. In the case of punitive penalties and violations rooted in common law, the right to a jury trial may well be triggered.
• If extended to EPA proceedings, Jarkesy would allow a party to force EPA to proceed in federal court. However, parties could still waive the right to a jury trial and engage in administrative consent agreements. Nothing in this opinion limits a respondent’s ability to do so. Presumably, parties would prefer the administrative path to settlement, rather than face the uncertainty and cost of a federal jury trial.
• Many states enforce their own environmental regulations through state environmental agencies and can seek civil penalties through state administrative agencies. Some states also incorporate jury trial rights in their state constitutions that are coextensive with the federal constitution. It remains to be seen how those processes will be impacted by Jarkesy, but in theory the same reasoning could apply.
• The Fifth Circuit’s holdings on the nondelegation doctrine and separation of powers violations were not addressed by the Supreme Court’s opinion. In letting those issues stand, the Supreme Court left open the question of how these issues could potentially impact other future administrative proceedings, including EPA administrative enforcement proceedings.

The firm’s Environmental team will continue to monitor case law and administrative changes in this area. Stay tuned for further developments.