Jarkesy v. SEC ( 2022 )

Case: 20-61007 Document: 00516323784 Page: 1 Date Filed: 05/18/2022
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
May 18, 2022
No. 20-61007
Lyle W. Cayce
Clerk
George R. Jarkesy, Jr.; Patriot28, L.L.C.,
Petitioners,
versus
Securities and Exchange Commission,
Respondent.
Petition for Review of an Order of
the United States Securities and Exchange Commission
No. 3-15255
Before Davis, Elrod, and Oldham, Circuit Judges.
Jennifer Walker Elrod, Circuit Judge:
Congress has given the Securities and Exchange Commission
substantial power to enforce the nation’s securities laws. It often acts as both
prosecutor and judge, and its decisions have broad consequences for personal
liberty and property. But the Constitution constrains the SEC’s powers by
protecting individual rights and the prerogatives of the other branches of
government. This case is about the nature and extent of those constraints in
securities fraud cases in which the SEC seeks penalties.
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The SEC brought an enforcement action within the agency against
Petitioners for securities fraud. An SEC administrative law judge adjudged
Petitioners liable and ordered various remedies, and the SEC affirmed on
appeal over several constitutional arguments that Petitioners raised.
Petitioners raise those same arguments before this court. We hold that:
(1) the SEC’s in-house adjudication of Petitioners’ case violated their
Seventh Amendment right to a jury trial; (2) Congress unconstitutionally
delegated legislative power to the SEC by failing to provide an intelligible
principle by which the SEC would exercise the delegated power, in violation
of Article I’s vesting of “all” legislative power in Congress; and (3) statutory
removal restrictions on SEC ALJs violate the Take Care Clause of Article II.
Because the agency proceedings below were unconstitutional, we GRANT
the petition for review, VACATE the decision of the SEC, and REMAND
for further proceedings consistent with this opinion.
I.
Petitioner Jarkesy established two hedge funds and selected Petitioner
Patriot28 as the investment adviser. The funds brought in over 100 investors
and held about $24 million in assets. In 2011, the SEC launched an
investigation into Petitioners’ investing activities, and a couple of years later
the SEC chose to bring an action within the agency, alleging that Petitioners
(along with some former co-parties) committed fraud under the Securities
Act, the Securities Exchange Act, and the Advisers Act. Specifically, the
agency charged that Petitioners: (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.
Petitioners sued in the U.S. District Court for the District of Columbia
to enjoin the agency proceedings, arguing that the proceedings infringed on
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various constitutional rights. But the district court, and later the U.S. Court
of Appeals for the D.C. Circuit, refused to issue an injunction, deciding that
the district court had no jurisdiction and that Petitioners had to continue with
the agency proceedings and petition the court of appeals to review any
adverse final order. See Jarkesy v. SEC, 48 F. Supp. 3d 32, 40 (D.D.C. 2014),
aff’d, 803 F.3d 9, 12 (D.C. Cir. 2015).
Petitioners’ proceedings moved forward. The ALJ held an
evidentiary hearing and concluded that Petitioners committed securities
fraud. Petitioners then sought review by the Commission. While their
petition for Commission review was pending, the Supreme Court held that
SEC ALJs had not been properly appointed under the Constitution. Lucia v.
SEC, 138 S. Ct. 2044, 2054–55 (2018). In accordance with that decision, the
SEC assigned Petitioners’ proceeding to an ALJ who was properly appointed.
But Petitioners chose to waive their right to a new hearing and continued
under their original petition to the Commission.
The Commission affirmed that Petitioners committed various forms
of securities fraud. It ordered Petitioners to cease and desist from
committing further violations and to pay a civil penalty of $300,000, and it
ordered Patriot28 to disgorge nearly $685,000 in ill-gotten gains. The
Commission also barred Jarkesy from various securities industry activities:
associating with brokers, dealers, and advisers; offering penny stocks; and
serving as an officer or director of an advisory board or as an investment
adviser.
Critical to this case, the Commission rejected several constitutional
arguments Petitioners raised. It determined that: (1) the ALJ was not biased
against Petitioners; (2) the Commission did not inappropriately prejudge the
case; (3) the Commission did not use unconstitutionally delegated legislative
power—or violate Petitioners’ equal protection rights—when it decided to
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pursue the case within the agency instead of in an Article III court; (4) the
removal restrictions on SEC ALJs did not violate Article II and separation-
of-powers principles; and (5) the proceedings did not violate Petitioners’
Seventh Amendment right to a jury trial. Petitioners then filed a petition for
review in this court.
II.
Petitioners raise several constitutional challenges to the SEC
enforcement proceedings.1 We agree with Petitioners that the proceedings
suffered from three independent constitutional defects: (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.
A.
Petitioners challenge the agency’s rejection of their constitutional
arguments. We review such issues de novo. See Emp. Sols. Staffing Grp. II,
L.L.C. v. Off. of Chief Admin. Hearing Officer, 833 F.3d 480, 484 (5th Cir.
2016); Trinity Marine Prods., Inc. v. Chao, 512 F.3d 198, 201 (5th Cir. 2007).
B.
Petitioners argue that they were deprived of their Seventh
Amendment right to a jury trial. The SEC responds that the legal interests
at issue in this case vindicate distinctly public rights, and that Congress
therefore appropriately allowed such actions to be brought in agency
1
Multiple amici have filed briefs with this court as well: the Cato Institute, Phillip
Goldstein, Mark Cuban, Nelson Obus, and the New Civil Liberties Alliance. Each argues
that the SEC proceedings exceeded constitutional limitations for reasons that Petitioners
raise.
4
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proceedings without juries. We agree with Petitioners. The Seventh
Amendment guarantees Petitioners a jury trial because the SEC’s
enforcement action is akin to traditional actions at law to which the jury-trial
right attaches. And Congress, or an agency acting pursuant to congressional
authorization, cannot assign the adjudication of such claims to an agency
because such claims do not concern public rights alone.
1.
Thomas Jefferson identified the jury “as the only anchor, ever yet
imagined by man, by which a government can be held to the principles of its
constitution.” Letter from Thomas Jefferson to Thomas Paine (July 11,
1789), in The Papers of Thomas Jefferson 267 (Julian P. Boyd ed., 1958). And
John Adams called trial by jury (along with popular elections) “the heart and
lungs of liberty.” The Revolutionary Writings of John Adams 55 (C. Bradley
Thompson ed., 2000); see also Jennifer W. Elrod, Is the Jury Still Out?: A Case
for the Continued Viability of the American Jury, 44 Tex. Tech L. Rev. 303,
303–04 (2012) (explaining that the jury is “as central to the American
conception of the consent of the governed as an elected legislature or the
independent judiciary”).2
2
Veneration of the jury as safeguard of liberty predates the American Founding.
Our inherited English common-law tradition has long extolled the jury as an institution.
William Blackstone said that trial by jury is “the glory of the English law” and “the most
transcendent privilege which any subject can enjoy or wish for, that he cannot be affected,
either in his property, his liberty, or his person, but by the unanimous consent of twelve of
his neighbors and equals.” Mitchell v. Harmony, 54 U.S. 115, 142–43 (1851) (quoting 4
William Blackstone, Commentaries on the Laws of England 227–29 (Oxford, Clarendon
Pr. 1992) (1765)); see also Jennifer W. Elrod, W(h)ither The Jury? The Diminishing Role of the
Jury Trial in Our Legal System, 68 Wash. & Lee L. Rev. 3, 7 (2011). Indeed, King George
III’s attempts to strip colonists of their right to trial by jury was one of the chief grievances
aired against him and was a catalyst for declaring independence. The Declaration of
Independence para. 20 (U.S. 1776).
5
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Civil juries in particular have long served as a critical check on
government power. So precious were civil juries at the time of the Founding
that the Constitution likely would not have been ratified absent assurance
that the institution would be protected expressly by amendment. 2 The
Debate on the Constitution 549, 551, 555, 560, 567 (Bernard Bailyn ed. 1993)
(collecting various state ratification convention documents calling for the
adoption of a civil jury trial amendment); The Federalist No. 83 (Alexander
Hamilton) (“The objection to the plan of the convention, which has met with
most success in this State [i.e., New York], and perhaps in several of the other
States, is that relative to the want of a constitutional provision for the trial by
jury in civil cases.”); Mercy Otis Warren, Observations on the Constitution
(1788), in 2 The Debate on the Constitution 290 (Bernard Bailyn ed. 1993)
(worrying that the unamended Constitution would lead to “[t]he abolition of
trial by jury in civil causes”); Parsons v. Bedford, 28 U.S. (3 Pet.) 433, 446
(1830) (“One of the strongest objections originally taken against the
constitution of the United States, was the want of an express provision
securing the right of trial by jury in civil cases.”).3
Trial by jury therefore is a “fundamental” component of our legal
system “and remains one of our most vital barriers to governmental
arbitrariness.” Reid v. Covert, 354 U.S. 1, 9–10 (1957). “Indeed, ‘[t]he right
to trial by jury was probably the only one universally secured by the first
American state constitutions . . . .’” Parklane Hosiery Co., Inc. v. Shore, 439
3
See also Kenneth Klein, The Validity of The Public Rights Doctrine in Light of the
Historical Rationale of the Seventh Amendment, 21 Hastings Const. L.Q. 1013, 1015 (1994)
(“At the time the Constitution was proposed, the people of the United States greatly
distrusted government, and saw the absence of a guaranteed civil jury right as a reason,
standing alone, to reject adoption of the Constitution; only by promising the Seventh
Amendment did the Federalists secure adoption of the Constitution in several of the state
ratification debates.”).
6
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U.S. 322, 341 (1979) (Rehnquist, J., dissenting) (quoting Leonard Levy,
Legacy of Suppression: Freedom of Speech and Press in Early American
History 281 (1960)). Because “[m]aintenance of the jury as a fact-finding
body is of such importance and occupies so firm a place in our history and
jurisprudence[,] . . . any seeming curtailment of the right to a jury trial should
be scrutinized with the utmost care.” Dimick v. Schiedt, 293 U.S. 474, 486
(1935).
The Seventh Amendment protects that right. It 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, and no fact tried by a jury,
shall be otherwise reexamined in any Court of the United States, than
according to the rules of the common law.” U.S. Const. amend. VII. The
Supreme Court 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. Tull v. United States, 481 U.S.
412, 417 (1987). The term can include suits brought under a statute as long
as the suit seeks common-law-like legal remedies. Id. at 418–19. 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. Id. at 418–24.
That is not to say, however, that Congress may never assign
adjudications to agency processes that exclude a jury. See Atlas Roofing Co.
v. Occupational Safety & Health Rev. Comm’n, 430 U.S. 442, 455 (1977).
“[W]hen Congress properly assigns a matter to adjudication in a non-Article
III tribunal, the Seventh Amendment poses no independent bar to the
adjudication of that action by a nonjury factfinder.” Oil States Energy Servs.,
LLC v. Greene’s Energy Grp., LLC, 138 S. Ct. 1365, 1379 (2018) (internal
quotations omitted).
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Whether Congress may properly assign an action to administrative
adjudication depends on whether the proceedings center on “public rights.”
Atlas Roofing, 430 U.S. at 450. “[I]n cases in which ‘public rights’ are being
litigated[,] e.g., cases in which the Government sues in its sovereign capacity
to enforce public rights created by statutes within the power of Congress to
enact[,] the Seventh Amendment does not prohibit Congress from assigning
the factfinding function and initial adjudication to an administrative forum
with which the jury would be incompatible.” Id. Describing proper
assignments, the Supreme Court identified situations “where the
Government is involved in its sovereign capacity under an otherwise valid
statute creating enforceable public rights. Wholly private tort, contract, and
property cases, [and] a vast range of other cases as well are not at all
implicated.” Id. at 458.
The Supreme Court refined the public-right concept as it relates to
the Seventh Amendment in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33(1989). There, the Court clarified that Congress cannot circumvent the
Seventh Amendment jury-trial right simply by passing a statute that assigns
“traditional legal claims” to an administrative tribunal. Id. at 52. Public
rights, the Court explained, arise when Congress passes a statute under its
constitutional authority that creates a right so closely integrated with a
comprehensive regulatory scheme that the right is appropriate for agency
resolution. Id. at 54.
The analysis thus moves in two stages. First, a court must determine
whether an action’s claims arise “at common law” under the Seventh
Amendment. See Tull, 481 U.S. at 417. Second, if the action involves
common-law claims, a court must determine whether the Supreme Court’s
public-rights cases nonetheless permit Congress to assign it to agency
adjudication without a jury trial. See Granfinanciera, 492 U.S. at 54; Atlas
Roofing, 430 U.S. at 455. Here, the relevant considerations include:
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(1) whether “Congress ‘creat[ed] a new cause of action, and remedies
therefor, unknown to the common law,’ because traditional rights and
remedies were inadequate to cope with a manifest public problem”; and
(2) whether jury trials would “go far to dismantle the statutory scheme” or
“impede swift resolution” of the claims created by statute. Granfinanciera,
492 U.S. at 60–63 (quoting Atlas Roofing, 430 U.S. at 454 n.11, 461 (first and
second quotations)).
2.
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. See 3
William Blackstone, Commentaries on the Laws of England *42 (explaining
the common-law courts’ jurisdiction over “actions on the case which allege
any falsity or fraud; all of which savour of a criminal nature, although the
action is brought for a civil remedy; and make the defendant liable in
strictness to pay a fine to the king, as well as damages to the injured party”).
And even more pointedly, the Supreme Court has held that actions seeking
civil penalties are akin to special types of actions in debt from early in our
nation’s history which were distinctly legal claims. Tull, 481 U.S. at 418–19.
Thus, “[a] civil penalty was a type of remedy at common law that could only
be enforced in courts of law.” Id. at 422.
Applying that principle, the Court in Tull held that the right to a jury
trial applied to an action brought by an agency seeking civil penalties for
violations of the Clean Water Act. Id. at 425. Likewise here, the actions the
SEC brought seeking civil penalties under securities statutes are akin to those
same 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.
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That conclusion harmonizes with the holdings of other courts
applying Tull. The Seventh Circuit followed the Supreme Court’s lead in
that case and has specifically said that when the SEC brings an enforcement
action to obtain civil penalties under a statute, the subject of the action has
the right to a jury trial. SEC v. Lipson, 278 F.3d 656, 662 (7th Cir. 2002)
(“Because the SEC was seeking both legal and equitable relief (the former
under the Insider Trading Sanctions Act, 15 U.S.C. § 78u–1, which (in
subsection (a)(1)) authorizes the imposition of civil penalties for insider
trading at the suit of the SEC[)] . . . [the defendant] was entitled to and
received a jury trial.”); see also id. (explaining that another circuit was wrong
to tacitly assume “that civil penalties in SEC cases are not a form of legal
relief”4). Some district courts have applied Tull similarly. See, e.g., SEC v.
Badian, 822 F. Supp. 2d 352, 365 (S.D.N.Y. 2011) (explaining that “whether
the facts are such that the defendants can be subjected to a civil penalty . . . is
a question for the jury, [and] the determination of the severity of the civil
penalty to be imposed . . . is a question for the Court, once liability is
established”); SEC v. Solow, 554 F. Supp. 2d 1356, 1367 (S.D. Fla. 2008)
(applying Tull for the proposition that civil penalties are “legal, as opposed
to equitable, in nature,” and that it therefore “was [the defendant’s]
constitutional right to have a jury determine his liability, with [the court]
thereafter determining the amount of penalty, if any”).
Other elements of the action brought by the SEC against Petitioners
are more equitable in nature, but that fact does not invalidate the jury-trial
right that attaches because of the civil penalties sought. The Supreme Court
has held that the Seventh Amendment applies to proceedings that involve a
mix of legal and equitable claims—the facts relevant to the legal claims
4
The Seventh Circuit was referring to the Ninth Circuit’s opinion in SEC v.
Clark, 915 F.2d 439, 442 (9th Cir. 1990). Clark did not address the issue whatsoever.
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should be adjudicated by a jury, even if those facts relate to equitable claims
too. See Ross v. Bernhard, 396 U.S. 531, 537–38 (1970); see also Lipson, 278
F.3d at 662 (noting that the defendant was entitled to a jury trial because the
SEC sought legal relief in the form of penalties, even though the SEC also
sought equitable relief). Here, the SEC sought to ban Jarkesy from
participation in securities industry activities and to require Patriot28 to
disgorge ill-gotten gains—both equitable remedies. Even so, the penalty
facet of the action suffices for the jury-trial right to apply to an adjudication
of the underlying facts supporting fraud liability.
3.
Next, the action the SEC brought against Petitioners is not the sort
that may be properly assigned to agency adjudication under the public-rights
doctrine. Securities fraud actions are not new actions unknown to the
common law. Jury trials in securities fraud suits would not “dismantle the
statutory scheme” addressing securities fraud or “impede swift resolution”
of the SEC’s fraud prosecutions. And such suits are not uniquely suited for
agency adjudication.
Common-law courts have heard fraud actions for centuries, even
actions brought by the government for fines. See Blackstone, supra at *42; see
also Tull, 481 U.S. at 422 (“A civil penalty was a type of remedy at common
law that could only be enforced in courts of law.”). Naturally, then, the
securities statutes at play in this case created causes of action that reflect
common-law fraud actions. The traditional elements of common-law fraud
are (1) a knowing or reckless material misrepresentation, (2) that the
tortfeasor intended to act on, and (3) that harmed the plaintiff. In re
Deepwater Horizon, 857 F.3d 246, 249 (5th Cir. 2017). The statutes under
which the SEC brought securities fraud actions use terms like “fraud” and
“untrue statement[s] of material fact” to describe the prohibited conduct.
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See 15 U.S.C. §§ 77a–77aa, 78j(b), 80b-6. When “Congress uses terms that
have accumulated settled meaning under . . . the common law, a court must
infer, unless the statute otherwise dictates, that Congress means to
incorporate the established meaning of these terms.” Nationwide Mut. Ins.
Co. v. Darden, 503 U.S. 318, 322 (1992) (quoting Cmty. for Creative Non-
Violence v. Reid, 490 U.S. 730, 739 (1989)); see also Felix Frankfurter, Some
Reflections on the Reading of Statutes, 47 Colum. L. Rev. 527, 537 (1947)
(explaining that “if a word is obviously transplanted from another legal
source, whether the common law or other legislation, it brings the old soil
with it”).
Accordingly, the Supreme Court has often looked to common-law
principles to interpret fraud and misrepresentation under securities statutes.
See, e.g, Omnicare, Inc. v. Laborers Dist. Council Indus. Pension Fund, 575 U.S.
175, 191 (2015) (considering the Restatement (Second) of Torts to determine
whether material omissions are actionable under a securities statute); Dura
Pharms., Inc. v. Broudo, 544 U.S. 336, 343–44 (2005) (relying on “the
common-law roots of the securities fraud action” in “common-law deceit
and misrepresentation actions” to interpret the statutory securities-fraud
action); SEC v. Cap. Gains Rsch. Bureau, 375 U.S. 180, 192–95 (1963)
(considering the principles of common-law fraud to determine the
requirements of fraud under the Advisers Act). Thus, fraud actions under
the securities statutes echo actions that historically have been available under
the common law.
Next, jury trials would not “go far to dismantle the statutory scheme”
or “impede swift resolution” of the statutory claims. See Granfinanciera, 492
U.S. at 60–63. For one, the statutory scheme itself allows the SEC to bring
enforcement actions either in-house or in Article III courts, where the jury-
trial right would apply. See Dodd–Frank Act § 929P(a), 15 U.S.C. § 78u-2(a).
If Congress has not prevented the SEC from bringing claims in Article III
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courts with juries as often as it sees fit to do so, and if the SEC has in fact
brought many such actions to jury trial over the years,5 then it is difficult to
see how jury trials could “dismantle the statutory scheme.” Congress could
have purported to assign such proceedings solely to administrative tribunals,
but it did not. And there also is no evidence that jury trials would impede
swift resolution of the claims.6 In this case, for example, the SEC took seven
years to dispose of Petitioners’ case and makes no argument that proceedings
with a jury trial would have been less efficient.
Relatedly, securities-fraud enforcement actions are not the sort that
are uniquely suited for agency adjudication. Again, Congress has not limited
the SEC’s ability to bring enforcement actions in Article III courts. Consider
the statutory scheme in Atlas Roofing for contrast. The statutes in that case
were new and somewhat unusual. They provided elaborate enforcement
mechanisms for the sorts of claims that likely could not have been brought in
legal actions before that point. See Atlas Roofing, 430 U.S. at 445 (describing
how the statutes required factfinders to undertake detailed assessments of
workplace safety conditions and to make unsafe-conditions findings even if
no injury had occurred). But the federal courts have dealt with actions under
5
Indeed, the SEC regularly brings securities-fraud actions in Article III courts and
adjudicates them through jury trials. See, e.g., SEC v. Fowler, 6 F.4th 255, 258–60 (2d Cir.
2021); SEC v. Johnston, 986 F.3d 63, 71 (1st Cir. 2021); SEC v. Life Partners Holdings, Inc.,
854 F.3d 765, 772 (5th Cir. 2017); SEC v. Quan, 817 F.3d 583, 587 (8th Cir. 2016); SEC v.
Miller, 808 F.3d 623, 626 (2d Cir. 2015); SEC v. Jasper, 678 F.3d 1116, 1119, 1121–22 (9th
Cir. 2012); SEC v. Seghers, 298 F. App’x 319, 321 (5th Cir. 2008).
6
The dissenting opinion contends that these considerations are “not decisive”
(that the SEC has for decades sued in Article III courts under securities statutes) or “not
determinative” (that those same suits are not unique to agency adjudication). To disregard
these facts is to ignore the Supreme Court’s explanation for what public rights are made of.
And in any event, though the facts may not in isolation make up a private right, they
together establish (along with the other considerations discussed above) that the right being
vindicated here is a private right, not a public one.
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the securities statutes for many decades, and there is no reason to believe that
such courts are suddenly incapable of continuing that work just because an
agency may now share some of the workload. In fact, for the first decades of
the SEC’s existence, securities-fraud actions against nonregistered parties
could be brought only in Article III courts. Thomas Glassman, Ice Skating
Uphill: Constitutional Challenges to SEC Administrative Proceedings, 16 J. Bus.
& Sec. L. 47, 50–52 (2015).7
The SEC counters that the securities statutes are designed to protect
the public at large, and that some circuits have identified SEC enforcement
actions as vindicating rights on behalf of the public. Indeed, the SEC says,
the statutes allow for enforcement proceedings based on theories broader
than actions like fraud that existed at common law.
Those facts do not convert the SEC’s action into one focused on
public rights. Surely Congress believes that the securities statutes it passes
serve the public interest and the U.S. economy overall, not just individual
parties. Yet 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. See Granfinanciera, 492 U.S. at 61 (explaining that “Congress cannot
eliminate a party’s Seventh Amendment right to a jury trial merely by
relabeling the cause of action to which it attaches and placing exclusive
jurisdiction in an administrative agency or a specialized court of equity”).
Purely private suits for securities fraud likely would have a similar public
purpose—they too would serve to discourage and remedy fraudulent
7
Moreover, the Supreme Court has noted that agency adjudicators generally do
not have special expertise to address structural constitutional claims—precisely the issues
central to this case. Carr v. Saul, 141 S. Ct. 1352, 1360 (2021) (“[T]his Court has often
observed that agency adjudications are generally ill suited to address structural
constitutional challenges, which usually fall outside the adjudicators’ areas of technical
expertise.”).
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behavior in securities markets. That does not mean such suits concern public
rights at their core. Granted, some actions provided for by the securities
statutes may be new and not rooted in any common-law corollary. The fact
remains, though, that the enforcement action seeking penalties in this case
was one for securities fraud, which is nothing new and nothing foreign to
Article III tribunals and juries.
That being so, Petitioners had the right for a jury to adjudicate the
facts underlying any potential fraud liability that justifies penalties. And
because those facts would potentially support not only the civil penalties
sought by the SEC, but the injunctive remedies as well, Petitioners had a
Seventh Amendment right to a jury trial for the liability-determination
portion of their case.
4.
The dissenting opinion cannot define a “public right” without using
the term itself in the definition. That leads to a good bit of question-begging.
It says at times that the “SEC’s enforcement action” is itself “a ‘public
right’ because it is a case ‘in which the Government sues in its sovereign
capacity to enforce public rights.” Post at 37. So the action is a public right
because (1) the SEC is the government, and (2) it is vindicating a public right.
And what is that public right being vindicated? The dissenting opinion does
not say. In reality, the dissenting opinion’s rule is satisfied by the first step
alone: The action is itself a “public right” because the SEC is the
government. And the not-so-far-removed consequences that flow from that
conclusion: When the federal government sues, no jury is required. This is
perhaps a runner-up in the competition for the “Nine Most Terrifying
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Words in the English Language.”8 But fear not, the dissenting opinion’s
proposal runs headlong into Granfinanciera: “Congress cannot eliminate a
party’s Seventh Amendment right to a jury trial merely by relabeling the
cause of action to which it attaches and placing exclusive jurisdiction in an
administrative agency or a specialized court of equity” 492 U.S. at 61. With
that limit in place, the dissenting opinion’s bright-line rule burns out.
Congress cannot change the nature of a right, thereby circumventing the
Seventh Amendment, by simply giving the keys to the SEC to do the
vindicating.
In this light, this approach treats the government’s involvement as a
sufficient condition for converting “private rights” into public ones. But
from 1856 to 1989, the government’s involvement in a suit was only a
necessary condition, not a sufficient condition, for determining whether a suit
vindicated public rights. See Granfinanciera, 492 U.S. at 65–66, 68–69
(Scalia, J., concurring in part) (referring to Murray’s Lessee v. Hoboken Land
& Improvement Co., 18 U.S. (How.) 272, 283 (1856), and N. Pipeline Constr.
Co. v. Marathon Pipeline Co., 458 U.S. 50, 68–69 (1982) (plurality op.)); cf. N.
Pipeline Constr. Co., 458 U.S. at 69 n.23 (“It is thus clear that the presence of
the United States as a proper party to the proceeding is a necessary but not
sufficient means of distinguishing ‘private rights’ from ‘public rights.’”).
Then Granfinanciera said that a dispute between two private parties could
still vindicate “public rights,” such that the government was no longer a
necessary condition for such suits. See 492 U.S. at 53–55. The dissenting
opinion thus says that, after Granfinanciera, the government is no longer a
necessary condition, but it is now a sufficient condition. That is at odds with
Granfinanciera and does not follow from any of the Court’s previous
8
Cf. Ronald Reagan, Presidential News Conference (Aug. 12, 1986),
https://www.presidency.ucsb.edu/documents/the-presidents-news-conference-957.
16
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decisions, which stressed that the government’s involvement alone does not
convert a suit about private rights into one about public rights.
The question is not just whether the government is a party, but also
whether the right being vindicated is public or private, and how it is being
vindicated. Tracing the roots of, and justification for, the public-rights
doctrine, the Supreme Court has explained “that certain prerogatives were
[historically] reserved to the political Branches of Government.” N. Pipeline
Constr. Co., 458 U.S. at 67. Specifically, “[t]he public-rights doctrine is
grounded in a historically recognized distinction between matters that could
be conclusively determined by the Executive and Legislative Branches and
matters that are ‘inherently . . . judicial.’” Id. at 68 (quoting Ex parte Bakelite
Corp., 279 U.S. 438, 458 (1929)).
The inquiry is thus inherently historical. The dissenting opinion tries
to avoid the history by again emphasizing that Granfinanciera dealt with
private parties, not the government. But again, if the right being vindicated
is a private one, it is not enough that the government is doing the suing. That
means we must consider whether the form of the action—whether brought
by the government or by a private entity—is historically judicial, or if it
reflects the sorts of issues which courts of law did not traditionally decide.
As discussed in Part II.B.2, history demonstrates that fraud claims like
these are “traditional legal claims” that arose at common law. Even aside
from post-Atlas Roofing refinements of the “public rights” doctrine, this fact,
among others, distinguishes that case. In Atlas Roofing, OSHA empowered
the government to pursue civil penalties and abatement orders whether or
not any employees were “actually injured or killed as a result of the [unsafe
working] condition.” 430 U.S. at 445; see also id. at 461 (“[Congress] created
a new cause of action, and remedies therefor, unknown to the common law
17
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. . . .”). The government’s right to relief was exclusively a creature of statute
and was therefore distinctly public in nature.
In contrast, fraud claims, including the securities-fraud claims here,
are quintessentially about the redress of private harms. Indeed, the
government alleges that Petitioners defrauded particular investors. Cf. 15
U.S.C. §§ 77q(a), 78j(b), 80b-6. As explained above, these fraud claims and
civil penalties are analogous to traditional fraud claims at common law in a
way that the “new” claims and remedies in Atlas Roofing were not. See Atlas
Roofing, 430 U.S. at 461.
That being so, Granfinanciera’s considerations about whether
Congress created a new action unfamiliar to the common law, and whether
jury trial rights are incompatible with the statutory scheme, are appropriate
for us to address even if the suit involves the federal government. And as
discussed above: (1) this type of action was commonplace at common law,
(2) jury trial rights are consistent and compatible with the statutory scheme,
and (3) such actions are commonly considered by federal courts with or
without the federal government’s involvement. Thus, the agency
proceedings below violated Petitioners’ Seventh Amendment rights, and the
SEC’s decision must be vacated.
C.
Petitioners next argue 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. Because Congress gave the SEC a significant legislative power
18
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by failing to provide it with an intelligible principle to guide its use of the
delegated power, we agree with Petitioners.9
“We the People” are the fountainhead of all government power.
Through the Constitution, the People delegated some of that power to the
federal government so that it would protect rights and promote the common
good. See The Federalist No. 10 (James Madison) (explaining that one of the
defining features of a republic is “the delegation of the government . . . to a
small number of citizens elected by the rest”). But, in keeping with the
Founding principles that (1) men are not angels, and (2) “[a]mbition must be
made to counteract ambition,” see The Federalist No. 51 (James Madison),
the People did not vest all governmental power in one person or entity. It
separated the power among the legislative, executive, and judicial branches.
See The Federalist No. 47 (James Madison) (“The accumulation of all
powers, legislative, executive, and judiciary, in the same hands, whether of
one, a few, or many, and whether hereditary, self-appointed, or elective, may
justly be pronounced the very definition of tyranny.”). The legislative power
is the greatest of these powers, and, of course, it was given to Congress. U.S.
Const. art. I, § 1.
The Constitution, in turn, provides strict rules to ensure that
Congress exercises the legislative power in a way that comports with the
People’s will. Every member of Congress is accountable to his or her
constituents through regular popular elections. U.S. Const. art I, §§ 2, 3; id.
amend. XVII, cl. 1. And a duly elected Congress may exercise the legislative
power only through the assent of two separately constituted chambers
9
This is an alternative holding that provides ground for vacating the SEC’s
judgment. “This circuit follows the rule that alternative holdings are binding precedent
and not obiter dictum.” Texas v. United States, 809 F.3d 134, 178 n.158 (5th Cir. 2015)
(quoting United States v. Potts, 644 F.3d 233, 237 n.3 (5th Cir. 2011)).
19
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(bicameralism) and the approval of the President (presentment). U.S. Const.
art. I, § 7. This process, cumbersome though it may often seem to eager
onlookers,10 ensures that the People can be heard and that their
representatives have deliberated before the strong hand of the federal
government raises to change the rights and responsibilities attendant to our
public life. Cf. Rachel E. Barkow, Separation of Powers and the Criminal Law,
58 Stan. L. Rev. 989, 1017 (2006). (“[T]he Framers weighed the need for
federal government efficiency against the potential for abuse and came out
heavily in favor of limiting federal government power over crime.”).
But that accountability evaporates if a person or entity other than
Congress exercises legislative power. See Gundy v. United States, 139 S. Ct.
2116, 2134 (2019) (Gorsuch, J., dissenting) (“[B]y directing that legislating
be done only by elected representatives in a public process, the Constitution
sought to ensure that the lines of accountability would be clear: The
sovereign people would know, without ambiguity, whom to hold accountable
for the laws they would have to follow.”). Thus, sequestering that power
within the halls of Congress was essential to the Framers. As John Locke—
10
Indeed, President Woodrow Wilson, the original instigator of the agency that
became the SEC, believed agencies like that one could solve the “problem” of
congressional gridlock and the burden of popular accountability. See Cochran v. SEC, 20
F.4th 194, 218 (5th Cir. 2021) (Oldham, J., concurring) (“Wilson’s ‘new constitution’
would ditch the Founders’ tripartite system and their checks and balances for a ‘more
efficient separation of politics and administration, which w[ould] enable the bureaucracy to
tend to the details of administering progress without being encumbered by the
inefficiencies of politics.’” (quoting Ronald J. Pestritto, Woodrow Wilson and the Roots of
Modern Liberalism 227 (2005))), cert. granted sub nom., SEC v. Cochran, 21-1239, 2022 WL
1528373 (U.S. May 16, 2022); see also id. (“Wilson’s goal was to completely separate ‘the
province of constitutional law’ from ‘the province of administrative function.’” (quoting
Philip Hamburger, Is Administrative Law Unlawful? 464 (2014))).
20
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a particularly influential thinker at the Founding—explained, not even the
legislative branch itself may give the power away:
The legislative cannot transfer the power of making laws to any
other hands; for it being but a delegated power from the people,
they who have it cannot pass it over to others. The people
alone can appoint the form of the commonwealth, which is by
constituting the legislative, and appointing in whose hands that
shall be. And when the people have said we will submit to rules,
and be governed by laws made by such men, and in such forms,
nobody else can say other men shall make laws for them; nor
can the people be bound by any laws but such as are enacted by
those whom they have chosen and authorised to make laws for
them.
Id. at 2133–34 (quoting John Locke, The Second Treatise of Civil
Government and a Letter Concerning Toleration § 141, p. 71 (1947)).11
Article I of the Constitution thus provides that “[a]ll legislative
Powers herein granted shall be vested in a Congress of the United States.”
U.S. Const. art. I, § 1 (emphasis added). In keeping with Founding
conceptions of separation of powers, 12 the Supreme Court has made clear
that Congress cannot “delegate to the Courts, or to any other tribunals,
powers which are strictly and exclusively legislative.” Wayman v. Southard,
23 U.S. (10 Wheat.) 1, 42 (1825); see also A.L.A. Schechter Poultry Corp. v.
11
Locke’s perspective on the legislature’s delegation of its power was influential in
the United States around the time of the framing of the Constitution. See Hamburger, supra
at 384.
12
Principles of non-delegation had even taken hold in England before the American
Founding. See Hamburger, supra at 381 (explaining that “even under [King] James I, the
judges recognized that the king’s prerogative power came from his subjects—that he was
exercising a power delegated by the people” and, as a result, he could not transfer the royal
powers to anyone else); see also id. (“[P]arliamentary subdelegations were widely
understood to be unlawful.”).
21
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United States, 295 U.S. 495, 529 (1935) (“Congress is not permitted to
abdicate or to transfer to others the essential legislative functions with which
it is thus vested.”). According to the Supreme Court’s more recent
formulations of that longstanding rule,13 Congress may grant regulatory
power to another entity only if it provides an “intelligible principle” by which
the recipient of the power can exercise it. Mistretta v. United States, 488 U.S.
361, 372 (1989) (quoting J.W. Hampton, Jr., & Co. v. United States, 276 U.S.
394, 409 (1928)). The two questions we must address, then, are (1) whether
Congress has delegated power to the agency that would be legislative power
but-for an intelligible principle to guide its use and, if it has, (2) whether it
has provided an intelligible principle such that the agency exercises only
executive power.14
We first conclude that Congress has delegated to the SEC what would
be legislative power absent a guiding intelligible principle. Government
actions are “legislative” if they have “the purpose and effect of altering the
legal rights, duties and relations of persons . . . outside the legislative
branch.” INS v. Chadha, 462 U.S. 919, 952 (1983). The Supreme Court has
noted that the power to assign disputes to agency adjudication is “peculiarly
13
Some contemporary academics have argued that the non-delegation doctrine
lacks a sound historical basis. See Julian Davis Mortenson & Nicholas Bagley, Delegation at
the Founding, 121 Colum. L. Rev. 277 (2021); but see Ilan Wurman, Nondelegation at the
Founding, 130 Yale L.J. 1490 (2021) (arguing that the doctrine was present at the
Founding); Philip Hamburger, Delegating or Divesting?, 115 Nw. U. L. Rev. Online 88
(2020) (similar). Of course, our role as an inferior court is to faithfully apply Supreme
Court precedent, so we do not reach the proper historical scope of the non-delegation
doctrine. See Morrow v. Meachum, 917 F.3d 870, 874 n.4 (5th Cir. 2019).
14
Adrian Vermeule, No, 93 Tex. L. Rev. 1547, 1558 (2015) (“[T]here is [no]
delegation of legislative power at all so long as the legislature has supplied an ‘intelligible
principle’ to guide the exercise of delegated discretion. Where there is such a principle,
the delegatee is exercising executive power, not legislative power.” (emphasis and footnote
omitted)).
22
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within the authority of the legislative department.” Oceanic Steam
Navigation Co. v. Stranahan, 214 U.S. 320, 339 (1909).15 And, as discussed
above, in some special circumstances Congress has the power to assign to
agency adjudication matters traditionally at home in Article III courts. Atlas
Roofing, 430 U.S. at 455. Through Dodd–Frank § 929P(a), Congress gave
the SEC the power to bring securities fraud actions for monetary penalties
within the agency instead of in an Article III court whenever the SEC in its
unfettered discretion decides to do so. See 15 U.S.C. § 78u-2(a). Thus, it
gave the SEC the ability to determine which subjects of its enforcement
actions are entitled to Article III proceedings with a jury trial, and which are
not. That was a delegation of legislative power. As the Court said in Crowell
v. Benson, “the mode of determining” which cases are assigned to
administrative tribunals “is completely within congressional control.” 285
U.S. 22, 50 (1932) (quoting Ex parte Bakelite Corp., 279 U.S. at 451).
The SEC argues that by choosing whether to bring an action in an
agency tribunal instead of in an Article III court it merely exercises a form of
prosecutorial discretion—an executive, not legislative, power. That position
reflects a misunderstanding of the nature of the delegated power. Congress
did not, for example, merely give the SEC the power to decide whether to
bring enforcement actions in the first place, or to choose where to bring a case
among those district courts that might have proper jurisdiction. It instead
effectively gave the SEC the power to decide which defendants should
15
Moreover, at the Virginia Ratifying Convention in 1788, then-delegate John
Marshall suggested that it is proper to the legislative power to determine the expedience of
assigning particular matters for jury trial. See John Marshall on the Fairness and
Jurisdiction of the Federal Courts, in 2 The Debate on the Constitution 740 (Bernard
Bailyn ed. 1993) (“The Legislature of Virginia does not give a trial by jury where it is not
necessary. But gives it wherever it is thought expedient. The Federal Legislature will do
so too, as it is formed on the same principles.”).
23
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receive certain legal processes (those accompanying Article III proceedings)
and which should not. Such a decision—to assign certain actions to agency
adjudication—is a power that Congress uniquely possesses. See id.Next, Congress did not provide the SEC with an intelligible principle
by which to exercise that power. We recognize that the Supreme Court has
not in the past several decades held that Congress failed to provide a requisite
intelligible principle. Cf. Whitman v. Am. Trucking Ass’ns, Inc., 531 U.S. 457,
474–75 (2001) (cataloguing the various congressional directives that the
Court has found to be “intelligible principle[s]”). But neither in the last
eighty years has the Supreme Court considered the issue when Congress
offered no guidance whatsoever. The last time it did consider such an open-
ended delegation of legislative power, it concluded that Congress had acted
unconstitutionally: In Panama Refining Co. v. Ryan, 293 U.S. 388, 405–06
(1935), the Court considered a statutory provision granting the President the
authority to prohibit the transportation in interstate commerce of petroleum
and related products. The Court scoured the statute for directives to guide
the President’s use of that authority, but it found none. Id. at 414–20. It
therefore explained:
[I]n every case in which the question has been raised, the Court
has recognized that there are limits of delegation which there is
no constitutional authority to transcend. We think that section
9(c) goes beyond those limits. As to the transportation of oil
production in excess of state permission, the Congress has
declared no policy, has established no standard, has laid down
no rule.
Id. at 430.
Congress’s grant of authority to the SEC here is similarly open-ended.
Even the SEC agrees that Congress has given it exclusive authority and
absolute discretion to decide whether to bring securities fraud enforcement
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actions within the agency instead of in an Article III court. Congress has said
nothing at all indicating how the SEC should make that call in any given case.
If the intelligible principle standard means anything, it must mean that a total
absence of guidance is impermissible under the Constitution. 16 See Gundy,
139 S. Ct. at 2123 (Kagan, J., plurality op.) (noting that “we would face a
nondelegation question” if the statutory provision at issue had “grant[ed]
the Attorney General plenary power to determine SORNA’s applicability to
pre-Act offenders—to require them to register, or not, as she sees fit, and to
change her policy for any reason and at any time” (emphasis added)). We
therefore vacate the SEC’s judgment on this ground as well.
D.
The SEC proceedings below suffered from another constitutional
infirmity: the statutory removal restrictions for SEC ALJs are
unconstitutional.17 SEC ALJs perform substantial executive functions. The
President therefore must have sufficient control over the performance of
their functions, and, by implication, he must be able to choose who holds the
16
As a member of this court aptly noted just last year, the fact that the modern
administrative state is real and robust does not mean courts are never called to declare its
limits. See Cochran, 20 F.4th at 222 (Oldham, J., concurring) (“If administrative agencies
‘are permitted gradually to extend their powers by encroachments—even petty
encroachments—upon the fundamental rights, privileges and immunities of the people,’
the Court warned that ‘we shall in the end, while avoiding the fatal consequences of a
supreme autocracy, become submerged by a multitude of minor invasions of personal
rights, less destructive but no less violative of constitutional guaranties.’” (quoting Jones
v. SEC, 298 U.S. 1, 24–25 (1936))).
17
Because we vacate the SEC’s judgment on various other grounds, we do not
decide whether vacating would be the appropriate remedy based on this error alone. See
Collins v. Yellen, 27 F.4th 1068, 1069 (5th Cir. 2022) (remanding to the district court to
determine what remedy, if any, is appropriate in light of the Supreme Court’s holding that
removal restrictions applicable to the Director of the Federal Housing Finance Agency
were unconstitutional).
25
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positions. Two layers of for-cause protection impede that control; Supreme
Court precedent forbids such impediment.
Article II provides that the President must “take Care that the Laws
be faithfully executed.” U.S. Const. art. II, § 3. The Supreme Court has
held that this provision guarantees the President a certain degree of control
over executive officers; the President must have adequate power over
officers’ appointment and removal.18 Myers v. United States, 272 U.S. 52, 117
(1926). Only then can the People, to whom the President is directly
accountable, vicariously exercise authority over high-ranking executive
officials. Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S.
477, 498 (2010). Yet not all removal restrictions are constitutionally
problematic. “Inferior officers” may retain some amount of for-cause
protection from firing. See, e.g., Morrison v. Olson, 487 U.S. 654, 691–92
(1988). Likewise, even principal officers may retain for-cause protection
when they act as part of an expert board. Seila Law LLC v. CFPB, 140 S. Ct.
2183, 2192 (2020).
But a problem arises when both of those protections act in concert. In
Free Enterprise Fund, the Supreme Court considered the constitutionality of
two layers of for-cause protection for members of the Public Company
Accounting Oversight Board (PCAOB). 561 U.S. at 492. The members of
the board answered to the SEC Commissioners. But the SEC could remove
them only for “willful violations of the [Sarbanes–Oxley] Act, Board rules,
or the securities laws; willful abuse of authority; or unreasonable failure to
enforce compliance—as determined in a formal Commission order, rendered
on the record and after notice and an opportunity for a hearing.” Id. at 503.
18
Of course, the President’s authority over appointments derives from the
Appointments Clause as well. See U.S. Const. art. II, § 2, cl. 2.
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On top of that, the President could only remove SEC Commissioners for
“inefficiency, neglect of duty, or malfeasance in office.” Id. at 486–87, 502.
The Supreme Court held that this extensive system insulating PCAOB
members from removal deprived the President of the ability to adequately
oversee the Board’s actions. Id. at 492, 496.
The question here is whether SEC ALJs serve sufficiently important
executive functions, and whether the restrictions on their removal are
sufficiently onerous, that the President has lost the ability to take care that
the laws are faithfully executed. Petitioners’ argument on this point is
straightforward: SEC ALJs are inferior officers; they can only be removed by
the SEC Commissioners if good cause is found by the Merits Systems
Protection Board; SEC Commissioners and MSPB members can only be
removed by the President for cause; so, SEC ALJs are insulated from the
President by at least two layers of for-cause protection from removal, which
is unconstitutional under Free Enterprise Fund. The SEC responds that this
case is not like Free Enterprise Fund. First, it contends that SEC ALJs
primarily serve an adjudicatory role. Second, it asserts that the for-cause
protections for ALJs are not as stringent as those which applied to PCAOB
members at the time of Free Enterprise Fund—or, at least, that this court
should read the removal protections for ALJs that way to avoid constitutional
problems.
We agree with Petitioners and hold that the removal restrictions are
unconstitutional. The Supreme Court decided in Lucia that SEC ALJs are
“inferior officers” under the Appointments Clause because they have
substantial authority within SEC enforcement actions. Lucia v. SEC, 138 S.
Ct. 2044, 2053 (2018). And in Free Enterprise Fund it explained that the
President must have adequate control over officers and how they carry out
their functions. 561 U.S. at 492, 496. If principal officers cannot intervene
in their inferior officers’ actions except in rare cases, the President lacks the
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control necessary to ensure that the laws are faithfully executed. So, if SEC
ALJs are “inferior officers” of an executive agency, as the Supreme Court in
Lucia indicated was the case at least for the purposes of the Appointments
Clause, they are sufficiently important to executing the laws that the
Constitution requires that the President be able to exercise authority over
their functions. Specifically, SEC ALJs exercise considerable power over
administrative case records by controlling the presentation and admission of
evidence; they may punish contemptuous conduct; and often their decisions
are final and binding. Lucia, 138 S. Ct. at 2053–54. But 5 U.S.C. § 7521(a)
provides that SEC ALJs may be removed by the Commission “only for good
cause established and determined by the Merit Systems Protection Board
(MSPB) on the record after opportunity for hearing before the Board.”
(Parenthetical not in original.) And the SEC Commissioners may only be
removed by the President for good cause.
The dissenting opinion’s response is all built on dicta from Free
Enterprise Fund. There, in noting what issues the Court was leaving open,
the Court identified characteristics that were true of ALJs that were not true
of PCAOB members: “[U]nlike members of the [PCAOB], many” ALJs
“perform adjudicative rather than enforcement or policymaking functions.”
Free Enterprise Fund, 561 U.S. at 507 n.10. Far from “stat[ing]” that this
“may justify multiple layers of removal protection,” post at 22, the Court
merely identified that its decision does not resolve the issue presented here.
In any event, the Court itself said in Myers that “quasi[-]judicial” executive
officers must nonetheless be removable by the President “on the ground that
the discretion regularly entrusted to that officer by statute has not been on
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the whole intelligently or wisely exercised.” 272 U.S. at 135.19 So even if
ALJs’ functions are more adjudicative than PCAOB members, the fact
remains that two layers of insulation impedes the President’s power to
remove ALJs based on their exercise of the discretion granted to them.20
Finally, the SEC urges us to interpret the for-cause protections for
ALJs to instead allow removal for essentially any reason. Even if we could do
so (and the statutory language likely does not give us that flexibility), that
19
The dissenting opinion deems this proposition from Myers to be obiter dicta that
the Court subsequently disregarded in Humphrey’s Executor v. United States, 295 U.S. 602,
626–28 (1935). Post at 54 n.113. But that itself is to disregard the Supreme Court’s more
recent guidance, which fortifies the Court’s “landmark decision” in Myers and narrowed
Humphrey’s Executor. See Seila Law, 140 S. Ct. at 2191–92, 2197–99 & n.2 (limiting the
Humphrey’s Executor exception to Myers to cases involving “for-cause removal protections
[given] to a multimember body of experts, balanced along partisan lines, that perform[]
legislative and judicial functions and [are] said not to exercise any executive power,” while
casting doubt on the existence of wholly non-executive, quasi-legislative or quasi-judicial
agency powers altogether); see also City of Arlington v. F.C.C., 569 U.S. 290, 305 n.4 (2013)
(noting that “[agency] activities take ‘legislative’ and ‘judicial’ forms, but they are
exercises of—indeed, under our constitutional structure they must be exercises of—the
‘executive Power’” (citing U.S. Const. art. II, § 1, cl. 1)).
20
In the next breath, the dissenting position draws from a law review article that
“[t]he ALJs’ role is similar to that of a federal judge.” Post at 52. It then concludes that
they must be insulated from removal by the president to maintain their independence. But
that analogy runs out under a little scrutiny. The SEC’s ALJs are not mere neutral arbiters
of federal securities law; they are integral pieces within the SEC’s powerful enforcement
apparatus. The ALJs report to the Commission itself and act under authority delegated by
it. SEC Organization Chart (2020), https://www.sec.gov/about/secorg.pdf; 15 U.S.C.
§ 78d-1(a); 17 C.F.R. § 200.30-10. As the amicus brief by the Cato Institute points out,
these administrative proceedings differ significantly from cases resolved in federal district
courts and reviewed by federal courts of appeals. Cato Amicus Br. at 19–31. First, the
Commission has ex parte discussions with the prosecutors to determine whether to pursue
securities-fraud claims. Then the Commission itself decides what claims should be brought
by the prosecutors. Only then do ALJs resolve the claims, which are then again reviewed
by the Commission. Suffice it to say, even if ALJs have some of the same “tools of federal
trial judges,” Lucia, 138 S. Ct. at 2053, they use those tools at the direction of and with the
power delegated to them by the Commission.
29
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would not solve the Article II problem. As noted above, the MSPB is part of
the mix as well. Furthermore, MSPB members “may be removed by the
President only for inefficiency, neglect of duty, or malfeasance in office.” 5
U.S.C. § 1202(d). So, for an SEC ALJ to be removed, the MSPB must find
good cause and the Commission must choose to act on that finding. And
members of both the MSPB and the Commission have for-cause protection
from removal by the President. Simply put, if the President wanted an SEC
ALJ to be removed, at least two layers of for-cause protection stand in the
President’s way.
Thus, SEC ALJs are sufficiently insulated from removal that the
President cannot take care that the laws are faithfully executed. The
statutory removal restrictions are unconstitutional.
III.
In sum, we agree with Petitioners that the SEC proceedings below
were unconstitutional. The SEC’s judgment should be vacated for at least
two reasons: (1) Petitioners were deprived of their Seventh Amendment right
to a civil jury; and (2) Congress unconstitutionally delegated legislative
power to the SEC by failing to give the SEC an intelligible principle by which
to exercise the delegated power. We also hold that the statutory removal
restrictions for SEC ALJs are unconstitutional, though we do not address
whether vacating would be appropriate based on that defect alone.21
We GRANT the petition for review, VACATE the decision of the
SEC, and REMAND for further proceedings consistent with this opinion.
21
Petitioners also argue that the SEC violated their equal protection rights, and
that its decision was infected with bias and violated their due process rights. Because we
vacate the SEC’s decision on other grounds, we decline to reach these issues.
30
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No. 20-61007
W. Eugene Davis, Circuit Judge, dissenting:
The majority holds that (1) administrative adjudication of the SEC’s
enforcement action violated Petitioners’ Seventh Amendment right to a jury
trial; (2) Congress unconstitutionally delegated an Article I legislative power
to the executive branch when it gave the SEC the discretion to choose
between bringing its enforcement action in an Article III court or before the
agency without providing an intelligible principle to guide the SEC’s
decision; and (3) the removal protections on SEC administrative law judges
violate Article II’s requirement that the President “take Care that the Laws
be faithfully executed.” I respectfully disagree with each of these
conclusions.
I.
The majority holds that the Seventh Amendment grants Petitioners
the right to a jury trial on the facts underlying the SEC’s enforcement action,
and administrative adjudication without a jury violated that right. In reaching
this conclusion, the majority correctly recognizes that a case involving
“public rights” may be adjudicated in an agency proceeding without a jury
notwithstanding the Seventh Amendment.1 But, the majority then
erroneously concludes that the SEC’s enforcement action does not involve
“public rights.” In my view, the majority misreads the Supreme Court’s
decisions addressing what are and are not “public rights.”
1
See, e.g., Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 42 n.4 (1989) (“If a claim
that is legal in nature asserts a ‘public right,’ . . . then the Seventh Amendment does not
entitle the parties to a jury trial if Congress assigns its adjudication to an administrative
agency or specialized court of equity. The Seventh Amendment protects a litigant’s right
to a jury trial only if a cause of action is legal in nature and it involves a matter of ‘private
right.’” (citation omitted)).
31
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No. 20-61007
A.
As declared by Professors Wright and Miller, “A definitive statement
by the Supreme Court regarding congressional authority in this context is
found in Atlas Roofing v. Occupational Safety & Health Review Commission.”2
That case concerned the Occupational Safety and Health Act (“OSHA” or
“the Act”), which created a new statutory duty on employers to avoid
maintaining unsafe or unhealthy working conditions. OSHA also empowered
the Federal Government, proceeding before an administrative agency
without a jury, to impose civil penalties on those who violated the Act.3 Two
employers who had been cited for violating the Act argued that a suit in a
federal court by the Government seeking civil penalties for violation of a
statute is classically a suit at common law for which the Seventh Amendment
provides a right to a jury trial; therefore, Congress cannot deprive them of
that right by simply assigning the function of adjudicating the Government’s
right to civil penalties to an administrative forum where no jury is available.4
The Court, in a unanimous opinion, disagreed:
At least in cases in which “public rights” are being litigated—
e.g., cases in which the Government sues in its sovereign
capacity to enforce public rights created by statutes within the
power of Congress to enact—the Seventh Amendment does
not prohibit Congress from assigning the factfinding function
and initial adjudication to an administrative forum with which
the jury would be incompatible. . . . This is the case even if the
Seventh Amendment would have required a jury where the
2
9 Charles Alan Wright & Arthur R. Miller, Federal
Practice and Procedure § 2302.2, at 59 (4th ed. 2020) (citing Atlas Roofing Co. v.
Occupational Safety & Health Rev. Comm’n, 430 U.S. 442 (1977)) (italics added).
3
Atlas Roofing, 430 U.S. at 445.
4
Id. at 449–50.
32
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adjudication of those rights is assigned instead to a federal
court of law instead of an administrative agency.5
Atlas Roofing drew its definition of “public rights” from, inter alia, Crowell v.
Benson, which described “public rights” in slightly broader terms: matters
“which arise between the Government and persons subject to its authority in
connection with the performance of the constitutional functions of the
executive or legislative departments.”6
The Supreme Court has never retreated from its holding in Atlas
Roofing.7 In fact, the Court implicitly re-affirmed Atlas Roofing’s definition of
“public rights” as recently as 2018, when it decided Oil States Energy
Services, LLC v. Greene’s Energy Group, LLC.8 That case involved the Leahy-
Smith America Invents Act, which granted the Patent and Trademark Office
(“PTO”) the power to reconsider a previously-issued patent via an
administrative process called “inter partes review.” 9 This was a departure
from historical practice, which placed this function in Article III courts
alone.10 The petitioner argued that inter partes review violated both Article
5
Id. at 450, 455 (emphasis added; paragraph break omitted); see also id. at 458(“Our prior cases support administrative factfinding in only those situations involving
‘public rights,’ e.g., where the Government is involved in its sovereign capacity under an
otherwise valid statute creating enforceable public rights.”).
6
Id. at 452 (quoting Crowell v. Benson, 285 U.S. 22, 50 (1932)) (emphasis added);
see also id. at 456, 457, 460 (citing Crowell, 285 U.S. 22).
7
Gideon Mark, SEC and CFTC Administrative Proceedings, 19 U. Pa. J. Const.
L. 45, 95 (2016).
8
138 S. Ct. 1365 (2018).
9
Id. at 1370–72.
10
Id. at 1384 (Gorsuch, J., dissenting) (“[F]rom the time it established the
American patent system in 1790 until about 1980, Congress left the job of invalidating
patents at the federal level to courts alone.”).
33
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No. 20-61007
III and the Seventh Amendment.11 The Court disagreed and explained that
Congress has “significant latitude” to assign adjudication of “public rights”
to non-Article III tribunals that do not use a jury. 12 Moreover, the Court,
quoting Crowell, defined “public rights” as “matters ‘which arise between
the Government and persons subject to its authority in connection with the
performance of the constitutional functions of the executive or legislative
departments.’”13
As mentioned, Atlas Roofing’s definition of “public rights” is a
slightly narrower version of Crowell’s definition. Thus, when Oil States re-
affirmed Crowell, it necessarily re-affirmed Atlas Roofing’s definition as
well.14
Oil States is also significant because it held that historical practice is
not determinative in matters governed by the public rights doctrine, as such
matters “‘from their nature’ can be resolved in multiple ways.”15
Accordingly, the Court rejected the view that “because courts have
traditionally adjudicated patent validity in this country, courts must forever
continue to do so.”16
11
Id. at 1372.
12
Id. at 1373, 1379.
13
Id. at 1373 (quoting Crowell, 285 U.S. at 50).
14
Oil States did not purport to provide an exhaustive definition of “public rights,”
and the opinion alludes to the possibility that, under certain circumstances, matters not
involving the Government may also fall within the realm of “public rights.” See id.However, the Court did not need to address these other, “various formulations” of “public
rights,” because inter partes review fell squarely within Crowell’s definition. See id. This
court reached a similar conclusion in Austin v. Shalala, discussed below.
15
Id. at 1378 (quoting Ex parte Bakelite Corp., 279 U.S. 438, 451 (1929)).
16
Id.; see also id. (“That Congress chose the courts in the past does not foreclose
its choice of the PTO today.”).
34
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No. 20-61007
Like Oil States, this court relied on Crowell to define “public rights”
in Austin v. Shalala.17 That case involved the Government’s action to recover
overpayment of social security benefits via an administrative proceeding
before the Social Security Administration.18 Austin rejected the plaintiff’s
argument that the proceeding violated her Seventh Amendment right,
explaining that “if Congress may employ an administrative body as a
factfinder in imposing money penalties for the violation of federal laws”—as
was done in Atlas Roofing and in the securities statutes at issue here—“it
plainly may employ such a body to recover overpayments of government
largess.”19
Consistent with the above cases, our sister circuits routinely hold that
an enforcement action by the Government for violations of a federal statute
or regulation is a “public right” that Congress may assign to an agency for
adjudication without offending the Seventh Amendment.20 For example, the
Eleventh Circuit relied solely on Atlas Roofing when it rejected a Seventh
Amendment challenge to administrative adjudication of an SEC
enforcement action and declared “it is well-established that the Seventh
17
994 F.2d 1170, 1177 (5th Cir. 1993).
18
Id. at 1173.
19
Id. at 1177-78 (citing Oceanic Steam Navigation Co. v. Stranahan, 412 U.S. 320,
339 (1909)).
20
See, e.g., Imperato v. SEC, 693 F. App’x 870, 876 (11th Cir. 2017) (unpublished)
(administrative adjudication for violations of the Securities Exchange Act); Crude Co. v.
FERC, 135 F.3d 1445, 1454–55 (Fed. Cir. 1998) (Mandatory Petroleum Allocation
Regulations); Cavallari v. Office of Comptroller of Currency, 57 F.3d 137, 145 (2d Cir. 1995)
(Financial Institutions Reform, Recovery and Enforcement Act); Sasser v. Adm’r EPA, 990
F.2d 127, 130 (4th Cir. 1993) (Clean Water Act).
35
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Amendment does not require a jury trial in administrative proceedings
designed to adjudicate statutory ‘public rights.’” 21
The SEC’s enforcement action satisfies Atlas Roofing’s definition of a
“public right,” as well as the slightly broader definition set forth in Crowell
and applied in Oil States and Austin. The broad congressional purpose of the
securities laws is to “protect investors.”22 For example, the Securities Act of
1933 was “designed to provide investors with full disclosure of material
information concerning public offerings of securities in commerce, to protect
investors against fraud and, through the imposition of specified civil
liabilities, to promote ethical standards of honesty and fair dealing.” 23 The
Dodd-Frank Act, which, inter alia, expanded the SEC’s authority to pursue
civil penalties in administrative proceedings, 24 was “intended to improve
investor protection,” particularly in light of the Bernard Madoff Ponzi
scheme.25 Other circuits have consistently recognized that “[w]hen the SEC
sues to enforce the securities laws, it is vindicating public rights and
furthering public interests, and therefore is acting in the United States’s
21
Imperato, 693 F. App’x at 876 (citing Atlas Roofing, 430 U.S. at 455–56).
22
Smallwood v. Pearl Brewing Co., 489 F.2d 579, 592 (5th Cir. 1974).
23
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195 (1976). In a similar vein, the
Investment Advisers Act of 1940 seeks to “protect[] investors through the prophylaxis of
disclosure,” in order to eliminate “the darkness and ignorance of commercial secrecy,”
which “are the conditions upon which predatory practices best thrive.” SEC v. Capital
Gains Research Bureau, Inc., 375 U.S. 180, 200 (1963).
24
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-
203, Sec. 929P, 124 Stat. 1376, 1862–64 (2010) (codified at 15 U.S.C. §§ 77h-1(g), 78u-2(a),
80a-9(d), 80b-3(i)).
25
Mark Jickling, Congressional Research Service, R41503 The Dodd-Frank Wall
Street Reform and Consumer Protection Act: Title IX, Investor Protection at i (2010).
36
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sovereign capacity.”26 Thus, the SEC’s enforcement action is a “public
right” because it is a case “in which the Government sues in its sovereign
capacity to enforce public rights created by statutes within the power of
Congress to enact.”27 It is also a matter “which arise[s] between the
Government and persons subject to its authority in connection with the
performance of the constitutional functions of the executive or legislative
departments.”28
Because the SEC’s enforcement action is a “public right,” the
Seventh Amendment does not prohibit Congress from assigning its
adjudication to an administrative forum that lacks a jury. 29 As discussed
below, the fact that the securities statutes at issue resemble (but are not
identical to) common-law fraud does not change this result.30 It also makes
26
SEC v. Diversified, 378 F.3d 1219, 1224 (11th Cir. 2004), abrogated on other
grounds by Kokesh v. SEC, 137 S. Ct. 1635 (2017); see also SEC v. Rind, 991 F.2d 1486, 1491
(9th Cir. 1993); United States v. Badger, 818 F.3d 563, 566 (10th Cir. 2016).
27
Atlas Roofing, 430 U.S. at 450.
28
Crowell, 285 U.S. at 22; Oil States, 138 S. Ct. at 1373; Austin, 994 F.2d at 1177.
The majority asserts that “[t]he dissenting opinion cannot define a ‘public right’
without using the term itself in the definition.” First, I rely on definitions the Supreme
Court has provided. Second, while Atlas Roofing does use “public rights” to define “public
rights,” Crowell does not. Furthermore, Granfinanciera observed that Atlas Roofing “left
the term ‘public rights’ undefined” and so looked to Crowell to fill in any perceived gap.
Granfinanciera, 492 U.S. at 51 n.8; see also id. at 53 (noting that, under Atlas Roofing, a
“public right” is simply “a statutory cause of action [that] inheres in, or lies against, the
Federal Government in its sovereign capacity”).
29
Atlas Roofing, 430 U.S. at 450; Granfinanciera, 492 U.S. at 52–54; Oil States, 138
S. Ct. at 1379.
30
See Granfinanciera, 492 U.S. at 52 (“Congress may fashion causes of action that
are closely analogous to common-law claims and place them beyond the ambit of the
Seventh Amendment by assigning their resolution to a forum in which jury trials are
unavailable” if the action involves “public rights.”).
37
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no difference that federal courts have decided claims under the securities
statutes for decades.31
B.
The majority’s conclusion that the SEC’s enforcement action is not a
“public right” is based primarily on an erroneous reading of Granfinanciera,
S.A. v. Nordberg.32 Specifically, the majority interprets that case as abrogating
Atlas Roofing. Granfinanciera did nothing of the sort.
In Granfinanciera, a bankruptcy trustee sued in bankruptcy court
(where a jury was unavailable) to avoid allegedly fraudulent transfers the
defendants had received from the debtor.33 The defendants argued that they
were entitled to a jury trial under the Seventh Amendment. 34 A key issue was
whether the trustee’s claim involved “public” or “private” rights. The
Court held that the action was a private right.35
Unlike Atlas Roofing, Granfinanciera did not involve a suit by or
against the Federal Government. This distinction is important. In discussing
what constitutes a “public right,” Granfinanciera, citing Atlas Roofing,
recognized that “Congress may effectively supplant a common-law cause of
action carrying with it a right to a jury trial with a statutory cause of action
shorn of a jury trial right if that statutory cause of action inheres in, or lies
31
See Oil States, 138 S. Ct. at 1378 (“[W]e disagree with the dissent’s assumption
that, because courts have traditionally adjudicated patent validity in this country, courts
must forever continue to do so. Historical practice is not decisive . . . [in] matters governed
by the public-rights doctrine . . . . That Congress chose the courts in the past does not
foreclose its choice of the PTO today.”)
32
492 U.S. 33.
33
Id. at 36.
34
Id. at 40.
35
Id. at 55, 64.
38
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against, the Federal Government in its sovereign capacity.”36 Granfinanciera
then clarified that “the class of ‘public rights’ whose adjudication Congress
may assign to administrative agencies . . . is more expansive than Atlas
Roofing’s discussion suggests”;37 i.e., the “Government need not be a party
for a case to revolve around ‘public rights’” provided certain other criteria
are met.38 Nevertheless, and contrary to what is implied by the majority,
Granfinanciera’s recognition that the public-rights doctrine can extend to
cases where the Government is not a party in no way undermines or alters
Atlas Roofing’s holding that a case where the Government sues in its
sovereign capacity to enforce a statutory right is a case involving “public
rights.”39
Because the bankruptcy trustee’s suit involved only private parties
and not the Government, Granfinanciera’s analysis is solely concerned with
whether the action was one of the “seemingly ‘private’ right[s]” that are
36
Granfinanciera, 492 U.S. at 53 (citing Atlas Roofing, 430 U.S. at 458) (emphasis
added).
37
Id. at 53 (emphasis added).
38
Id. at 54 (citing Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568, 586,
596–99 (1985)).
39
Granfinanciera itself makes this clear when it states:
The crucial question, in cases not involving the Federal Government, is
whether “Congress, acting for a valid legislative purpose pursuant to its
constitutional powers under Article I, [has] create[d] a seemingly ‘private’
right that is so closely integrated into a public regulatory scheme as to be a
matter appropriate for agency resolution with limited involvement by the
Article III judiciary.” If a statutory right is not closely intertwined with a
federal regulatory program Congress has power to enact, and if that right
neither belongs to nor exists against the Federal Government, then it must
be adjudicated by an Article III court.
Id. at 54-55 (quoting Thomas, 473 U.S. at 593–94) (footnote omitted; emphasis added;
bracketed alterations in original).
39
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within the reach of the public-rights doctrine. Thus, any considerations or
requirements discussed in Granfinanciera that go beyond Atlas Roofing or
Crowell apply only to cases not involving the Government.
This understanding of Granfinanciera is supported by our subsequent
decision in Austin, which stated:
Although the definition is somewhat nebulous, at a minimum,
suits involving public rights are those “which arise between the
Government and persons subject to its authority in connection
with the performance of the constitutional functions of the
executive or legislative departments.” Crowell v. Benson, 285
U.S. 22, 50, 52 S. Ct. 285, 292, 76 L.Ed. 598 (1932). Beyond
that, certain other cases are said to involve public rights where
Congress has created a “seemingly ‘private’ right that is so
closely integrated into a public regulatory scheme as to be a
matter appropriate for agency resolution with limited
involvement by the Article III judiciary.” Granfinanciera, 492
U.S. at 54 . . . .40
Similarly, while Oil States acknowledged that Crowell did not provide the sole
definition of what constitutes a “public right,” it did not discuss any of the
other “formulations” because Crowell’s definition was met.41
The majority overlooks the fact that Granfinanciera’s expansion of the
public-rights doctrine applies only when the Government is not a party to the
case. As a result, the majority applies “considerations” that have no
relevance here. For example, the majority, quoting Granfinanciera, states
that “jury trials would not ‘go far to dismantle the statutory scheme’ or
‘impede swift resolution’ of statutory claims.” Again, Granfinanciera
discussed these considerations in the context of a suit between private
40
Austin, 994 F.2d at 1177 (emphasis added).
41
Oil States, 138 S. Ct. at 1373.
40
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persons, not a case involving the Government acting in its sovereign capacity
under an otherwise valid statute creating enforceable public rights. 42 Indeed,
neither Austin nor Oil States, both of which were decided after Granfinanciera
and which found public rights to exist, mentions these considerations.43
The majority also states that the securities statutes at issue created
causes of action that “reflect” and “echo” common-law fraud. But this does
not matter, because, as Granfinanciera itself recognized, the public-rights
doctrine allows Congress to “fashion causes of action that are closely
analogous to common-law claims and place them beyond the ambit of the
Seventh Amendment by assigning their resolution to a forum in which jury
trials are unavailable.”44
The majority asserts that Atlas Roofing is distinguishable from the
SEC’s enforcement action because “OSHA empowered the government to
pursue civil penalties regardless of whether any employe[e]s were ‘actually
injured or killed as a result of the [unsafe working] condition.’” 45 But the
securities statutes share this feature: The SEC may impose civil penalties on
42
Granfinanciera, 492 U.S. at 61, 63.
43
The same goes for the out-of-circuit decisions cited in footnote 20 above. Atlas
Roofing, in a footnote, does make a passing reference to “go far to dismantle the statutory
scheme.” 430 U.S. at 454 n.11. But the Court was merely describing its reasoning in another
bankruptcy case. Nothing in Atlas Roofing suggests that this consideration is relevant to
whether Congress may assign the Government’s enforcement action to an administrative
proceeding lacking a jury.
44
Granfinanciera, 492 U.S. at 52 (citations omitted); see also id. at 53 (“Congress
may effectively supplant a common-law cause of action carrying with it a right to a jury trial
with a statutory cause of action shorn of a jury trial right if that statutory cause of action
inheres in, or lies against, the Federal Government in its sovereign capacity.” (citing Atlas
Roofing, 430 U.S. at 458)); accord Crude Co., 135 F.3d at 1455 (“The public right at issue is
not converted into a common law tort simply because the theory of liability underlying the
enforcement action is analogous to a common law tort theory of vicarious liability.”).
45
Majority Op. at 17–18 (quoting Atlas Roofing, 430 U.S. at 445).
41
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a person who makes a material misrepresentation even if no harm resulted
from the misrepresentation.46 The statutory cause of action created by the
securities statutes is as “new” to the common law as the one created by
OSHA.47
Relatedly, the majority harps on the fact that federal courts have dealt
with actions under the securities statutes for decades. But Oil States makes
clear that “[h]istorical practice is not decisive here.” 48 “That Congress
chose the courts in the past does not foreclose its choice of [an administrative
adjudication] today.”49
The majority also states that “securities-fraud enforcement actions
are not the sort that are uniquely suited for agency adjudication.” Again, this
is not relevant. As Oil States explained, “the public-rights doctrine applies to
matters ‘arising between the government and others, which from their nature
46
See 15 U.S.C. §§ 78u-2(c), 77h-1(g)(1), 80a-9(d)(3), 80b-3(i)(3).
47
Atlas Roofing recognized that, before (and after) OSHA, a person injured by an
unsafe workplace condition may have an action at common law for negligence. See Atlas
Roofing, 430 U.S. at 445. Through OSHA, specific safety standards were promulgated, and
the Government could bring an enforcement action for a violation even if no one was
harmed by the violation. Id. Similarly, before enactment of the securities statutes, an
investor who was defrauded in the course of a securities transaction had a common-law
action for fraud. Like OSHA, the securities statutes expressly prohibited certain conduct
and empowered the SEC to bring an enforcement action for a violation, even if no one was
actually harmed by the violation.
48
138 S. Ct. at 1378.
49
Id. Oil States likewise refutes the majority’s assertion that “[t]he inquiry is thus
inherently historical.” I add that the majority’s support for this proposition consists of a
concurring opinion in Granfinanciera and the plurality opinion in Northern Pipeline
Construction Co. v. Marathon Pipeline Co., 458 U.S. 50 (1982) (plurality), which addressed
whether a bankruptcy court may decide a breach of contract action between two private
parties.
42
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do not require judicial determination and yet are susceptible of it.’”50 Indeed,
“matters governed by the public-rights doctrine ‘from their nature’ can be
resolved in multiple ways.”51
Finally, it should be emphasized that Tull v. United States52 does not
control the outcome here. That case concerned the Government’s suit in
district court seeking civil penalties and an injunction for violations of the
Clean Water Act.53 Tull did not involve an administrative proceeding. Thus,
while Tull concluded that the Government’s claim was analogous to a “Suit
at common law” for Seventh Amendment purposes,54 the Court did not
engage in the “quite distinct inquiry” into whether the claim was also a
“public right” that Congress may assign to a non-Article III forum where
juries are unavailable.55 Tull itself acknowledges in a footnote prior decisions
“holding that the Seventh Amendment is not applicable to administrative
proceedings,” making clear that it was not deciding whether the defendant
would be entitled to a jury in an administrative adjudication. 56
C.
In summary, the SEC’s enforcement action against Petitioners for
violations of the securities laws is a “public right” under Supreme Court
precedent as well as our own. Accordingly, Congress could and did validly
50
Id. at 1373 (citing Crowell, 285 U.S. at 50) (emphasis added).
51
Id. at 1378 (quoting Ex parte Bakelite Corp., 279 U.S. at 451).
52
481 U.S. 412 (1987).
53
Id. at 414–15.
54
Id. at 425.
55
Granfinanciera, 492 U.S. at 42 n.4; accord Sasser, 990 F.2d at 130.
56
Tull, 481 U.S. at 418 n.4 (citing Atlas Roofing, 430 U.S. at 454; Pernell v. Southall
Realty, 416 U.S. 363, 383 (1974)).
43
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assign adjudication of that action to an administrative forum where the
Seventh Amendment does not require a jury.
II.
I also disagree with the majority’s alternative holding that Congress
exceeded its power by giving the SEC the authority to choose to bring its
enforcement action in either an agency proceeding without a jury or to a court
with a jury. The majority reasons that giving the SEC this power without
providing guidelines on the use of that power violates Article I by delegating
its legislative authority to the agency. The majority’s position runs counter
to Supreme Court precedent. As set forth below, by authorizing the SEC to
bring enforcement actions either in federal court or in agency proceedings,
Congress fulfilled its legislative duty.
In support of its determination that Congress unconstitutionally
delegated its authority to the SEC, the majority relies on Crowell v. Benson,
wherein the Supreme Court explained that “the mode of determining” cases
involving public rights “is completely within congressional control.” 57
Crowell did not state that Congress cannot authorize that a case involving
public rights may be determined in either of two ways. By passing Dodd-
Frank § 929P(a), Congress established that SEC enforcement actions can be
brought in Article III courts or in administrative proceedings. In doing so,
Congress fulfilled its duty of controlling the mode of determining public
rights cases asserted by the SEC.
The majority maintains that because the SEC has “the power to
decide which defendants should receive certain legal processes (those
accompanying Article III proceedings) and which should not,” then such a
57
285 U.S. at 50 (quoting Ex parte Bakelite Corp., 279 U.S. at 451).
44
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decision falls under Congress’s legislative power. The Supreme Court’s
decision in United States v. Batchelder58 demonstrates that the majority’s
position on this issue is incorrect.
In Batchelder, the issue presented was whether it was constitutional for
Congress to allow the Government, when prosecuting a defendant, to choose
between two criminal statutes that “provide[d] different penalties for
essentially the same conduct.”59 The defendant had been convicted under
the statute with the higher sentencing range, and the Court of Appeals
determined that the delegation of authority to prosecutors to decide between
the two statutes, and thus choose a higher sentencing range for identical
conduct, was a violation of due process and the nondelegation doctrine. 60
Specifically, the Court of Appeals determined that “such prosecutorial
discretion could produce ‘unequal justice’” and that it might be
“impermissibl[e] [to] delegate to the Executive Branch the Legislature’s
responsibility to fix criminal penalties.”61
The Supreme Court disagreed. The Court explained that “[t]he
provisions at issue plainly demarcate the range of penalties that prosecutors
and judges may seek and impose.”62 The Court further stated: “In light of
that specificity, the power that Congress has delegated to those officials is no
broader than the authority they routinely exercise in enforcing the criminal
laws.”63 The Court concluded: “Having informed the courts, prosecutors,
58
442 U.S. 114 (1979).
59
Id. at 116.
60
Id. at 123, 125–26.
61
Id. at 125–26.
62
Id. at 126.
63
Id.45
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and defendants of the permissible punishment alternatives available under
each Title, Congress has fulfilled its duty.”64
The Supreme Court has analogized agency enforcement decisions to
prosecutorial discretion exercised in criminal cases.65 If the Government’s
prosecutorial authority to decide between two criminal statutes that provide
for different sentencing ranges for essentially the same conduct does not
violate the nondelegation doctrine, then surely the SEC’s authority to decide
between two forums that provide different legal processes does not violate
the nondelegation doctrine. Thus, the SEC’s forum-selection authority is
part and parcel of its prosecutorial authority.66
Although no other circuit court appears to have addressed the
particular nondelegation issue presented in this case, a district court did so in
Hill v. SEC.67 Like the majority does here, the plaintiff in Hill relied on I.N.S.
v. Chadha68 to assert that the SEC’s choice of forum is a legislative action
because it “alter[s] the rights, duties, and legal relations of individuals.” 69
Chadha addressed the question whether a provision in the Immigration and
64
Id. (citation omitted).
65
See Heckler v. Chaney, 470 U.S. 821, 832 (1985) (“[W]e recognize that an
agency’s refusal to institute proceedings shares to some extent the characteristics of the
decision of a prosecutor in the Executive Branch not to indict—a decision which has long
been regarded as the special province of the Executive Branch . . . .”).
66
Cf. SEC v. Chenery Corp., 332 U.S. 194, 203 (1947) (“[T]he choice made between
proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the
informed discretion of the administrative agency.”) (citation omitted).
67
114 F. Supp. 3d 1297 (N.D. Ga. 2015) (holding that SEC’s forum-selection
authority does not violate the nondelegation doctrine), vacated and remanded on other
grounds, 825 F.3d 1236 (11th Cir. 2016).
68
462 U.S. 919 (1983).
69
Hill, 114 F. Supp. 3d at 1312 (quoting Chadha, 462 U.S. at 952).
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Nationality Act (INA) allowing one House of Congress to veto the Attorney
General’s decision to allow a particular deportable alien to remain in the
United States violated the Presentment Clauses and bicameral requirement
of Article I.70 Specifically, it addressed whether Congress, after validly
delegating authority to the Executive, can then alter or revoke that valid
delegation of authority through the action of just one House.
I agree with the district court in Hill that if Chadha’s definition of
legislative action is interpreted broadly and out of context, then any SEC
decision which affected a person’s legal rights—including charging
decisions—would be legislative actions, which is contrary to the Supreme
Court’s decision in Batchelder.71 Chadha, one of the primary authorities the
majority relies on, does not touch on any issue involved in this case.
I agree with the persuasive and well-reasoned decision of the district
court in Hill that “Congress has properly delegated power to the executive
branch to make the forum choice for the underlying SEC enforcement
action.”72 In sum, it is clear to me that Congress’s decision to give
prosecutorial authority to the SEC to choose between an Article III court and
an administrative proceeding for its enforcement actions does not violate the
nondelegation doctrine.
III.
Finally, the majority concludes that the statutory removal restrictions
applicable to SEC administrative law judges are unconstitutional because
they violate Article II’s requirement that the President “take Care that the
70
462 U.S. at 923, 946.
71
Hill, 114 F. Supp. 3d at 1313.
72
Id.47
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Laws be faithfully executed.” Specifically, the majority determines that SEC
ALJs enjoy at least two layers of for-cause protection, and that such insulation
from the President’s removal power is unconstitutional in light of the
Supreme Court’s decisions in Free Enterprise Fund v. Public Company
Accounting Oversight Board73 and Lucia v. SEC.74 I disagree. Rather than
support the majority’s conclusion, these cases explain why the SEC ALJs’
tenure protections are constitutional: ALJs perform an adjudicative function.
Free Enterprise concerned the Public Company Accounting Oversight
Board (“PCAOB”), which Congress created in 2002 to regulate the
accounting industry.75 The PCAOB’s powers included promulgating
standards, inspecting accounting firms, initiating formal investigations and
disciplinary proceedings, and issuing sanctions.76 In other words, PCAOB
members were inferior officers who exercised “significant executive
power.”77 The President could not remove the members of the PCAOB;
rather, they could be removed by the Securities and Exchange Commission
under certain, limited circumstances.78 Furthermore, SEC Commissioners
cannot themselves be removed by the President except for inefficiency,
neglect of duty, or malfeasance in office.79 While prior cases upheld
restrictions on the President’s removal power that imposed one level of
protected tenure, Free Enterprise held that these dual for-cause limitations on
73
561 U.S. 477 (2010).
74
138 S. Ct. 2044 (2018).
75
Id. at 484-85.
76
Id. at 485.
77
Id. at 514.
78
Id. at 486, 503.
79
Id. at 487.
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the removal of PCAOB members unconstitutionally impaired the President’s
ability to ensure that the laws are faithfully executed, because “[n]either the
President, nor anyone directly responsible to him, nor even an officer whose
conduct he may review only for good cause, has full control over the
[PCAOB].”80
Free Enterprise, however, “did not broadly declare all two-level for-
cause protections for inferior officers unconstitutional.”81 Furthermore, the
Court expressly declined to address “that subset of independent agency
employees who serve as administrative law judges.” 82 The Court made two
observations about ALJs that potentially distinguished them from the
PCAOB: (1) whether ALJs are “Officers of the United States” was, at that
time, a disputed question, and (2) “unlike members of the [PCAOB], many
administrative law judges of course perform adjudicative rather than
enforcement or policymaking functions or possess purely recommendatory
powers.”83
The Supreme Court subsequently addressed the first observation in
Lucia v. SEC.84 There, the Court held that SEC ALJs are “inferior officers”
within the meaning of the Appointments Clause in Article II.85 However, the
Court again expressly declined to decide whether multiple layers of statutory
removal restrictions on SEC ALJs violate Article II.86
80
Id. at 496.
81
Decker Coal Co. v. Pehringer, 8 F.4th 1123, 1122 (9th Cir. 2021).
82
Free Enter. Fund, 516 U.S. at 507 n.10.
83
Id. (citations omitted; emphasis added).
84
138 S. Ct. 2044 (2018).
85
Id. at 2055.
86
Id. at 2051 & n.1.
49
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Thus, neither Free Enterprise nor Lucia decided the issue raised here:
whether multiple layers of removal restrictions for SEC ALJs violate Article
II. As the Ninth Circuit recently concluded, the question is open. 87
It is important to recognize that the Constitution does not expressly
prohibit removal protections for “Officers of the United States.”88 The
concept that such protections may be unconstitutional is drawn from the fact
that “Article II vests ‘[t]he executive Power . . . in a President of the United
States of America,’ who must ‘take Care that the Laws be faithfully
executed.’”89 The test is functional, not categorical:
The analysis contained in our removal cases is designed not to
define rigid categories of those officials who may or may not be
removed at will by the President, but to ensure that Congress
does not interfere with the President’s exercise of the
“executive power” and his constitutionally appointed duty to
“take care that the laws be faithfully executed” under Article
II.90
Consistent with this standard, Free Enterprise thoroughly explained
why two levels of removal protection for the PCAOB interfered with the
executive power.91 The first step in the Court’s analysis focused on the fact
that the PCAOB exercised “significant executive power” 92 as it
87
See Decker Coal Co., 8 F.4th at 1122.
88
ERWIN CHEMERINSKY, CONSTITUTIONAL LAW § 4.2 (5th ed. 2015) (“No
constitutional provision addresses the [President’s] removal power.”).
89
Free Enter. Fund, 561 U.S. at 483 (quoting U.S. CONST. , art. II §§ 1 & 3).
90
Morrison v. Olson, 487 U.S. 654, 689–90 (1988) (footnote omitted; emphasis
added).
91
Free Enter. Fund, 561 U.S. at 495–96.
92
Id. at 514.
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“determine[d] the policy and enforce[d] the laws of the United States.” 93
Then the Court explained how the PCAOB’s removal protections subverted
the President’s ability to oversee this power.94 The point here is that the
function performed by the officer is critical to the analysis—the Court did
not simply conclude that because members of the PCAOB were “Officers of
the United States” (which was undisputed)95 that dual for-cause protections
were unconstitutional.
Unlike the PCAOB members who determine policy and enforce laws,
SEC ALJs perform solely adjudicative functions. As the Lucia Court stated,
“an SEC ALJ exercises authority ‘comparable to’ that of a federal district
judge conducting a bench trial.”96 Their powers include supervising
discovery, issuing subpoenas, deciding motions, ruling on the admissibility of
evidence, hearing and examining witnesses, generally regulating the course
of the proceeding, and imposing sanctions for contemptuous conduct or
procedural violations.97 After a hearing, the ALJ issues an initial decision that
is subject to review by the Commission. 98 Commentators have similarly
observed that “SEC ALJs do not engage in enforcement or rulemaking”99
93
Id. at 484; see also id. at 508 (describing the PCAOB as “the regulator of first
resort and the primary law enforcement authority for a vital sector of our economy”).
94
Id. at 498.
95
Id. at 506.
96
Lucia, 138 S. Ct. at 2049 (quoting Butz v. Economou, 438 U.S. 478, 513 (1978)).
97
Id.98
Id.99
Mark, supra, at 107.
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and proceedings before them are “analogous to that which would occur
before a federal judge.”100
Free Enterprise stated, albeit in dicta, that the fact that an ALJ performs
adjudicative rather than enforcement or policymaking functions may justify
multiples layers of removal protection.101 I believe this to be the case. The
ALJs’ role is similar to that of a federal judge; 102 it is not central to the
functioning of the Executive Branch for purposes of the Article II removal
precedents.103 As the Southern District of New York concluded, invalidating
the “good cause” removal restrictions enjoyed by SEC ALJs would only
“undermine the ALJs’ clear adjudicatory role and their ability to ‘exercise[ ]
. . . independent judgment on the evidence before [them], free from pressures
by the parties or other officials within the agency.’”104
In fact, the Ninth Circuit recently employed similar reasoning in
Decker Coal Co. v. Pehringer, which held that two layers of removal protection
for ALJs in the Department of Labor do not violate Article II.105 Like SEC
ALJs, the ALJs in Decker Coal performed “a purely adjudicatory
100
David Zaring, Enforcement Discretion at the SEC, 94 Tex. L. Rev. 1155, 1166
(2016).
101
561 U.S. at 507 n.10.
102
Lucia, 138 S. Ct. at 2049.
103
Free Enter. Fund v. Public Co. Accounting Oversight Bd., 537 F.3d 667, 669 (D.C.
Cir. 2008) (Kavanaugh, J., dissenting) (citing Morrison, 487 U.S. at 691–92).
104
Duka v. SEC, 103 F. Supp. 3d 382, 395–96 (S.D.N.Y. 2015), abrogated on other
grounds by Tilton v. SEC, 824 F.3d 276 (2d Cir. 2016) (quoting Butz, 438 U.S. at 513–14).
See also Mark, supra, at 102–08 (arguing that multiple layers of removal protection for SEC
ALJs do not violate Article II); Zaring, supra, at 1191–95 (same).
105
Decker Coal Co., 8 F.4th at 1133.
52
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function.”106 The majority’s decision is in tension, if not direct conflict, with
Decker Coal.
Free Enterprise also noted that the exercise of “purely
recommendatory powers” may justify multiple removal protections.107
When an SEC ALJ issues a decision in an enforcement proceeding, that
decision is essentially a recommendation as the Commission can review it de
novo.108 Even when the Commission declines review, the ALJ’s decision is
“deemed the action of the Commission.” 109 Furthermore, the Commission
is not required to use an ALJ and may elect to preside over the enforcement
action itself.110 This further supports the conclusion that the SEC ALJs’
removal protections do not interfere with the President’s executive power.
The majority reasons that because Lucia determined that SEC ALJs
are inferior officers under the Appointments Clause, “they are sufficiently
important to executing the laws that the Constitution requires that the
President be able to exercise authority over their functions,” and,
consequently, multiple for-cause protections inhibit the President’s ability to
take care that the laws be faithfully executed. But nowhere does the majority
explain how the ALJs’ tenure protections interfere with the President’s
ability to execute the laws. The majority does not mention Free Enterprise’s
observation that the performance of “adjudicative rather than enforcement
or policymaking functions” or “possess[ing] purely recommendatory
powers” distinguishes ALJs from the PCAOB and may justify multiples
106
Id.
107
Free Enter. Fund, 561 U.S. at 507 n.10.
108
See Lucia, 138 S. Ct. at 2049 (citing 17 C.F.R. § 201.360(d)); 5 U.S.C. § 557(b).
109
Lucia, 138 S. Ct. at 2049 (quoting 15 U.S.C. § 78d-1(c)).
110
Id. (citing 17 C.F.R. § 201.110).
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layers of removal protection for ALJs.111 The majority does not mention that
Lucia found SEC ALJs to be similar to a federal judge.112 The majority does
not mention Decker Coal. Instead, the majority applies what is essentially a
rigid, categorical standard, not the functional analysis required by the
Supreme Court’s precedents.113
Accordingly, I disagree with the majority that multiple layers of
removal protection for SEC ALJs violate Article II. Because SEC ALJs solely
perform an adjudicative function, and because their powers are
recommendatory, these removal restrictions do not interfere with the
President’s ability to “take Care that the Laws be faithfully executed.”
IV.
I find no constitutional violations or any other errors with the
administrative proceedings below. Accordingly, I would deny the petition for
review.
111
561 U.S. at 507 n.10.
112
138 S. Ct. at 2049.
113
Morrison, 487 U.S. at 689–90. The majority also cites Myers v. United States, 272
U.S. 52, 135 (1926), for the proposition that quasi-judicial executive officers must be
removable by the President. But that part of Myers is dicta, which is why the Court
disregarded it in Humphrey’s Executor v. United States, 295 U.S. 602, 626–28 (1935).
54