How The Fifth Circuit Used An SEC Case To Declare Open Season On The Administrative State

A Fifth Circuit Court of Appeals panel handed down a ruling this week that would significantly change how the U.S. Securities and Exchange Commission (SEC) prosecutes cases.

It would force the agency to litigate certain cases in federal courts rather than through its internal adjudication process. That could slow down the trial process, would involve a jury with significantly less expertise in this area of law and raises the possibility that cases will draw conservative, anti-regulation judges hostile to the SEC. 

But more important than the court’s move to curtail this aspect of SEC power — which has incurred some good-faith arguments against it — is one of the ways in which the panel did it. The Fifth Circuit took the opportunity to fire a shot across the bow of the administrative state with an argument experts widely agree is dubious at best. 

It came in the form of an invocation of “nondelegation,” a theory that has largely lain dormant since the 1930s, when it was deployed against FDR’s New Deal. It holds that Congress cannot outsource its legislative power to other entities, and is an idea that has been resurrected by the anti-agency, anti-regulation movement on the right. 

If that part of the decision stands and is disseminated through other court rulings, it would throw a major aspect of how federal agencies enforce regulations into doubt, and could completely overwhelm the federal judiciary with cases formerly left to the agencies to adjudicate themselves. 

“It’s clickbait,” Jed Shugerman, a professor at Fordham University’s School of Law, told TPM. “They added on that second part about nondelegation to get more attention from libertarians and Federalist Society conservatives. It’s a bit of a hobby horse for Gorsuch, so maybe they were even trying to get the attention of the Supreme Court.” 

The Case 

The central question in the case, Jarkesy v. SEC, is whether the hedge fund manager involved is entitled to a trial by jury. 

The SEC brought an administrative action against George Jarkesy, accusing him of fraud. The SEC official, called an “administrative law judge” (ALJ), found against him, fining him a combined roughly $1 million and banning him from ever participating in the industry again. Jarkesy appealed to the SEC commissioners, who upheld the ALJ’s finding. Then he appealed to the Fifth Circuit, saying that the agency’s whole method of adjudication is unconstitutional. This case has been ongoing for nearly 10 years. 

The Fifth Circuit agreed with Jarkesy, and found that the 7th Amendment entitles him to a jury trial. 

The Decision

The decision seems to only apply to a certain, though still significant, subset of cases the SEC brings. 

“The majority of SEC administrative enforcement actions do not seek financial penalties — they seek other kinds of remedies, like barring you for life from participating in the securities industry,” Alex Platt, an associate professor at the University of Kansas School of Law, said. “Had they brought this exact case against this exact defendant and just left off the financial penalties, there’d be no 7th Amendment issue.”

What’s more, the agency’s ability to litigate these cases internally is fairly new. Congress gave the agency the power to bring securities fraud actions for monetary penalties internally — and not just through federal courts, like it had been doing up until that point — in 2010 through the Dodd-Frank Act. 

Since Congress gave the SEC that power, there have been legitimate arguments about its constitutionality. 

“Critics feel the SEC has a home court advantage before its own judges,” Jim Park, professor at UCLA’s School of Law, told TPM. “Some may say the ALJs have a more narrow or biased view than an independent federal judge.”

“There is a concern that it makes any administration judge, jury and executioner,” added Shugerman. 

And there have also been ideologically motivated arguments. Opponents of the administrative state and its regulatory power often lodge constitutional challenges against agency procedures, as a right-wing legal group has in a similar lawsuit against the SEC that the Supreme Court decided to take up this week. The organization’s tagline? “Protecting Americans From the Administrative State.”

Importantly, a large swath of the federal administration operates in a similar manner to the SEC, magnifying a significant but perhaps not apocalyptic curtailing of one agency’s power to a potential threat across the board. 

Tacking On Nondelegation

The Fifth Circuit takes no pains to limit its decision to cases like Jarkesy’s. Instead, it slaps on a nondelegation argument that, at best, can be read as a call for open season on federal agencies. At worst, it’s a ruling that would throw much of the administrative state’s enforcement mechanics into complete disarray and flood the federal judiciary with extremely technical cases.

The legitimate concern with congressional delegation of power to agencies is that the people who make them up are unelected, and somewhat insulated from democratic accountability. But it’s how much of our system works — democratically elected lawmakers give agencies somewhat broad writs of power, and leave it to the agencies, staffed by professionals and experts in the subject matter, to translate that into specific rules and regulations. Libertarian-minded conservatives often argue that agencies take the regulatory power they’re given by Congress and, in their rule-making and enforcement, go far beyond what Congress intended.

Here, there isn’t any ambiguity. Congress gave the SEC the prosecutorial discretion to adjudicate these kinds of cases internally, rather than in federal court, if it so chooses. But still, because Congress doesn’t spell out how the agency should choose the forum for litigation, the Fifth Circuit concludes that it’s somehow an unconstitutional delegation of power.  

“Even the SEC agrees that Congress has given it exclusive authority and absolute discretion to decide whether to bring securities fraud enforcement actions within the agency instead of in an Article III court,” the Fifth Circuit opinion reads. “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.”

It’s a nonsensical decision when held against how prosecutors normally operate.

“This just sounds like what prosecutors and executive enforcers do all the time,” Platt said. “DOJ often makes decisions like ‘should we proceed in the Eastern District of Virginia or the Southern District of New York?’” 

“If this stands, it might raise a lot of questions about a lot of prosecutorial discretion practices: federal prosecutors could often charge somebody with 12 different offenses, and exercise discretion over which of those to charge,” he added. “And what covers that discretion? Nothing! It’s just their expertise as prosecutors, their charge to protect the public. Once you start thinking of prosecutorial discretion as a nondelegation problem, I don’t know where it stops.”

It also raises the problem of expertise. ALJs within agencies know those areas of law very well, and are thus well-equipped to hear cases of great procedural complexity. Throwing all of those cases to the federal judiciary means that suddenly, generalist judges may be faced with a flood of cases about everything from securities intricacies to bankruptcy complexities to pollution regulations.

Our legal infrastructure is simply not set up for the federal judiciary to suddenly take on agencies’ caseloads. 

This case does not start off as a black-and-white example of the right-wing judiciary’s baseless hostility towards the administrative state. But the Fifth Circuit loses any benefit of the doubt with an extremely flimsy nondelegation argument that, logistically, would defang agency enforcement with a federal judiciary disabled by the influx of complicated cases. 

And amid an environment where anti-administrative state actors are practically salivating at the amenability of the ultra-conservative Supreme Court, it’s a hint at where things are going, a rallying cry to others in the right-wing legal world that now is the time to throw nondelegation arguments at the wall and see what sticks.

“I don’t think the 7th Amendment arguments are crazy,” Shugerman said. “But it’s just unprecedented to go this far on so many parts of the federal government which rely on ALJs and depend on efficiency and expertise.”