Discover more from FinRegRag
Justice Thomas Questioned the Constitutionality of Administrative Enforcement Adjudications, Possibly Presaging Review of Jarkesy
Several federal agencies, including the Securities and Exchange Commission and the Federal Trade Commission, have statutory power to use an internal administrative court system to decide whether a person committed an alleged violation of law and, if so, to order various remedies such as monetary penalties, other types of payment, and limitations on the defendant’s activities. These agency adjudications of enforcement charges, call them administrative proceedings or APs, have been strongly criticized for depriving defendants of constitutional protections. For example, in SEC v. Jarkesy, a federal court of appeals concluded that SEC APs had three separate constitutional flaws. That outcome did not sit well with the SEC, which requested the Supreme Court to review the decision.
Recently, in a different case, Axon Enterprise, Inc. v. FTC, Justice Clarence Thomas of the Supreme Court registered related concerns about SEC and FTC APs. Axon consolidated an FTC administrative enforcement case and a separate SEC case against different defendants. The defendants in both cases believed that features of the APs violated the Constitution and wanted a federal district court to hear their challenges immediately instead of asserting the objections first in the AP. Administrative cases in both agencies begin with a trial-type process before an administrative law judge and provide for the possibility of appeal to the full commissions. Only then does a defendant have access to a federal court, specifically a court of appeals. The Supreme Court concluded that a person charged in an agency administrative enforcement proceeding could go to federal district court to assert a constitutional claim based on the structure or very existence of the agency and did not need to raise such a claim in the AP or the special statutory review system Congress created for an agency’s APs.
Justice Thomas agreed with the majority but identified a different question he thought the Court should consider in a future case. Thomas expressed “grave doubts about the constitutional propriety of Congress vesting administrative agencies with primary authority to adjudicate core private rights with only deferential judicial review on the back end.” He wanted the Court to examine whether an agency such as the SEC or FTC could have authority to function like a court in an enforcement case and impose severe sanctions on a defendant after finding a violation of law.
Thomas posited that, when private, vested rights to life, liberty, or property are at stake, plenary Article III adjudication is probably required. A statute allowing an administrative agency to have adjudicatory authority over core private rights might violate the separation of powers, due process, and the right to jury trial. The ability of an agency to levy fines or order the transfer of intellectual property to another person, which were possibilities in SEC or FTC APs, implicated the core private right to property.
Thomas was skeptical that review by an Article III appellate court was an answer. Statutes require courts in SEC and FTC cases to accept the facts found by the agency as long as the facts are supported by evidence. Factfinding by the agency infringes on the operation of courts because the essence of judicial power includes both factfinding, often by jury, and deciding questions of law.
Thomas emphasized the statutes obliging courts to defer to the agency’s facts but could have been equally concerned about the deference many lower federal courts show to agency legal analysis. Justice Thomas and Justice Gorsuch have been severe critics of undue judicial deference to executive branch legal interpretations.
Resolving Justice Thomas’s concerns about the judicial function of agencies in enforcement cases faces a major obstacle: the body of Supreme Court precedent upholding agency adjudication in those cases. Key precedents include Atlas Roofing Co. v. Occupational Safety & Health Rev. Comm’n, NLRB v. Jones & Laughlin Steel Corp., and Withrow v. Larkin. Withrow rejected a due process challenge to the combination of investigation, initiation, and adjudication of enforcement matters in one agency. Atlas Roofing and Jones & Laughlin upheld Congress’s power to assign factfinding and initial adjudication of enforcement cases with potential financial sanctions to an administrative forum that did not use a jury. Atlas Roofing said: “Congress has often created new statutory obligations, provided for civil penalties for their violation, and committed exclusively to an administrative agency the function of deciding whether a violation has in fact occurred. These statutory schemes have been sustained by this Court ….”
Thomas understands that precedents would need to be over-ruled. He nonetheless thinks the full Court should reconsider earlier decisions because of the serious constitutional issues raised by statutory systems permitting agencies to adjudicate enforcement charges and order remedies backstopped only by constricted federal court review.
Justice Thomas’s questions have merit, but the public-private rights dichotomy does not seem the best way to resolve them. Although the distinction has roots in Supreme Court cases going back many years, it is obscure and subject to competing and inconsistent interpretations. As Thomas recognized, the need for courts to protect private rights did not stop the Supreme Court from permitting agency adjudications that impose penalties and sanctions. A renewed examination of the public and private rights doctrine might not put to rest uncertainty about whether the Constitution forbids an agency from acting as a court to penalize violations of a congressionally created regulatory system.
The due process requirement for an independent and impartial decision-making procedure is a better way to think about agency adjudication in government enforcement cases. A private party stands little chance against a federal agency with power to write regulations, investigate possible violations of it, charge a violation, decide whether that violation occurred, and then extract harsh sanctions for the violation. That system consolidates too much power in one government actor, lacks impartiality and fundamental fairness, and has conflicts of interest. Federal court review at the end of the costly process is too late and too deferential to act as a real check on agency bias, momentum, and abuse.
Justice Thomas in Axon and the court in Jarkesy were right to renew questions about the constitutionality of administrative adjudications in an agency’s own enforcement cases. Agency enforcement is little different from enforcement of the criminal laws, which all accept must occur in the courts. The Supreme Court should re-evaluate whether the in-house court systems at the SEC, FTC, and other enforcement agencies are just.
Thanks for reading FinRegRag. Subscribe for free to receive more posts like this.