Agencies Avoid Disaster After High Court’s In-House Judge Ruling

Companies have lost most of their initial attempts to bar agency in-house judges from hearing a wide range of disputes based on recent US Supreme Court precedent, though one of their most significant wins could send the issue back to the justices.

Federal courts sided against challengers in 34 of 38 rulings involving arguments that the high court’s 2024 decision in SEC v. Jarkesy prevents agencies from bringing enforcement actions in proceedings without a jury, according to a Bloomberg Law review of cases.

The Jarkesy decision—which created a new legal test to determine when regulators must bring cases in court—has the potential to disrupt federal efforts to police businesses, especially for agencies that can’t go directly to court. Companies have won cases that could hamper enforcement for the Federal Communications Commission and the Labor Department.

But few judges thus far have aggressively applied Jarkesy, suggesting they need clearer guidance before broadly countermanding agency enforcement as Congress designed in numerous statutes.

“The Supreme Court changed a lot of law with Jarkesy,” said Todd Phillips, a law professor at Georgia State University who’s written about the decision. “Lower court judges want to see the Supreme Court flesh it out before taking a sledgehammer to statutes.”

Agencies prevailed in seven of nine appeals court decisions and 27 of 29 district court rulings in the Bloomberg Law review. The analysis included orders on motions seeking preliminary injunctions, dismissals, and summary judgments.

Several judges rejected company attempts to block ongoing administrative cases, holding that Jarkesy challenges should come later, when they appeal the agencies’ in-house rulings in court.

In addition, tax court judges denied claims that Jarkesy requires jury trials for tax penalties in at least five cases, although a district judge ruled the opposite way in a case that’s being briefed at the US Court of Appeals for the Fifth Circuit.

The same judge—Reed O’Connor, a George W. Bush appointee in Texas—also held that the Food and Drug Administration couldn’t penalize a vape company in an administrative proceeding. Two other federal judges disagreed in similar FDA cases.

Circuit Split

In July, the Third Circuit ruled that Labor Department administrative judges can’t hear enforcement disputes over the H-2A visa program for seasonal farm workers. But a DC district judge just a month later allowed in-house proceedings for that immigration issue, suggesting a circuit split could emerge.

A rift between appeals courts has already formed over the Federal Communication Commission’s power to police the telecommunications industry. In a decision vacating a $57 million penalty against AT&T Inc., the Fifth Circuit held that FCC enforcement actions need to go before a jury, even though the agency can’t file such cases directly in court.

Meanwhile, the DC Circuit upheld $92 million in penalties against the now-merged Sprint Corp. and T-Mobile USA Inc., and the Second Circuit backed $47 million in fines against Verizon Communications Inc.

The DC and Second circuits ruled that the FCC’s enforcement system provides an option for jury trials that the companies waived. A business that’s penalized in administrative proceedings can either pay the fine and then seek review in an appeals court, or it can decline to pay and face a Justice Department collection action filed in district court.

The FCC has asked for Supreme Court review, but it’s not challenging the Fifth Circuit’s holding that the agency’s enforcement action triggers the need for a jury trial under Jarkesy. Instead, the agency argues that the back-end option related to a collection action in district court satisfies that Seventh Amendment requirement.

That means the cert petitions on FCC enforcement give the Supreme Court the opportunity—but not the obligation—to clarify the test it set forth in Jarkesy.

“If the court were to take the case, those meaty issues that continue to have implications might not be addressed,” said Peter Karanjia, head of DLA Piper LLP’s administrative appellate practice and former FCC deputy general counsel.

Jarkesy Shortcomings

The Jarkesy test has two parts plus an exception. A statutory claim triggers the jury trial right if it resembles a common law cause of action from when the Seventh Amendment was enacted, and it seeks a remedy that’s legal in nature—which generally means a monetary penalty. The court said the remedy is the more important factor.

Cases involving public rather than private rights, however, can still go through administrative proceedings. The justices said the public rights exception traditionally covered revenue collection, customs enforcement, immigration, and the grant of public benefits.

While determining whether a remedy is legal or equitable is relatively straightforward, the other parts of the test are harder for judges to apply, legal scholars said.

Jarkesy shrunk what can be considered public rights by an indeterminate degree, eschewing clearer guidance from earlier case law and offering abstractions, such as whether statutory claims bring “common law soil with them,” said Richard Pierce, an administrative law professor at George Washington University.

Scholars also criticized the historical analogy factor that asks judges to compare modern statutory claims and Eighteenth Century common law causes of actions. Judges aren’t trained historians and historical analogy tests are vulnerable to the use of cherry-picked examples, they said.

“It’s more like permission for lower courts to do whatever they want and decide based on politics,” said Alex Platt, a University of Kansas law professor who specializes in securities regulations.

But agencies may have a way to avoid the problematic Jarkesy test in enforcement actions involving business that they’ve licensed, Platt said, by arguing those companies have consented to administrative adjudication and waived their jury-trial right.

Attorneys raised that argument in a pending Sixth Circuit case involving the Securities and Exchange Commission’s enforcement of a Financial Industry Regulatory Authority sanction, as well as an undecided dispute in the Seventh Circuit involving the Federal Deposit Insurance Corporation.

“The waiver argument is so simple and clear, unlike this impossible-to-answer question about historical analogs,” Platt said.