The Federal Courts are full of cases that are challenging the authority of federal regulatory agencies like the FCC. In November, the Supreme Court heard arguments in the case of Securities and Exchange Commission v. Jarkesy. The facts of the case are fairly straightforward. Hedge fund manager George Jarkesy was accused of committing fraud by misrepresenting himself to investors.
The complication comes in that the case was decided by an administrative law judge at the SEC. The judge imposed a fine and penalties of $300,000 and also ordered Jarseky to disgorge unlawful profits he made of $685,000. Jarseky appealed the case to federal court. The U.S. Appeals Court of Appeals for the 5th Circuit didn’t disagree with any of the facts in the case but made the extraordinary ruling that the SEC’s decision was unconstitutional and that the Jaresky case should have been heard in court rather than at a federal agency.
If the Supreme Court upholds that ruling, it will be devastating to federal agencies like the SEC and the FCC. There has been a long tradition in the country that courts shuttle technical issues to specialist judges at federal agencies when it makes sense. For example, there have been many lawsuits filed in federal courts where a judge remanded the case to the FCC to consider. The judges at agencies like the SEC and the FCC are specialists in the technical and legal issues involved in cases for the applicable industry.
Many industry lawsuits are extremely technical, and it’s hard for a federal judge to fully understand the technical nuances of a case. Agency administrative judges are also fully knowledgeable about the technical details of past cases that might apply to a current case.
Jaresky is arguing that the ruling against him should now be vacated and that he instead deserves his day in federal court to decide the issue. Jaresky further argues that he was denied a jury trial under his rights in the Seventh Amendment. One of the nuances of the case is that the SEC awarded monetary damages and was not seeking (or authorized to impose) criminal charges.
It will be a huge challenge to administrative agency proceedings if the FCC rules for Jaresky. Agencies might be able to stop bad behavior by bad actors but would lose the ability to impose fines. Imposing penalties is the only real punishment tool available to agencies like the FCC and SEC.
The other issue is that federal courts are already overloaded today, and there are huge numbers of cases heard by administrative law judges. Not only would federal judges struggle with some of the technical issues that are decided by administrative judges today, but it’s not hard to imagine that all federal cases will become backed up for years.
There may be a compromise position in that agencies could give a defendant the right to choose federal court or an administrative law judge. Industry folks might still pick agency judges if they think they have good merit on technical grounds. Congress could probably give administrative judges the ability to impanel a jury, although that seems unlikely.
One of the immediate consequences of a ruling for Jaresky is that administrative penalties imposed in recent years would likely all be appealed, further mucking up the courts.
I recently wrote about a similar case in front of the Supreme Court from a dispute between herring fishermen in New Jersey and the National Marine Fisheries Service (NMFS). In a recent ruling, the agency said that the fisherman had to cover the salaries of the inspectors. The fisherman appealed this at the NMFS and lost in a case decided by an SEC administrative judge. The fishing companies appealed the loss to District Court, and the Court ruled for the government. However, one dissenting judge said there was no explicit language in any existing legislation that allowed for the NMFS to make this decision, and it has also been appealed to the Supreme Court.