Is Right to Jury Trial Itself on Trial in Hedge Fund Manager’s Case Before Supreme Court?

Will ill-advised precedent or fundamental constitutional principles prevail when the right to a jury trial is at stake?

After two hours of oral argument Wednesday morning in Securities and Exchange Commission v. Jarkesy, that was the important issue confronting the Supreme Court. That, and whether the modern desire to empower the administrative state overcomes yet another constitutional check on the growth of an invasive central government.

That’s because, as Alexis de Tocqueville aptly said, “The institution of the jury … places the real direction of society in the hands of the governed … and not in that of the government.”

The case arises from the SEC’s efforts to prosecute hedge fund manager George Jarkesy. The SEC alleges that he overestimated the value of his assets and made false claims to investors. 

Tort of Fraud Under Common Law

The wrongs Jarkesy allegedly committed are strikingly similar to the centuries-old tort of fraud under common law. Had the commission or anyone else sued Jarkesy for his misrepresentations in court, the Seventh Amendment would have guaranteed Jarkesy the right to have a jury decide his case.

Yet, the SEC chose not to go to court. Instead, it pursued its enforcement action under federal law through an in-house proceeding, in which an administrative law judge appointed by the commission would decide all questions, including whether Jarkesy was guilty of securities fraud.

To no one’s surprise, the commission enjoys a decidedly better win rate when one of its own is deciding the dispute.  

Jarkesy challenged the commission’s decisions in court, and the 5^th U.S. Circuit Court of Appeals ruled in his favor on three grounds: First, the agency proceeding violated Jarkesy’s Seventh Amendment right to a jury trial; second, Congress had impermissibly delegated lawmaking authority to the commission; and third, the SEC’s administrative law judges were unconstitutionally protected from removal by the president.

The government appealed all three rulings to the Supreme Court, but it was the jury question that dominated nearly the entire oral argument. 

‘Public Right’

Deputy Solicitor General Brian Fletcher of the U.S. Department of Justice, representing the commission, maintained that the Seventh Amendment imposes no restriction on the executive branch’s ability to enforce federal law through administrative tribunals so long as the executive is enforcing a “public right,” one created by Congress and integrated within a federal regulatory scheme.

Here, Fletcher argued, federal law doesn’t protect the right of an individual to recover for losses caused by fraud, but rather, the public’s right to securities markets free from deception.

If the distinction sounds too fine, Fletcher at least had solid support in the Supreme Court’s past decisions; specifically, the 1977 decision in Atlas Roofing v. Occupational Safety and Health Review Commission.

There, the justices blessed both Congress’ creation of statutory rights closely related to the common law tort of negligence and the decision to have these new federal rights adjudicated in juryless administrative courts.

Yet the availability of that precedent did little to assuage the justices’ concerns. Chief Justice John Roberts posed hypotheticals searching for some limit on the government’s ability to create public rights and thereby avoid the Seventh Amendment’s jury right.

What About Car Crashes, Medical Malpractice?

Would the government’s interest in the interstate highway system allow it to implement legislation requiring all cases arising from vehicle accidents to be adjudicated in an administrative court? Would the government’s interest in regulating health care permit Congress to send all medical malpractice cases to a juryless tribunal?

Fletcher conceded that under Atlas Roofing, those scenarios were constitutionally permissible if Congress decided that the traditional tort claims covering accidents and medical injuries did not adequately protect the public.

Justice Neil Gorsuch took the theme further. In his hypothetical, the government had revived the long-reviled Sedition Act, a 1798 statute that criminalized criticism of the government and was enacted by the Federalist-controlled Congress to target members of the opposing Democratic-Republican Party.

The hypothetical Congress had assigned all defamation claims under the new Sedition Act to an administrative judge, who would decide them without a jury. Gorsuch asked Fletcher whether the lack of a jury for persons accused of defaming the government raised a constitutional problem.

Answering by Evasion  

Palpably uncomfortable with the question, Fletcher sought to evade it by insisting that the First Amendment would prevent the hypothetical. But an audibly frustrated Gorsuch would not permit that evasion: “Forget about the First Amendment … too easy. We’re talking about the Seventh Amendment and the right to a jury trial, and that—that is an important and ancient right, too.” 

Lacking further avenues for retreat, Fletcher fell back on Atlas Roofing and insisted that the Sedition Act scenario raised no Seventh Amendment problems because the jury right applies only in courts, not in administrative tribunals.

In answering one question, Fletcher raised another, however.

Justice Samuel Alito asked:

Doesn’t that seem like a pretty patent evasion of the Seventh Amendment to say this protection, which was regarded at the time of the adoption of the Bill of Rights as sufficiently important to merit inclusion in the Constitution, can be nullified simply by changing the label that is attached to a tribunal?

Fletcher resisted Alito’s concern, noting that Article III of the Constitution as well as the due process clause of the Fifth Amendment set some (indeterminate) limit on Congress’ ability to consign claims to juryless forums.

But Alito commented that whatever protections Article III and the due process clause provide, the Constitution’s ratifiers found them inadequate because they insisted on adding the Seventh Amendment’s jury requirement. 

Arguments Unmade Are Forfeited

The questions Fletcher fielded from the bench indicated a broad skepticism about the correctness of Atlas Roofing, but Jarkesy had not asked the court to overrule that case.

Arguments not made in the lower courts are typically forfeited. Constrained by that omission, Michael McColloch, counsel for Jarkesy, had to argue that Jarkesy could win even under Atlas Roofing. 

McColloch maintained that Atlas Roofing permitted juryless decisions of new federal rights, whereas in this case, Congress simply codified a right closely analogous to common law fraud.

He argued further that the court had undermined Atlas Roofing in subsequent decisions, leaving Congress less leeway to avoid jury trials by creating public rights. 

Two possible answers arose from McColloch’s colloquy with the court.

The first is that securities law allows the federal government to pursue conduct that would not meet the definition of fraud, but the specific conduct for which it pursued Jarkesy was quintessential fraud. Therefore, the commission could pursue nonfraudulent misrepresentations internally, but it must bring traditional fraud claims in courts, where jury rights attach.

The second possibility was posited by Alito, who mused that the elements of the federal cause of action may be a logical subset of the common law claim.  If so, the logical connection between the federal right and the common law would be close enough to require the protection of the Seventh Amendment.

Questions Not Always Indicative of Votes

The court is still months away from a decision in this case, and the tenor of questions are not always reliable indicators of a justice’s vote. Roberts and Alito, as well as Gorsuch and Justice Clarence Thomas, sounded consistently skeptical of the government’s arguments. Jarkesy’s failure to ask for the overruling of Atlas Roofing, however, may leave them without an avenue for channeling those frustrations into doctrinal change.

Meanwhile, questions from Justices Sonia Sotomayor, Elena Kagan, and Ketanji Brown Jackson indicated an inclination to hold that Atlas Roofing resolves Jarkesy’s case in the commission’s favor.

Several justices, including Kagan, were concerned by the apparent ease with which the federal government can avoid the right to a jury trial. Still, it’s uncertain that Jarkesy has distinguished his case from Atlas Roofing, and it is unlikely the court will risk overruling that case when it was not asked to do so.

But counterbalancing the regard for precedent is the regard for the judiciary’s traditional role as defender of the guarantees integral to American liberty. The founding generation placed the utmost importance on the guarantee of jury rights even in civil cases. That the federal government can so easily render that right nugatory would surely have dismayed them.

Perhaps the current court, sharing that dismay, will reconsider its approach in Atlas Roofing and ensure that the Seventh Amendment cannot be so easily evaded. 

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