Jarkesy v. SEC

United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
October 21, 2022
No. 20-61007
Lyle W. Cayce
Clerk
George R. Jarkesy, Jr.; Patriot28, L.L.C.,
Petitioners,
versus
Securities and Exchange Commission,
Respondent.
Petition for Review of an Order of the
Securities & Exchange Comm
Agency No. 3-15255
ON PETITION FOR REHEARING EN BANC
Before Davis, Elrod, and Oldham, Circuit Judges.
Per Curiam:
Treating the petition for rehearing en banc as a petition for panel
rehearing (5th Cir. R. 35 I.O.P.), the petition for panel rehearing is
DENIED. The petition for rehearing en banc is DENIED because, at the
request of one of its members, the court was polled, and a majority did not
vote in favor of rehearing (Fed. R. App. P. 35 and 5th Cir. R. 35).
No. 20-61007
In the en banc poll, six judges voted in favor of rehearing (Richman,
Stewart, Dennis, Haynes, Graves, and Higginson), and ten judges voted
against rehearing (Jones, Smith, Elrod, Southwick, Willett, Ho, Duncan,
Engelhardt, Oldham, and Wilson).
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No. 20-61007
Haynes, Circuit Judge, joined by Stewart, Dennis, Graves, and
Higginson, Circuit Judges, 1 dissenting from denial of rehearing en banc:
I respectfully dissent from the denial of the petition for rehearing en
banc and would grant it. The excellent dissenting opinion explains the
problems with the panel majority opinion’s holdings, so, rather than repeat
that, I will only summarize here.
Jarkesy and Patriot28 sought review in this court of an SEC order
finding securities fraud. They advanced several constitutional challenges to
the SEC enforcement proceeding. The panel majority opinion largely agrees
with those challenges and holds that: (1) Petitioners were deprived of their
Seventh Amendment right to a jury trial; (2) Congress unconstitutionally
delegated legislative power to the SEC by failing to provide it with an
intelligible principle by which to exercise delegated power; and (3) statutory
removal restrictions on SEC ALJs violate Article II. See Jarkesy v. Sec. &
Exch. Comm’n, 34 F.4th 446, 449 (5th Cir. 2022).
The Seventh Amendment “preserve[s]” the right to a jury trial in
civil cases. U.S. CONST. amend. VII. But Congress may assign factfinding
functions and initial adjudications to administrative forums without a jury if
“the Government sues in its sovereign capacity to enforce public rights
created by statutes within the power of Congress to enact.” Atlas Roofing Co.
v. Occupational Safety & Health Rev. Comm’n, 430 U.S. 442, 450 (1977). A
public right, at its core, is a matter “which arise[s] between the Government
and persons subject to its authority in connection with the performance of
the constitutional functions of the executive or legislative departments.”
Crowell v. Benson, 285 U.S. 22, 50 (1932). The panel majority opinion
1
As a Senior Judge, Judge Davis was not eligible to vote on whether to take this
case en banc, but he agrees that the case should have been taken en banc and also agrees
with this dissenting opinion.
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No. 20-61007
recognizes the Seventh Amendment’s public rights exception but concludes
that it does not apply here because the SEC action at issue was enforcing a
wholly private right as opposed to a public one. As the dissenting opinion
explains at length, that conclusion is incorrect and in conflict with Supreme
Court and this court’s precedent. See, e.g., Jarkesy, 34 F.4th at 470–73
(Davis, J., dissenting); Oil States Energy Servs., LLC v. Greene’s Energy Grp.,
LLC, 138 S. Ct. 1365, 1373 (2018); Austin v. Shalala, 994 F.2d 1170, 1177 (5th
Cir. 1993). The majority opinion relies upon dicta in Granfinanciera, S.A. v.
Nordberg, 492 U.S. 33, 60 (1989), but overlooks that Granfinanciera’s dicta
expanding the public-rights doctrine to some unidentified, future case applies
only when the Government is not a party. Jarkesy, 34 F.4th at 453; but see id.
at 470–71 (Davis, J., dissenting). Under Atlas Roofing and a fair reading of
Granfinanciera, there is no question that the SEC’s enforcement action
against Petitioners in this matter for violations of the securities laws involves
“public rights.” Granfinanciera offers no support for the panel majority
opinion’s position that this enforcement action by the SEC does not involve
a public right.
I now turn to the majority opinion’s nondelegation doctrine holding.
Jarkesy, 34 F.4th at 459. The Dodd-Frank Act allows the SEC to select
whether it enforces securities laws in-house or in federal court. See
§ 929P(a), 15 U.S.C. § 78u-2(a). Concluding that Congress failed to provide
the SEC with an intelligible principle to guide that choice, the majority
opinion holds that this was an impermissible delegation of legislative power.
Jarkesy, 34 F.4th at 461–62. The majority opinion’s holding rests on an
incorrect conclusion that this was a delegation of legislative power. The
majority opinion asserts that “Government actions are ‘legislative’ if they
have ‘the purpose and effect of altering the legal rights, duties and relations
of persons . . . outside the legislative branch.’” Id. at 461 (emphasis added)
(quoting INS v. Chadha, 462 U.S. 919, 952 (1983)). But the majority opinion
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No. 20-61007
borrows that definition of “legislative power” from Chadha—a case that
does not discuss the nondelegation doctrine—and incorrectly applies it here.
Id.There are ample real-world examples of executive action that “alter[s]
the legal rights, duties and relations of persons . . . outside the legislative
branch” that are not considered exercises of legislative power. Chadha, 462
U.S. at 952. The dissenting opinion addresses that in detail. See Jarkesy, 34
F.4th at 474–75 (Davis, J., dissenting); see also United States v. Batchelder, 442
U.S. 114 (1979). In its petition, the Government also gave as an example the
fact that it may choose to charge a defendant with a misdemeanor as opposed
to a felony—a decision that would deprive the defendant of a right to a jury
trial, Baldwin v. New York, 399 U.S. 66, 69–70 (1970), and remove the
requirement of a grand jury, United States v. Linares, 921 F.2d 841, 844 (9th
Cir. 1990). Additionally, of course, agencies have the discretion not to
enforce. See Heckler v. Chaney, 470 U.S. 821, 837–38 (1985) (holding that an
agency decision to initiate an enforcement action was within the agency’s
unreviewable discretion). Being required to defend yourself in an
enforcement action certainly alters your legal rights and duties, but the Court
has never defined such agency discretion as an exercise of legislative power.
I finally turn to the Article II holding. The majority opinion
erroneously concludes that the removal restrictions on SEC ALJs are
unconstitutional, citing that “SEC ALJs perform substantial executive
functions.” Jarkesy, 34 F.4th at 463. In summary, the majority opinion
reaches this conclusion by incorrectly reading Lucia v. SEC, 138 S. Ct. 2044(2018), and Free Enterprise Fund v. Public Co. Accounting Oversight Board, 561
U.S. 477 (2010). See Jarkesy, 34 F.4th at 463–64.
In Lucia, the Court concluded that SEC ALJs are inferior officers for
purposes of the Appointments Clause. See 138 S. Ct. at 2055. According to
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No. 20-61007
the majority opinion, that decidedly means that SEC ALJs perform executive
functions. See Jarkesy, 34 F.4th at 463–64. Stated differently, if you are an
officer under the Appointments Clause, you automatically perform executive
functions, and the President must be able to exercise authority over those
functions. As such, two-layer, for-cause removal protections are
categorically invalid.
Under Article II, however, inferior officers can be appointed by the
President, “Courts of Law,” or “Heads of Departments.” U.S. CONST.
art. II, § 2, cl. 2. The Constitution does not require—nor did Lucia hold—
that the President alone must appoint SEC ALJs. See 138 S. Ct. at 2050–51.
So how can the majority opinion conclude that, under Lucia, an ALJ’s
insulation from the President’s ability to remove violates the constitutional
duty to faithfully execute the laws?
The discussion of Free Enterprise is similarly worrisome as it addresses
inherently executive functions but, by contrast, an SEC ALJ’s duties are
distinctly adjudicatory. These duties include, inter alia: (1) fixing the time and
place of hearings, (2) postponing or adjourning hearings, (3) granting
extensions to file papers, (4) permitting filings of briefs, (5) issuing
subpoenas, (6) granting motions to discontinue administrative proceedings,
(7) ruling on the admissibility of evidence, and (8) hearing and examining
witnesses. See 17 C.F.R. §§ 201.111, 200.30-10. SEC ALJs do not decide to
bring enforcement actions, they merely preside over administrative hearings
as neutral arbitrators. The majority opinion’s conclusion to the contrary
lacks any authority. If, as the Court in Seila Law LLC v. Consumer Financial
Protection Bureau, 140 S. Ct. 2183 (2020), determined, the purpose of
removal is to hold officials accountable to the executive, what implications
would that have on administrative proceedings more broadly? Certainly,
ALJs would not continue to be independent. If the majority opinion is
concerned with bias on behalf of the SEC, the solution is not to make ALJs—
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No. 20-61007
whose authority is “comparable to that of a federal district judge”—subject
to executive authority. Lucia, 138 S. Ct. at 2049 (internal quotation marks
and citation omitted). Indeed, the reasons for insulating ALJs from executive
authority are exactly the same as those reasons articulated in Morrison v.
Olson, 487 U.S. 654 (1988); the potential “‘coercive influence’ of the
removal power would ‘threate[n] the independence’” of the ALJs. 487 U.S.
at 688 (alteration in original) (quoting Humphrey’s Ex’r v. United States, 295
U.S. 602, 630 (1935)).
The panel majority opinion, in addition to being incorrectly decided,
is more than worthy of en banc consideration. Indeed, having deviated from
over eighty years of settled precedent, the opinion doubtlessly merits a full
review. Beyond its massive impacts on the directly involved statutes, the
opinion’s potential application to agency adjudication more broadly raises
questions of exceptional importance. The Government’s petition aptly sums
up this point: “Each holding [in this case] strikes down an Act of Congress
and so presents a question of exceptional importance. The majority’s
decision nullifies provisions Congress determined necessary to enforce the
securities laws and calls into question adjudication within the Executive
Branch more broadly.” That is exactly the sort of peril that, in the face of an
incorrect opinion, should cause us to grant en banc rehearing. Given the
decision of the majority of this court not to do so, I respectfully dissent.
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