Adjudications of Agency Actions and the Right to Jury Trial (5/21/22; 6/26/24)

Added 6/26/24 3pm: The Supreme Court affirmed and remanded the case to the Fifth Circuit. SEC v. Jarkesy,  603 U. S. ____ (2024), here. The Court held (per the syllabus): “When the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial.” The jury trial must occur in the federal district court.

I don't know if readers have paid any attention to the Fifth Circuit's decision in Jarkesy v. SEC. 34 F. 4th 446 (5th Cir. 5/18/22), CA5 here and GS here. Jarkesy is not a tax case but, I think, might have potential implications in Tax Court cases.  Jarkesy seems to be driven by fear of the administrative state that can be mitigated by constitutional generalities in service of ideology. If that were all that was involved and did not at least potentially implicate tax procedure issues, I would not discuss it here. But I do have concerns about tax procedure. I apologize to readers if my concerns are not fully fleshed out here, but I would appreciate any readers' contributions to my education.

Judge Jennifer Walker Elrod for the majority offers a summary in the opening (pp. 1-2):

            Congress has given the Securities and Exchange Commission substantial power to enforce the nation's securities laws. It often acts as both prosecutor and judge, and its decisions have broad consequences for personal liberty and property. But the Constitution constrains the SEC's powers by protecting individual rights and the prerogatives of the other branches of government. This case is about the nature and extent of those constraints in securities fraud cases in which the SEC seeks penalties.

            The SEC brought an enforcement action within the agency against Petitioners for securities fraud. An SEC administrative law judge adjudged Petitioners liable and ordered various remedies, and the SEC affirmed on appeal over several constitutional arguments that Petitioners raised. Petitioners raise those same arguments before this court. We hold that: (1) the SEC's in-house adjudication of Petitioners' case violated their Seventh Amendment right to a jury trial; (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle by which the SEC would exercise the delegated power, in violation of Article I's vesting of "all" legislative power in Congress; and (3) statutory removal restrictions on SEC ALJs violate the Take Care Clause of Article II. Because the agency proceedings below were unconstitutional, we GRANT the petition for review, VACATE the decision of the SEC, and REMAND for further proceedings consistent with this opinion.

The best commentary I have seen on Jarkesy is Joe Patrice, Fifth Circuit Blows Up SEC Because The Word 'Ponzi' Is Nowhere In The Constitution (Above the Law 5/19/22), here. This commentary starts as follows:

Every 1L lecture has that kid who raises their hand and poses some wacky hypo and asks if this brain nugget that they've come up with for the first time actually upends 250 years of collected jurisprudence on the subject that they didn't actually read about for today's class.

That kid is now on the Fifth Circuit.

Fresh off telling private companies employees are enjoined from enforcing any rule if an employee even asserts that it's religious, and attempting to insert itself at the head of the Department of Defense, the Fifth Circuit Mental Gymnastics Squad offered up another perfect 10 with Jarkesy v. SEC.

I found that a particularly apt introduction to the Jarkesy majority opinion.   I will let Judge Elrod's majority summary quoted above set up this discussion. Focus on (1) of the summary. Tax administration has no analog to SEC in-house adjudication since tax-related adjudication is in the Tax Court (a legislative court), the district courts (Article III courts), and the Court of Federal Claims (Article I courts). However, Judge Elrod's stated concern was the lack of a jury trial for types of issues that historically could be tried to a jury and thus potentially within the ambit of the Seventh Amendment. Judge Elrod mentioned particularly penalty issues (fraud) that historically was within the ambit of jury trials when the Seventh Amendment was adopted. If jury trial is the real concern, whether the adjudicative proceeding is tried in an executive function (such as the SEC) or in a legislative court (such as the Tax Court) should not make a difference, for it is the lack of jury trial that is the issue. My question is whether that is or could be an issue with respect to the Tax Court's various jurisdictions.

Of course, in most tax contexts, a taxpayer can get a jury trial on tax issues triable to a jury by proceeding by refund (meeting jurisdictional requirements) or awaiting a collection suit. So, perhaps the Government could argue that, by using a Tax Court remedy (either deficiency or CDP or some other), the taxpayer has waived his "right" to jury trial, so that the issue does not arise for Tax Court proceedings.

I am not sure that would be a complete or sufficient answer to ideologues such as the author of Jarkesy who do not seem to engage a sense of history, precedent, nuance, and common sense, preferring glittering generalities (such as right to jury trial which has considerable nuance ignored when it is usually bandied about in partisan discussions).

One person with whom I discussed my concerns above advised that a distinction between Tax Court cases and the SEC enforcement proceeding in Jarkesy is that the taxpayer brings the case in the Tax Court. I responded to that distinction by saying (as revised):

Just to address the issue of who brings the proceeding in the Tax Court, the taxpayer is the nominal starting party, but the taxpayer is really a responding party, with the issues framed by the notice of deficiency as if it were an opening pleading to which the taxpayer files an answer (although nominally called a petition, but functionally serving as an answer to the notice of deficiency with all claims in the notice admitted unless contested in the petition). The Tax Court petition functions as an answer in the usual civil litigation context. Relatedly, the notice of deficiency starts a process for the IRS to get the assessment which is a functional equivalent of a judgment against the taxpayer. The notice is thus functionally an enforcement proceeding to which the taxpayer responds although nominally a petitioner in the Tax Court case.

So, I would appreciate hearing from anyone to further educate me and/or the readers as to whether Jarkesy-type issues can be extended to the federal tax adjudication processes.