In Securities and Exchange Commission v. Jarkesy, No. 22-859 (U.S. June 27, 2024), the United States Supreme Court held that the Securities and Exchange Commission’s (“SEC”) adjudication of an enforcement action seeking civil penalties before an in-house administrative law judge (“ALJ”) violated the Seventh Amendment’s right to a jury trial. The decision could impact other federal administrative agencies such as the National Labor Relations Board (“NLRB”), which has sought to expand the remedies for unfair labor practices and, like the SEC, uses in-house ALJs to hear enforcement proceedings.
In Jarkesy, the SEC brought a civil enforcement action against the respondents for securities fraud, seeking civil penalties and other remedies. The action was brought in-house before an ALJ, who presides (like a judge in court) and issues an initial decision that is subject to review by the SEC’s Commissioners. An ALJ found that respondents committed securities fraud, which was affirmed on review. The SEC ordered respondents to pay a civil penalty of $300,000.
Respondents sought review before the U.S. Court of Appeals for the Fifth Circuit, which vacated the SEC’s order. The Fifth Circuit found that the SEC’s adjudication of the action in-house violated respondents’ Seventh Amendment right to a jury trial. The Fifth Circuit also found that the statutory removal restrictions for SEC ALJs – which include two layers of “for-cause” removal protection from the President – violated the Constitution’s separation of powers.
The Supreme Court affirmed the Fifth Circuit’s ruling that respondents’ Seventh Amendment rights were violated. First, the Court concluded that the action implicated the Seventh Amendment because the SEC’s statutory claims were “legal in nature”: the monetary remedy sought – civil penalties – was a legal one “designed to punish or deter the wrongdoer,” rather than an equitable one solely to “restore the status quo.” Second, the Court concluded that the action did not fall within the “public rights” exception, which permits Congress to assign certain matters to administrative agencies for adjudication without a jury. The SEC’s claims were by their nature subject to an action at common law and concerned private rights. Because its Seventh Amendment analysis resolved the case, the Court did not consider the constitutional issues regarding the statutory removal restrictions for SEC ALJs.
What does Jarkesy mean for the NLRB?
The Jarkesy decision could impact NLRB proceedings in at least two ways. First, Jarkesy could limit the Board’s recent initiative to expand the remedies for unfair labor practices under the National Labor Relations Act. The Board’s traditional remedies have included reinstatement and backpay, which are intended to restore employees to the position that they would have been in had the employer (or union) not committed an unfair labor practice. However, in Thryv, Inc., 372 NLRB No. 22 (2022), the Board expanded its remedies to include consequential-like damages for “direct or foreseeable pecuniary harms” resulting from an unfair labor practice. Jarkesy noted that “money damages are the prototypical common law remedy.” At least one lawsuit has already been filed in the wake of Jarkesy to stop an NLRB proceeding on the ground that the employer has a right to a jury trial on the NLRB’s claim for consequential damages. See Energy Transfer LP v. NLRB, No. 3:24-cv-00198 (S.D. Tex. filed June 27, 2024).
Second, by not addressing the constitutionality of the SEC ALJs, Jarkesy left the door open that the NLRB ALJs are also unconstitutional. NLRB ALJs play an important role in the adjudication of unfair labor practice complaints. They hold hearings and issue initial decisions that are subject to – and often adopted by – the full Board. Like SEC ALJs, NLRB ALJs may be removed only for “good cause” after a hearing before the Merit Systems Protection Board (“MSPB”). Moreover, members of both the NLRB and the MSPB themselves may be removed by the President only for good cause. The Fifth Circuit found this structure for SEC ALJs unconstitutional, a ruling not disturbed by the Supreme Court and could be cited by employers to challenge NLRB proceedings. In the Energy Transfer case, plaintiffs also allege that such removal protections for NLRB ALJs are unconstitutional.
Besides the NLRB, Jarkesy may affect other federal administrative agencies that use ALJs. For example, the U.S. Department of Labor may assess civil money penalties for certain violations of the Fair Labor Standards Act. Employers who contest such penalties must do so through an administrative proceeding before an ALJ.
We will continue to follow developments in this area. In the meantime, if you have any questions about Jarkesy or its impact on the NLRB, please contact attorney William C. Boak or any member of Barley Snyder’s Labor Law Practice Team.
