Justices sound skeptical about agencies' use of in-house judges

Bloomberg Creative Photos/Bloomberg Creative

Conservative justices on the U.S. Supreme Court expressed skepticism Wednesday about the use of in-house judges to decide enforcement cases brought by federal administrative agencies.

In a case with substantial stakes for bankers who get into hot water with their regulators, several justices questioned whether government agencies should be allowed to deny jury trials to the targets of their enforcement activity.

A top lawyer in the Biden administration defended the use of so-called administrative law judges in cases where agencies are seeking civil money penalties.

But Justice Brett Kavanaugh, one of the court's conservatives, said that the widely used adjudication process does not seem neutral. He noted that officials at federal agencies that bring enforcement cases also appoint the in-house judges who decide them, and then they review the rulings.

"That seems problematic, to say the government can deprive you of your property, your money, substantial sums, in a tribunal that is at least perceived as not being impartial," Kavanaugh said.

The case heard by the Supreme Court on Wednesday arose from an enforcement action brought by the Securities and Exchange Commission. The SEC initially won its case against hedge-fund founder George Jarkesy. But Jarkesy appealed to a panel of the 5th U.S. Circuit Court of Appeals, which voted 2-1 to vacate the ruling against him.

The 5th Circuit judges found multiple problems with the SEC's use of an administrative law judge in the case. They found that Congress violated the Seventh Amendment of the U.S. Constitution, which concerns the right to a jury trial, by empowering the SEC to seek civil penalties through certain administrative proceedings.

The case that was heard by the Supreme Court on Wednesday has broad implications for dozens of federal agencies that use administrative law judges. In the banking realm, those agencies include the Federal Deposit Insurance Corp., the Federal Reserve, the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau.

Prior to Wednesday's oral arguments, the American Bankers Association, the Bank Policy Institute and the American Association of Bank Directors asked the Supreme Court to uphold the 5th Circuit's decision.

"The specter of unfair enforcement proceedings," the industry groups wrote in a brief filed last month, "is a disincentive for talented professionals to serve as bank directors or otherwise work in the banking industry."

In a separate brief filed with the Supreme Court, former Wells Fargo Chief Auditor David Julian argued that a case brought against him by regulators is an example of how the deck can be stacked against defendants who appear before administrative law judges.

Julian's case grew out of the phony-accounts scandal at Wells Fargo. The OCC argued that Julian and other former Wells executives did not perform their duties and responsibilities adequately, and that their failures contributed to systemic problems at the bank.

Julian fought the allegations during a monthslong hearing before Administrative Law Judge Christopher McNeil. The former Wells chief auditor contends that he did not get a fair shake from McNeil, who ultimately recommended that Julian be ordered to pay a $7 million penalty.

In their brief to the Supreme Court, Julian's lawyers took issue with McNeil's refusal to require the OCC to turn over certain documents, his decision not to allow certain potential witnesses to testify and certain limits he placed on the cross-examination of the OCC's witnesses.

"The administrative proceeding," Julian's lawyers wrote, "was nothing short of mind-boggling."

Other observers have argued that overturning the long-standing use of administrative law judges by federal agencies would disrupt the federal court system by flooding it with new cases.

"Except in the most extraordinary case," law professors Ronald Levin and Alan Morrison wrote in a brief to the court, "the Seventh Amendment should not be interpreted to constrict Congress' decision to have an adjudication heard by an agency, particularly where the alternative would add massively to the workload of the federal courts."

Law and legal issues

Supreme Court could limit enforcement powers of U.S. banking agencies

July 5, 2023 11:27 PM

During Wednesday's oral arguments, Brian Fletcher, principal deputy solicitor general at the Department of Justice, leaned heavily on a 1977 Supreme Court decision in a case involving a roofing company. 

In that case, the court ruled unanimously that Congress had the power to give the Occupational Safety and Health Review Commission the authority to adjudicate violations of the law, notwithstanding what the Constitution says about the right to a jury trial.

But Chief Justice John Roberts argued that the impact of administrative agencies on daily life is far greater today than it was in the 1970s.

Fletcher responded: "I think it's true there are more agencies now than there were then. I don't think that changes the relevant constitutional principles."

At another point, Fletcher said: "There have always been circumstances where important rights get adjudicated without a jury."

But he faced tough questioning from Justices Neil Gorsuch and Samuel Alito, among other conservatives on the court. Gorsuch noted that the SEC's powers have been expanded substantially since the agency was established in the 1930s.

"This is not your grandfather's SEC," Gorsuch said.