Jarkesy v. SEC—How a Seemingly Boring Fraud Case Begins to Restore the Separation of Powers (and our Individual Rights)

“Again, there is no liberty, if the judiciary power be not separated from the legislative and executive.” These words written by Baron de Montesquieu were foundational to the Framers’ concept of separation of powers. In turn, they influenced the very fabric of our government as it exists today. The Framers firmly believed that the judiciary must be wholly separate from the executive branch. It was their fear of the Crown, along with Montesquieu’s ideas, that led them to this conclusion. See, under the English system at the time of the founding, the judiciary was an arm of the executive, the Crown. Because of this, judges served at the pleasure of the King. If a judge angered the Crown, he could be removed without a second thought. Because of this, the Framers created a distinct and insulated judiciary.

Yet, since the framing, the Court has departed from the traditional understanding of separation of powers. Namely, the executive has begun to subsume a large part of the judiciary’s responsibility and role. Ironically, this was the very scenario that the Framers had sought to avoid. However, the Court started down a treacherous path with Murray’s Lessee by noting that “public rights,” those rights which a person holds against the government, do not have to be heard before an Article III court because the government could merely wipe away the suit by invoking sovereign immunity. While the Court’s reasoning was sound (and narrowly focused), future courts took Murray’s Lessee and twisted the doctrine until it became unrecognizable.

The doctrine morphed into an analysis of whether the claim was a suit at common law, or whether it was a claim in equity, which is the test we use to determine if a party is entitled to a civil jury trial. In doing so, the Court destroyed the Article III power to hear cases in law and equity. It tore cases in equity from the judiciary, reduced the Seventh Amendment to nothing more than an ornament, and bestowed upon the Administrative State the power to prosecute, try, and decide cases.

Thankfully, Jarkesy has begun to set the record straight. In Jarkesy, the Securities and Exchange Commission (SEC) brought an in-house action against Mr. Jarkesy for fraud. The case was prosecuted by an SEC attorney and decided by an SEC administrative law judge. Mr. Jarkesy was found guilty of securities fraud and was required to pay $300,000 in civil penalties. Mr. Jarkesy appealed arguing that he was deprived of his right to a Seventh Amendment jury trial. The Court agreed, and in the process, emphasized the importance of the Seventh Amendment to the Framers, who saw the civil jury as an integral component of the justice system.

While the majority opinion is encouraging for the status of the public rights doctrine and the Seventh Amendment, it is perhaps Gorsuch’s concurrence that provides the clearest window into the future of the public rights doctrine and Seventh Amendment jurisprudence. Gorsuch reminds us that these administrative law proceedings are nothing new and hearken back to the British use of vice-admiralty courts that deprived colonists of their jury trial rights and due process. In fact, Gorsuch notes that the abuse of such courts, courts that look awfully similar to administrative proceedings, were at the center of the colonial calls for revolution. Gorsuch highlights the entanglement of the Fifth and Seventh Amendments with Article III itself, arguing that these three pieces form the foundation of our justice system. With Gorsuch’s opinion in mind and Justice Thomas joining in, it is evident that at least some members of the Supreme Court are emphatically opposed to the abuses of the Administrative State and the Supreme Court’s longstanding complicity in those abuses.

Gorsuch’s concurrence indicates that some on the Court are ready for massive changes. The Court is primed for a restoration of these rights to their proper place in our legal system, but where might the Court strike next on this issue? While bankruptcy and fraud proceedings are often the focus of this area, other areas of the law remain relevant. Specifically, Gorsuch points to public rights in property as an area in which Article III has previously adjudicated public rights, but the Court has since relinquished control and enabled the Administrative State to handle the issue. Perhaps Gorsuch’s mention of property is an indication of what the Court is looking at moving forward. Regardless of where the Court looks next, clearly some on the Court are keen to promote individual liberty through the original understanding of separation of powers, as the Founders intended. With the help of NCLA, the Court is poised to act swiftly and decisively.

August 13, 2024