The campaign to gut Washington’s power over corporate America
A yearslong legal crusade to hobble Wall Street’s top cop could have repercussions across the government.
A decade-long conservative crusade against financial regulators will come to a head soon with a crucial Supreme Court ruling, part of a legal strategy that has spread across multiple Washington agencies into a broad attack on a core power of the federal government.
The court’s ruling on Securities and Exchange Commission v. Jarkesy, a case challenging the power of in-house federal judges, could hobble a whole range of agencies in unpredictable ways, cutting the powers of antitrust enforcers, labor regulators and consumer finance watchdogs.
Driven by an alliance of tech billionaires, conservative legal activists and the business lobby, the legal campaign that has arisen around Jarkesy is a little-appreciated but significant version of the “war on the administrative state” that Donald Trump promised but largely failed to deliver.
The decision is one of three Supreme Court fights this term over efforts to undermine key powers of the federal government. On Thursday, the justices came down in favor of regulators by upholding the funding of the Consumer Financial Protection Bureau. Another pair of cases awaiting decision could overturn a crucial 40-year precedent that allows agencies to broadly interpret federal law.
Jarkesy itself is a challenge to the legal legitimacy of the SEC’s internal system of judges and courts, which hear cases and impose fines. Such internal courts are key to enforcement at many federal agencies. Critics say they give bureaucrats an unchecked, almost shadowy power when cracking down on business malfeasance — a power they believe properly belongs with the U.S. court system.
“I support the right to a jury trial. Period, end of story,” said billionaire entrepreneur Mark Cuban, who has agitated against the SEC’s courts for years, after beating insider trading allegations brought by the agency a decade ago. “There is no constitutional reason or support for the SEC or any government agency to supersede that.”
Since Jarkesy was filed, companies including Meta, SpaceX and Amazon have escalated it into a broader fight against federal power by suing other agencies over their own courts — a way of fighting unfavorable judgments by attacking the system that delivered it.
Meta sued the Federal Trade Commission late last year after the agency reopened an enforcement order on the company’s privacy practices, challenging the legality of the FTC’s in-house court. SpaceX has done the same against the National Labor Relations Board, which charged the company with wrongly firing employees who criticized CEO Elon Musk. Other companies facing unwelcome government scrutiny, like Trader Joe’s and Amazon, have replicated those arguments in internal proceedings.
Some of those cases are on hold pending the Supreme Court’s ruling on the Jarkesy case. Other agency proceedings could be substantially altered.
The suits highlight the immense importance of in-house courts, and the administrative law judges who preside over them, in the day-to-day functioning of Washington. Agencies like the SEC and FTC have long referred many of their cases to their internal courts. Others, like the Social Security Administration, use the courts for a constant stream of routine complaints.
Progressives who see agency courts as a key source of government leverage over bad actors — especially big corporations — have been worrying about the impact of the coming decision. They see the cases as a brute-force effort by companies and activists to get an important source of oversight off their backs.
They’re “really just trying to get the Supreme Court to tear down the regulatory system that’s been in place since before the New Deal,” said Todd Phillips, a fellow at the Roosevelt Institute. “Jarkesy is just one battle in that larger war.”
Although conservative legal activists have helped drive the arguments against federal power, the concern about judges’ power crosses party lines: Cuban, for instance, is an outspoken Biden supporter.
Each of the current suits — some in aggressive and historical terms — argues the agency’s use of internal courts is unconstitutional, depriving plaintiffs of due process. The crux of the argument is that the use of administrative judges violates the right to a jury trial, that these judges are improperly insulated from removal by the president and in some instances that the internal-court process allows agency leaders to improperly serve as both prosecutor and judge.
“It goes to fairness,” said Peggy Little, senior litigation counsel at the New Civil Liberties Alliance, a conservative legal activist group that has been at the forefront of the attacks on the SEC’s courts. The NCLA has previously been backed by organizations such as the Charles Koch Foundation.
“If you were charged by a government agency, you’d be deeply disturbed to then have your case tried before someone who’s employed by that very agency,” Little said. “The deck is completely stacked against the people who are charged.”
For agencies reliant on in-house judges, the outcome of a Supreme Court ruling against the SEC would be unclear and potentially very disruptive. One former FTC official who recently left the agency described a potential ruling against the SEC as a “code red.”
Other legal experts project a messy but not catastrophic outcome for regulators, even if the SEC loses. David Vladeck, a Georgetown law professor and former head of consumer protection at the Federal Trade Commission in the Obama administration, said the FTC in particular would be able to weather the shift by prosecuting more of its cases directly in federal courtrooms — though it might hurt the agency’s ability to adapt laws to new situations and problems, a process that often emerges from internal court proceedings.
If they were undercut by the Supreme Court, “That’s a loss,” said Vladeck, “and would require the independent agencies to organize their work in a very different way, but it’s doable.”
So far, the Supreme Court has sent mixed signals about how it might rule. Last year conservative justices aired concern about the SEC’s in-house courts trampling on the right to a jury trial.
Last week, in an unrelated case, the Supreme Court upheld the constitutionality of how the CFPB is funded, suggesting the justices are not wholly hostile to the administrative state.
“I think that holds some good news for the future of the administrative state, if you will, which may play over into Jarkesy,” said Paul Verkuil, former Dean of Cardozo and Tulane law schools and co-author of a key treatise on administrative law. He pointed to how two conservative justices, Brett Kavanaugh and Amy Coney Barrett, joined two liberal colleagues in a concurring opinion that said longstanding government practices must be given some weight when interpreting Constitutional provisions.
For that reason and others, a full takedown of agencies’ in-house courts now seems unlikely to some experts. J. Robert Brown Jr., a former SEC attorney who teaches at Denver University, expects the court to tailor its ruling to cases involving fraud.
“It’s an attack on the bureaucratic state for sure,” he said. “But I don’t think it’ll be an enormous impact.”
The SEC has been a special target of ire for years, often by high-profile figures like Cuban and Musk infuriated to have to defend their financial dealings.
The Jarkesy case itself revolves around a hedge-fund manager, George Jarkesy, also a conservative TV and radio commentator, who was fined for defrauding investors and then sued over the validity of the tribunal that did it.
Supporters of the process say there’s a good reason to empower such internal courts, especially in complex issues like securities fraud and labor relations. They argue that the courts and their specialized judges, known as administrative law judges, allow agencies to develop the deep legal and sector expertise that underpins their regulatory efforts. And defendants are ultimately allowed to appeal to a federal court outside the agency.
Even without the Supreme Court weighing in, the cases are already affecting some operations in Washington. The SEC has largely abandoned using its courts for more contentious cases, instead opting to funnel them directly to federal courtrooms.
At the FTC, several current and former officials say it has yet to seep into their current enforcement decisions. Some of its highest-profile lawsuits, like its case against Amazon, are brought in federal court, though that is often a function of wanting to sue alongside state attorneys general, who are more easily able to levy financial penalties.
At the NLRB, labor-law enforcement has continued, though agency experts say there’s little chance the board could function in its current form if the arguments advanced by SpaceX in its suit against the agency prove persuasive.
“I can’t think of any other agency that relies on adjudication as a sort of policymaking avenue like the NLRB does,” said University of North Carolina law professor Jeffrey Hirsch, a former NLRB attorney.
Others have fretted that the high court’s ruling could even hit the routine in-house courts of agencies like the Social Security Administration, which employs about 1,200 administrative judges. If not properly tailored, they say, the decision could wind up sending a wave of relatively low-dollar Social Security claims into the already bustling federal courts.
“They don’t have the judges to hear all these cases, if they take them away from the [administrative law judges],” Verkuil said. “There are 10 times the number of administrative judges as there are federal judges, so the workload would be insurmountable.”
Another agency whose in-house court has come under fire is the relatively new Consumer Financial Protection Bureau, which in 2022 made internal changes that expanded agency Director Rohit Chopra’s ability to shape the proceedings, including by bypassing the agency’s administrative law judge altogether on certain legal questions. Senate Republicans balked at both Chopra’s move and criticized the agency’s court system, which they said “blurs the constitutional separation of executive and judicial powers” in a letter to Chopra that year.
For companies, the pushback is adding sunlight to a system that has left them frustrated and at the mercy of what they perceive to be an unaccountable and obscure process.
“It’s really simple. In the 1700s citizens got the right to a jury trial for trials where the outcome to be determined was financial,” Cuban wrote in an email to POLITICO.
In practice, though, a jury trial might not always be the best option strategically for defendants, said Vladeck — especially those like Jarkesy facing claims of securities fraud.
“Juries hate scam artists,” Vladeck said. “Be careful what you wish for.”
https://www.politico.com/news/2024/05/21/supreme-court-jarkesy-administrative-state-00158948
