THE RECENT RULINGS IN JARKESY & WALMART SET THE TABLE FOR BIG CHANGES IN THE ADMINISTRATIVE LAW WORLD

The impact of the US Supreme Court’s decision in Jarkesy v. SEC, which curbed the Securities and Exchange Commission’s in-house courts (Administrative Law Proceedings), will go well beyond the Walls of the SEC, as it has without a doubt opened the flood gates to challenges to other agencies seeking to impose financial penalties.

Defendants are entitled to jury trials when the SEC seeks civil penalties for securities fraud, the Supreme Court Justices ruled this past month in the Jarkesy Decision. The SEC’s Anti-Fraud Provisions “replicate common law fraud” and it was “well established” those types of claims should be heard by a jury," the court said.

Many agencies use in-house proceedings to adjudicate some of their enforcement actions (approximately 35 by my count – with approximately 24 of them imposing monetary penalties). The US Department of Labor and the Environmental Protection Agency, among others, are likely to face more challenges after the ruling, inviting disputes about how closely federal provisions resemble common law claims and whether the penalties are designed to punish.

Even before the ruling in Jarkesy, there was an interesting ruling in the United States District Court for the Southern District of Georgia, Statesboro Division. In Walmart vs King, published on March 25, 2024, Chief Justice J. Randal Hall granted the Plaintiff’s (Walmart) motion for summary judgment “to stop administrative proceedings in a federal agency that are being conducted by an administrative law judge (ALJ) who is unconstitutionally shielded from the President’s supervision.”

Walmart questioned the constitutional authority of Administrative Law Judge Jean King, the Defendant — and the Department of Justice’s (DOJ) Office of the Chief Administrative Hearing Officer (OCAHO) — to make such a ruling. Without authority, the underlying ALJ proceedings would be unlawful.

According to the Plaintiff (Walmart), ALJ Jean King “is an executive officer whom the Attorney General may not remove except ‘for good cause’ as established and determined by the Merit System Protective Board.” Walmart asserted that “OCAHO ALJs are unconstitutionally insulated from presidential control” and that “the remedy for this unconstitutional scheme is to enjoin the Underlying ALJ Proceedings and declare them unlawful.”

Following a discussion of the powers granted to the President by Article II of the United States Constitution, including the “powers of appointment and removal of executive officers "— and the legal precedent that has shaped the role and function of OCAHO ALJs through the years, Justice Hall determined that OCAHO ALJs are performing their role “without the supervision required by Article II.”

The Court finds the multilevel protection from removal present for the OCAHO ALJs is contrary to Article II and contrary to the executive power of the President. The current statutory scheme unconstitutionally subverts the President’s ability to ensure that the laws are faithfully executed — as well as the public’s ability to pass judgment on his efforts. It is, therefore, incompatible with the Constitution’s separation of power and cannot stand.

The ruling in Walmart came just five years after the U.S. Supreme Court’s ruling in Lucia v. SEC. In Lucia v. SEC (2018), the Supreme Court considered whether the SEC complied with the Constitution’s Appointments Clause by having the SEC staff—rather than the Commission itself—appoint its ALJ’s. The Appointments Clause lays out permissible methods of appointing “Officers of the United States,” vesting appointment power only in the President, a court of law, or a head of a department (depending on the officer’s seniority). In a 7-2 decision, the Court held that the SEC’s ALJs were “Officers of the United States,” not simply Commission employees, and it therefore invalidated their appointment as unconstitutional.

More recently, in the matter of H&R Block, Inc.; HRB Digital LLC; and HRB Tax Group, Inc. (collectively the “Respondents”), in front of the Federal Trade Commission Office of Administrative Law Judges, Respondents recently filed a “Motion to Disqualify the Administrative Law Judge” due to the fact that the Federal Trade Commission’s “ALJ’s have three layers of insulation from removal by the President” and that the FTC’S Administrative Law proceedings are “unconstitutional and deprives FTC ALJ’s of valid authority to participate in this adjudication.”

As with this case, and other cases like it currently making their ways through various stages & levels, we can predict that more cases will undoubtedly follow that seek to: (1) to vacate ALJ’s previous rulings, (2) to have matters moved from Administrative Law proceedings to Federal Court due to the lack of due process (mainly limited discovery), (3) to have matters moved from Administrative Law proceedings to Federal Court due to lack of due process (no option for a jury trial), and (4) - along with other motions attacking elements of the Administrative Law proceedings of various Departments, but some with an overall attack as to effectively eliminate the entire Administrative Law proceedings of Departments (if not completely change how they are operated and/or structured)…

Though I am not overly familiar with the Administrative Law processes with the Social Security Administration or the Department of Veterans Affairs, one can be assured that the challenges of their ALJ’s and proceedings are on the horizon. Further, as the U.S. Immigration is poised to finally make some wholesale changes to its immigration system, keep a close on the Administrative Law Judges & processes to be part of a large industry wide set of changes.

Steven J. Mueller (7/20/2024)