The FCC s enforcement process needs legislative reform following SEC v. Jarkesy

The US Supreme Court recently decided Securities and Exchange Commission v. Jarkesy, a landmark case that will have far-reaching implications for federal agencies – such as the Federal Communications Commission (FCC) – that have been authorized by statute to seek civil penalties in administrative enforcement proceedings without juries. 

In our latest white paper, Peter Karanjia, Chair of the firm’s Administrative Law Appellate practice and former Deputy General Counsel of the Federal Communications Commission, explores the profound effect the decision will likely have on the FCC’s enforcement practices. 

The Seventh Amendment to the US Constitution provides that, in “[s]uits at common law, . . . the right of trial by jury shall be preserved.”  And the Supreme Court has long held that the civil jury-trial right is triggered by claims that are “legal in nature” – in other words, the types of claims that were traditionally adjudicated by courts of law rather than courts of equity.  

As discussed in our white paper, the Court in Jarkesy held that the Seventh Amendment prohibited the Securities and Exchange Commission from subjecting an individual and corporate entity to an administrative enforcement proceeding seeking civil penalties for alleged securities fraud, rather than proceeding in a federal court action with a jury.  Accordingly, the defendants were “entitled to a jury trial in an Article III court” before civil penalties could be assessed.

This paper focuses on the practical implications of Jarkesy for the FCC – in particular, how courts are likely to interpret and apply the decision when addressing the constitutionality of FCC enforcement actions.  In doing so, the paper reaches the following conclusions:

• The FCC’s current regime of administratively adjudicating forfeiture orders that impose civil penalties without a jury is incompatible with Jarkesy and the Seventh Amendment right to a civil jury trial.  Legislative reform therefore would be needed to enable the FCC to continue its current enforcement efforts.  Specifically, Congress will have to adopt new legislation authorizing the FCC to file enforcement proceedings in federal court (as various agencies, including the SEC, can do) or allow parties to enforcement proceedings to remove those proceedings to federal court for initial adjudication. 
  
  
• Courts applying Jarkesy will likely conclude that, at a minimum, many FCC enforcement actions seeking civil penalties – including actions the FCC has emphasized as high enforcement priorities – would trigger the Seventh Amendment’s right to a jury trial and that the FCC could not proceed administratively based on the historical “public rights exception” (discussed in the paper).  Examples of such actions triggering the jury-trial right include claims that a party has engaged in fraud or misrepresentation (for example, by misrepresenting the nature of the services it offers); claims that a telecommunications carrier has engaged in “unjust and unreasonable practices”; various privacy and data breach claims; and claims that a service provider acted unreasonably in failing to prevent a network outage. 
  
  
• Absent reform, the FCC also faces litigation risk that courts will interpret Jarkesy to bar virtually any FCC enforcement action that seeks civil penalties because the action does not fall within certain historically recognized areas of adjudication under the public rights exception (for example, tax and revenue collection, immigration, and relations with Native American tribes).
  
  
• Courts are unlikely to find that the FCC can avoid the Seventh Amendment problem by pointing to the fact that, in theory, targets of forfeiture orders may obtain a jury trial by declining to pay the penalties assessed and instead waiting for a potential DOJ collection action any time within five years – an action over which the enforcement target has no control. 

In short, Jarkesy is a game-changer for the FCC (as well as other administrative agencies), and the FCC’s Enforcement Bureau will not be able to continue with “business as usual.”   Moving forward, parties subject to FCC administrative enforcement proceedings should be mindful that Jarkesy provides a strong basis to raise Seventh Amendment challenges to those proceedings.