The Incredible Shrinking U.S. Government?

Could a decision by the Fifth Circuit radically shrink government?” – The Lonely Realist


The Fifth Circuit Court of Appeals in New Orleans recently decided Jarkesy v. SEC, holding that the power and authority granted by Congress to the SEC is, essentially, unConstitutional. Your reaction should be “WOW! That would mean that the SEC (and probably other government agencies) can’t enforce the laws!” If the Fifth Circuit’s decision (a 2-1 majority) is affirmed by the Supreme Court (which could well happen based on the reasoning expressed by Justice Gorsuch in his dissent in Gundy v. U.S.), it would overrule 80+ years of judicial precedent and radically change America by unempowering – defunctioning – Federal agencies. While the Fifth Circuit has justifiably gained a reputation for being the country’s premier judicial forum for Constitutional originalism, the breathtaking potential of Jarkesy breaks new ground.

The case arose from the determination of an SEC Administrative Law Judge (ALJ) that George Jarkesy had made material misrepresentations to investors and overvalued assets in his reports to them, both of which are a matter of record, for which he was fined and banned from the securities industry. The SEC had chosen to try the case before an ALJ forum rather than in District Court before a judge and jury pursuant to the authority granted it by Congress under the Dodd-Frank Act of 2010. The Fifth Circuit, in vacating the decision and remanding the case for a new District Court trial, determined that Congress can’t delegate such a choice of forum to a government agency because the Seventh Amendment to the U.S. Constitution requires that defendants in both civil and criminal actions have the right to a jury trial. This is accepted wisdom in criminal prosecutions, but is less clear in civil ones. Nevertheless, the result if applied to Federal agency administrative actions would be legal havoc. America’s already overburdened District Court system would become the only forum in which the SEC and other Federal agencies (including the Consumer Protection Bureau, the Federal Trade Commission, the Environmental Protection Agency, and the National Labor Relations Board) could enforce laws, rules and regulations. They would be functionally unable to do so because the American judicial system is in no position to handle any increase in caseload let alone one of this magnitude.

The Fifth Circuit has therefore held that the failure of Dodd-Frank to ensure the right to a jury trial renders parts of Dodd-Frank unConstitutional. That should have marked the end of the Fifth Circuit’s inquiry since such unConstitutionality was outcome determinative for George Jarkesy. The Fifth Circuit, however, decided to gratuitously add two more unConstitutional observations (that is, legal dictum) to its opinion, the first being that the process by which ALJs are appointed and removed also is unConstitutional. The Fifth Circuit accordingly determined that under Article I of the Constitution, ALJs do not have authority to make any decisions since they were appointed and can be removed by SEC Commissioners and not by the President. If this were to be upheld, Congress would be unable to legislatively vest authority in any government administrative tribunal, creating a supercharged 21st Century bureaucratic appointment spoils system that would fundamentally change – and fundamentally overburden – American-style democracy. It is worth noting that the Fifth Circuit’s interpretation of Article I is unsupported by existing legal precedent.

The third unConstitutionality conclusion reached by the Fifth Circuit is based on a reading of Article II of the Constitution that is referred to as the “non-delegation doctrine,” which states that Congress cannot delegate to the Executive Branch of government the Congressional authority to make laws. Because the Dodd-Frank legislation hadn’t provided the SEC with “intelligible” guidelines as to how to choose between bringing actions before an ALJ or a District Court, the Fifth Circuit determined that Congress had unConstitutionally delegated legislative authority to the Executive Branch and thereby violated Article II. As a former law school professor and tax law practitioner, TLR is all-too-familiar with the non-delegation doctrine since the Treasury Department has taken broad license in interpreting the Internal Revenue Code. TLR holds the view that in doing so, Treasury and the IRS have violated the Doctrine. However, courts have disagreed. They’ve adopted the position that Congress doesn’t have the luxury of figuring out every nuance in today’s complex laws and that, unless a regulatory agency like the IRS or the SEC takes an outlandish position, its expertise in overseeing the complex legalities should be respected, a practical solution to a modern problem. After all, Congress cannot be expected to cross every “t” and dot every “i” in areas in which it has limited knowledge and no expertise. It can choose to delegate some degree of rule-making. In Jarkesy, the Fifth Circuit determined that the Founders had intended Congress to authorize all legislation in copious detail, crossing the “t’s” and dotting the “i’s.” And, yet, the Dodd-Frank “choice of forum” that was delegated by Congress to the SEC is an everyday legal decision and therefore is highly “intelligible.” Choosing between trying a case before one forum or another is built into the legal system. There would have been no reason for Congress to have restated in Dodd-Frank what is, after all, part of the bedrock of legal practice and integral to the business law enforcement agencies are in.

A recurrent TLR theme has been opposition to enlarging America’s government (most recently here). Big government can pursue a great many beneficial policies, but too-big government isn’t better government. It’s worser. Congress has been facilitating enlarging government … and both Political Parties are guilty of doing so. Governments need to be right-sized. Unfortunately, many U.S. government agencies have become sclerotic, their operations geared less to enforcing their mandate and more to increasing it. That expansion, however, has been on the regulatory side. The enforcement side of government agencies has gone into reverse because it’s been budgetarily short-changed by Congress. The result is more (and more) rules and regulations and less (and less) enforcement of existing laws, rules and regulations. Addressing this unfortunate divergence, however, is a job for Congress and not for America’s judiciary. It would be counterproductive for the Judicial Branch of government to be expanding its power and authority by broadly revisiting long-standing precedents on Constitutionally-philosophical, rather than purely legal, grounds. Moreover, expansion of SEC power and authority was not part of any fact-finding or legal application problem that led to the ALJ’s decision in Jarkesy. To the contrary, Congress had delegated to the SEC specific powers intended to make its enforcement of civil fraud measures more efficient and effective …, and it’s worth noting that the Fifth Circuit, in striking down in three different ways Congress’s effort to make SEC processes workable, did so by taking an activist approach (“legislating from the bench”) that, if followed by other Federal courts, would provide them with license to strike down laws, rules and regulations at the whim of deciding judges. That’s another reason why America’s judicial system has so rigorously adhered to precedent. By advocating novel theories of Constitutional law that depart from existing legal precedent, the Fifth Circuit’s decision in Jarkesy, if affirmed by the Supreme Court, would instantly and radically change America’s legal landscape. It would be destabilizing, redistributing government powers and vesting disproportionate authority in an activist court system.

TLR recognizes that determining a Goldilocks’ size for every branch of government is an impossible task. What is clear, however, is that determining how America’s government should be balanced and how it should operate is a task that is best decided in the first instance by America’s elected officials, the Legislative and Executive Branches of government, Congress and the President. It is not a task for the judiciary. It is a well-established Constitutional principle that courts need to be restrained in their actions – “activist” is the label used by both conservatives and liberals to describe judicial excess. The courts need to provide stability and continuity. That’s why precedent and the Rule of Law have been the bedrock upon which American democracy has been built. It is a primary reason why America has flourished.

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