The Supreme Court’s decision in a battle over the power of agencies to punish investment fraud has the potential to upend federal enforcement against polluters and pipeline builders.
During oral arguments Nov. 29, the Supreme Court will consider the Biden administration’s arguments that the Securities and Exchange Commission has the constitutional authority to enforce its own rules against hedge fund manager and conservative talk radio host George Jarkesy, who stands accused of lying about audits, misrepresenting investments and overvaluing holdings.
In SEC v. Jarkesy, the justices could decide that the enforcement case should instead go to federal court, an outcome that would transform how agencies like the Federal Energy Regulatory Commission, EPA and the Interior Department handle legal issues internally — and potentially handcuff Congress from delegating power to the executive branch.
“While this case arises out of an SEC enforcement action, there is nothing SEC-specific about the multiple, grave, constitutional violations that occurred here,” energy industry lawyers wrote in an amicus brief.
In 2017, the latest year for which data is available, the federal government employed about 2,000 administrative law judges, according to the Office of Personnel Management. More than half of those in-house judges worked for the Social Security Administration. Nine worked for Interior. Three worked for EPA.
FERC has about a dozen administrative law judges who resolve disputes and facilitate settlements at the agency’s direction. It is the enforcement process at FERC, which oversees the natural gas and transmission sectors, that has led energy lawyers to join the call in Jarkesy for the Supreme Court to overhaul agencies’ in-house courts.
“All I ever really want is a fair fight on the merits,” said Bill Scherman, a partner at the law firm Vinson & Elkins, “and I don’t think targets of investigations at FERC can get due process.”
Scherman has signed on to two amicus briefs in the Jarkesy case — one on behalf of TotalEnergies Gas & Power North America, which faces a FERC-imposed fine of nearly a quarter-billion dollars for alleged market manipulation, and one on behalf of Energy Transfer, which faces millions of dollars in civil penalties for removing a 180-year-old farmhouse along the route of its Rover natural gas pipeline.
FERC declined to comment for this story. The agency has a policy against commenting on pending litigation.
Gillian Giannetti, senior attorney with the Natural Resources Defense Council, said it’s important for FERC to retain enforcement power because courts often don’t understand the complexities of the natural gas industry.
“Courts have to be jacks of all trades,” said Giannetti, who works with NRDC’s Sustainable FERC Project. “We have seen situations where courts have struggled to be able to execute the missions of a FERC condition due to just lack of subject matter expertise.”
She said that Energy Transfer and TotalEnergies have a lot to gain if the Supreme Court upholds Jarkesy’s win in the 5th U.S. Circuit Court of Appeals and rules against agencies’ in-house enforcement powers.
“I am inherently suspicious of reforms that are being strongly advocated by actors who need strong policing,” she said.
Pipeline legal saga
The stakes of the Jarkesy case are high for developers of the Rover pipeline.
Energy Transfer, the company behind the Rover project and the Dakota Access oil pipeline, faces a massive $40 million fine for spilling diesel-tainted drilling fluid into an Ohio river near the Rover line. The company could also pay $20 million for failing to disclose its plans to remove a historic farmhouse near the site of a compressor station designed to push natural gas through the Rover project.
Last year, Energy Transfer sued in the U.S. District Court for the Northern District of Texas, arguing that its enforcement case is the purview of a federal judge — not FERC’s in-house courts.
“The government will still be able to bring cases that it thinks have merit,” said Scherman. “It will just have to do so in federal district court.”
The Northern District of Texas has put Energy Transfer’s case on hold — first for the Supreme Court to reach a unanimous decision in April that allowed legal challenges to federal agencies’ use of in-house judges, and then to give the justices time to decide Jarkesy.
FERC attorneys have appealed the most recent pause, which also froze the agency’s enforcement case against Rover.
Scherman said that pipeline investigations take on a “very different characteristic” when they arrive in federal courts. There are federal rules of procedure and evidence, he said, and there are limits to the number of days that parties can be deposed.
Courts can also serve as a more neutral third party in enforcement matters between pipeline developers and their regulators, he wrote in an amicus brief in the Jarkesy case.
“FERC’s in-house enforcement and adjudication process stacks the deck against targets at every turn,” he wrote. “Many parties are forced to settle by the prospect of enduring years of agency investigation and hearing proceedings, the in terrorem effect of career- and business-ending civil sanctions, and the agency’s essentially unbroken ‘win’ record when trying claims before its in-house court.”
The Biden administration, which brought the Jarkesy case to the Supreme Court after losing in the 5th Circuit, wrote that the SEC and other federal agencies have power under the Constitution to decide disputes that involve public rights. In-house proceedings, said Solicitor General Elizabeth Prelogar, help agencies punish violators, even if no private person has yet been harmed by their infraction.
In federal court, by comparison, parties who sue must show that they have been injured by the action they are challenging, she wrote in a brief on behalf of the SEC. She compared Jarkesy’s case to an earlier workforce safety enforcement proceeding against a roofing company that went up to the Supreme Court in 1977.
The prior case “had an evident potential to cause harm to employees, but which authorized awards of civil penalties without a showing of actual injury to any worker.”
Chance to hobble Congress
Jarkesy also presents the justices with an opportunity to revive a long-dormant legal theory that would blunt Congress’ ability to hand off power to federal agencies.
Throughout the proceedings against him, Jarkesy has argued that the SEC’s enforcement process violates the nondelegation doctrine because the agency holds unchecked power to assign the claims against him to its in-house courts.
The 5th Circuit sympathized with his argument.
But the Supreme Court has plenty of other avenues if it wants to rule in favor of Jarkesy, said Ilan Wurman, a law professor at Arizona State University.
Deciding the case on nondelegation grounds would be “earth-shattering,” said Wurman, who authored an amicus brief in favor of neither party in Jarkesy.
“If this violates the nondelegation doctrine,” he said, “then the Supreme Court is probably looking to revive it in an even more robust way than many people anticipated.”
The justices last used the nondelegation doctrine in two 1935 cases that invalidated key elements of the Franklin Roosevelt administration’s New Deal legislation. But some current members of the Supreme Court’s six-justice conservative supermajority have recently expressed interest in bringing the doctrine back to life.
In the landmark 2022 climate ruling West Virginia v. EPA, Justice Neil Gorsuch wrote a concurring opinion joined by Justice Samuel Alito that said courts should not allow Congress to write statutes like the Clean Air Act in a manner that hands too much power to agencies like EPA.
And in the 2019 case Gundy v. United States, all four conservative justices participating in the case showed support for a strengthened nondelegation doctrine. Justice Brett Kavanaugh did not participate in the Gundy case but in later writings expressed interest in revisiting the doctrine.
Justice Amy Coney Barrett was not on the court at the time Gundy was decided and may be the “wild card” the next time the issue comes up, said Wurman.
Still, he questioned whether there is a need for the justices to revive the nondelegation doctrine — even if they want to put strict limits on agency powers. In West Virginia, the justices put new force behind the major questions doctrine, which requires Congress to speak clearly if it wants agencies to regulate politically and economically significant issues.
And in a case set to be argued next year, the justices appear ready to limit the Chevron doctrine, which gives agencies leeway to interpret ambiguous statutes.
“Between getting rid of Chevron deference and imposing a clear statement requirement when there’s a politically controversial and economically significant regulation,” Wurman said, “what kind of cases that would have raised the nondelegation doctrine won’t be resolved with the major questions doctrine?”
The Supreme Court will hear oral arguments in SEC v. Jarkesy at 10 a.m. Nov. 29.