Courts join push to defang federal business regulation

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(Reuters) - Federal courts are beginning to support a longstanding conservative movement to abolish much of the government’s regulatory regime by hamstringing agencies responsible for protecting the public from harmful business practices.

A federal appeals court in New Orleans on May 18 decided 2-1 that the U.S. Securities and Exchange Commission’s use of in-house judges in administrative proceedings against accused fraudsters violates those defendants’ constitutional right to a jury trial.

Federal agencies are generally tasked with defending what courts consider to be “public” rights, like the right to maintain a clean water source or a level and fair marketplace for investors. The 5th U.S. Circuit Court of Appeals held, however, that the SEC can’t fine people for marketplace fraud because the right to collect a debt is a private right.

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Judge Eugene Davis said in a dissent that the majority misread U.S. Supreme Court precedent on public versus private rights.

The 5th Circuit’s decision, which undid an SEC administrative law judge's decision that an investment adviser committed securities fraud, is the most clear indication yet that the judiciary might soon fulfill a longstanding goal of the business community and conservative politicians to dismantle much of the federal regulatory regime that protects the public.

Counsel for the defendants did not immediately respond to a request for comment.

The ruling has major implications beyond the world of brokers and hedge-fund managers: Administrative law judges are widespread across the government and have been a central, decades-old component of many agencies’ enforcement structure, including the Environmental Protection Agency, the Consumer Financial Protection Bureau, the Occupational Safety and Health Administration and the Federal Trade Commission.

Most immediately, the court’s ruling essentially nullifies much of the SEC’s administrative enforcement powers within the 5th Circuit. A broad reading would also support an argument that many other agencies can’t lawfully continue their normal enforcement activities against companies and individuals accused of violating the law — that a large swath of the federal regulatory regime is now unconstitutional in Texas, Louisiana and Mississippi, essentially.

Moreover, the ruling comes just two days after the Supreme Court decided to hear a case presenting a similar question, and some of the court’s conservatives are sympathetic to the notion of curtailing agencies’ regulatory and enforcement powers.

Efforts to avoid regulation are probably as old as “the first instance in which Congress considered giving a federal agency the authority to regulate private conduct,” Lewis & Clark Law School professor William Funk wrote in a 2018 law review article on the “attack on administrative regulation.”

Much of those efforts have been focused on adding procedural requirements — red tape within the agency — to agencies’ regulatory functions, Funk wrote. Since the 1980s, large corporations and mostly Republican politicians have worked to “slow the adoption of a regulation or order and perhaps, by raising the cost of adopting it, dissuading the agency from proceeding altogether.”

The policy argument is that government regulation kills jobs, innovation and investment. Tax breaks and deregulation will therefore benefit everyone else, the theory goes. In a word, Reaganomics. (The 5th Circuit’s ruling in fact references that political argument explicitly.)

Still, there have rarely been attacks on “the legitimacy of administrative regulation altogether,” until recently, Funk wrote, describing “a concerted effort” by businesses, Republicans and the courts over the past several years “to undermine agency regulation as fundamentally illegitimate--if not unconstitutional.”

The sentiment was perhaps expressed most clearly by former President Donald Trump’s chief strategist, Steve Bannon, who said in 2017 that “the deconstruction of the administrative state” was a top priority for the Republican administration.

The Trump administration ordered agencies to repeal two rules for every new one adopted — a policy Funk described as a historic departure “from any pretense of improving the regulatory process.”

House Republicans have also tried since 2017 to pass a bill that would require a Congressional resolution and presidential signature before agencies can approve most rules, which would transform the regulatory regime into a largely advisory body.

With regard to the SEC specifically, legal developments concerning the agency are a prime example of how federal courts have begun to accept conservative political arguments about the regulatory regime.

The agency has been able to use in-house processes to fine entities and people in certain circumstances since at least 1990, according to a 2015 law review article by Thomas Glassman, an attorney in Houston. Although many lawsuits challenging its authority were filed, “the Government was unbeaten when arguing against these constitutional challenges.”

There “have only been three cases since 2010” where federal courts found they even had jurisdiction to decide whether an SEC administrative proceeding was unconstitutional, Glassman wrote. One was settled, and two found for the SEC.

After the Glassman article, the Supreme Court held in a 2018 decision that the way some in-house SEC judges were selected violated the constitution. That ruling meant the agency had to set aside some decisions and reassign cases to new, properly appointed judges, according to a Reuters report on May 16.

The 5th Circuit’s recent decision, though, is expected to compel the agency to shift further away from using administrative proceedings altogether.

Indeed, some of the high courts’ conservatives, including Justices Clarence Thomas and Neil Gorsuch, have written opinions indicating their disagreement with a longstanding precedent that courts should defer to agency expertise, and other rulings indicating their belief that agency regulation itself is unconstitutional, according to Funk.

The 5th Circuit's opinion is rich with irony. Courts almost never give serious consideration to arguments about the deprivation of jury rights (the key issue in the 5th Circuit's opinion) in other contexts, like hearings before administrative judges at immigration agencies, for example. In fact, the Supreme Court decided last week that federal courts can't even review an immigration judge's decision not to grant protection from deportation, including in cases where the judge made an obvious error, Reuters reported May 16.

Conversely the Supreme Court has allowed businesses to settle sexual harassment, discrimination and a range of other workplace disputes before a "jury" of their own choosing under the Federal Arbitration Act. And, of course, there are also gaping holes in our criminal system — where many people of color are often not afforded an adequate right to an impartial jury.

The decision by the 5th Circuit suggests the judiciary will continue to curtail business regulation, largely at the public’s expense, while ignoring constitutional concerns in other agency actions against less powerful actors.

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Hassan Kanu writes about access to justice, race, and equality under law. Kanu, who was born in Sierra Leone and grew up in Silver Spring, Maryland, worked in public interest law after graduating from Duke University School of Law. After that, he spent five years reporting on mostly employment law. He lives in Washington, D.C. Reach Kanu at hassan.kanu@thomsonreuters.com