Securities Regulation Daily Panel mulls jurisdictional issues in ALJ challenge
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Monday, October 31, 2016

Panel mulls jurisdictional issues in ALJ challenge

By Mark S. Nelson, J.D.

Lawyers for Dawn Bennett urged a Fourth Circuit panel to reverse a district court opinion that short-circuited her bid to challenge the SEC’s administrative law judges in federal court without first completing the SEC’s in-house process. Bennett, like several others targeted in SEC administrative proceedings, argued that the agency’s ALJs are appointed unconstitutionally and enjoy too many layers of good cause removal.

But Bennett’s case, like many others, has been tripped up by jurisdictional issues. Some other cases that did go through the SEC’s administrative process have resulted in petitions for review in federal appeals courts that do raise the constitutional issues devoid of jurisdictional roadblocks. These cases at least raise the potential for a circuit split on the Appointment Clause issue that is at the heart of all the cases challenging the SEC’s ALJs (Bennett v. SEC, October 28, 2016).

Special type of case? Bennett’s counsel argued that her complaint in federal court challenged the SEC’s forum as unconstitutional. According to Bennett, these are special claims that under Supreme Court precedent should be heard in district courts because they seek forward-looking injunctive relief. When asked what type of claim could not be phrased in constitutional terms, Bennett’s counsel said her claim was about the SEC’s process and likened Bennett’s situation to double jeopardy.

By contrast, the government’s lawyer took issue with Bennett’s characterization of the claim as being special. The government argued that Congressional intent showed a desire that cases like Bennett’s go through the administrative process first, and then to federal appellate court only after a final, adverse agency decision. While a respondent denied access to federal district court may eventually not get the remedy they want, the government said there still are remedies available later, and that letting a case like Bennett’s proceed on a parallel track to the SEC’s in-house proceeding could create a principle without limit.

Bennett and the government would later spar over cases in other circuit courts that the district court had found persuasive. But they also argued over the applicability of a Fourth Circuit case—National Taxpayers Union. That case was significant for its reading of the Supreme Court’s Thunder Basin opinion while holding that a challenge to a provision in the Social Security Act could not proceed in federal district court. Bennett’s counsel emphasized footnote three and the concurrence, which he said demonstrated that the type of case is important under Thunder Basin and in the Fourth Circuit. The government’s brief had seized upon the case as an example of the Fourth Circuit barring a suit to evade an administrative proceeding.

Trial judge leaned on circuit courts. The district court closed the courthouse doors to Bennett mostly in reliance on opinions from the Seventh Circuit (Bebo) and the D.C. Circuit (Jarkesy) which it found to be persuasive. The district court also said a somewhat older Fourth Circuit decision was at least helpful.

With respect to Bebo and Jarkesy, the district court found the Exchange Act statutory scheme indicative of Congress’s intent that administrative matters must proceed via the SEC’s in-house process with the possibility of a respondent filing a petition for review of an adverse, final Commission decision at some later time. The district court noted subtle differences between Bebo and Jarkesy on whether the availability of meaningful judicial review is virtually determinative or whether a more holistic approach is warranted. The court said Bennett could get meaningful judicial review later.

The district court also followed Jarkesy’s “vehicle” approach to the “wholly collateral” question, while noting that the D.C. Circuit had explained in Jarkesy that the timing of a suit relative to the issuance of an order instituting proceedings could be significant. Under the vehicle approach, a district court case is not wholly collateral if its constitutional aspect is nothing more than a means to attack the administrative proceeding. As a result, Bennett’s claims against the SEC were not wholly collateral to the administrative case against her.

But the district court also found support for its conclusion in the Fourth Circuit’s 1996 Virginia v. U.S. opinion that affirmed the dismissal of a case brought by the state against the U.S. (specifically the Environmental Protection Agency) in district court, ostensibly to attack an administrative proceeding by making a facial constitutional challenge. That case, said the district court, was not “directly on point” with Bennett’s case, and yet the Fourth Circuit’s opinion was instructive because the court held that, despite the fact that Virginia’s district court case and petition for review were filed on the same day, the EPA’s statutory scheme under the Clean Air Act provided only for direct review in the appellate court.

In the Virginia case, the court concluded by noting that its holding was based on the “circumstances presented.” The court also rejected Virginia’s assertion that a statutory direct review provision must yield when the claimant raises a constitutional question. On this policy point, the court said it sought to avoid duplicative litigation and divergent court decisions. Retired Supreme Court Justice Lewis Powell was on the Virginia panel for oral argument, but did not participate in the decision, which was handed down by a quorum of the court under a federal court procedural law.

In Bennett’s opening brief and reply, her lawyers argued that the Virginia case was essentially irrelevant because it sought to overturn the EPA’s final decision and, thus, would fall short under Thunder Basin. The government in Bennett, noted that Virginia involved an attempt to circumvent direct review by couching the claim there in constitutional language; the government made this point twice in its brief, once in a parenthetical citation in its main text, and again in a footnote.

The case is No. 15-2584.

Attorneys: Andrew Morris (Morvillo LLP) for Dawn J. Bennett. Melissa Patterson, U.S. Department of Justice, for the SEC.

Companies: Bennett Group Financial Services, LLC

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