Discourse: Upside-down courts, agency adjudication and the rule of law

January 12, 2023 | By JOHN KERKHOFF
Empty courtroom with scales of justice.

It often starts with a knock. Someone comes to the front door holding papers—legal documents—and hands them over. You’re being sued. Even so, you can draw some comfort from the fact that the U.S. promises, at least in theory, equal justice under the

law. The Constitution guarantees protections such as a fair trial, an impartial judge and jury, and due process of law. “The history of American freedom,” as Justice Felix Frankfurter once wrote, “is, in no small measure, the history of procedure.”

But something funny happens when the entity suing you is one of the dozen or so independent federal agencies: They get to play by their own rules, and the usual procedural protections don’t apply. The agency’s trial-level judge, not a jury, first decides who wins. During that trial, the normal rules of evidence and procedure go out the window. Instead, the agency applies its own rules, and—no surprise—the agency often gets the benefit of the doubt.

Justice is blind, the old saying goes—unless an independent federal agency is a party. And while ending administrative adjudication is unfeasible, several smaller reforms could reduce unfairness in the system.

Separation of Powers, Due Process and Trial by Jury

The American Constitution is based fundamentally on the idea that the sovereign people delegate specific, enumerated and limited powers to the government. These powers are vested in three separate branches, and the judicial branch alone holds the “judicial power of the United States,” which includes “the power to bind parties and to authorize the deprivation of private rights.” Other branches cannot exercise judicial power. Were it otherwise, the Constitution’s structure and purpose would be undermined.

This all makes good sense. Legal judgments are what courts do, not law enforcement officials and lawmakers. And while this might sound as simplistic as a “Schoolhouse Rock!” episode, its importance is hard to overstate. No one wants the police officer who arrested him to also adjudicate the case on the spot.

And if courts make binding legal judgments, executive agencies can’t. As Judge Eric Murphy put it this year: “[B]oth Article III and the Due Process Clause generally require the government to follow common-law procedure (including, fundamentally, the use of a ‘court’) when seeking to deprive people of their private rights to property or liberty.” It’s really that simple. Executive adjudication, though, runs roughshod over this principle. Allowing the executive branch to decide the law and issue binding judgments on individuals when private rights are involved takes the “judicial power” outside of Article III. That poses a grave constitutional problem.

Additionally, agency adjudication often does not provide opposing parties with due process of law. Long before the Constitution, legal thinkers understood that “No man ought certainly to be a judge in his own cause, or in any cause in respect to which he has the least interest or bias.” It would be “unreasonable,” famed legal scholar William Blackstone taught, “that any man should determine his own quarrel.” James Madison, too, knew that “[n]o man is allowed to be a judge in his own cause . . . because his interest would certainly bias his judgment.” And Alexander Hamilton simply recognized the basic human trait that “it would be natural that the judges, as men, should feel a strong predilection to the claims of their own government.”

Anyone can see how bias would infect a judge who has an interest in the outcome of a case. So, since the start of our republic, the Supreme Court has limited just what types of cases federal and state judges can hear. Our legal system depends on fair and impartial justice. And legal scholars and judges such as former Judge Richard Posner of the Seventh Circuit have long known that it “is too much to expect men of ordinary character and competence to be able to judge impartially in cases that they are responsible for having instituted in the first place.”

Yet this is precisely what happens in administrative adjudication. Commissioners investigate, vote to file the complaint, oversee a “judge” who makes an initial decision, and decide the appeal. They also create policy through this adjudicatory process. Commissioners have full control from soup to nuts.

Those in the crosshairs of agency enforcement won’t even get a jury, among the most important protections to the framers of the Constitution. For one reason or another, jury rights fall away in agency proceedings. And scholars and judges have long forgotten about the jury’s central role in our history since the Supreme Court’s decision in Atlas Roofing, which essentially allowed Congress to place any claim by a federal agency in juryless agency adjudication. In that case, the Supreme Court ruled that the government could seek civil penalties for violations of workplace safety rules in an administrative proceeding—without a jury. Atlas Roofing was wrong, egregiously so. But it has long allowed agencies to investigate, prosecute and decide core private rights without any juror ever hearing the case.

This could soon change, however. Last May, the Fifth Circuit Court dropped a bombshell, holding that Securities and Exchange Commission (SEC) proceedings required a jury under the Seventh Amendment. The SEC sought to impose thousands of dollars of fines against an individual accused of fraud under the securities laws. Civil penalties of this sort, the Supreme Court has said, require a jury in federal court. After all, the Seventh Amendment was long understood to ensure that the government cannot impose fines—deprive individuals of their property—without proving its case to a jury. But under Atlas Roofing, agencies could avoid all that by simply filing in their own “courts.” The Fifth Circuit’s ruling threatens to upend this practice.

Practical Consequences of Agency Adjudication

Consider just one example of the negative consequences of our current administrative system. In late 2021 the Consumer Product Safety Commission (CPSC) investigated an infant “lounger” pillow and alleged it to be unsafe. Commissioners demanded that the company pull its product, issue refunds to all customers and pay all the costs to third parties associated with recalling the product. This was no small demand. For a company with a couple dozen employees, such a recall would not only cause financial disaster, but it would also permanently brand them with reputational harm.

The commission’s complaint openly acknowledged that both injuries—yes, there were only two instances in more than a decade of selling 180,000 products, an incident rate of less than 0.01%—occurred because of consumer misuse. Further, the commissioners admitted that the company posted open and clear warnings on the product that would have prevented these tragedies if followed. But the commissioners claimed that the product must be pulled from the market because it was foreseeable that some people would misuse the product despite the warnings.

The theory pushes traditional legal principles to the breaking point. But the more fundamental problem runs even deeper: who decides whether the commission’s reading is right or wrong? You surely saw it coming: the commission itself.

And when the company decided to push back, commissioners didn’t hide their bias. Commissioner Richard Trumka warned, “When companies refuse to recall products deemed deadly by CPSC staff, they should expect an administrative complaint to quickly follow.” In other words, do what we say—or else.

That’s no empty threat. Trumka and his fellow commissioners, after all, will ultimately decide the appeal, prevailing precedent will give their views on the law deference in court, and factual findings will get the same treatment. Similar schemes exist at the SEC, Federal Trade Commission, National Labor Relations Board, Federal Deposit Insurance Corporation and other agencies.

Consider, for example, the case of Michelle Cochran, a certified public accountant. The SEC accused her of paperwork errors, and instead of bringing the case in federal court, the agency ran to its in-house adjudication system. No surprise, the SEC won at the trial. But Cochran got a redo when the Supreme Court ruled the SEC’s judges were unconstitutionally appointed. Yet, even then, the SEC refused to go to a neutral court. Instead, it simply reappointed its judges and refiled its claims in the agency adjudication proceeding.

Cochran pushed back, filing a federal lawsuit challenging the SEC’s procedure, and her case now sits at the Supreme Court. The justices could rule within the next couple months as to whether SEC adjudication comports with the Constitution. But even if Cochran “wins,” consider the cost: It’s been nearly seven years since the SEC came knocking, and Michelle Cochran still has no answers.

And the resolution of her case could take even more time. The recent Fifth Circuit Court case held that juryless SEC proceedings violated the Seventh Amendment. But that decision came more than a decade after the SEC started investigating the defendant in the case. And even now, the SEC may appeal the Fifth Circuit case to the Supreme Court, so the outcome remains unknown. These examples leave no doubt: The process is the punishment.

In the Shadows

Few Americans have any sense of the breadth of agency adjudication, and for good reason: Most of it is hidden from view. Alphabet-soup agencies enforce arcane statutes and indecipherable regulations through an opaque process one wouldn’t even know how to find, much less navigate. Not many observers follow the docket of the Federal Deposit Insurance Corporation or the Commodity Futures Trading Commission. In fact, you can’t even access some agencies’ dockets unless you file a Freedom of Information Act request.

Also, defendants settle in an overwhelming number of cases where agencies bring charges. These settlements obscure the wide-ranging effects of agency enforcement. Given the adverse odds (and costs in terms of time, money and reputation), it’s hard to fault those who accede immediately to agency demands. No one, after all, wants to bet his entire company with such slim odds of victory—especially since a quiet settlement will push things under the rug. Economist Thomas Sowell put his finger on the point long ago: “A legal right worth X (in money or otherwise) is not in fact a right if it costs 2X to exercise it.” But when a party settles, no federal court will ever hear important constitutional arguments. This enforcement-by-settlement approach ensures that agencies remain largely insulated from federal court review.

That’s not all. To a layperson, agency proceedings look like court. They come coupled with all the frills of “judicial” process. The documents resemble those filed with real judges. Lawyers make legal arguments. Objections are sustained or denied. There’s talk of “jurisdiction” and “motions” and “trials.” Sometimes, too, the “judge” might even bang a gavel. To a casual observer, agency and court proceedings look the same. But on closer inspection, the imitation is mere mirage—courtroom cosplay with nothing but a veneer of similarity.

The administrative apparatus remains insulated from public scrutiny while it makes, enforces and interprets the law—all without independent judicial oversight. We’re told agencies need flexibility to use their expertise to solve complex problems in today’s technical world. That could be true, but it doesn’t require agency adjudication when disputes arise. In-house hearings simply make it easier for the agency to win—and then tout its win while seeking more funding from Congress—without any measurable gain to the public.

Even without in-house proceedings, agencies could still enforce the law. They would just have to do so in court. Proponents of administrative adjudication say that overburdened courts need agencies—that administrative hearings take the weight off an already strained federal court system. They have a point; any case taken out of agency proceedings and into federal courts would indeed add to the federal case load. But an overwhelming majority of agency hearings occur in “public rights” cases—those where the government distributes benefits, issues licenses or otherwise distributes government property. And virtually no one is arguing that those cases must be heard in federal court.

Private-rights cases represent a small portion of the agency docket. In adjudicating these cases, agencies are often no more efficient than courts. Moving them into the judiciary would result in hardly a noticeable difference in federal courts. And anyway, does anyone believe that the Securities and Exchange Commission would incur a barrage of losses if it had to bring cases in federal court rather than in its own proceeding? Would it be too hard for the SEC to file a normal lawsuit rather than get access to its own judge and appellate panel? If so, that’s more reason to rein in SEC proceedings. Why should the SEC (or any agency) get special treatment?

Returning to Due Process of Law

The separation of powers guards against arbitrary rule and protects liberty. Madison warned that a judge would “behave with all the violence of an oppressor” if he were “joined” with “the executive power.” Yet today’s upside-down administrative courts ignore Madison’s wisdom and instead have agencies make, enforce and interpret the law.

The result is no surprise. Agencies cakewalk through their own courts. Data reveal sky-high win rates, and to avoid the process altogether, defendants usually settle. When opposing parties do push back, they face a near-insurmountable hurdle. And at every turn, the government gets the benefit of the doubt. Heads, the agency wins. Tails, the defendant loses.

But common-sense solutions exist. For one, the Supreme Court must police agency adjudications more rigorously. Simply deferring to whatever an agency does—without addressing key underlying constitutional problems—allows agencies to trample important individual rights. The Supreme Court has the opportunity to take such a step this term. In November, it heard arguments in two cases that ask whether parties can challenge agency adjudications before submitting to the process, rather than waiting until the agency has made an unfavorable decision. Siding with the plaintiffs in those cases would force agencies to act within their constitutional sphere—and that is something we ought to encourage.

Second, agencies should exercise more caution before filing cases in-house. Many agencies can choose whether to file a case in federal court or use their internal process. But the fact that agencies can choose an internal process doesn’t always mean they should. Just as a criminal prosecutor exercises discretion in bringing cases, so too should federal agencies. Agencies should tread lightly where people’s individual rights are involved—and when they don’t, we should at least be aware of the unfair advantages they’re exploiting.

Finally, a straightforward approach: Congress should simply permit defendants to remove cases to an Article III court. Parties who prefer agency proceedings can stay there, but if they want a neutral judge or jury, they can get that too. That option would flip the current regime around: Instead of the agency determining whether it goes to court or uses its own proceeding, the defendant gets the choice. Easy, logical and constitutional.

Regardless of which path we take, something must change. Otherwise, private individuals and businesses will continue to get lost in the opaque and unfair courtroom-by-agency machine.

This op-ed was originally published at Discourse Magazine on January 12, 2023.