SCOTUS Goes After the Admin State: What it Means for Crypto

This summer, the Supreme Court of the United States issued a spate of opinions deciding administrative law issues. The decisions in Loper Bright Enterprises v. Raimondo, Securities and Exchange Commission v. Jarkesy, and Corner Post, Inc. v. Board of Governors of the Federal Reserve System will fundamentally change how regulators function and by extension how regulated industries interact with the government. This blog post provides an overview of each of these cases and their potential impacts on the digital assets industry.

Loper Bright and the End of Chevron Deference

In Loper Bright Enterprises v. Raimondo, the Supreme Court decided that courts need not defer to agencies' interpretations of the law, overturning the Chevron doctrine. DEF previously discussed the background and potential implications of Loper Bright in a blog post, and now that the Court published its opinion, we cover the Court’s reasoning and takeaways.

To provide a brief background, the plaintiffs in Loper Bright brought suit to challenge the Magnuson-Stevens Fishery Conservation and Management Act by the National Marine Fisheries Service (NMFS), which required professional fishers to pay for government compliance agents to oversee their at-sea activities. The plaintiffs claimed that the NMFS had no clear statutory authority to support forcing businesses to cover the cost of these agents and the NMFS had improperly relied on an ambiguity in the explicit text to derive their interpretation. This challenge struck at the heart of statutory interpretation under Chevron. Under Chevron, courts would allow agencies to interpret statutes within their purview, and, if the agency’s interpretation was deemed reasonable by a reviewing court, the reviewing court would then defer to the agency’s interpretation.

The decision in Loper Bright overturned Chevron and held that federal courts are required to independently determine what statutes mean rather than defer to agency interpretations. The Court stated that “Presumptions have their place in statutory interpretation, but only to the extent that they approximate reality,” and quoted an esteemed Administrative Law scholar Professor Cass Sunstein, who said “a[n] ambiguity is simply not a delegation of law interpreting power. Chevron confuses the two.” The reasoning in Chevron proceeded with the presumption that an ambiguity was in fact an implicit delegation from Congress, Loper Bright denied this proposition and returned reviewing courts to the standard of old: “courts decide legal questions by applying their own judgment.” This last quote can summarize the whole of the opinion; courts must decide legal questions on their own. Although agencies can still provide persuasive reasoning and rationale for their decisions, they must now persuade the court that their interpretation is right, instead of arguing that the statute is ambiguous and their interpretation deserves deference.

Implications for the Digital Asset Industry

While the Loper Bright decision has limited immediate impact on ongoing digital asset litigation, it will be significant in the long run. In the short term, litigants in existing cases may not be able to use Loper Bright directly because the Securities and Exchange Commission seldom used Chevron to justify its enforcement actions and does not rely on it when arguing securities law. In most digital asset cases, a defendant is charged with an unregistered offering of an investment contract. The SEC does not use its own interpretation to define what an investment contract is, rather, they use the Supreme Court’s test laid out in SEC v. W.J. Howey Co., often referred to as the Howey test. Because the test is not derived from the agency’s interpretation of the law, the holding in Loper Bright will likely not impact how the SEC argues cases dealing with alleged investment contracts.

In the long term, given the likelihood of a market structure bill taking form in the next year, this case could meaningfully affect how courts determine legal questions pertaining to such new legislation. Any market structure bill that includes a jurisdictional provision, delineating whether digital assets are securities or commodities (or some yet undefined third thing), will be interpreted by agencies regulating the industry. Under Loper Bright, a court will not have to defer to that agency’s interpretation of its own jurisdiction. Knowing they will not receive deference for statutory interpretation, agencies will also keep this ruling in mind when they propose and finalize rules under the Administrative Procedures Act (APA).

Jarkesy and Administrative Proceedings

In Securities and Exchange Commission v. Jarkesy, the question before the Court was: Does the Seventh Amendment require a jury trial when a government agency seeks civil penalties for securities fraud? The majority held that the answer was an unequivocal yes. To understand how they got there and its implications, let’s break down the basics of the case and the logic applied by the Court.

George Jarkesy, the plaintiff in the case, was the founder of two hedge funds in the early 2000s. Following the Dodd-Frank Act’s passage in 2010, new requirements and greater scrutiny were placed on investment companies, including a provision that allowed the SEC to adjudicate certain alleged violations in house, rather than in front of a federal court and judge. In these proceedings, an administrative law judge (ALJ) acts as factfinder and decides the defendant’s liability and penalty. The SEC chose this route to try the Jarkesy case and convicted him. The imposition of civil penalty without a trial in front of a jury formed the basis for Jarkesy’s Seventh Amendment challenge to the SEC’s investigation and in-house adjudication.

Legal Background: Penalties, ALJs, and Forum Choice

Jarkesy was found liable for violating Rule 10b-5, which creates a statutory alternative to common law fraud and deals with falsities in disclosures and other fraud in the securities world. He was issued a civil penalty by an ALJ, meaning a monetary fine separate from remediation or disgorgement. The type of penalty is important in determining the proper forum for a particular matter. Historically, courts were classified as either courts of law or equity depending on the type of remedies or penalties able to be adjudicated within their halls. This division, although mainly deprecated in the modern era, still has implications for Seventh Amendment purposes as highlighted by this case.

At the time, under the newly enacted Dodd-Frank statute, the SEC had the option of choosing between two forums (or courts) to adjudicate cases and seek a civil penalty: either a federal court presided over by an impartial Article III judge or an administrative proceeding presided over by an SEC employee, the aforementioned ALJ. Forum choice is ultimately up to the discretion of the SEC; however, prosecutors are likely to choose the forum with the highest likelihood of success. In most cases, that forum will be an administrative proceeding. 

Why? Administrative proceedings offer at least three clear benefits to the government. First, they operate under separate rules of evidence and procedure, which diverge dramatically from the federal rules in Article III courts. For instance, federal court rules of evidence preclude hearsay testimony in many circumstances, but in SEC administrative proceedings, hearsay is permissible. 

Second, administrative proceedings offer a direct benefit to the government on appeal: when an Article III court reviews a final agency decision, they must uphold it if there is “more than a mere scintilla of evidence” supporting the decision. This is a very easy standard for the SEC to meet. 

Last and directly at issue in Jarkesy, administrative proceedings do not use a jury to make factual determinations. ALJs act as both the finder of law and the finder of fact. At its core, the ties between the agency and its ALJs, which are its employees, create either the air of or actual bias for agency decisions and arguments. There is also a direct conflict with the Seventh Amendment, which states: “In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise reexamined in any court of the United States, than according to the rules of the common law.” 

Ultimately, the Supreme Court held that the type of remedy the SEC sought — money damages, not to make investors whole, but rather to disincentivize further violations of the law — was inappropriate to bring in front of an ALJ and required a jury trial in federal court. To support this, the Court reaffirmed precedent standing for the proposition that matters that would normally take place in federal court, such as fraud charges, and that seek the type of penalties at issue in Jarkesy, must be adjudicated in front of a jury. On these bases, the Court held that the Jarkesy action required a jury trial and affirmed the Fifth Circuit’s opinion, vacating the decision of the SEC.

Impact on the Digital Asset Industry

The Jarkesy ruling could see an increase in SEC cases brought in federal court that would have been decided in front of an ALJ. For digital assets, between 2013 and the beginning of 2024, the SEC filed, settled, and/or won seventy-five cases dealing with Rule 10b-5. Following this ruling, the agency will have to decide whether to sever Rule 10b-5 cases from the other charges that are still allowed to proceed in front of an ALJ. For instance, an SEC attorney may decide to bring a case dealing with both alleged Section 5 registration violations and Rule 10b-5 fraud violations in front of a federal judge instead of dealing with the Section 5 charge in house and separately bringing a Rule 10b-5 case to federal court. 

For the digital asset industry, moving away from the SEC's opaque and hostile home court is a great victory. Access to impartial federal courts is in and of itself a boon, as is being tried by a jury of one’s peers to decide the facts of the case. The federal rules of evidence provide much greater fairness to potential litigants.  Additionally, the access potential litigants have to appellate review is greatly bolstered under this new regime. By requiring cases alleging common law equivalent rights of action seeking punitive remedies to be filed in an Article III federal court, all litigants will benefit from greater impartiality, access to and quality of review, and judgment by their peers. 

Corner Post and Statutes of Limitation

In Corner Post, Inc. v. Board of Governors of the Federal Reserve System, the Supreme Court held that the statute of limitations for APA challenges does not start tolling until a plaintiff is injured by a final agency action. In simpler terms, the Court held that a plaintiff is only barred from bringing a suit pursuant to the APA after six years has passed since they were injured by an agency rule or other official action.

The previous rule on when the six-year statute of limitations started (or, in lawyer-speak, tolled) was unclear, leading some courts to rule that the statute of limitations started immediately after the final action was consummated. This would mean that a plaintiff could not challenge a final agency rule if six years had passed since the rule was finalized, even if the plaintiff was unaware of the rule or had yet to be affected by it. In practice, this prevented businesses that were created six or more years after the passage of a rule from challenging the rule, despite having no opportunity to challenge the action before. Although of direct benefit to the government in terms of efficiency and certainty, the previous standard improperly limited the available plaintiffs for a given action and restricted their right to redress. 

The holding in Corner Post clarifies the ambiguity in the APA, expanding the time period for challenging a final agency action, and therefore, expanding the available pool of plaintiffs to challenge agency actions. Now, a plaintiff has six years from the time they were injured by an agency action to bring suit, regardless of when the agency action occurred.

Impact on the Digital Asset Industry

Anyone following cryptocurrency is aware of the lack of clarity from regulators regarding the status of digital assets. Many in the digital asset industry are most familiar with enforcement sanctions, since the SEC and CFTC have not issued final rules regarding digital assets. However, given the shift in Congress regarding crypto-assets, the status quo is unlikely to persist. Agencies will likely create new rules and regulations which directly implicate the holding in this case. Moreover, businesses facing penalties from decades-old rules will finally have access to courts to challenge them where they would have previously been barred. Due to the relative newness of the industry, the previous regime directly affected the capacity of digital asset industry businesses to challenge rules. The decision in Corner Post rights this wrong, and allows injured plaintiffs to obtain redress.

Conclusion

The recent Supreme Court decisions in Loper Bright Enterprises v. Raimondo, Securities and Exchange Commission v. Jarkesy, and Corner Post, Inc. v. Board of Governors of the Federal Reserve System signify a shift in the regulatory landscape, particularly impacting the administrative state and regulated industries. These rulings collectively move away from deference to agency interpretations, reinforce the necessity of jury trials in certain SEC enforcement actions, and clarify the statute of limitations for challenging agency rules. While the direct impact on the digital assets industry may be limited under current regulatory frameworks, they will likely lead to significant changes if new regulatory regimes emerge. As agencies like the SEC and CFTC navigate these new landscapes, industry participants may have additional access to litigation and benefit from shifts in regulatory strategies. 

This piece was written by Jonathan Obeda, a legal intern with the DeFi Education Fund. Jonathan is currently a student at The George Washington University Law School.