Jarkesy Decision Calls Into Question U.S. HHS Authority to Impose Civil Monetary Penalties on Healthcare, Life Sciences Companies

The logic of the U.S. Supreme Court’s decision last week that defendants facing civil monetary penalties from the U.S. Securities and Exchange Commission (SEC) have a right to a jury trial has significant implications for healthcare administrative enforcement actions. Healthcare and life sciences companies confronting civil monetary penalties (CMPs) that could be imposed by components of the U.S. Department of Health and Human Services (HHS) should carefully consider options for moving disputes outside of the administrative process.

As discussed further here, a long-running dispute between the SEC and George Jarkesy laid the groundwork for the Court’s decision. The SEC alleged that Jarkesy, an investment fund manager, defrauded his customers in violation of federal securities statutes. The SEC initiated an enforcement action against Jarkesy, seeking hundreds of thousands of dollars in civil penalties. By statute the SEC had two venues in which it could proceed: federal court, in which an Article III judge would preside and a jury of Jarkesy’s peers would decide the facts, or the SEC’s in-house tribunal, in which the SEC itself, often acting through an SEC-appointed administrative law judge (ALJ), would be judge and jury. In Jarkesy’s case, the SEC chose the latter. The ALJ found Jarkesy liable, and, after a six-year delay, the SEC affirmed the ALJ’s order. Jarkesy petitioned for judicial review, and the Fifth Circuit held that the SEC’s decision to adjudicate the case in house violated Jarkesy’s Seventh Amendment right to a jury trial.

The Supreme Court affirmed, holding that the Seventh Amendment prohibited the SEC from bringing a securities fraud action seeking civil penalties in an administrative tribunal without a jury. The Court first explained that a claim implicates the Seventh Amendment if it is “legal” (as opposed to equitable) “in nature,” which depends on both the cause of action and the remedy sought. In Jarkesy, the “remedy [wa]s all but dispositive” because the civil monetary penalties sought by the SEC were designed to punish or deter wrongful conduct rather than “restore the status quo.” That securities fraud and common law fraud had a “close relationship,” that is, shared elements and history, “confirm[ed]” that the former was a “legal” action implicating the Seventh Amendment.

The Court went on to reject the SEC’s argument that the “public rights” exception to the Seventh Amendment applied. The Court explained that the exception must be read narrowly, and “what matters is the substance of the suit, not where it is brought, who brings it, or how it is labeled.” Furthermore, “ ‘practical’ considerations alone,” the Court emphasized, can never justify applying the exception.

In recognizing the “legal” nature of civil penalties and cabining the public rights exception, Jarkesy casts doubt on the validity of numerous federal regulatory schemes under which enforcement proceedings are brought in an agency tribunal.

HHS has a significant, and growing, roster of CMP authorities. Now updated every year to account for inflation, the latest list of CMP authorities and their financial consequences spans 22 pages in the Federal Register. For example, the Centers for Medicare & Medicaid Services can impose CMPs for violations of various billing and reporting rules applicable to healthcare providers or regulatory rules of operation applicable to Medicare Advantage plans and Part D sponsors, misrepresentation of average sales price of a drug or biologic, and violations of the No Surprises Act. The HHS Office of Inspector General can impose CMPs for failing to report and return an overpayment, making or using a false record or statement that is material to a false or fraudulent claim, and information blocking. And the HHS Office of Civil Rights can impose CMPs for violations of the Health Insurance Portability and Accountability Act of 1996.

Similarly, the Food and Drug Administration (FDA), an agency within HHS, has several CMP authorities. For example, FDA can assess CMPs against medical device companies for significant or knowing departures from good manufacturing practice requirements, against pharmaceutical companies for violations related to Risk Evaluation and Mitigation Strategy requirements, against food companies for introducing adulterated food in interstate commerce, against tobacco companies for failing to comply with certain requirements, and against companies subject to clinical trial reporting requirements for failure to submit required clinical trial information, among other violations. More recently, FDA has used its CMP authorities most commonly against tobacco retailers.

But as the Justice Gorsuch and Justice Thomas concurrence noted, the administrative procedures Jarkesy faced in the underlying SEC administrative proceeding were devoid of “many of the procedural protections our courts supply in cases where a person’s life, liberty, or property is at stake.” HHS’s administrative proceedings similarly give defendants nowhere near the procedural protections they enjoy under the Federal Rules of Evidence. The Court’s decision in Jarkesy casts significant doubt on HHS’ ability to continue its historical reliance on these administrative procedures. Healthcare and life sciences companies facing the potential for CMPs imposed by HHS should carefully evaluate the facts and circumstances and statutory framework of their case and consider the potential for new options in light of Jarkesy.