The Effect of Supreme Court Decision in SEC v. Jarkesy on HHS-OIG Powers

The U.S. Supreme Court’s highly anticipated decision in SEC v. Jarkesy has made waves this summer, creating significant implications for government agencies and calling into question whether or not agencies can impose civil monetary penalties (CMPs). The ruling came the same week as the decision in Loper Bright Enterprises v. Raimondo, where the Supreme Court overturned the Chevron doctrine and ruled that courts are no longer required to give deference to federal agencies where there is statutory ambiguity.

Jarkesy: Adjudication and CMPs

The Securities Exchange Commission (SEC) sought civil penalties against Jarkesy, alleging the hedge fund manager committed fraud. The case went up to the Supreme Court, which found the Seventh Amendment (preserving the right to a jury trial where the amount in controversy exceeds $20) applies and entitles the defendants to a jury trial. Because the CMP served as a form of punishment and not a way to “restore the status quo,” the action was legal in nature, also requiring a jury trial, unlike an action in equity for which there is no constitutional right to a jury trial.

The Supreme Court also considered whether the SEC’s authority to impose CMPs falls under the “public rights” exception. Under this exception, Congress may assign some matters to agencies for internal adjudication. However, the Supreme Court found that proceedings that correctly fall under the exception are those that do not punish or deter individuals from violating laws. Because the SEC’s ability to impose CMPs is aimed at punishing or deterring violations, it does not fall under the exception.

Additionally, the Supreme Court held that the SEC’s structure violated the Constitution’s separation of powers because its administrative law judges (ALJ) serve in “the roles of prosecutor, judge, and jury.” The Supreme Court further diluted agency powers in Loper Bright by creating a stricter standard for agency interpretation of laws and requiring clear statutory justification for agency actions.

Loper Bright: The End of Chevron Deference

In Loper Bright, the Supreme Court ended a long-standing administrative law doctrine called the Chevron deference. Under Chevron, where statutes were “silent or ambiguous with respect to the specific issue at hand,” agencies could interpret the statute in a “reasonable” manner. Such agency interpretation would be given deference by courts with the assumption that agencies had appropriate subject matter expertise to better interpret ambiguous statutes than courts.

Under Loper Bright, the Supreme Court determined that courts must be the ones to “decide all relevant questions of law” and interpret any ambiguous statutory provisions. As such courts now must “apply all relevant interpretive tools” and conclude which reading of an ambiguous statute is best, taking the ability to interpret statutes away from agencies. While courts may not have subject matter expertise, the Supreme Court held they do have a “special competence” in statutory interpretation, putting courts in a better position to “handle technical statutory questions.”

Ultimately, it will take several cases and even more years to see the extent of the impact made by Jarkesy and Loper Bright. However, one thing is clear: administrative law is changing significantly and entities in highly-regulated industries must closely monitor future developments.

Within the Healthcare Industry

Key healthcare agencies and offices such as the Department of Health and Human Services, Office of the Inspector General (HHS-OIG), the Centers for Medicare and Medicaid Services (CMS), the Health and Human Services Office for Civil Rights (HHS-OCR), and the Food and Drug Administration (FDA) will likely face legal challenges as a result of these Supreme Court decisions.

Like the SEC, the HHS-OIG has an agency adjudication process: ALJs handle exclusions or denials and the Departmental Appeals Board (DAB) handles appeals to final written decisions. The DAB uses evidentiary hearings. Unlike the SEC, most DAB cases call for evidentiary hearings and are decided on the basis of the written record, as well as oral arguments, including a discovery process. While appellants can self-represent, it is not typical. Cases are heard by a panel of three DAB members.

Further, the HHS-OIG is able to impose CMPs for a wide variety of reasons, each typically meant to punish prohibited conduct. Both HHS-OIG’s CMP authority and the reason for imposition of CMPs are not dissimilar to the authority challenged in Jarkesy.

Key Takeaways

Here are three things to watch for as healthcare organizations continue to ride this wave.

1. Healthcare entities can expect scrutiny of CMPs and agency enforcement proceedings. Agencies will need to justify each penalty as an action in equity, restoring the status quo, or face a jury trial. The “public rights” exception will likely not save agencies’ authority to impose CMPs or exclude individuals from federal healthcare programs. Therefore it stands to reason that Jarkesy’s line of thinking will apply to CMPs and exclusions imposed by the HHS-OIG. Healthcare and life sciences companies may attempt to challenge the constitutionality of both the proceedings and the penalties.

2. Stakeholders should keep a close eye on legislative and regulatory changes aimed at aligning constitutional requirements and resolving ambiguity. While the DAB does not blend “the roles of prosecutor, judge, and jury,” it is likely the HHS will revisit and revise their adjudication processes to strengthen appellate rights. This may result in a change to the overall structure of administrative enforcement actions. Any such changes designed to meet the standards established by Jarkesy and Loper Bright will likely affect the timing of regulatory enforcement actions.

3. Healthcare providers have stronger grounds to challenge interpretations of statutory authorities. This includes sub-regulatory statutory guidance that, until now, has been deemed acceptable agency interpretation. Within the healthcare industry, the most notable statute at risk is the Anti-Kickback Statute (AKS). While the AKS does not define remuneration, there are decades of agency guidance, including special fraud alerts, advisory opinions, and compliance guidance documents that determine the parameters of remuneration under the AKS.

Under Jarkesy and Loper Bright, we may see an increase in challenges to the HHS-OIG’s efforts to define remuneration more broadly than the statute or prior case law has contemplated. Until agencies are able to update and refine their policies, silent or ambiguous statutory interpretation allows for the possibility of litigation. Reviewing courts will need to scrutinize statutory interpretation and demand clear justification to authorize actions until these changes result in unambiguous and simple policy language.

Notwithstanding Jarkesy, it is important to note that defendants may still affirmatively choose to waive their right to a jury trial. This is an appealing prospect for defendants to avoid the risk, cost, and uncertainty of a jury trial. The same can be assumed of healthcare entities and HHS-OIG’s imposition of CMPs. A healthcare entity that self-reports fraud and abuse issues may ultimately pay lesser damages.

For more information, please contact the Barnes & Thornburg attorney with whom you work or Tony Burba at 312-338-5908 or tony.burba@btlaw.com or Megha Mathur at 312-214-8828 or megha.mathur@btlaw.com.

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