Post-Jarkesy, Circuits Diverge On Whether The FCC's Enforcement Process Is Constitutional

Key Takeaways

1. The U.S. Court of Appeals for the Fifth Circuit found the FCC's in-house enforcement process unconstitutional under the Seventh Amendment, while the appellate courts for the District of Columbia and Second Circuits upheld its adequacy, leading to ongoing legal uncertainty.
2. The core dispute was whether the Communications Act of 1934 provides a sufficient right to a jury trial before monetary penalties are imposed, with circuits split on whether this right is adequately protected.
3. Given the divergent rulings, further appellate review—and potentially U.S. Supreme Court intervention—is expected, which could reshape FCC enforcement practices and regulated entities' rights.

Since the U.S. Supreme Court significantly limited the authority of federal agencies to conduct in-house enforcement actions last year in SEC v. Jarkesy, three circuit courts have interpreted the decision in ways that continue to cast uncertainty over regulatory enforcement. Earlier this year in AT&T v. FCC, the U.S. Court of Appeals for the Fifth Circuit applied Jarkesy to the Federal Communications Commission's (FCC) enforcement processes and determined that the FCC's in-house enforcement proceedings violate the Seventh Amendment by not providing a right to a jury trial. But in two later cases involving FCC enforcement proceedings arising from similar facts, the U.S. Court of Appeals for the District of Columbia Circuit, in Sprint v. FCC, and the U.S. Court of Appeals for the Second Circuit, in Verizon v. FCC, concluded that Jarkesy did not apply. They reached this conclusion because, in their view, the organic act of the FCC—the Communications Act of 1934, as amended (Communications Act)—does provide a right to a jury trial; the defendants simply waived their right to it.

Arguably, the divergent decisions do not create a circuit split; none of the circuit courts challenged the Jarkesy decision on the merits. But the question remains whether the Communications Act's enforcement procedures provide an adequate right to a jury trial for purposes of the Seventh Amendment. The Fifth Circuit says they do not, while the D.C. Circuit and Second Circuit say they do.

Background

For several years, certain wireless carriers allegedly sold customer location data to aggregators, who then resold it to numerous third parties for services such as roadside assistance and fraud prevention. Between 2017 and 2019, several high-profile incidents revealed that this data was potentially being misused, including through unauthorized access by bail-bond firms and law enforcement. The FCC investigated and, in April 2024, issued significant fines against the carriers, determining that location data constitutes customer proprietary network information which the carriers had failed to adequately protect. The fines ranged between $46.9 and $92 million.

FCC Enforcement Process at Issue

At issue in each of AT&T, Verizon,and Sprint was the FCC's enforcement process. Under the Communications Act, an FCC enforcement action begins when the FCC issues a notice of apparent liability (NAL) for alleged violations of the law or the FCC's rules. Through an NAL, the FCC provides notice of the alleged violations and sets a proposed monetary penalty. The target can provide a written response contesting the proposed forfeiture, but the FCC can, in its own discretion, affirm its decision and the monetary penalty and proceed to issue a final order (known as a "forfeiture order"). During this in-house enforcement proceeding, the target (1) cannot rely on the protections of the federal rules of evidence (including hearsay rules) and civil procedure; (2) has no right to confront its accusers or to impeach witnesses; (3) is not provided with copies of all evidence, including exculpatory evidence, that the FCC gathered as part of its investigation; and (4) faces a tribunal in which the FCC acts as "judge, prosecutor and jury," according to the Supreme Court in Jarkesy and reiterated by the Fifth Circuit in AT&T.

If the FCC issues a forfeiture order, the Communications Act provides the target with only two options: appeal or concede.

1. Appeal. The forfeiture order target can challenge the final order by seeking appellate review, but only after it pays the FCC's monetary penalty in full and within 30 days of the FCC's forfeiture order, which can be a significant hardship if the amount of the penalty is substantial (as it was in the carriers' cases). Appellate review is also limited to the facts and legal arguments in the FCC administrative record developed during the enforcement proceeding, during which (as noted above) the target was not afforded the due process rights of an Article III trial court.
2. Concede. The target can concede to the forfeiture order and allow it to become effective. This concession would entail failing to timely pay the fine set forth in the FCC's forfeiture order. However, conceding to the forfeiture order in this fashion forfeits the right to appellate review (the option above) and assumes the risk of waiting for the U.S. Department of Justice (DOJ) to sue for collection of the penalty in a U.S. district court within the five-year statute of limitations. As a practical matter, the DOJ has a very poor record of bringing collection actions to recover the penalties. If the DOJ seeks to collect the fine, the target then has the right under the Communications Act to a de novo review of the FCC's forfeiture order. Because the unchallenged forfeiture order becomes final and legally binding, the FCC is free to take adverse actions based on the forfeiture order (e.g., denying license renewals, disapproval of mergers and acquisition transactions, or assessing greater penalties in subsequent enforcement actions). The target may also suffer reputational damage, customer attrition, and removal from industry associations.

Divergent Circuits

Both the Second Circuit in Verizon and the D.C. Circuit in Sprint,respectively, focused on the statutory framework of the Communications Act, specifically Section 504(a). The courts reasoned that this statutory scheme provides a constitutionally adequate opportunity for a jury trial before any monetary penalty is collected. In both cases, by choosing the first option (above) of contesting the forfeiture order by seeking appellate review and timely paying the monetary penalty, the carriers were found to have waived their right to a jury trial under the second option. The Second Circuit emphasized that the de novo district court proceeding, if elected by DOJ, allows for full factual and legal challenges to both the alleged violations and the amount of the penalty and rejected arguments that the FCC's enforcement process is constitutionally inadequate. Similarly, the D.C. Circuit held that the availability of a jury trial in a de novo collection action, if elected by DOJ, satisfies the Seventh Amendment, and that the carriers' voluntary payment of the forfeiture constituted a waiver of that right.

Both courts also addressed the Supreme Court's decision in Jarkesy. The Second and D.C. Circuits distinguished the FCC's enforcement process from the SEC's, interpreting the Communications Act to provide for a jury trial in federal court before any penalty is collected in a DOJ collection action, unlike the SEC's process. As a result, the courts determined that the FCC's enforcement processes were constitutional under Jarkesy. The Second and D.C. Circuits were not persuaded that the defendant's act of having to concede to the forfeiture order to preserve this potential jury trial was constitutionally significant, despite the fact that the DOJ may not bring a collection action for many years, if at all (it has a five year statute of limitations); the potential for adverse actions in the interim by the FCC based on the concession; and the likelihood of reputational damage and customer attrition that could follow such concession.

By contrast, the Fifth Circuit rejected the argument that the "appeal or concede" structure of Section 504(a) was constitutionally adequate, determining that the right to a jury trial must be available before any penalty is imposed, not merely at the collection stage, and that defendants also suffered other indirect harms, including reputational harm. The Fifth Circuit emphasized that under governing Fifth Circuit precedent, in a 504 action, U.S. district courts are "limited to considering the factual basis for the agency action," not the petitioner's "legal arguments." The Fifth Circuit found this limitation to be a critical defect in the statutory scheme, as the defendant must choose between one of the two enforcement options above and either get a jury trial in district court for a review of the order's factual basis, or challenge the legality of the forfeiture order in appellate court. In these scenarios, the defendant cannot get both a jury trial and challenge the legality of a forfeiture order. Specifically, the Fifth Circuit explained that this structure deprived the defendant of the ability to challenge the legality of a forfeiture order in district court, thereby denying the defendant full judicial review of the agency's legal conclusions.

What's Next?

Following the decision in AT&T, the FCC filed for but was denied a rehearing en banc in the Fifth Circuit. The FCC argued that a recent Supreme Court decision decided after AT&T, McLaughlin Chiropractic Assoc., v. McKesson Corp., overturned precedent that the Fifth Circuit relied on in its decision and supported reinstatement of the forfeiture order. Specifically, the FCC argued that McLaughlin allows defendants in agency enforcement actions to raise both factual and legal challenges de novo in district court, thereby addressing the Seventh Amendment concerns on the limited scope of judicial review available to defendants that underpinned the Fifth Circuit's ruling. The Fifth Circuit was not persuaded and denied the rehearing petition. Similarly, following the D.C. Circuit's decision in Sprint, the defendants petitioned for an en banc rehearing, arguing conflicts with the Fifth Circuit on the Seventh Amendment issue. The outcome of that petition has not been decided. In the Verizon case, no petition for rehearing en banc has been filed as of this Update. However, given the divergent circuit opinions, it is likely that one of the regulated parties will appeal Verizon or Sprint, or that the FCC will appeal AT&T, to the Supreme Court.

Takeaways

The divergence among the circuits creates uncertainty for regulated entities and for the FCC's enforcement proceedings with now differing opinions on the constitutional adequacy of such proceedings. The varying interpretations of the Communications Act also raise the prospect of further appellate review and potentially Supreme Court intervention to resolve the constitutional question. The ultimate resolution of these cases may have a significant effect on how and to what extent the FCC can bring enforcement actions with monetary penalties in the future.

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