Securities Regulation Daily Wrap Up, ENFORCEMENT—5th Cir.: Appeal of SEC gag order was dead on arrival, (Mar 21, 2024)

By Anne Sherry, J.D.

Opponents of the SEC’s controversial “gag rule” hoped the Fifth Circuit would rule it unconstitutional, but the court denied the challenge on jurisdictional grounds.

A First Amendment challenge to an SEC gag order was dismissed on jurisdictional grounds. The Fifth Circuit held that the district court properly denied the defendant’s motion for declaratory relief as an improper pleading. In an issue of first impression, the appeals court agreed with the district court’s conclusion and determined that it lacked jurisdiction to consider the defendant’s appeal (SEC v. Novinger, March 19, 2024, Smith, J.).

The case surrounds the SEC’s controversial policy of requiring settling defendants to agree not to publicly deny the allegations against them. Opponents say this amounts to an unconstitutional prior restraint, and that’s the argument the defendant here made in challenging the 2016 gag order against him.

The defendant first sought relief under Federal Rule of Civil Procedure 60(b), but the district court denied his motion, and the Fifth Circuit affirmed. The defendant next moved for declaratory judgment under FRCP 57 and the Declaratory Judgment Act (“DJA”). The district court denied that motion as well, ruling it procedurally improper.

Lack of jurisdiction. The Fifth Circuit concluded, sua sponte, that it lacked jurisdiction to hear the defendant’s appeal. Just like in a similar Eleventh Circuit case, the underlying order disposed of only a procedurally improper motion. Because it did not dispose completely of the defendant’s claim, but merely prevented him from using the wrong procedural vehicle to advance that claim, the district court’s order was not a final decision.

Accordingly, as long as the appeals court agreed that the motion was procedurally improper, then the appeals court lacked jurisdiction under 28 U.S.C. § 1291. The court would also lack interlocutory jurisdiction under 28 U.S.C. § 1292(a), which specifies what types of interlocutory orders are subject to appeal. A motion for declaratory judgment is not among them.

The court therefore reviewed de novo whether the district court correctly determined that the motion was procedurally improper. This was a first impression in the Fifth Circuit, but the Ninth and Eleventh Circuits have held that requests for declaratory judgment are not properly raised by motion. The DJA allows such a remedy “upon the filing of an appropriate pleading.” The Fifth Circuit agreed with its sister circuits that a motion is not a pleading.

No exceptions available. The appeals court rejected the defendants’ arguments that an exception should be made. First, the defendant could—and did—challenge the gag order under Rule 60(b). “That he failed does not entitle him to some other form of relief,” the court stated. Furthermore, the defendant’s motion is unlike other motions for declaratory judgment that the court has interpreted more liberally. And ignoring the federal rules and construing the motion as an appropriate pleading under the DJA “would undermine the differentiation between a pleading as an initial filing in a case and a motion as a subsequent filing.”

The case is No. 23-10525.

Attorneys: Jeffrey Alan Berger for the SEC. Margaret A. Little (New Civil Liberties Alliance) for Christopher A. Novinger and ICAN Investment Group, L.L.C.

Companies: ICAN Investment Group, L.L.C.

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