On Friday, the U.S. Supreme Court agreed to consider the constitutionality of the Dodd-Frank Act law that prohibits the President from removing a CFPB Director except for “inefficiency, neglect of duty, or malfeasance” — the so-called “for cause” restriction (see 12 U.S.C. §5491(c)(c)). The Court’s decision to address this restriction, which the CFPB announced last month it would no longer defend, is not a surprise. We therefore focus here on three key questions raised by the decision for those affected by the CFPB’s activities:

  1. Is the Court likely to find the “for cause” restriction unconstitutional?
  2. If there is a constitutional violation, what remedy is the Court likely to impose?
    • The Court specifically directed the parties to address this second question on Friday.
  3. What are the potential practical impacts of a Court ruling on these issues?

Likely Constitutional Ruling

Most observers appear to believe, and we agree, that at least five justices will vote to hold the restriction unconstitutional, as now-Justice Kavanaugh decided in what we believe was a persuasive opinion when the question was before him at the D.C. Circuit three years ago (see our prior posts on that case here and here). Restricting a President’s ability to remove a single head agency of a powerful regulatory agency (as opposed to individuals on a multi-member commission) is unprecedented. Indeed, the case that most supports the restriction, Morrison v. Olson, which upheld a similar restriction on the removal of a statutorily appointed Independent Counsel, may be ripe for reconsideration, as the Justice Department pointed out in its brief to the Court (at p. 16 n.2). A ruling that the restriction is unconstitutional is all the more likely now that the CFPB and the Solicitor General have announced that they will not defend the statute. In fact, it appears that the Court will have to appoint an amicus to present that defense.

What is the Remedy?

In Friday’s order, the Court also instructed the parties to address a related but not unexpected question: If the CFPB “is found unconstitutional on the basis of the separation of powers, can 12 U.S.C. §5491(c)(3) [the for-cause removal provision] be severed from the Dodd-Frank Act?” This question just raises the remedy issue, specifically, whether the correct remedy for the (presumed) constitutional defect is:

  • the limited remedy of striking the “for cause” restriction, thereby making the Director removable at will; or
  • some broader remedy like invalidating the agency entirely, which is the result advocated by the petitioner in the case now before the Court, a law firm defending a CFPB Civil Investigative Demand.

The first, limited remedy, which the Justice Department is advocating for, seems the most likely one to us. As the government pointed out, it is the remedy selected by the Supreme Court in a recent case involving the Public Company Accounting Oversight board (at pp. 16-17). Moreover, in the case now before the Court (and unlike that recent one), there is clear evidence of Congress’ intent – the severability clause in the Dodd-Frank Act – in the event the Court finds a constitutional defect. That clause in the Dodd-Frank Act provides that if “any provision of” the Act “is held to be unconstitutional, the remainder of this Act … shall not be affected thereby.” 12 U.S.C. § 5302.

Practical Effects

As interesting as the constitutional issue is to academics, there may be little to no practical effects in the short-term if the Court decides merely to “blue-pencil” out the “for cause” restriction. President Trump already has his preferred personnel installed at the CFPB. Indeed, the most significant effect under a limited-remedy scenario may only come if President Trump is defeated next fall. With the statute as it stands now, current CFPB Director Kathleen Kraninger is entitled to serve out her full five-year term, until 2023; but if the Court makes her removable at will, a new President presumably would replace her with someone more in tune with that President’s views.

In the meantime, while a few courts may be amenable to arguments by enforcement targets that cases involving them be stayed until the high Court rules, we doubt that those cases will be much impacted in the end. As now-Justice Kavanaugh observed when the CFPB’s structure was before the D.C. Circuit, in the several recent cases where other agencies were found to be unconstitutionally structured, those agencies and the courts “[w]ithout major tumult” have “subsequently worked through the resulting issues regarding the legality of past rules and of past or current enforcement actions” (at pp. 69-70 n.19). We would note that the parties with the best hope for some retrospective relief may be those who can show adverse effects from prior Director Richard Cordray’s “over-stay”: the ten-month period when he continued to serve during the Trump Administration. The Court’s forthcoming opinion in this case may shed light on the effect, if any, of a ruling that the statute is invalid on past and current CFPB actions, or potentially could leave important questions unanswered, resulting in significant uncertainty and litigation.

Finally, this case may also provide the final answer to a similar question about the for-cause restriction on removing the head of the Federal Housing Finance Agency, which oversees Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The U.S. Court of Appeals for the Fifth Circuit already has found that restriction unconstitutional.