Since the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) expanded the authority of the Securities and Exchange Commission (“SEC”) to seek civil penalties through administrative proceedings,1 the SEC has brought, as one court observed, “an ever increasing number of enforcement actions within its own administrative scheme, rather than in federal court.”2 In 2014, for instance, the SEC initiated 43% of its litigated actions as administrative proceedings.3 This shift may be due, at least in part, to the reported advantage the SEC enjoys before its own Administrative Law Judges (“ALJs”). From October 2010 through March 2015, the SEC won 90% of its litigated administrative proceedings. By comparison, the SEC won only 69% of the cases it brought in district court over the same time period.4
In light of this discrepancy, a growing number of respondents in administrative proceedings have sought to require the SEC to litigate in district court. Suing the SEC in federal district court, they allege various constitutional deficiencies with the administrative law proceedings and request an injunction to stop them. One recent approach is for respondents to challenge the constitutionality of the ALJs under Article II of the Constitution. This year, five district court judges have considered such suits, with one agreeing that the SEC’s administrative process likely is unconstitutional.5
Article II of the Constitution defines the authority of the Executive branch and includes the Appointments Clause, which provides that “inferior Officers” may be appointed only by the President, the “Courts of Law,” or the “Heads of Departments.”6 Respondents seeking to enjoin SEC administrative proceedings have argued that “since ALJs are not appointed by the SEC Commissioners themselves, i.e., the head of a department, the ALJ appointments scheme is unconstitutional.”7 Further, because ALJs can be removed only for “good cause” by the SEC Commissioners, who themselves may not be removed “except for inefficiency, neglect of duty, or malfeasance in office,” respondents have argued that the current system interferes with the President’s constitutional power to remove officers.8
When challenging the constitutionality of SEC administrative proceedings—whether under Article II or another constitutional provision—respondents face the initial hurdle of establishing that the district court has subject matter jurisdiction even to consider the suit. That is because, in the normal course, respondents are permitted by statute to challenge the proceeding in a federal court of appeals after it is complete and the Commission has issued a final order.9 In Free Enterprise Fund v. Public Company Accounting Oversight Board,10 the Supreme Court set forth the circumstances under which such statutory review schemes do not deprive federal district courts of jurisdiction. Under Free Enterprise Fund, a statutory review scheme does not preclude federal district courts from exercising jurisdiction “ if ‘a finding of preclusion could foreclose all meaningful judicial review’;  if the suit is ‘wholly collateral to a statute’s review provisions’; and  if the claims are ‘outside the agency’s expertise.’”11 Analyzing these three factors necessarily “involves case-specific determinations,” so “[w]hether jurisdiction exists in a particular instance depends in significant part on the nature of the constitutional claim at issue.”12
- To Date, One of Two District Courts to Reach the Merits of an Article II Challenge to ALJs Has Found the SEC’s Administrative Process Likely Unconstitutional
To date, five district courts have considered Article II challenges to the SEC’s ALJs. Of those, one district court found the SEC’s administrative process likely unconstitutional and agreed to enjoin an administrative proceeding;13 three ruled they lacked subject matter jurisdiction and dismissed the suits;14 and the fifth exercised jurisdiction but found no likelihood that the respondent would prevail on the merits and thus denied a motion for a preliminary injunction and temporary restraining order.15
Two of the district courts to rule that they lacked jurisdiction did so in published opinions: Bebo v. SEC, from the Eastern District of Wisconsin, and Tilton v. SEC, from the Southern District of New York.16 The Bebo and Tilton courts analyzed the Free Enterprise Fund factors the same way. First, they agreed that meaningful judicial review is available because even “[i]f the [SEC] process is constitutionally defective, [the respondent] can obtain relief before the Commission, if not the court of appeals.”17 The courts rejected the respondent’s argument that they should not have to endure the same proceedings they alleged are unconstitutional and shoulder the associated expenses. “Oftentimes in our system,” Tilton observed, “a party challenging the legality of the very proceeding or forum in which she is litigating must ‘endure’ those proceedings before obtaining vindication.”18 To find otherwise would create “an exception to the enforceability of statutory review schemes” that “could swallow the schemes themselves.”19 Both courts held that the respondents’ Article II arguments were not wholly collateral to the administrative proceedings because the respondents had raised them before the SEC as affirmative defenses. This fact sufficiently “intertwined” the claims with the proceedings, although the Tilton court described the question as “close.”20 Finally, both courts acknowledged that constitutional arguments are not within the SEC’s expertise, but found that fact not dispositive given the possibility of appeal to a federal circuit court, which has expertise in the issues.21 The judges thus dismissed the cases, even though the Bebo court described the respondent’s Article II argument as “compelling and meritorious.”22
The other two cases to consider Article II challenges to SEC ALJs are Duka v. Hill, from the Southern District of New York, and Hill v. SEC, from the Northern District of Georgia. Duka and Hill agreed with Bebo and Tilton that the SEC does not have constitutional expertise,23 but they took an opposing view of the first two Free Enterprise Fund factors. The Duka court reasoned that because the respondent’s “claim for injunctive and declaratory relief would likely be moot” after the SEC issued a final order,24 the court of appeals “would be unable to remedy . . . the substantial litigation and resource burdens incurred during [the] administrative proceeding.”25 The courts further deemed the challenges wholly collateral because they did not relate to the conduct of the particular proceedings at issue.26 Accordingly, both courts exercised jurisdiction to consider the merits of respondents’ constitutional arguments.
On the merits, the courts reached different conclusions on whether to enjoin the SEC administrative proceeding. The Duka court denied an injunction because it found that the respondent was not likely to succeed on her claim that ALJs’ tenure protections violate Article II.27 Because ALJs exercise adjudicatory functions, the court held, limiting the President’s ability to remove them is necessary to protect their independence.28 The Hill court concurred with Duka on this point, expressing “serious doubts” that the limits on removing ALJs are unconstitutional.29 But it held that the ALJs are inferior officers whose appointment scheme likely violates the Appointments Clause, a question not raised in Duka.30 Therefore, it issued an injunction.31
- The Viability of Article II Challenges Going Forward
District courts have not been uniform in their approach to deciding Article II challenges to SEC administrative proceedings. That may change when the circuit courts have an opportunity to weigh in, and soon: the Seventh Circuit heard oral argument in Bebo on June 6th, the SEC has appealed Hill to the Eleventh Circuit, and the respondents in Tilton have filed a notice of appeal to the Second Circuit. If there is a circuit split, it is quite possible this battle may end up being decided by the Supreme Court.