On Friday, January 25, 2013, the D.C. Circuit ruled on the highly anticipated case of Noel Canning v. NLRB, in which the legality of President Barack Obama’s recess appointments to the National Labor Relations Board (NLRB) was challenged. The appellate court invalidated the recess appointments to the NLRB, ruling that allowing the President to make such appointments as a way around Senate opposition “would wholly defeat the purpose of the Framers in the careful separation of powers structure” they created.

The Noel Canning decision is significant because if the NLRB recess appointments were invalid, this also calls into question the recess appointment of Richard Cordray as director of the Consumer Finance Protection Bureau (CFPB). As was the case with the NLRB recess appointments at issue in Noel Canning, Mr. Cordray was appointed as a recess appointment on January 4, 2012, while the Senate was in pro forma session.

This client advisory analyzes the impact of the Noel Canning decision on Mr. Cordray’s appointment, as well as the more challenging issue of how an invalidation of Mr. Cordray’s appointment would impact the various settlements, enforcement actions and regulations implemented by the CFPB since the appointment. [Alston & Bird is issuing a separate Client Advisory focused on the impact of Noel Canning on other NLRB decisions.]

Noel Canning

The Noel Canning decision arose out of an NLRB decision issued in February 2012. Noel Canning, a Washington state bottler, was involved in a dispute with the Teamsters Local 760 union concerning a new collective bargaining agreement. The union argued that it reached agreement with Noel Canning for a new bargaining contract in December 2010, while Noel Canning argued there was no such agreement. The NLRB issued a decision in February 2012 finding for the union.

After losing at the NLRB, Noel Canning petitioned for review on the grounds that there was not the required quorum at NLRB because two members of the three-person panel that issued the ruling were questionable recess appointments made by President Obama in January 2012. On January 4, 2012, President Obama appointed three members to the NLRB, relying on the Recess Appointments Clause of the Constitution. These three recess appointments joined two other Senate-confirmed NLRB members. Three members are required for a quorum on the NLRB.

While recess appointments are provided for in the Constitution, the situation was unusual at the time of the appointments because the Senate was not in a traditional “recess.” Instead, the Senate was on a 20-day break over the holidays, but it was gaveled in and out every few days for pro forma sessions.

In defense of the recess appointments, the government argued for an expansive interpretation of “the Recess” to include intrasession breaks of the Senate. Using textual, structural and historical arguments, the court rejected the government’s interpretation, holding that recess appointments are limited to intercession recesses. Since the Senate was in pro forma session at the relevant time, the D.C. Circuit ruled that the appointments were invalid from their inception. And, because the NLRB lacked a quorum of three members when it issued a decision in Noel Canning’s case, that decision was invalid.

Richard Cordray’s Appointment

The three NLRB recess appointments were made on January 4, 2012. The same day, President Obama also invoked the Recess Appointments Clause to appoint Mr. Cordray as director of the CFPB.

Prior to this, Mr. Cordray’s appointment had been held up in the Senate. On July 17, 2011, President Barack Obama announced the nomination of Mr. Cordray to be the director of the CFPB. Mr. Cordray was the former Ohio attorney general and, at the time of his nomination, was serving as the CFPB enforcement chief. Senate Republicans objected to the nomination, due to a perceived lack of congressional oversight of the CFPB’s activities, as well as a lack of accountability. They refused to confirm any nominee to the position without first instituting several amendments to the agency’s structure. Among their concerns, Senate Republicans took issue with the fact that the CFPB would be headed by a single director, as opposed to a five-member commission.

The CFPB

The CFPB was created by Title X of the Dodd-Frank Wall Street Reform Act (“Dodd-Frank”), and was a key component of Dodd-Frank. Signed into law on July 21, 2010, Dodd-Frank created the CFPB as an independent agency within the Board of Governors of the Federal Reserve System. Dodd-Frank tasked the CFPB with implementing and enforcing the regulations of consumer financial products and services under federal consumer financial laws.

The CFPB, as mandated by Dodd-Frank, is to be headed by a President-appointed and Senate-confirmed director. In addition to the Dodd-Frank-created authorities, such as the power to supervise non depository institutions and the power to adopt new rules prohibiting unfair, deceptive or abusive acts in connection with consumer financial products, the CFPB would be taking certain authorities from several different federal agencies, including the FDIC, FTC, NCUA, OCC, OTS and HUD. These powers consisted of supervisory and enforcement authority over large banks, savings associations and credit unions.

Although the newly established powers of the CFPB were made dependent upon a director being put in place, the powers transferred to the CFPB from other federal agencies were fully in effect as of July 21, 2011. In fact, a report by two inspectors general of the Treasury Department and Federal Reserve confirmed that Dodd-Frank permits the CFPB to carry out certain powers over depository institutions even without a director, including prescribing rules, issuing orders and providing guidance where such actions were previously within the authority of the transferor agency.

With that said, the CFPB needs a director in place to wield regulatory authority over nondepository institutions such as payday lenders, private education lenders and mortgage companies.

Impact on Past CFPB Conduct

As noted earlier, the appointment of Mr. Cordray as director of the CFPB occurred simultaneously with the appointment of the three NLRB members invalidated in Noel Canning. In light of the fact that CFPB director clearly falls into the category of “Officers of the United States” as that term is used in the Appointments Clause of the Constitution, there does not appear to be any legal basis for differentiating between President Obama’s appointment of the NLRB members and his appointment of Mr. Cordray. Therefore, it seems likely that the same panel of D.C. Circuit judges that decided Noel Canning would likewise find the appointment of Mr. Cordray to have run afoul of the Appointments Clause.

It is still unknown whether the Obama administration plans to appeal the Noel Canning decision, and if it were to, a specific outcome is far from predictable. It should also be noted that President Obama renominated Mr. Cordray on January 24, 2013. However, such a nomination would not have any impact on the legality of the conduct taken by the CFPB since the January 4, 2012, “Recess nomination.”

Although much of the following analysis will be rendered moot if the Noel Canning decision is reversed on appeal, if the D.C. Circuit’s interpretation does stand, the validity of a host of CFPB activity would be in question. For example, all CFPB actions taken against nondepository institutions are arguably void. As stated earlier, the only authority held by the CFPB prior to the appointment of Mr. Cordray was whatever authority was transferred to it from other federal agencies. The power to prohibit unfair, deceptive or abusive acts in connection with consumer financial products and services and the power to supervise non depository institutions were not among those powers transferred to the CFPB.

There are numerous examples of CFPB activities during the past year that are in legal limbo post-Noel Canning, including:

  • the CFPB’s recent regulations relating to “qualified mortgages” and mortgage servicing guidelines;
  • a CFPB probe into potentially illegal collusion between an insurance company and a mortgage lender; and
  • a joint enforcement action with state attorneys general against Payday Loan Debt Solution, Inc., for unlawful fees.

Other CFPB post-appointment activities are arguably on more solid ground based on the fact that they were made jointly with another agency that had some degree of independent authority over the settling entity, including enforcement actions that the CFPB has undertaken jointly with the FDIC and OCC.

Although it is too early to speak conclusively about the validity of particular CFPB activities, much of the activity undertaken by the CFPB over the past year could arguably be described as ultra vires, based on the holding in Noel Canning. While it is obvious that supervisions, enforcements and regulations of nonbanking entities enacted during the subject period would have been outside the scope of the bureau, more interesting is the impact that an invalidation of Mr. Cordray’s appointment would have on consent orders and settlements made during the period. While an argument may be made that such consent orders and settlement agreements were voluntarily entered into, and thus were not ultra vires, an argument may also be made that such agreements were made under a false duress placed upon the settling party. Additionally, parties that do not wish to remove themselves from their earlier agreements with the CFPB might consider obtaining a reaffirmation of the terms of the agreement to ensure its validity going forward.

Challenging the Appointment

In order to challenge Mr. Cordray’s appointment in federal court, the plaintiff bringing suit must have standing. In past challenges under the Appointments Clause, courts have looked to whether the plaintiff was directly subject to the government authority it seeks to challenge and whether the specific appointment is the source of the government authority. Furthermore, Supreme Court precedent indicates that judicial review of an Appointments Clause claim will proceed even where any possible injury is “radically attenuated,” and several federal courts have stated that plaintiffs making such a challenge need not show that they would not have suffered their injury if the officials had been properly appointed. In sum, federal standing jurisprudence in Appointments Clause cases appears to be quite liberal.

Given that the newly created powers provided to the CFPB by Dodd-Frank would not have been available without a director, it appears clear that any CFPB assertion of such a power against a particular entity would likely provide that particular entity with standing to challenge Mr. Cordray’s appointment. In fact, the unique relationship created by Dodd-Frank between the scope of the authority of the CFPB and the appointment of a director makes proving the relationship between Mr. Cordray’s appointment and any challenged CFPB activity all the easier. What is less clear is whether any party subject to the rules and regulations issued by the CFPB pursuant to its Dodd-Frank powers has standing, regardless of whether they were subject to an enforcement action. However, in light of the Supreme Court’s broad interpretation of standing in Appointments Clause cases, it is certainly possible that such a party would be found to have standing to challenge Mr. Cordray’s appointment.

There is currently at least one active challenge to the appointment of Mr. Cordray in federal court. In the case of State National Bank of Big Spring v. Geithner, a small Texas community bank is challenging the constitutionality of several aspects of the CFPB, including the appointment of Mr. Cordray. On November 20, 2012, the government filed a motion to dismiss on the grounds that the plaintiffs lacked standing. The plaintiffs’ response to the motion to Dismiss is due no later than February 13.

Even assuming that the plaintiffs are found to have standing in the Bank of Big Spring case, a definitive answer on Mr. Cordray’s appointment is not likely to come anytime soon. Should the Obama administration decide to challenge the Noel Canning decision on appeal and the Supreme Court grants certiorari, it will likely be many months before the Supreme Court issues any decision. In fact, it is not rare for Supreme Court decisions to come more than 18 months after the challenged decision of the Court of Appeals is issued.

Conclusion

While it is too early to fully analyze the impact of the Noel Canning decision on the CFPB’s post-director conduct, the decision has provided solid ground for parties to make the argument that CFPB actions taken pursuant to the director-dependent authorities created by Dodd-Frank are invalid and unenforceable.

Regulated entities should be advised, however, that not all powers possessed by the CFPB are dependent upon having a director, and CFPB actions taken pursuant to those transferred powers do not appear to be impacted by the Noel Canning decision. The greatest uncertainty lies in between, where regulated entities voluntarily entered into consent orders or settlement agreements in the shadow of regulations and enforcements for which the CFPB may never have had the authority in the first place.