Article II, Section 2, Clause 2 of the United States Constitution, the Appointments Clause, states in part that "Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments."
On April 23, 2018, the Supreme Court heard oral argument in Lucia v. SEC. Lucia is an Appointments Clause case that has its most immediate roots in the Dodd-Frank Act, which expanded the powers of the Securities and Exchange Commission in its administrative forum, and set up a similar adjudicatory framework for the Consumer Financial Protection Bureau (CFPB). As the SEC and CFPB began to exercise their authority in these administrative forums, affected parties began to push back, citing the expedited nature of the forum, lack of procedural and evidentiary standards, bias concerns, and constitutional issues.
Mainly, parties have appealed decisions rendered in these administrative forums on the grounds that the Appointments Clause of the Constitution is violated. Lucia, and other parties, have argued that the administrative law judges that initially heard the cases were not properly appointed, since (the parties contended) the ALJs wielded "substantial authority" and constitute inferior officers of the United States—rather than mere employees. The case came before the Supreme Court because of a split between the D.C. Circuit (holding the ALJs are employees) and the Tenth Circuit (holding that ALJs are inferior officers).
The Administration, through a filing by the Solicitor General, took Lucia's side in November 2017. The Administration argued that ALJs are officers because they exercise "significant authority pursuant to the laws of the United States," and urged the Supreme Court to grant cert. Shortly after the Department of Justice filed this brief, the SEC ratified the prior appointment of its ALJs and ordered the ALJs to reconsider all pending cases and issue new determinations.
Issues before the Supreme Court
The decision in Lucia will play a major role in determining the future of an important aspect of the administrative state: As respondents before the SEC, CFPB, and other agencies are well aware, ALJs conduct formal adjudications, akin to trials in court, to determine, among many other things, whether a person has violated federal law and whether the agency should impose civil money penalties or other equitable remedies because of the alleged wrongdoing. Lucia could challenge the process that Congress adopted in the Administrative Procedure Act of 1946 to establish a merits-based civil service process for the selection of individuals who are responsible for presiding over agency adjudications, and will affect the power of Congress to determine how ALJs are selected.
While the Supreme Court's final decision likely will address only the Appointments Clause, the Justices will address three interconnected constitutional doctrines that affect adjudications:
- The Appointments Clause – Must ALJs who conduct adjudications be appointed by the President or by the political head of the agency appointed by the President?
- The Removal Clause – Does Congress unconstitutionally interfere with the President's executive authority by giving for-cause tenure protection to ALJs who work in independent regulatory agencies?
- Due Process Clause – What remedies are available in cases where the appointment of the presiding ALJ was unconstitutional?
At oral argument, all Justices were concerned, in different ways, about the need to persuade individuals whose rights are determined through agency adjudications that the process is fair and impartial.
Chief Justice Roberts expressed concern that the current method of appointing ALJs through a civil service process may not convince defendants that the result of the adjudication is fair, because it removes the political accountability of the President over how the process is run to prevent biased outcomes.
Justices Breyer and Kagan were concerned that overturning the current merit civil service method of appointments, and replacing it with a political appointment process, would undermine the decisional independence of the ALJs and undermine public confidence in the entire adjudicatory process.
Justice Kennedy asked what the effect of converting to a political appointment process would be on ALJs in other agencies, such as the Social Security Administration or Veterans Affairs, that conduct hundreds of thousands of adjudications per year, and whether it was important to the perception that justice is being served that selection of the adjudicator is independent of politics.
The Next Case
Lucia uses the Appointments Clause as a specific example of fundamental issues with agency adjudication. Fundamentally, Lucia and other pending cases that raise constitutional issues question the appropriateness of administrative forum. The SEC and other agencies frequently act as prosecutor, trial judge, and appellate court when pursuing actions administratively. The Dodd-Frank Act sharpened this issue by expanding the remedies that the SEC could obtain through adjudication – further reducing the necessity of filing cases in federal court.
The issues coming up behind Lucia include:
- Removal Power – In Free Enterprise Fund v. PCAOB, the Supreme Court found that two layers of tenure protections for board members was unconstitutional – a violation of the Separation of Powers. There, the Supreme Court severed the unconstitutional tenure protection provision. The SEC has taken the position that its ALJs differ from PCAOB board members because ALJs perform only an "adjudicative" function and not "core executive activities," but this issue may be a close follow-on depending on Lucia.
- Due Process – Parties have argued that many of the rights inherent in the Article III judicial system are not present in administrative adjudication, including, among others, a lack of impartiality, Federal Rules of Civil Procedure, Federal Rules of Evidence, and right to a trial by jury.
- Equal Protection – Parties have also looked into the Equal Protection issues surrounding the discretion afforded agency staff in choosing a forum and whether such discretion gives rise to inherent equal protection issues. Neither the SEC nor the CFPB has promulgated binding rules or guidance, regarding how the agencies decide whether to file a case in federal court or in the administrative forum.
Application to the CFPB
While the CFPB has pursued fewer administrative adjudications than the SEC, the Dodd-Frank Act provided the CFPB with administrative adjudicatory authority similar to that of the Commission. The CFPB has discretion to file enforcement actions in federal court or its administrative forum, and may seek identical remedies in both. The CFPB has faced the same types of criticism in how it has used its administrative forum.
In the only administrative adjudication that has gone all the way to a final order, then-Director Richard Cordray raised the recommended penalty in the ALJ's decision by a factor of 17 boosting the $6.4 million recommendation to $109 million. The Director also took the position that no statutes of limitations applied in cases brought in the CFPB's administrative forum (notwithstanding any application to the exact same case brought in federal court). Challenges to CFPB ALJs hinge on the arguments in Lucia and other SEC cases, as the authorities of the ALJs and other arguments are similar.
The CFPB does face an additional challenge, in that it is not clear that the director of the CFPB is a "head of a department" as required under the Appointments Clause. The CFPB, though an independent agency, "is established in the Federal Reserve System" pursuant to the Dodd-Frank Act. This appears to be at odds with the Supreme Court's relatively recent definition of the term "department," which it explains, in Freytag v. Commissioner, means a "freestanding component of the Executive Branch, not subordinate to or contained within any other component." This presents one more possible follow-on argument that could develop out of Lucia.