The Supreme Court Resolves A Split In Circuits, Holding That SEC Administrative Law Judges Are Subject To The Appointments Clause

The Supreme Court Resolves A Split In Circuits, Holding That SEC Administrative Law Judges Are Subject To The Appointments Clause

After several years and many challenges,  the Supreme Court has finally decided that Securities and Exchange Commission (“SEC”) administrative law judges (“ALJs”) are “inferior officers” who exercise significant federal authority and therefore are required by the Appointments Clause of the US constitution to be appointed by either the President, the courts or the SEC commissioners.  As ALJs traditionally have been appointed through a process managed by the Office of Personnel Management and the SEC’s Office of the Chief Administrative Law Judge, the Court determined that their appointment is unconstitutional.  In the case of Raymond Lucia, who took this challenge to the high Court, this flaw entitles him to a do-over of his SEC hearing, which resulted in him being fined $300,000 and barred from the investment advisory industry.  He also gets to have his matter heard before a new, constitutionally appointed ALJ.  In reaching its decision the Court was fractured into several groups, resulting in four opinions, with Justice Kagan writing for a six vote majority, supported by a concurrence from Justice Thomas and a partial concurrence from Justice Breyer, who also turned in a partial dissent.  Justices Ginsburg and Sotomayor dissented.

From the majority’s perspective, it was a straightforward decision answered by two earlier opinions, U.S. v. Germaine (1879) and Freytag v. Commissioner of the IRS (1991).  Relying on these two cases, the essence of the Court’s holding is that an “officer” is someone who occupies a continuing office established by law.  In other words, it’s not a temporary position but one having permanence.  SEC ALJs receive “career appointments,” which means they are there for as long as they are not removed for cause.  This establishes the continuing office element articulated in Germaine.  Next, the ALJ position for all federal agencies was established by the Administrative Procedures Act, which not only validates the position’s legal provenance but also reinforces its permanence.  In addition to ALJs serving in a permanent position created by statute, the Court, following Freytag, also found that they also exercise significant federal authority, very near to that wielded by Article III judges who are nominated by the President and confirmed by the Senate.  Among other things, SEC ALJs administer oaths, receive evidence, make evidentiary rulings, subpoena witnesses and documents, rule on motions, and enforce compliance with discovery orders by having the power to punish non-compliance.  Moreover, at the conclusion of a hearing they have authority to make findings of facts, formulate conclusions of law and prepare initial decisions that provide a remedy for any unlawful conduct.

The presence of these elements led the majority to make quick work of a heretofore long-contentious issue on which the circuit courts had split.  But that  did not end the discussion.  The fact that three other opinions were issued, including by Justices who agreed with the majority’s outcome, albeit for different reasons, shows that what the majority took only 13 pages to resolve remains a topic on which more may need to be written.  For example, in a concurring opinion in which Justice Gorsuch joined, Justice Thomas took the majority to task for relying on Freytag’s factors to show only what is “sufficient” to establish officer status, yet not taking the moment to define a minimum standard of what is “necessary” to establish that status.  In other words, there remains no defined minimum standard for determining who is, or is not, an inferior officer for Appointments Clause analysis.  For Justice Thomas, the determination of officer status is defined primarily, if not solely, by whether the relevant office, and hence its holder, is permanent and bears a statutory responsibility to the public.  The issue of whether the officer exercises significant authority is, for Justice Thomas, irrelevant.  Citing historical antecedents, Justice Thomas notes that the Founders considered all persons holding a public office, even if a lowly one, to be an officer of the United States, no matter the level of authority they exercised.

Justice Breyer agreed with the majority that SEC ALJs were not properly appointed, but not because of any Appointments Clause issue.  In fact, he doesn’t see the issue as implicating the Constitution at all.  Rather, his view is that the statute which created all federal ALJs, the Administrative Procedure Act (“APA”), authorizes each agency to appoint an appropriate number of ALJs to conduct the agency’s business.  Justice Breyer interprets “each agency” to mean the principal officer/s of such agency which, in the Lucia case, means the SEC Commissioners themselves.  Because the APA does not expressly allow the SEC to delegate its appointment authority to lower level agency officials, nor does the SEC’s own rules, the appointment of ALJs is to be made by the SEC Commissioners, which was not the case here.  Justices Ginsburg and Sotomayor concurred in Justice Breyer’s partial concurrence, and also in his partial dissent, which completely flipped the Court’s approach to the question presented.

According to Justice Breyer, the Court could not fairly resolve the question whether a SEC ALJ is an inferior officer without first addressing the question of how such officers may be removed.  He grounds his analysis in the Court’s 2010 decision in Free Enterprise Fund v. PCAOB, where the Court held that members of the Public Company Accounting Oversight Board who, like SEC Commissioners, are executive officers, were improperly insulated from removal by the President by two layers of protection, in violation of the Executive Vesting Clause  of the Constitution.  By way of illustration, PCAOB members are appointed by the SEC, which has sole authority to remove them, but only for cause.  And the SEC Commissioners themselves are removable only for cause.  In a situation where the President determines that a PCAOB member is not fulfilling his/her duties, or not faithfully executing laws the President is charged with enforcing, the President could not discharge the offending PCAOB member, nor direct the SEC Commissioners to do so, or remove them for not doing so, as both the SEC Commissioners and the offending PCAOB member – all executive officers – are dischargeable only for cause, after a hearing.

In Justice Breyer’s view, because SEC ALJs are appointed per authority granted by the APA, an act of Congress, which conditions removal of ALJs only for cause, after a hearing before the Merit Systems Protection Board (whose members, themselves, are removable only for cause), Congress intentionally insulated ALJs from removal by the same two layers that protected the PCAOB members.  This was done, Justice Breyer notes, to ensure ALJs have tenure and can act with independence in their positions.  As a result, because the Appointments Clause vests each branch of government with authority to appoint inferior officers, and Congress elected to insulate ALJs – who, unlike SEC Commissioners or PCAOB members, are not executive officers – from summary removal, as was its constitutional prerogative, it follows that ALJs are not inferior officers, as it would have been unconstitutional for Congress to insulate such officers with two layers of protection.  “[G]iven the constitutional language, the Court, when deciding whether other positions are ‘Officers of the United States’ under the Appointments Clause, should give substantial weight to Congress’ decision.”  Dissent, at 10.  Finally, Justice Breyer disagreed with the majority that the ALJ who heard Lucia’s case should not preside over the re-trial.

In her dissent, Justice Sotomayor, with whom Justice Ginsburg joined, lamented the Court’s refusal to articulate what constitutes the exercise of “significant authority” for purposes of measuring whether an ALJ is an inferior officer.   (As a note of irony, her dissent is both in sync with Justice Thomas’ critique of the Court for not being more specific and directly at odds with his belief that level of authority is completely irrelevant to a determination of officer status.)  Justices Sotomayor and Ginsburg support the position in Freytag, and the D.C. Circuit’s position below, that the ability to bind the government, or make a final decision, is the determining factor.  Noting, and notwithstanding, that ALJs perform a wide-range of functions, these Justices nonetheless believe that without the authority to end a dispute or make a position final, a SEC ALJ is just an employee, no matter how important his other functions may be (echoing Justice Thomas’ disregard of functions).

What these varying opinions reflect is that much remains to be clarified before the SEC, and other federal agencies, can know precisely what activities will definitively identify an employee as an inferior officer.  For now, that status is determined solely by who appoints her.

Ron Wood

Ron Wood

Ron Wood is a partner with Brown White & Osborn LLP. A former Assistant Director in the SEC's Division of Enforcement, Executive Director in the Law Division at Morgan Stanley, and litigation partner with Proskauer LLP, he practices securities law with a focus on regulatory and enforcement matters. He also conducts internal investigations and complex commercial litigation.
Ron Wood