The Supreme Court’s Majority in Lucia Makes For Strange Bedfellows

25 Jun The Supreme Court’s Majority in Lucia Makes For Strange Bedfellows

Posted at 22:17h in Securities Litigation & Regulation by

The Supreme Court’s recent decision in Lucia v. SEC hardly came as a surprise.  Sure, it invalidated a decades-old process for appointing SEC administrative law judges (“ALJs”), a rare occurrence, the reverberations of which are sure to flow across the federal landscape.  But, after the SEC in December 2017 conceded the flaw in its ALJ appointment process, the outcome was all but ordained.  Not so the alignment of Justices taking issue with the majority position.

Although six justices found that SEC ALJs were improperly appointed vis-à-vis the Appointments Clause of the Constitution, two members of the majority questioned the basis for the majority’s position.  Specifically, Justices Thomas and Gorsuch did not find the activities of, or authority exercised by, SEC ALJs to be determinative of their status as “inferior officers.”  In this respect, they aligned with Justices Breyer, Ginsburg and Sotomayor, none of whom believed the majority’s heavy reliance on Freytag v. IRS Commissioner to be warranted.  One could scarcely conceive a more bizarre alignment on the Court than these guardians of the right and left, respectively, of the political divide.

Where the majority found the powers exercised by SEC ALJs mirror similar powers exercised by IRS special trial judges (“STJ’s”), which the Freytag court concluded were sufficient to establish that STJs were officers, for Appointments Clause purposes, Thomas and Gorsuch concluded that it is the office itself that determines whether a federal employee is or is not an inferior officer.  To them, if the office is permanent and performs a public duty the occupant is an officer, no matter whether her duties be great or small, many or few.  SEC ALJs satisfy this standard because their positions are created by statute and have an ongoing public obligation, that even survives the current occupant.

For his part, Justice Breyer concluded that SEC ALJs were improperly appointed not because of any constitutional issue, but because the Administrative Procedure Act (“APA”), which created the ALJ position for all federal agencies, vested appointment authority to the SEC Commissioners, not its staff or employees.  Nor does the Securities Act of 1933, which established the Commission, authorize it to delegate its appointment function to staff persons absent certain procedural steps, which were not taken.  Hence, for Justice Breyer, the appointment of Lucia’s ALJ was improper because it wasn’t made by the SEC Commissioners.

Justice Breyer also challenged the majority’s finding that SEC ALJs are officers. because the removal provisions for ALJs embedded in the APA reflect Congress’ intent that they be insulated from conflicts and political pressures, something the Court in Free Enterprise Fund v. PCAOB found unconstitutional with respect to executive officers (as distinct from judicial officers) of the Public Company Accounting Oversight Board.  Free Enterprise construed the President’s obligation under the “Take Care” Clause of the Constitution, by which he must “take care that the laws be faithfully executed.”  Because the President must have authority to remove officers who frustrate his discharge of this constitutional mandate, any scheme that frustrates this authority cannot stand.

The fact that Congress chose to insulate ALJs from such summary removal by adding two layers of protection demonstrates, in Justice Breyer’s view, that Congress did not consider ALJs to be inferior officers subject to the Appointments Clause.

For Justices Sotomayor and Ginsburg, a person lacking the authority to make a decision and bind her agency, by definition, cannot be deemed an officer no matter what else and what other authority she may exercise.  To them it is inconceivable that someone requiring the approval of another to finalize a decision or bind the agency would be considered anything other than an employee.

The alignment of these five justices against the core decision announced by the majority, as well as on the majority’s failure – in the view of four of these – to articulate an objective standard for determining what factors delineate who is an officer begs the question of how durable the majority’s reasoning is.  We may find that what appears a numerically solid decision is really just a shell, a temporary fix that is soon to be troubled.  Lucia v. SEC, 585 U.S. (2018).

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

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