(Article from Securities Law Alert, April 2018)
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On April 23, 2018, the Supreme Court heard oral arguments in Lucia v. SEC, No. 17-130. The question before the Court is whether the administrative law judges (“ALJs”) for the SEC’s in-house courts qualify as either “Officers of the United States” or “inferior officers” subject to the Appointments Clause of the United States Constitution, or employees not subject to the Appointments Clause.
Background
The Appointments Clause states that the President “shall nominate, and by and with the Advice and Consent of the Senate, shall appoint … Officers of the United States.” U.S. Const. art. II, § 2, cl. 2. The Appointments Clause further provides 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.”
In Raymond J. Lucia Cos. v. SEC, 832 F.3d 277 (D.C. Cir. 2016), the D.C. Circuit held that SEC ALJs are not “Officers of the United States” or “inferior officers” within the meaning of the Appointments Clause. The court held that the key inquiry for determining the applicability of the Appointments Clause is whether SEC ALJs “issue final decisions” of the SEC. The D.C. Circuit found it significant that the SEC has a discretionary right to review the action of any ALJ as it sees fit.[1]
However, in Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016), the Tenth Circuit relied on the Supreme Court’s decision in Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), to hold that SEC ALJs are “inferior officers” who must be appointed in conformity with the Appointments Clause. The Tenth Circuit rejected final decision-making power as the key criterion for assessing whether the Appointments Clause applies. The Tenth Circuit determined that “SEC ALJs exercise significant discretion in performing ‘important functions’ commensurate with” the functions performed by the special trial judges of the federal Tax Court deemed to be “inferior officers” in Freytag.
Oral Argument Highlights
Counsel for Raymond J. Lucia and Raymond J. Lucia Companies (“Petitioners”) began by arguing that SEC ALJs are “inferior officers” for purposes of the Appointments Clause because they “have been invested with the sovereign power to preside over formal adjudications” and they have “independence in their decisional functions, their hearing functions, and their evidentiary functions.” Chief Justice Roberts countered that “any decisions of the ALJs in every case aren’t operative until the Commission issues an order of finality.” Justice Sotomayor joined in, emphasizing that an SEC ALJ’s decision “doesn’t become final except by the actions of the SEC officers.” She later questioned, “why isn’t that the line? Whether the ALJ’s word is final or not?”
Justice Kagan questioned whether the problem of the SEC ALJ’s alleged bias in the case involving the Petitioner would be solved by “the greater political accountability that comes from the Appointments Clause.” She asked, “wouldn’t putting those decision-makers even closer to the political body only exacerbate the problem that you’re complaining of?” She later observed that “[t]here are different ways to interfere with decisional independence,” and one way is to be “the person who gets to decide who gets the job or not.” She explained that holding SEC ALJs subject to the Appointments Clause would “in some manner tie the adjudicator more closely to the political system.”
Counsel for the SEC (“Respondent”), arguing in support of Petitioners’ position,[2] asserted that SEC ALJs “adjudicate disputes that impose liability and sanctions on private individuals, and they can and do issue binding decisions.” Counsel for Respondent contended that there is “no meaningful difference between this case and Freytag.” Justice Breyer stated that he was “fairly certain … that the Constitution does not inhibit the creation of … an adjudicatorily merit-based system of hearing examiners.”
Court-appointed amicus curiae argued, in support of the D.C. Circuit’s decision and the SEC’s original position, that “an officer of the United States is someone with the power to bind the government or private parties in the name of his own office.” He further stated that “someone whose acts have no binding effect without the sanction of an officer is not himself an officer of the United States.”
Chief Justice Roberts asked how the case before the Court was different than Freytag. Court-appointed amicus curiae explained that the special trial judges in Freytag also had contempt power. Justice Kagan took issue with this distinction, and noted that the Freytag Court did not even mention the special trial judges’ contempt power until the second half of the opinion. She noted that it was “hard to get around” the “commonalities” between SEC ALJs and the tax judges in Freytag.
Chief Justice Roberts expressed concern that the process for appointing SEC ALJs “operates as insulation from the political accountability that the drafters of the Constitution intended.” He observed that the SEC could disclaim responsibility for the decisions of its ALJs. Court-appointed amicus curiae disagreed, and stated that the SEC “is going to be held 100 percent accountable for every single decision, whether it’s initially made by an ALJ or not” because the statutory structure “makes clear that the decision is always the decision of the Commission.”
Court-appointed amicus curiae emphasized that the test he proposed “turns on a legal authority to either bind the government, make the government do particular things, or bind private parties.” Justice Alito noted that this test is “potentially very broad and also quite vague.” He observed that “an enormous number of executive branch officials have the power to bind the government in one way or another.”
Justice Kagan found that there was “a good deal to be said” for this proposed test, but she questioned the basis for the proposed test. She noted, “I don’t really see what the source of this test is.” Court-appointed amicus curiae responded that the test was based in part on the long-established distinction between whether the holder of an office is “authorized to act in the name of their own office” or “only in the name of somebody else’s office.” He explained that without his test, “every AUSA is going to be considered an officer, even though the U.S. Attorney is going to be held 100 percent accountable for every decision in his or her office.”
In response to the arguments advanced by Court-appointed amicus curiae, counsel for Petitioners stated that the “binding authority” test applies only to principal officers, but not to inferior officers. Moreover, he emphasized that the SEC has only a discretionary right to review SEC ALJ decisions that is frequently not exercised.
The Court will issue a decision in the Lucia case later this term.
[1] Pursuant to 17 C.F.R. § 201.411, the SEC has the authority to review an ALJ’s decision de novo. If no review is sought or ordered, the SEC will issue an order directing enforcement of the ALJ’s decision. 17 C.F.R. § 201.360(d). The ALJ’s initial decision becomes final only upon issuance of the SEC’s order.
[2] Under the Obama administration, the federal government took the position that SEC ALJs are only employees, rather than “Officers” or “inferior officers” subject to the Appointments Clause. But in November 2017, the federal government reversed course and took the view that ALJs exercise significant authority and are subject to the Appointments Clause. Counsel for Respondent therefore argued in favor of the position advanced by the Petitioners. The Court appointed counsel to argue in support of the D.C. Circuit’s decision and the original position advanced by the SEC.