May 25, 2017

D.C. Circuit Hears Constitutional Arguments on SEC ALJs and CFPB's Structure

5 min

The D.C. Circuit heard oral arguments on May 24 in two cases arising from federal agency administrative adjudication, PHH Corp. v. CFPB and Lucia v. SEC, in which the court had granted en banc review. These cases have the potential to alter the agencies' approach to enforcement actions and the use of the administrative forum. For the CFPB, fundamental constitutional issues regarding the Bureau's structure were the center of attention.

PHH Corp. v. CFPB

In PHH Corp. v. CFPB, the parties were directed to address the following issues:

  1. Is the CFPB's structure as a single-Director independent agency consistent with Article II of the Constitution, and, if not, is the proper remedy to sever the for-cause provision of the statute?
  2. May the court appropriately avoid deciding that constitutional question, given the panel's ruling on the statutory issues in this case?
  3. If the en banc court, which has today separately ordered en banc consideration of Lucia v. SEC, 832 F.3d 277 (D.C. Cir. 2016), concludes in that case that the administrative law judge (ALJ) who handled that case was an inferior officer rather than an employee, what is the appropriate disposition of this case?

The bulk of the parties' arguments, and judges' questions, dealt primarily with the application of the Supreme Court authority relevant to the first part of question 1. Through its questions, the en banc court explored the relationship between the Supreme Court's decisions in Humphrey's Executor v. United States, Morrison v. Olson, and Free Enterprise Fund v. Public Company Accounting Oversight Board. Key focus points for the court were to determine what factors—or combination of factors—(e.g., single directorship vs. commission structure, for-cause vs. at-will removal, appointment term length, budget and appropriations) should be considered dispositive and what overarching principle should be applied to the question of whether the structure of an independent agency accords with Article II.

The U.S. Department of Justice, which filed an amicus curiae brief with the D.C. Circuit, also argued that the CFPB's structure is unconstitutional.

Neither the judges nor the parties significantly addressed the issue of whether, as the dissent in the panel's decision argued, the court should avoid the constitutional issues, given the ruling on the merits of the statutory issues involved. Indeed, the statutory issues themselves were only briefly addressed, primarily by the CFPB. Responding to questions from the bench, the CFPB stated as follows:

  • On the question of the statute of limitations, the CFPB agreed that 28 U.S.C. § 2462 (which imposes a five-year statute of limitations on the enforcement of civil fines, penalties, or forfeitures) would apply to the Bureau, but not in this particular case, given that the CFPB's Enforcement Counsel sought equitable relief (restitution) rather than civil penalties or disgorgement. The CFPB maintained its position that other than Section 2462, no statutes of limitations applied to the Bureau in its administrative forum (although the Bureau noted that it would be bound by principles of equity, with regard to older cases).
  • With respect to the Real Estate Settlement Procedures Act (RESPA), the CFPB responded to a question regarding notice to the industry and the effect of HUD's prior interpretation of Section 8(A) and 8(C) of RESPA. The Bureau responded that the language of the statute provided notice of the requirements of the law, irrespective of HUD guidance.

The en banc PHH court did not address the effect of the outcome of Lucia regarding ALJs on the CFPB.

Lucia v. SEC

In Lucia v. SEC, the en banc D.C. Circuit explored the definition and scope of an "inferior officer" under Article II of the Constitution. The questions before the court were:

  1. Is the SEC administrative law judge who handled this case an inferior officer rather than an employee for the purposes of the Appointments Clause of Article II of the Constitution?
  2. Should the court overrule Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000)? (In Landry, the D.C. Circuit held that FDIC ALJs are not "inferior officers" under the Constitution because they issue recommended, but not final, decisions.)

At oral argument, the judges sought a guiding principle for determining when personnel of the executive branch of government exercise "substantial authority" such that they are "inferior officers" under the Constitution. Argument surrounded the matter of whether SEC ALJs ever have the authority to issue final decisions (given the statutory framework of the administrative adjudication process), whether final decision-making authority would be the sole dispositive question in determining whether an ALJ is an "inferior officer," and, if not, what other elements of the ALJs' authorities would be necessary to deem an ALJ to be an "inferior officer." The court and the parties discussed other SEC ALJ authorities, including the ALJ's authority to make discovery rulings, evidentiary/admissibility rulings, and credibility determinations at the hearing level.

If the court rules in favor of Lucia, then the SEC administrative law judge would be an "inferior officer" rather than a mere employee – meaning that this ALJ and potentially many others were appointed in a manner at odds with the Constitution. In response to concerns voiced by several judges, Lucia argued that, by its calculations, only 142 ALJs (specifically, adjudicative ALJs) would potentially be affected should the D.C. Circuit reverse course and find the SEC ALJs to be "inferior officers." The SEC argued on the other hand that such a finding would have wide-reaching ramifications and affect ALJs across a broad spectrum of government agencies.

Moving Forward

PHH Corp. and Lucia have the potential to change how two of the most prolific federal regulators and law enforcement agencies approach enforcement through administrative adjudication. The outcome of the cases could determine both the consequences of ALJ decisions and appointment procedures for ALJs. The questions regarding the CFPB's structure are even more critical to this relatively new agency. Both may be likely candidates for Supreme Court review on these issues.