June 29, 2017 | Consumer Financial Services

Courts Remain Divided on ALJ Appointments Issue

2 min

The D.C. Circuit, in Raymond J. Lucia v. SEC, has solidified a split between federal appeals courts regarding the application of the Appointments Clause of the Constitution to administrative law judges. This issue, which affects whether certain ALJs were in their positions unconstitutionally when they heard administrative cases before federal agencies, will likely now be heard by the Supreme Court.

As the SEC and CFPB began exercising their post-Dodd-Frank expanded abilities to bring cases in administrative adjudication rather than through litigation in district court, defendants (called "respondents" in the administrative forum), including respondents in the SEC and CFPB administrative forums, began making numerous arguments, including, among others, protests against:

  • the lack of federal rules of procedure and evidence;
  • the accelerated time frame of adjudications, which respondents have argued limits discovery and encourages heavy reliance on the agencies’ investigative documents;
  • the role and authority of the ALJ, the official who presides over the administrative hearing.

While the SEC, through Bandimere and Lucia in particular, has been at the forefront of the Appointments Clause challenges, the CFPB has also been challenged on its own use of ALJs. The D.C. Circuit teed up this issue in PHH Corp. v. CFPB, when it asked the parties to address the implications of the ALJ/Appointments Clause issue in that case.

As we have discussed previously, the arguments hinge on whether an ALJ is an "inferior officer" under Article II of the Constitution, rather than an employee of the agency. An inferior officer would be required to be appointed pursuant to the Appointments Clause of Article II, which agency ALJs typically are not.

This issue came to a head in a split between two federal appeals courts (the Tenth Circuit and the D.C. Circuit), with the Tenth Circuit holding that an SEC ALJ is an inferior officer, and the D.C. Circuit holding that an SEC ALJ is not an inferior officer. Neither court decided to review the decisions en banc.

A divided en banc D.C. Circuit in Lucia deadlocked 5-5 on the issue, meaning that the court’s decision will stand. This follows the Tenth Circuit’s earlier decision to decline to hear the Bandimere case en banc. The circuit split means that this issue will likely be decided by the Supreme Court.