Will The Supreme Court Review SEC’s In-House Judges?

By Harold J. Krent, Dean and Professor of Law, IIT Chicago-Kent College of Law in Chicago.

This post is an abridged version of an article first published at Law360.

Challenges to appointment of U.S. Securities and Exchange Commission administrative law judges (ALJs) have spread across the country. Private parties that have lost on the merits before the SEC have then challenged the legitimacy of those proceedings by asserting that SEC ALJs, as inferior officers, should have been appointed by SEC commissioners instead of by the chief ALJ. Article II of the Constitution provides that inferior officers of the United States can only be appointed by the president, courts of law, or heads of departments, and the SEC conceded that, if the ALJs are deemed inferior officers, then the appointments were invalid.

Article II vests the appointment power in presidents to permit them influence over the vast amount of authority delegated by Congress to agencies in the executive branch. The president has the power to appoint principal officers such as SEC commissioners, and all inferior officers within the agency must be appointed either by the president or the SEC commissioners themselves. In contrast, presidents need not appoint employees because they do not exercise significant authority under the laws of the United States. The appointments clause thereby promotes political accountability.

I, along with others, confidently predicted — at least until last week — that the U.S. Supreme Court would grant certiorari to resolve the split in the federal circuit courts over whether federal ALJs should be considered inferior officers or employees under Article II of the Constitution. Resolving the Article II issue has ramifications for many federal agencies whose appointment of ALJs have not conformed to the appointments clause. The Social Security Administration, for example, employs over 1,400 ALJs. As a practical matter, the ongoing appointments challenges have cast a pall over a wide swathe of current administrative proceedings before federal ALJs.

Review by the Supreme Court seemed likely for another reason. A second and more important question raised by the cases is whether ALJs, if deemed inferior officers, can be protected from “at will” removal in independent agencies such as the SEC and SSA. In an analogous context, the Supreme Court in Free Enterprise Fund held that inferior officers in independent agencies cannot be protected by a “for cause” removal standard because two layers of “for cause” insulation from the president’s removal authority creates an attenuated chain of accountability to the president.  ALJs, however, currently can only be removed for “cause.”

Nevertheless, ALJs arguably need protection from at-will removal in order to assure private entities contesting government action that decision makers in their cases enjoy a measure of independence. Our administrative system of adjudication, in other words, largely turns on a promise of independence at least at the level of the front-line adjudicator, even if not from the agency itself. The agency inherently is political, but not the front-line adjudicator whose factual findings remain in the record no matter what the agency decides and can influence subsequent judicial review. The court may well be tempted to craft a rule that limits Free Exercise Fund, possibly on the ground that the president need not have as close supervision over officers exercising routine adjudicative as opposed to administrative functions. The path toward certiorari seemed clear.

This past week, the U.S. Department of Justice changed course and disavowed the SEC’s earlier position that its ALJs should be considered employees. But, in a surprise twist, the DOJ asked the court nonetheless to grant certiorari.

What will the court do? On one hand, although the case appears moot, perhaps the court can entertain jurisdiction because the parties might still disagree as to the remedy — can the properly appointed ALJ ratify what he had determined earlier without holding yet another hearing. The SEC has not yet stated whether the ALJs have to rehear the cases previously decided, so it seems a stretch for the court to take the case on that basis. And, even if the court accepts the DOJ’s invitation to grant certiorari, the parties are not adverse with respect to the two key issues — the private parties and the SEC now agree 1) that ALJs are inferior officers, and 2) neither side has weighed in on the removal question. At the end of the day, DOJ’s call for review now may be enticing, but traditional principles of restraint likely will result in a denial.

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