MISCHIEF MANAGED? THE UNCONSTITUTIONALITY OF SEC ALJS UNDER THE APPOINTMENTS CLAUSE.

Author:Blais, Jackson C.
Position:Administrative law judges
 
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INTRODUCTION

Since Congress passed the Administrative Procedure Act in 1946 (APA), (1) the administrative state has expanded exponentially. Today, federal agencies are critical players in the administrative scheme due to their role in establishing and enforcing regulations. (2) An important part within this system is played by Administrative Law Judges ("ALJs"). (3) In 2016, the Tenth Circuit (4) and the D.C. Circuit (5) took up the question of whether ALJs of the Securities and Exchange Commission (SEC) were hired in accordance with the Appointments Clause of the Constitution. The two courts came to opposite conclusions--the Tenth Circuit concluded that SEC ALJs are inferior officers, and as a result, do not comport with the Appointments Clause, (6) whereas the D.C. Circuit determined that the SEC ALJs are employees, and so do not run afoul of the Constitution. (7) Though similar claims have been made, other circuit courts have not yet decided this argument on the merits. (8) Nevertheless, the Tenth and D.C. Circuits have created a split that the Supreme Court will answer by the end of this term (9)--whether SEC ALJs comport with the Appointments Clause of the Constitution. Answering this question will at least indirectly implicate other agencies' ALJs because of their similar duties.

This Note argues that SEC ALJs are inferior officers of the United States and, as a result, are unconstitutional under the Appointments Clause. Part I examines the current state of ALJs and the jurisprudence of the Appointments Clause. Part II provides an analysis of the circuit split between the Tenth and D.C. Circuits over the question of SEC ALJs and the Appointments Clause. Part III argues that the Tenth Circuit in Bandimere v. SEC correctly decided the question presented. This Part further urges the Supreme Court to reverse the D.C. Circuit's holding in Lucia and, in so doing, adhere to its correctly decided past doctrine, notwithstanding the potential ramifications for the administrative state.

  1. BACKGROUND ON ALJS AND THE APPOINTMENTS CLAUSE

    1. ALJs

      Each federal agency is authorized to employ ALJs, the number of which varies according to each agency's need. (10) The Office of Personnel Management (OPM) manages the application and hiring process of ALJs for all agencies, (11) though the OPM does not actually select which candidates are chosen to become ALJs. (12) Some agencies do not hire or utilize ALJs whatsoever, (13) but other agencies employ hundreds or even thousands of ALJs. (14) Though their number varies, ALJs perform an extensive array of duties in accordance with sections 553 and 554 of the APA. (15) In essence, ALJs hold hearings in each agency and occupy a quasi-judicial role. (16) Within the administrative framework, ALJs make decisions that may be appealed up to the agency's leadership, whose decision can then be appealed to the federal court system. (17)

      SEC ALJs, like other ALJs, "serve as independent adjudicators." (18) Currently, they are hired by the Chief ALJ of the SEC, (19) who receives potential nominees from the OPM. SEC ALJs conduct public hearings and issue decisions based on those hearings. (20) The SEC Commission always has the discretionary power to review an SEC ALJ's decision, and sometimes has a mandatory duty to review should a party from the SEC ALJ's decision seek an appeal. (21) If the SEC Commission does not take up an SEC ALJ's decision, the SEC ALJ's decision becomes final. (22)

    2. Appointments Clause

      The Appointments Clause of the Constitution reads as follows:

      [The President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the 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. (23) The Appointments Clause lays out a framework that maintains a separation of powers among the governmental branches by blending the branches' powers and creating checks and balances. For example, the President is given the ability to nominate principal officers, (24) whereas Congress is given the power to choose whether the President, a court, or the head of a department may appoint inferior officers. (25) Furthermore, principal officers are subject to "Advice and Consent of the Senate," which provides an additional check on the Executive's discretion. (26) This appointments framework, though not always clear, (27) or strictly interpreted, (28) has nevertheless ossified into a workable standard. (29)

      Most caselaw concerning the Appointments Clause revolves around the distinction between principal and inferior officers. (30) The Appointments Clause does not precisely define what designates an officer as inferior, nor does it mention government employees. If an official is designated as an employee, as opposed to an officer, she need not comport with the Appointments Clause. (31) Since most Appointments Clause jurisprudence concerns the difference between inferior and principal officers, the distinction between inferior officers and employees has received far less attention. For example, the Court in dicta has briefly mentioned that an employee of the United States is simply a "lesser functionar[y] subordinate to officers of the United States." (32)

      The Supreme Court's primary case concerning the definitions of inferior officers and employees is Freytag v. Commissioner of Internal Revenue, which involved a challenge to the constitutionality of Special Trial Judges ("STJs") appointed by the Chief Judge of the United States Tax Court. (33) Freytag focused on whether the Tax Court, under the Appointments Clause, had the authority to appoint STJs. (34) This necessarily required the Court to answer the threshold question of whether an STJ was an inferior officer or an employee. (35)

      For the purposes of this Note, the Court determined that an STJ was an inferior officer. (36) In so finding, the Court relied on three factors: (1) that the office of STJs is "established by law," (2) that the "duties, salary, and means of appointment for that office are specified by statute," (37) and (3) that an STJ carried out "important functions" while exercising "significant discretion." (38) The IRS Commissioner argued that STJs were employees because they could not enter a final decision, but the Court rejected this notion by identifying the STJs' significant duties and discretion as proof that STJs were in actuality inferior officers. (39)

  2. LUCIA AND BANDIMERE

    The facts of the circuit split cases, Lucia and Bandimere, are roughly analogous--both involve the SEC bringing an administrative enforcement action against Lucia and Bandimere for alleged violations of various securities laws. (40) In both cases, the SEC ALJs presiding over the hearing found the defendants liable and imposed various penalties upon them. (41) In their appeals, Lucia and Bandimere argued inter alia that because the Chief ALJ who hired the SEC ALJs was not the Head of a Department, the SEC ALJs were hired in violation of the Appointments Clause--as a result, the judgments made by the ALJs could not stand. (42) The ALJs in both cases unsurprisingly found themselves to be employees, which the SEC Commission subsequently affirmed. (43)

    1. The D. C. Circuit in Lucia

      In Lucia, the D.C. Circuit unanimously held that SEC ALJs are employees and not inferior officers, so their hiring process does not run afoul of the Constitution. (44) The court noted that since SEC ALJs were not appointed in a way that satisfies the Appointments Clause, the relevant question was whether an SEC ALJ is an employee or not. (45) Though it recognized the importance of Freytag, the court relied upon tests established by its own line of caselaw post-Freytag to determine whether an appointee is a constitutional Officer. (46) The court noted that SEC ALJs were "established by Law" and that an ALJ's "duties, salary and means of appointment" were specified by statute. (47)

      The court, relying on its own precedent, then listed the "main criteria" that determine whether an appointee is an employee or an inferior officer: "(1) the significance of the matters resolved by the officials, (2) the discretion they exercise in reaching their decisions, and (3) the finality of those decisions." (48) According to the court, an official must meet each of these criteria--that is, the official must resolve significant matters, exercise discretion in doing so, and their decisions must be final--in order to be considered an inferior official. (49) The D.C. Circuit proceeded to reject Lucia's argument because an SEC ALJ's decision is not considered final until the SEC Commission issues a finality order. (50) Though an SEC ALJ may exercise discretion in deciding significant matters, the D.C. Circuit found that an SEC ALJ has no power to bind anyone until the Commission has embraced the ALJ's decision as its own. (51) Because SEC ALJs therefore lacked final decision-making power, the court held that SEC ALJs are employees and that their hiring process does not violate the Appointments Clause. (52)

      One year later, the court in an en banc memorandum opinion upheld the decision, in an even 5-5 split vote. (53) No judge wrote an opinion, so little can be gleaned concerning the disagreements in the split. The split nevertheless indicates that the consensus among the D.C. Circuit judges is not as strong as the original Lucia decision made it appear.

    2. The Tenth Circuit in Bandimere

      A few months after the D.C. Circuit passed down its Lucia decision, the Tenth Circuit came to the conclusion that SEC ALJs are inferior officers and, as such, are unconstitutional under the Appointments Clause in a divided opinion. The Bandimere court...

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