On June 21, 2018, the Supreme Court in Raymond J. Lucia, et al. v. SEC,1 held that the SEC's administrative law judges are "Officers of the United States" whose appointment must comport with the requirements of the Constitution's appointments clause. The Court further concluded that having made a "timely challenge" to the validity of the appointment of the ALJ who decided his case, Lucia is entitled to a new hearing before a different, properly appointed ALJ.
The decision reverses an earlier ruling by the D.C. Circuit and resolves a Circuit split. Previously, the D.C. Circuit concluded that the SEC's ALJs were mere employees, not officers subject to the appointments clause, reasoning that the ALJs could not independently issue final or binding decisions. That judgment was upheld en banc, when a ten-judge panel split evenly on the issue. By contrast, the Tenth Circuit, in Bandimere v. SEC,2 held that the SEC's ALJs are officers because they occupy a position "established by law" and exercise "significant discretion" in the performance of an "adjudicative" — as opposed to "ministerial" — function.
As officers, the SEC's ALJs are subject to the appointments clause and thereby must be appointed by the president, "Courts of Law" or "Heads of Departments."3 The SEC, however, hires ALJs through the Office of Personnel Management, which presents the SEC's chief ALJ with a list of three candidates, one of whom is selected subject to approval by the SEC's Office of Human Resources.
Significantly, in response to Lucia's petition for certiorari, the Department of Justice, which had been defending the SEC's position that the agency's ALJs are employees, switched sides, agreeing with Lucia that the SEC's ALJs should be deemed officers because they "exercise significant authority pursuant to the laws of the United States."
In reaching its conclusion, the Supreme Court applied Freytag v. Commissioner,4 a prior decision finding that the U.S. Tax Court's "special trial judges" are officers subject to the appointments clause. Justice Kagan, writing for the majority in Lucia, observed that Freytag "necessarily decides this case" because the STJs in Freytag are "near-carbon copies" of the SEC's ALJs. Comparing the features of each position, Kagan concluded that both sets of officials "hold a continuing office established by law"; possess "all the tools of federal trial judges" including the authority to take testimony, conduct trials, rule on evidentiary issues and enforce discovery orders; and exercise "significant discretion" in "carrying out these important functions."
The Court explained further that the SEC's ALJs are "more autonomous" than the STJs in Freytag because the SEC can opt not to review an ALJ's decision, which then becomes the final word of the commission. STJs' proposed findings and opinions, by contrast, must be reviewed by a Tax Court judge in major cases and "count[] for nothing" unless adopted.
Justice Sotomayor, joined by Justice Ginsburg in dissent, argued that the ability to "make final, binding decisions" is a "prerequisite to officer status," even under Freytag, and that the SEC's ALJs are not subject to the appointments clause because they lack that authority.
The Lucia decision is a culmination of a series of challenges that were brought against the SEC's increased use of administrative proceedings following the passage of Dodd-Frank. Amendments to securities laws in Dodd-Frank permitted the SEC to seek civil penalties in administrative proceedings against not only regulated persons but also non-regulated persons.5 Beginning with Gupta v. SEC6 in 2011, litigants have argued that the commission's administrative proceedings suffer from various constitutional deficiencies, including violations of the appointments, due process and equal protection clauses.
The Lucia decision leaves a number of issues unresolved.
The government had urged the Court to address the constitutionality of statutory "for cause" restrictions on the ALJs' removal. The Court, however, declined, noting that the question has not yet been addressed by a lower court. In light of the Lucia holding, the constitutionality of these removal restrictions may be in question based on the Court's prior appointment and removal jurisprudence.7
The decision also will affect other agencies like the Social Security Administration, some of which appoint ALJs in a manner similar to the SEC. Indeed, one set of amici argued that holding that the SEC's ALJs are constitutional officers may subject "millions of adjudicatory disputes" to similar challenge.8 Interestingly, in his separate opinion concurring in the judgment, Justice Breyer explained that he would have decided Lucia on statutory, not constitutional, grounds, potentially avoiding subsequent attacks on other agencies' ALJs.
Relatedly, during the pendency of the suit, many agencies, including the SEC itself, moved to "ratify" the appointment of their ALJs to conform with the appointments clause. Lucia, for his part, argued that the SEC's ratification order is invalid, but the Court declined to address the question. In its ruling, the Court did not offer guidance on what steps agencies can take to ensure their appointments are constitutional, and future cases may challenge the validity of these agency ratification actions.
Footnotes
1 Lucia v. SEC., No. 17-130, 2018 WL 3057893, at *1 (U.S. June 21, 2018).
2 No. 15-9586, 2016 WL 439007 (10th Cir. Dec. 27, 2016).
3 U.S. Const. art. II. § 2, cl. 2.
4 501 U.S. 868 (1991).
5 See Kramer Levin, SEC Approves Amendments to Rules of Practice, Making Welcome but Incremental Changes to Enforcement Procedures, July 20, 2016.
6 796 F. Supp. 2d 503 (S.D.N.Y) (2011). Kramer Levin Naftalis & Frankel LLP represented Mr. Gupta in his successful federal court equal protection challenge.
7 See Free Enterprise Fund v. Public Company Accounting Oversight Board., 561 U.S. 477, 484 (2010) (holding that the vesting clause prohibits Congress from providing constitutional officers with "multilevel protection from removal").
8 See Brief for Federal Administrative Law Judges Conference, as Amici Curiae In Support of Neither Party, Lucia v. SEC, __ U.S. ___ (2018) (No. 17-130), 2018 WL 3057893, at *2 n.4; Brief for Administrative Law Scholars, as Amici Curiae, In Support of Neither Party at 9, Lucia v. SEC, __ U.S. ___ (2018) (No. 17-130), 2018 WL 3057893, at *9.
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