April 01, 2020

The Long Term Implications of Lucia v. SEC and Executive Order 13843

By Timothy L. Nemechek
Powers of the President. (2) He shall have power, by and with the Advice and Consent of the Senate…to 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. 
U.S. Constitution Art. II, §2, cl 2

On June 21, 2018, the U.S. Supreme Court issued its decision in Lucia v. SEC, 585 U.S.__, 138 S. Ct. 2044 (2018) in which the Court decided whether Administrative Law Judges (ALJs) were “officers” under the Appointments Clause of the U.S. Constitution. Answering in the affirmative, the decision could have a far-reaching effect on the adjudication of administrative cases. The implications of the Lucia v. SEC decision and the President’s subsequent Executive Order, specifically on ALJs in other federal agencies, on the system of selection for ALJs, as well as the potential impact on state ALJs, are significant.

Facts and Holding
The Lucia case arose out of an enforcement action filed by the SEC against Petitioner Raymond Lucia. Lucia was charged with violating certain securities laws and the SEC assigned an ALJ to adjudicate the case. The ALJ held a hearing and after nine days of testimony and argument, the ALJ imposed a $300,000 fine, along with a lifetime ban in the investment industry. Lucia appealed to the Commission, arguing that the administrative hearing was invalid because the ALJ was not constitutionally appointed, as he was appointed by SEC staff members. The SEC rejected the argument and concluded SEC ALJs were not “officers of the United States,” but rather “employees” of the agency, and the Appointments Clause did not apply. After he appealed, Petitioner’s claim was rejected by the Court of Appeals for the D.C. Circuit[i] and on rehearing, the court was evenly split.[ii] The Supreme Court granted cert to resolve a conflict between the circuits.

Writing for the majority, Justice Elena Kagan concluded SEC ALJs were “officers of the United States” and within the ambit of Appointments Clause.  Justice Kagan determined that the test articulated in Freytag v. Commissioner,[iii] (in which the Court held that special trial judges (“STJs”) were “officers,” not mere “employees”) controlled Lucia and that Freytag said “everything necessary to decide this case.” [iv]  Citing Freytag, Justice Kagan noted that these officials had “all the authority needed to ensure fair and orderly adversarial hearings — indeed nearly all the tools of federal trial judges.”[v] This included administering oaths, ruling on motions and regulating the course of a hearing, as well as the conduct of parties and counsel. Because SEC ALJs had equivalent duties and powers as STJs in Freytag, they conducted adversarial inquiries, held a continuing office established by law and exercised significant discretion, the Court determined they were “inferior officers” and subject to the Appointments Clause.6 The Court of Appeals decision was reversed and the case remanded for further proceedings.

The immediate impact of the decision for SEC ALJs was somewhat limited, as the five ALJs who conducted hearings for the Commission were constitutionally appointed in the interim. Justice Kagan noted that the hearing involving Raymond Lucia was required to be conducted by a different ALJ. 

Executive Order 13843
Following the Court’s decision in Lucia, President Trump issued Executive Order 13843 on July 10, 2018, which changed the process for selection of federal ALJs. The Executive Order noted the role of ALJs had increased and decisions frequently become the final word for the agency for whom they conducted adjudications. The Executive Order also noted that Lucia potentially applied to all federal ALJs. Accordingly, the Executive Order specified:

the conditions of good administration make necessary an exception to the competitive hiring rules and examinations for the position of ALJ. These conditions include the need to provide agency heads with additional flexibility to assess prospective appointees without the limitations imposed by competitive examination and competitive service selection. Placing the position of ALJ in the excepted service will mitigate concerns about and limitations on the selection of ALJs, reduce the likelihood of successful Appointments Clause challenges, and forestall litigation in which such concerns have been raised.

The effect of this Executive Order was to eliminate the competitive selection process for federal ALJs, which had been in effect for decades.  In particular, ALJs were required to pass an examination administered by the Office of Personnel Management, as well as complete an interview. Federal ALJs were subject to Merit Systems Protection Board rules (MSPB)  including removal procedures for good cause. By excepting ALJs from this process, the Executive Order immediately increased the power of individual agency heads, as well as potentially politicizing the process of ALJ selection.

Long Term Ramifications
The Lucia decision, coupled with Executive Order 13843, raises the specter of interference with independent judgment of the federal ALJs. To the extent that ALJs employment is directly controlled by the head of the agency for whom they adjudicate cases, that could impact judicial independence. Indeed, Justice Steven Breyer, who concurred in the judgment in part and dissented in part, would have addressed the constitutionality of the statutory “for cause” protections that Congress provided for ALJs. At present, ALJs are appointed pursuant to the Administrative Procedure Act.  Removal of ALJs is limited to “good cause” and must be approved by the MSPB. The MSPB is seen as the body which evaluates the for cause removals and is thus separated from the day-to-day adjudicative process. There could well be a legal challenge to what is essentially removal of the MSPB protections.

This issue has been further clouded by recent guidance, issued by the Solicitor General, which instructed that all ALJs be appointed as inferior officers under the Appointments Clause. The guidance went further and interpreted Lucia’s reasoning to apply with equal force to ALJs who presidse over non-adversarial proceedings, as well as adversarial hearings.

At least one other agency, the Department of Health and Human Services (“HHS”) adopted new procedures for merit-based selection and appointment of its 126 ALJs. This policy appears to be an attempt to comply with the Executive Order and Lucia, while at the same time ensuring merit-based appointment of ALJs. The policy sets forth the required and desired qualifications for ALJs, which meets the needs of the agency for the cases the ALJs adjudicate. The policy states that career officials with extensive experience in administrative law and HHS programs will recommend individuals qualified to be ALJs to the Secretary of HHS, who will make the final decision. The policy specifically notes that it will allow HHS to appoint ALJs quickly and maintain the critical independence that is required.

It remains to be seen whether other agencies with ALJs will adopt similar changes to their internal rules and procedures, which keep some vestiges of the merit based selection process. To the extent that any of these new agency rules potentially conflict with Lucia or Executive Order 13843, further litigation will almost certainly ensue. Lucia v. SEC has the biggest potential to impact the Social Security Administration, which employes the largest number of ALJs in the federal government.

The application of Lucia v. SEC to state ALJs, who are appointed pursuant to state constitutional provisions or statutes is somewhat limited. The holding in Lucia v. SEC was based on the text of the Appointments Clause of the Constitution. However, the rationale articulated by the Court in Lucia v. SEC could be applied to the extent appointment of ALJs did not comport with an individual state’s Constitution or rules.

Timothy L. Nemechek is an Administrative Law Judge for the State of Colorado, a position he has held since 2015. In that capacity, he also works as a mediator in licensure cases and Individuals with Disabilities Education Act cases. Prior to that, he was in private practice for 29 years and worked as a litigator representing private employers, governmental entities, individuals, and insurance carriers as well as non-profit organizations in state and federal court.

[i] Lucia v. SEC, 832. F.3d 277 (2016).
[ii] Lucia v. SEC, 868 F.3d 1021 (2017).
[iii] Freytag v. Commissioner, 501 U.S. 868 (1991).
[iv] Lucia 138 S. Ct. at 2053.
[v] Id.
[vi] Lucia 138 S. Ct. at 2055.