Are Statutory Restrictions on Removing ALJs Constitutional?

Judicial Independence Questions Remain after Lucia v SEC

By Hon. Timothy Nemechek
When the gavel comes down, are statutory restrictions on removing ALJs constitutional?

When the gavel comes down, are statutory restrictions on removing ALJs constitutional?

Two and one half years ago, the United States Supreme Court issued its decision in Lucia v. SEC, 585 U.S.—, 138 S. Ct. 2044 (2018). The Court decided the issue of whether Administrative Law Judges (ALJs) were “Officers” under the Appointments Clause of the U.S. Constitution. Answering in the affirmative, the Court decided that Securities and Exchange Commission’s (SEC) ALJs were Officers of the United States because they exercised significant authority and occupied a position established by law. This article will review the significant question Lucia left unanswered as well as the potential long-term implications of the Lucia v. SEC decision.

Lucia v. SEC was an enforcement action the SEC filed against Petitioner, Raymond Lucia. The action alleged a violation under the Investment Advisers Act over a retirement savings strategy presentation Petitioner was using called “Buckets of Money”. The SEC assigned ALJ Cameron Elliot to adjudicate the case, who held a hearing. After nine days of testimony and argument, ALJ Elliot imposed a $300,000 fine, along with a lifetime ban from the investment industry. Petitioner appealed to the SEC, 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 this argument and upheld the penalty. Petitioner appealed and ultimately cert was granted by the United States Supreme Court.

Writing for the 7-2 majority, Justice Kagan concluded that the SEC’s ALJs were “Officers of the United States” and not simply employees of the Federal Government. Only the President, a court of law, or a head of department could appoint SEC ALJs under Art. II, § 2, cl. 2 [Lucia 138 S. Ct. at 2055] and the appointment of ALJ Elliot was unconstitutional. Justice Kagan, citing Freytag v. Commissioner, 501 U.S. 868 (1991), utilized that case’s framework when it delineated between an officer and employee. The Court noted ALJs had “all the authority needed to ensure fair and orderly adversarial hearings”. This included administering oaths, ruling on motions, regulating the course of a hearing, and regulating the conduct of parties and counsel. [Lucia 138 S. Ct. at 2053]. The Court found SEC ALJs had equivalent duties and powers as Special Trial Judges in Freytag, as they conducted adversarial inquiries, held a continuing office established by law (seen as an equivalent to lifetime appointment), and exercised significant discretion. The Court held ALJs were “inferior officers” and subject to the Appointments Clause. The Court of Appeals decision was reversed, and the case remanded for further proceedings.

Justice Thomas wrote a concurrence (joined by Justice Gorsuch) in which he concluded that the original public meaning of “Officers of the United States” under the Appointments Clause should be utilized in deciding the question. Justice Breyer concurred in the judgment, but dissented, as he disagreed with the majority‘s failure to address job protections and removal of ALJs. Justice Sotomayor dissented and concluded federal ALJs were employees and not subject to the requirements of the Appointments Clause. Justice Ginsburg joined in this dissent.

In the immediate aftermath of Lucia, the SEC rectified the constitutional infirmity and all ALJs were appointed by the head of the SEC. Other federal agencies, including the Social Security Administration (which employs the most federal ALJs) followed suit. In addition, there were hundreds of pending cases in which non-constitutionally appointed ALJs had issued orders that were now null and void. These cases were directly impacted by the Lucia holding and required either re-hearing or other resolution.

On July 10, 2018, then-President Trump issued Executive Order No. 13843, titled “Excepting Administrative Law Judges from the Competitive Service”. (83 Fed. Reg. 32,755 (July 13, 2018.) Citing Lucia, the Executive Order noted: “at least some-and perhaps all-ALJs are ‘Officers of the United States’ subject to the Constitution’s Appointments Clause”. This included merit-based hiring and removal, which was administered by the Office of Personnel Management (“OPM”). Specifically, Executive Order No. 13843 noted: “that 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 procedures.” A new classification—Category F—was created that covered ALJs (by Executive Order No. 13957) and, pursuant to a subsequent Memorandum issued by the Office of the Solicitor General, the heads of executive departments were authorized to make ALJ appointments without OPM approval.

Prior to Executive Order No. 13843, civil service protections were given to ALJs under the Administrative Procedure Act. These protections have been in place for decades. Under these rules, ALJs were to be removed only on a showing of good cause, as found by the Merit Systems Protections Board (MSPB). The President has authority to remove members of the MSPB only for “inefficiency, neglect of duty or malfeasance in office”. Executive Order No. 13843 exempted ALJs from the competitive civil service process, including competitive selection and examination. Coupled with the direction provided by the Memorandum issued by the Office of the Solicitor General, ALJs’ merit-based job protections were very much in question over the past two years. Congress also did not take up the question of the federal job protections to which ALJs were entitled following Lucia and Executive Order No. 13843. Given President Biden’s recent issuance of Executive Order 14003 (eliminating Category F), it appears that federal job protections have been restored to ALJs. However, the constitutional issue left unresolved by Lucia stands a very good chance to be taken up by the courts in the near future.

The Lucia Court specifically declined to decide the issue of whether statutory restrictions on removing Commission ALJs were constitutional. Justice Breyer called this the “embedded constitutional question” in Lucia. [Lucia 138 S. Ct. at 2057]. In this regard, Justice Breyer’s dissent framed the most significant remaining issue which followed the Court’s decision in Lucia. More particularly, are the statutory job protections established by Congress under the APA and MSPB in conflict with the holding that ALJs are Article II “Officers”? Justice Breyer noted that the elimination of job protections for SEC ALJs “would risk transforming administrative law judges from independent adjudicators to dependent decisionmakers, serving at the leisure of the Commission”. [Lucia 138 S. Ct. at 2060]. This would allow “the Commission to remove an administrative law judge with whose judgments it disagrees—say because the judge did not find a securities law violation where the Commission thought there was one or vice versa”. Id. The constitutionality of the “for cause” protections for removal of ALJs remains an issue to be decided. Free Enterprise Fund v. Public Company Accounting Oversight Bd., 561 U.S. 477, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010).

Most recently, this constitutional issue has been raised in two cases, Cochran v. United States Securities and Exchange Commission (U.S.C.A Case No.19-10396) and Fleming, et al. v. United States Department of Agriculture (U.S.C.A Case Nos. 17-1246, 171249 and 17-1250, consolidated). Fleming, et al. v. United States Department of Agriculture has been pending in the U.S. Court of Appeals for the District of Columbia. Cochran v. United States Securities and Exchange Commission is pending in the U.S. Court of Appeals for the Fifth Circuit. In both cases, the attorneys representing Petitioners have averred that the job protections for ALJs, as Officers of the United States, are unconstitutional. In both appeals, Petitioners have cited Free Enterprise Fund v. Public Company Accounting Oversight Bd. supra, 561 U.S. 477 and requested that the appeals court strike down agency action as unconstitutional. Oral argument was just heard in Cochran v. United States Securities and Exchange Commission (on a Petition for Rehearing En Banc) in January 2021.

On February 16, 2021, a decision was issued in Fleming, et al. v. United States Department of Agriculture, -F.3d.-, No. 17-1246 (D.C. Cir. 2021). This case arose out of sanctions imposed on Petitioners for violating the Horse Protections Act. These penalties were imposed for a practice known as “soring” in which horses’ forelimbs are intentionally injured to make them step higher at shows or auctions. Administrative complaints were filed against Petitioners, who failed to file timely answers. Default orders were issued by an ALJ, which were then appealed. The USDA rules provide that an ALJ decision may be appealed to a department officer known as the Judicial Officer, who renders the final agency decision. In these cases, the Judicial Officer affirmed the default orders.

Petitioners initially argued that the ALJ who presided over the cases was improperly appointed and this was before the Supreme Court’s decision in Lucia. Petitioners also argued that the Judicial Officer’s appointment was invalid under the Appointments Clause and asserted that the dual layers of “for cause” protection were unconstitutional, as it constrained the President’s power. Ultimately, the Court of Appeals declined to rule on that issue, although it noted that Petitioners did not raise the “for-cause” removal issue before the ALJ or Judicial Officer. The case was remanded for further proceedings before either the Secretary of the USDA or another officer with properly delegated authority. The Court also declined to address the other arguments raised by Petitioners, including the question of exhaustion, except to reject their contention that the Department’s ALJs were principal officers under the Appointments Clause.

It is unknown when the decision will be rendered in Cochran v. United States Securities and Exchange Commission. Also, it is unclear whether the U.S. Supreme Court will take up either of these cases in the near future.

In the meantime, there are specific steps Congress could take by enacting amendments to the APA, which would secure job protections for ALJs while balancing the need for agencies to appoint ALJs in a constitutional fashion and, where appropriate, remove them for cause. Statutory protections could provide more stability and foster the policy of judicial independence. Individual federal agencies can also provide job protections by adopting additional personnel rules that protect ALJs. Congress could establish a federal central panel of ALJs, similar to many states. Regardless of whether any of these steps are taken, the role of and job protections for federal ALJs will continue to be a source of controversy and litigation for the foreseeable future.

Hon. Timothy Nemechek

Administrative Law Judge

Hon. Timothy Nemechek is an Administrative Law Judge with the Colorado Office of Administrative Courts.

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