chevron-down Created with Sketch Beta.
September 06, 2018 Top Story

Supreme Court Holds ALJ Appointment Procedure at SEC Unconstitutional

Circuit split resolved, impacting all federal agencies

By Erik A. Christiansen

The U.S. Supreme Court has resolved a circuit split regarding the constitutionality of administrative law judge (ALJ) appointments, holding that the U.S. Securities and Exchange Commission (SEC) can no longer consider ALJs “employees” exempt from the U.S. Constitution’s Appointments Clause.

The SEC must consider administrative law judges officers, not employees

The SEC must consider administrative law judges officers, not employees

Pexels | Sora Shimazaki

In Lucia v. SEC, the Court held that ALJs exercise “significant” authority, “comparable to that of a federal district court judge conducting a bench trial,” and thus are “Officers of the United States” who, under Article II, Section 2, Clause 2 of the Constitution, must be appointed by the President, “Courts of Law,” or “Heads of Departments” rather than SEC staff. The decision overturned a ruling by the U.S. Court of Appeals for the D.C. Circuit concluding that SEC ALJs were employees rather than officers, which conflicted with the U.S. Court of Appeals for the Tenth Circuit’s prior decision in Bandimere v. SEC.

The impact of Lucia has already spread to all federal agencies. Following the decision, President Donald J. Trump issued an Executive Order Excepting Administrative Law Judges from the Competitive Service. The Order announced that the “expanding responsibility” of ALJs as recognized in Lucia calls for the elimination of competitive examination and service selection procedures for all ALJs to provide agency heads with “additional flexibility to assess prospective appointees” in discharging their duties under the Appointments Clause. Each agency should be empowered to assess “critical qualities in ALJ candidates, such as work ethic, judgment, and ability to meet the particular needs of the agency,” the Order stated, which will help “promote confidence in, and the durability of, agency adjudications.”

Resolving a Constitutional Debate

The Lucia dispute began in 2012, when the SEC initiated an administrative action against investment adviser Raymond J. Lucia and Raymond J. Lucia Companies, Inc. The presiding ALJ found that the Lucia parties had committed securities laws violations and imposed monetary sanctions in addition to barring them from the industry. After an unsuccessful appeal at the SEC, the Lucia parties appealed to the D.C. Circuit, which refused to disturb the SEC’s findings. When the petitioners sought Supreme Court review, the Solicitor General abandoned the government’s prior stance by admitting the ALJ had not been properly appointed. To remedy this violation, the petitioners advocated for a rehearing before a lawfully appointed ALJ, remand to an Article III court, or dismissal of the case.

A group of legal scholars asserted the opposite position in an amicus brief, urging the Court to ignore the Solicitor General and affirm the D.C. Circuit. The scholars argued that agencies have broad powers to appoint subordinate officers. The SEC’s ALJs are not constitutional “officers,” and thus do not need to be appointed under the Appointments Clause, they argued. Providing a prescient warning, they observed that a different holding would likely affect thousands of ALJs in other federal agencies tremendously by potentially requiring compliance with the Appointments Clause across the board.

Sweeping Effect Across All Agencies

The Lucia Court ultimately granted the petitioners the relief they sought, remanding the case for hearing before a different ALJ lawfully appointed by the SEC. The Court held that the SEC’s ALJs “are near-carbon copies” of the tax court judges previously deemed Officers of the United States in the Supreme Court’s 1991 decision in Freytag v. Commissioner. “Freytag says everything necessary to decide this case,” opined the Lucia Court. “The [SEC] Commission’s ALJs exercise the same ‘significant discretion’ when carrying out the same ‘important functions’” as [Special Tax Judges] do.”

Given the Court’s analogy to Freytag in Lucia and President Trump’s Executive Order expressly based on that opinion, the case’s impact on administrative law is undeniable. Lucia will have “far-reaching implications for administrative law,” predicts Julie H. Firestone, cochair of the ABA Section of Litigation’s Securities Litigation Committee. There are hundreds of cases currently pending at the SEC, Firestone observes, and other government agencies also rely on a delegation of authority to ALJs.

“It is important for ALJs to remain independent if administrative proceedings are going to be a fair forum and not just a rubber stamp,” Firestone opines.

Removal Protections for ALJs Still Up in the Air

Lucia and the Executive Order address ALJ appointments, but they leave questions about ALJ removal up in the air, according to Firestone. “[I]f ALJs are officers rather than employees, then ‘for cause’ job protection becomes constitutionally suspect under [the 2009 Supreme Court decision in Free Enterprise Fund v. Public Company Accounting Oversight Board],” which prohibits undue agency interference with Presidential removal authority, she says.

Currently, ALJ removal under existing SEC internal procedures requires a good cause determination by the Merit Systems Protection Board, which provides job protections and due process for federal employees. The Solicitor General raised ALJ removal as an issue on appeal in Lucia, arguing that the Court should re-interpret the “good cause” standard “to avoid unconstitutional interference with the President’s supervision of the Executive Branch.”

The Court expressly declined to consider the constitutionality of civil service removal protections in the majority opinion in Lucia because lower courts had not yet addressed the issue. However, Justice Stephen Breyer raised the issue for further consideration in a separate partial concurrence and partial dissent. According to Justice Breyer, both ALJ appointment and ALJ removal are governed by the Administrative Procedure Act. Considering ALJs “officers” may render their removal protections unconstitutional, which “would risk transforming administrative law judges from independent adjudicators into dependent decisionmakers, serving at the pleasure of the Commission,” Breyer writes.

Reinterpretation of the “good cause” standard for ALJ removal has significant implications, Louis J. Virelli III, Acting Editor-in-Chief of the ABA’s Administrative and Regulatory Law News, opines. It “reflects an effort by the Solicitor General’s office to consolidate agency power in the executive branch,” Virelli says.


Erik A. Christiansen is a contributing editor for Litigation News.

Hashtags: #ALJ #SEC #appointmentsclause #executivebranch #separationofpowers

Related Resources

Copyright © 2018, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).