October 23, 2012

Q and A on Free Enterprise Fund v. Public Co. Accounting Oversight Bd Oral Argument with Steve Schwinn

Q and A on Free Enterprise Fund v. Public Co. Accounting Oversight Bd Oral Argument with Steve Schwinn

Can you briefly review how the case got to the Court?
The case came to the Court by a somewhat unusual route. The petitioners in the case—Free Enterprise Fund and Beckstead and Watts, LLP, a member of Free Enterprise Fund—brought the case in the course of the Public Co. Accounting Oversight Board's (PCAOB) on-going investigation into Beckstead and Watts. But the petitioners did not challenge the PCAOB’s authority through the administrative channels established by the Act. Instead, they brought a direct facial challenge to the PCAOB in the United States District Court for the District of Columbia.

Because the petitioners brought the case in the middle of an on-going investigation, and because they by-passed the normal administrative procedures, they had to build their case largely on speculation about how the PCAOB might act, not how it did act. Moreover, because the petitioners lodged a facial challenge, they had to show that the PCAOB was inherently unconstitutional, regardless of its actions.

The Court was probably interested in the case because of the PCAOB's unique status in the federal bureaucracy: It is an "independent" board within another "independent" agency, the SEC. PCAOB members can be removed "for cause" only by the SEC; SEC members, in turn, can also be removed only "for cause." The result: PCAOB members, according to the petitioners' theory, enjoy a kind of double-insulation from presidential control—a status, petitioners claim, that runs afoul of the Appointments Clause and separation-of-powers principles.

Can you briefly review the main issues?
There were two. The first issue was whether Congress could vest the appointment of "independent" PCAOB members in the already "independent" SEC under the Appointments Clause. That Clause permits Congress to vest the appointment of inferior officers in department heads; petitioners challenged PCAOB members' designation as "inferior officers" and the SEC's designation as a "department head."

The second issue was whether the PCAOB, with its double-insulation from presidential control, violated separation-of-powers principles—especially the idea that the executive must have control over the executive branch.

How did the oral argument go? Which side, if any, do you think should have come out feeling good about their hour in Court?
The arguments were generally well presented. Each side set out its theory quite clearly and defended its theory well.

Justices Scalia, Ginsburg, Breyer, and Sotomayor were most active with Michael Carvin, the lawyer for the petitioners. These four pressed Mr. Carvin about the degree and type of control the SEC exerts over the PCAOB—a central question to both the Appointments Clause issue and the separation-of-powers issue. Justice Ginsburg was the only justice to ask about standing—whether the petitioners properly exhausted their administrative appeals prior to filing their complaint in federal court. She also noted on rebuttal that, because of the unusual way the case came to the Court, the petitioners' claims were speculative. Justice Stevens weighed in on rebuttal with Justice Ginsburg, suggesting possible ways the Court might rule so as not to overturn the entire PCAOB. Mr. Carvin stood his ground and argued that the PCAOB's significant authority independent of the SEC meant that the PCAOB was inherently unconstitutional.

Chief Justice Roberts and Justices Scalia and Alito were most active with the respondents. Chief Justice Roberts, especially, picked up on the petitioners' theory that PCAOB members’ "double for-cause" removal rendered the PCAOB unconstitutional. Justices Scalia and Alito focused more generally on the President's lack of direct control over PCAOB members. Respondents' attorneys, Solicitor General Elena Kagan and Mr. Jeffrey Lamken (for the PCAOB), both argued that the structure of the PCAOB is solidly supported by Humphrey’s Executor v. United States, which upheld independent agencies within the executive branch.

There was one moderate surprise at oral argument: Justice Breyer, and later Justice Kennedy, seemed to challenge the assumption by all parties that SEC commissioners could be terminated only for cause. Under long-standing practice—but not under any law—SEC commissioners can be terminated only for cause. No party challenged this practice, but Justice Breyer seemed particularly troubled by the lack of statutory authority for it.

There was no obvious winner coming out of oral argument, and all the attorneys should have felt good about communicating and defending their theories and arguments.

What do you think the Court saw as the strongest argument?
Different arguments resonated differently with different Justices. The petitioners' strongest argument—that the PCAOB violated the Appointments Clause and separation of powers because of its members' "double insulation" from presidential control—seemed to resonate most with Chief Justice Roberts and Justices Scalia and Alito. The respondent's strongest argument—that PCAOB members are "inferior officers" that are subject to extraordinary SEC control—seemed to resonate most with Justices Ginsburg, Breyer, and Sotomayor. Justices Stevens and Kennedy appeared to be open and possibly searching for a way to preserve the core of the PCAOB structure (even if not its members' "for cause" removal).

Justice Ginsburg—and notably only Justice Ginsburg—raised the standing question.

Which argument seemed to get the least traction with the Justices?
Again, different arguments resonated differently with different Justices. The only significant argument that seemed almost wholly ignored was the standing argument.

Were there any questions or discussions that surprised you?
Two things surprised me. First, the issue of SEC independence—that SEC commissioners are nowhere protected from all but "for cause" removal—surprised me, because neither party challenged this in the briefing or at oral argument. Justice Breyer raised it and did not seem to get a satisfactory answer. This issue is unlikely to affect the outcome of the case, however: Even if SEC commissioners do not have statutory protection, the executive branch has long treated them as having protection; and, in any event, this would only make the entire SEC, not only its "head," the President's "alter ego." This still raises Appointments Clause problems.

Next, the lack of interest in the standing issue surprised me. Given the Roberts Court’s several rulings that curtail access to the federal courts, I would have expected this Court to give much more attention to an issue like standing. Yet the Court all but ignored it.

What was the media coverage of the argument like? If there was any, do you think it was a fair representation?
Media coverage was sparse, but this was not surprising: These structural issues can seem abstract and too removed from more immediate constitutional questions; and for the public, perhaps, the PCAOB has not yet firmly established itself as the institution to prevent accounting scandals like Enron, and therefore has not generated a lot of public attention or debate. This case can seem all too academic.

Adam Liptak at the New York Times and Fawn Johnson and Jess Bravin at the Wall Street Journal put the case in a larger context, briefly exploring the implications of the case for presidential control over independent agencies. Robert Barnes at the Washington Post looked at the issue of executive power and noted that neither President Bush nor President Obama objected to the PCAOB as an intrusion upon their power. The Associated Press reported that the Court "cast doubt" on the validity of the PCAOB, and that Justice Kennedy may be the swing vote in the case. Reuters reported that several justices "questioned . . . whether the President had enough authority" over the PCAOB and suggested that Congress may have to revisit the Sarbanes-Oxley Act if the Court overturns the PCAOB.

On the blogs, Lyle Denniston at SCOTUSblog focused on the justices’ questions about SEC’s control over the PCAOB. Orin Kerr at The Volokh Conspiracy wrote that "the day did not go well for the challengers . . . . The Justices seemed to think the Board didn’t have many powers and was pretty closely controlled by the SEC." Ilya Shapiro at Cato@Liberty wrote that the decision will turn on Justice Kennedy's vote. Shapiro also noted the oddity that the PCAOB brought its own attorney to oral argument, “begging the question: If PCAOB is subservient to the SEC and/or the president, why does it need its own counsel to represent its own views?”

Any guesses on how the case will be resolved? Did any of the justices show their hand?
It seemed pretty clear from the arguments that Chief Justice Roberts and Justices Scalia and Alito are concerned about the lack of presidential control over the PCAOB. It seemed equally clear that Justices Ginsburg, Breyer, and Sotomayor were less concerned. Justice Stevens seemed to search for a possible middle ground, and Justice Kennedy seemed genuinely to have an open mind. If, as some expect, Justice Kennedy becomes the swing vote, he gave little indication how he might decide. In his only question that may have tipped his hand, he asked General Kagan about the "history and tradition" of a PCAOB independent of the SEC—a statement that seems to suggest that PCAOB members’ appointments violated the Appointments Clause.

Going into the argument, I would have guessed that the Court would have focused more on the standing issue. In general, lack of attention to an issue says little about its role in the ultimate outcome of a case. But here, only Justice Ginsburg asked about standing, and she did not press the point hard. I still maintain that this is the most direct, the most obvious, and the doctrinally correct way to deal with the case, but, given the Court's inattention to the issue, the case is unlikely to turn on standing.

Because of a probable close split among the Justices, it seems unlikely that the Court will use this case to make a sweeping ruling on the Appointments Clause or separation of powers. Instead, the Court seems much more likely to rule quite narrowly—either in favor or against the PCAOB on the specific facts of this case—quite possibly sending the Act back to Congress for revision.