Raymond J. Lucia v. Securities and Exchange Commission
June.22.2018
The U.S. Supreme Court ruled 7-2 that the Securities and Exchange Commission’s administrative law judges have been serving in violation of the Constitution. In Raymond J. Lucia v. SEC (No. 17-130), the Court held that SEC ALJs are “Officers of the United States,” not regular federal employees. They therefore must be appointed under the Constitution’s Appointments Clause instead of hired through the civil service system. Lucia throws numerous recent SEC enforcement proceedings into doubt and, more broadly, raises questions about the constitutional status of ALJs in other agencies.
The Appointments Clause and the SEC ALJs
The Appointments Clause requires that certain important officials – those who are “Officers of the United States” – must be appointed through defined procedures. Art. II, § 2, cl. 2. Officials who are “principal” officers – such as ambassadors, Supreme Court justices, and heads of agencies – must be appointed by the President and approved by the Senate. Officials who are “inferior” officers can be appointed through other means. Congress may grant appointing authority for these inferior officers to “Heads of Department,” such as the SEC Commission, to the “Courts,” or to the President. No matter which method Congress chooses, it is exclusive: Officers may not be hired through the usual employment process. The issue in Lucia was whether SEC ALJs are inferior officers or regular civil service employees.
Traditionally, the SEC has considered its ALJs civil service employees. The SEC Commission delegated authority to staff members to hire the ALJs. Respondents to SEC enforcement actions had little reason to consider this quirk when SEC ALJs had relatively little power. But the ALJs’ power has expanded over the years, especially since Congress enacted Dodd Frank in 2010: SEC ALJs now adjudicate enforcement proceedings against private citizens in the SEC’s in-house court, and they can recommend severe sanctions. In the case of petitioner Raymond J. Lucia, an SEC ALJ conducted a bench trial and agreed with the SEC Enforcement Division that Lucia had violated the securities laws. The ALJ ordered Lucia to pay a money penalty and barred him from the securities industry for life.
The Court’s decision
The matter made its way to the Supreme Court, which overturned the SEC’s sanctions because of the ALJ’s unconstitutional appointment. Justice Kagan wrote for the Court, joined by Chief Justice Roberts and Justices Kennedy, Alito, Thomas and Gorsuch. Justice Breyer concurred in the decision but disagreed with the reasoning. Justice Kagan’s narrow opinion avoided articulating a new test for determining who qualifies as an inferior officer under the Constitution. Instead, she noted that further clarification was “unnecessary” because the Court’s 1991 decision in Freytag v. Commissioner “says everything necessary to decide this case.” In Freytag, the Court ruled that special judges of the Article I Tax Court were inferior officers. The judges there wielded a variety of powers, ranging from conducting trial-like proceedings – issuing subpoenas, ruling on evidence, and generally trying cases – to issuing preliminary decisions on the merits. Justice Kagan concluded in Lucia that the special tax judges in Freytag “are near-carbon copies of the [SEC] Commission’s ALJs.”
On its face, Lucia is limited in scope. The Court addressed only ALJs at the SEC and did not offer a general test for identifying the line between an “inferior Officer” and a mere employee. In fact, the Court recognized that the existing standards are “no doubt framed in general terms, tempting advocates to add whatever glosses best suit their arguments.” And the Court acknowledged that “maybe one day we will need to refine or enhance” the applicable test, but it concluded “that day is not this one.” But the concurrence by Justice Thomas, joined by Justice Gorsuch, urged the Court to take that step now, pushing to define “Officer” as “all federal civil officials ‘with responsibility for an ongoing statutory duty.’”
Finally, Lucia concluded by addressing the appropriate remedy. Not only does the petitioner (Mr. Lucia) get a new hearing, but the Court insisted that it must be before a different, properly appointed ALJ. The Court believed that the ALJ who initially presided over the case, even if validly appointed now, “cannot be expected to consider the matter as though he had not adjudicated it before.”
Implications for future cases
Because of its narrow scope, Lucia is likely to generate a wave of follow-on questions, beginning with its effects at the SEC. Respondents in SEC administrative actions that have not reached final judgment – or those who timely objected to their ALJs appointment and were awaiting the Court’s decision – will cite Lucia to challenge earlier ALJ rulings in those cases. The SEC will likely have to re-try those matters, and the respondents will likely demand different ALJs than those that oversaw their first proceeding. Respondents in some of those cases may also argue that it is too late because, in their cases, the statute of limitations has expired. And of course the SEC can re-try cases only after it fixes the constitutional defect, and its proposed solution is likely to encounter still more litigation. The SEC tried to resolve the Appointments Clause problem while Lucia was pending in the Supreme Court by issuing an order “ratifying” the earlier hiring of the current ALJs. Mr. Lucia argued that this order was invalid, but the Supreme Court saw “no reason to address that issue” because it was not clear that Mr. Lucia’s subsequent proceedings would necessarily be before an ALJ whose appointment was ratified. This issue is thus likely to be settled in future litigation.
A broader question is Lucia’s implications for ALJs at other agencies. The Court’s rationale may apply fairly directly to ALJs at agencies where ALJs also decide enforcement actions, such as the FDIC and CFPB – involving about 150 ALJs. Less clear is whether Lucia will apply to ALJs at the agencies that employ the great majority of ALJs. The Social Security Administration alone employs more than a thousand, but they rule on eligibility for benefits, not enforcement actions brought by the government. Inevitably we will see these questions in court as well.
Finally, there is sure to be a future controversy over how ALJs may be removed. Currently, ALJs receive tenure protection under the Administrative Procedures Act and may be removed “only for good cause” as “established and determined by the Merit Systems Protection Board.” Members of the MSPB, in turn, are also tenure-protected and can be removed only for good cause. This creates a problem: Under the Court’s decision in Free Enterprise Fund v. Public Company Accounting Oversight Board, dual layers of tenure protection – an Officer removable only for good cause as determined by another Officer also removable only for good cause – impermissibly infringes on the President’s Executive power. Free Enterprise Fund, however, added in a footnote that its holding did not necessarily apply to ALJs. Justice Breyer’s separate opinion in Lucia noted that this issue is bound to surface now that ALJs are officially inferior officers.
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In Raymond J. Lucia v. SEC, Orrick, Herrington & Sutcliffe LLP filed an amicus brief on behalf of JS Oliver Capital Management LP and Ian O. Mausner.
Summer associate James Sasso also contributed to this article.