Jeffrey McCoy and Oliver Dunford are attorneys at Pacific Legal Foundation in Sacramento, California. They authored an amicus brief filed by Pacific Legal Foundation in support of Raymond Lucia in Lucia v. Securities and Exchange Commission. Pacific Legal Foundation recently filed three lawsuits on behalf of nine clients challenging the issuance of Food and Drug Administration regulations as violating the appointments clause.
At first blush, Lucia v. SEC may seem like a case that only those in the financial industry, and certain individuals in the legal community, would take interest in. But the Supreme Court’s opinion could have far reaching consequences for the federal government’s various administrative agencies. At issue in Lucia was the interpretation of the appointments clause of the Constitution, which lays out certain procedures for appointing “officers of the United States.”
Raymond J. Lucia is a financial advisor who marketed a retirement savings strategy. The Security and Exchange Commission charged Lucia with violating the Investment Advisers Act, alleging that he misled prospective clients about his investment strategy. His case was heard by an administrative law judge, Cameron Elliot, who issued a decision concluding that Lucia had violated the act and imposing a $300,000 penalty and a lifetime ban from the investment industry.
On appeal to the commission, Lucia argued that the ALJ was an “officer of the United States.” Therefore, he continued, because the judge was not appointed by the president or the head of a department, but rather by the commission’s staff, the ALJ’s proceedings violated the appointments clause. The Supreme Court, in an opinion by Justice Elena Kagan, agreed with Lucia that the ALJ was an officer of the United States, rather than a mere employee.
The Supreme Court’s decision lays out the key criteria for what constitutes an “officer of the United States.” An officer is an individual who holds a “continuing position established by law” and who exercises “significant authority pursuant to the laws of the United States.” The parties asked the court to clarify the “significant authority” part of the test, but the court declined. The court stated that the SEC’s ALJs “are near-carbon copies” of the tax-court judges the court ruled were “officers” in Freytag v. Commissioner in 1991, so there was no need to further clarify what constitutes “significant authority.”
The Supreme Court’s opinion therefore leaves open who in the federal government is an officer. Under the broad test articulated by the court, many other civil servants may also be officers who have not been properly appointed to their positions. Regulated individuals and companies are likely to raise appointments clause claims in future regulatory proceedings. In fact, at oral argument, Justice Stephen Breyer and Justice Sonia Sotomayor expressed some concern about how Lucia might impact other administrative proceedings.
It is likely that ALJs in other agencies are also officers under the meaning of the appointments clause. There are over 1,300 ALJs dispersed over 30 federal agencies. Many of these ALJs are “near-carbon copies” of the SEC’s ALJs, who preside over adversarial hearings, take testimony, conduct trials, rule on the admissibility of evidence and have the power to enforce compliance with discovery orders.
The “significant authority” criterion suggests that federal employees other than ALJs may also be officers. Often, agency staff members issue rules and regulations that bind private individuals and companies. There should be little doubt that issuing such rules is an exercise of “significant authority.” Indeed, rulemaking was explicitly listed as a “significant authority” when that term was first used by the Supreme Court in Buckley v. Valeo in 1976.
Furthermore, it may not matter whether these rules and regulations are “final decisions” or whether the decisions must be approved by others in the agency. As Kagan stated in a footnote, final decision-making authority is not an essential component of officer status. Even so, there are some career employees who were never properly appointed as officers who have been given final rulemaking authority and have exercised it in excess of 200 times.
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If other individuals in the federal government are officers, how they are appointed will depend on whether they are inferior or principal officers. This distinction was not discussed in Lucia because the parties agreed that the ALJ in this case was an inferior officer. But the distinction will be important in the future. According to the appointments clause, principal officers can be appointed only by the president, with the advice and consent of the Senate. But Congress may — by law — allow the president alone, or a court, or a department head to appoint inferior officers.
In a separate opinion, Breyer touched on this issue. He argued that the Supreme Court should have resolved the case on statutory — not constitutional — grounds. According to Breyer, the Administrative Procedure Act controls the appointment of inferior officers in the SEC, and the APA does not allow the SEC to delegate that task without a formal written delegation. Because ALJ Elliot had been “appointed” by SEC staff members, the appointment was ineffective. Therefore, Breyer concluded, the court should have invoked the constitutional-avoidance rule and held merely that ALJ Elliot’s “appointment” violated the APA. The constitutional question, he said, can wait.
Breyer’s desire to avoid the constitutional question was based in part on what he believes to be an important aspect of an ALJ’s role in any administration — the ALJ’s independence. In Free Enterprise Fund v. Public Company Oversight Board, the Supreme Court considered whether a president may be “restricted in his ability to remove a principal officer, who is in turn restricted in his ability to remove an inferior officer, even though that inferior officer determines the policy and enforces the laws of the United States.” The court answered that question in the negative. As Breyer points out, the SEC’s ALJs enjoy a similar multi-level, for-cause protection: An ALJ can be removed only for cause by the Merit Systems Protection Board, whose members in turn can be removed by the president only for cause. Therefore, if Free Enterprise Fund applies to ALJs, and if ALJs are officers, then their removal protections may be unconstitutional. According to Breyer, this “would risk transforming administrative law judges from independent adjudicators into dependent decisionmakers, serving at the pleasure of the Commission.”
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Today’s opinion is a positive step. From now on, ALJs in the federal government who exercise “significant authority” must be appointed under the appointments clause. This should result in more scrutiny of those appointed — and those who make the appointments. An accountable government is necessary to protect individual liberty.
But as we argued in Pacific Legal Foundation’s amicus brief, the Supreme Court should have used this opportunity to clarify the definition of “officers of the United States.” The original meaning of the appointments clause — identified in the Supreme Court’s early jurisprudence — broadly included federal employees who had an ongoing duty on behalf of the federal government. Today’s opinion simply reaffirmed the “test” set forth in the court’s 1991 Freytag decision.
In any event, it seems likely that the latest opinion will not be the last word on “officers” in general or on the status of ALJs in particular. The Supreme Court has left for another day who in the federal government exercises “significant authority” and the distinction between principal and inferior officers. Breyer has raised interesting questions about the court’s precedents on ALJs. And as Thomas pointed out, in a concurring opinion joined by Gorsuch, neither today’s opinion nor the court’s precedents have clearly defined what is necessary to make someone an officer of the United States.