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Kavanaugh on the executive branch: PHH Corp. v. Consumer Financial Protection Bureau

Judge Brett Kavanaugh wrote two opinions in PHH Corp. v. Consumer Financial Protection Bureau: a panel opinion declaring an aspect of the bureau to be unconstitutional and an opinion dissenting from the en banc U.S. Court of Appeals for the District of Columbia Circuit’s decision overruling his panel opinion. In both opinions, Kavanaugh expressed serious skepticism of the regulatory state while celebrating a view of the Constitution that vests in the president an extensive degree of unilateral authority over the executive branch’s enforcement of federal laws. Those views have been lauded by conservative commenters who celebrate Kavanaugh’s “[t]aming” of “the administrative state” — and by the White House, which has praised his record of “protect[ing] American businesses from illegal job-killing regulation.” Commenters on the left see in Kavanaugh’s PHH opinions a hostility to the CFPB’s mission more than to its structure, detecting an anti-consumer bias and general hostility to financial regulation.

In 2010, in response to the financial crisis of 2008, Congress enacted the Dodd-Frank Wall Street Reform Act and Consumer Protection Act. Among other things, the Dodd-Frank Act created a new administrative agency: the Consumer Financial Protection Bureau. Congress charged the CFPB with improving transparency and accountability in the market for consumer financial products, including enforcing a broad array of consumer-protection laws. Because the new agency was created to respond to a financial crisis and would operate in what Congress viewed as a fast-changing world of consumer finance, Congress designed it to become operational promptly and to act efficiently by providing for a single director to lead the CFPB, rather than a multi-member body. And, in order to give the agency some degree of independence and to promote stability and confidence in the country’s financial system, Congress provided that the director will serve a five-year term and can be removed by the president only for cause (i.e., for inefficiency, neglect of duty or malfeasance in office). Independent agencies are nothing new — the Federal Communications Commission, the Securities and Exchange Commission, the Federal Trade Commission, the National Labor Relations Board and the Federal Energy Regulatory Commission all operate independently in the sense that the heads of those agencies are removable only for cause. But each of those agencies is headed by a multi-member body, with the idea that the members of the leadership body will serve as a check on each other.

This case arose out of the CFPB’s 2014 civil enforcement action against PHH Corp., a mortgage lender. CFPB determined that PHH had violated the Real Estate Settlement Procedures Act and the director ultimately entered a $109 million disgorgement order against the company. PHH challenged the order in the D.C. Circuit and a panel of that court vacated the order in an opinion written by Kavanaugh. Over the dissent of Judge Karen Henderson, the divided panel held that providing for-cause protection to the CFPB director violates the separation of powers principles embodied in the Constitution. (The panel also unanimously overturned the director’s interpretation of RESPA.)

The opening line of Kavanaugh’s opinion nicely captures his take on the issue: “This is a case about executive power and individual liberty.” In Kavanaugh’s view, the power of the executive branch to enforce federal laws poses “a grave threat to individual liberty” — a threat that is held in check by the Framers’ decision to “lodge[] full responsibility for the executive power in the President of the United States, who is elected by and accountable to the people.” That structural “unitary Executive,” Kavanaugh explained (borrowing from Justice Antonin Scalia), was intended “to preserve individual freedom.” Although he acknowledged that the president executes the laws with the assistance of subordinate officers, he emphasized that the president “must be able to control subordinate officers in executive agencies” in order “[t]o carry out the executive power and be accountable for the exercise of that power.”

By way of background, the constitutional issues in this case are governed by a small universe of Supreme Court decisions. Two of them — Myers v. United States, decided in 1926, and Humphrey’s Executor v. United States, decided in 1935 — set up a general rule and an exception. The court in Myers struck down a law that prevented the president from removing certain postmasters without the advice and consent of the Senate. In so doing, the court established the principle that the president must have authority to supervise, direct and remove at will subordinate officers in the executive branch. Nine years later, in Humphrey’s Executor, the court established an exception to that rule for independent agencies when it upheld a law giving for-cause protection to FTC commissioners. In the ensuing decades, the court has upheld restrictions on the president’s ability to remove executive officers in a handful of other cases, including 1958’s Wiener v. United States, which upheld for-cause protection for members of the War Claims Commission, and 1988’s Morrison v. Olson, which upheld restrictions on the president’s ability to remove the independent counsel. More recently, in Free Enterprise Fund v. Public Company Accounting Oversight Board, the court in 2010 struck down a restriction on the president’s authority to remove members of the PCAOB (an agency within the SEC), who could be removed only for cause by an order of the SEC, whose members could themselves be removed only for cause.  Notably, Kavanaugh had dissented from the D.C. Circuit decision in Free Enterprise Fund, which upheld the same restrictions.

Applying those precedents, Kavanaugh concluded that the exception in Humphrey’s Executor for independent agencies is limited to agencies headed by multimember bodies. He emphasized that, until recently, no other independent agency has been headed by a single director. In his view, “when measured in terms of unilateral power, the Director of the CFPB is the single most powerful official in the entire U.S. Government, other than the President.” Emphasizing the lack of any “settled historical practice of independent agencies headed by single Directors who possess the substantial executive authority that the Director of the CFPB enjoys,” Kavanaugh explained that the CFPB’s “departure from the settled historical practice requiring multi-member bodies at the helm of independent agencies” “threatens individual liberty.” Writing for the panel, Kavanaugh “conclude[d] that the CFPB is unconstitutionally structured because it is an independent agency headed by a single Director.”

The CFPB (acting through its own attorneys, i.e., without support from the Department of Justice) filed a petition for rehearing en banc and the petition was granted. A divided court left intact the portion of the panel decision addressing RESPA, but overruled the panel’s holding that the CFPB director’s for-cause protection from removal is unconstitutional. The en banc court produced seven different opinions, including an opinion for the court written by Judge Cornelia Pillard and a dissenting opinion from Kavanaugh. Pillard’s opinion emphasized the tradition of independence among executive branch agencies and officers charged with financial regulation and concluded that the CFPB fit well within that tradition. In her view, Congress acted within its authority when it “decided that the CFPB needed a measure of independence and chose a constitutionally acceptable means to protect it.” She explained that the director’s for-cause protection is exactly the same as was approved in Humphrey’s Executor and concluded that “the CFPB Director’s autonomy is consistent with a longstanding tradition of independence for financial regulators, and squarely supported by established precedent.” Pillard rejected the types of liberty concerns advanced by Kavanaugh, noting that “[i]t remains unexplained why we would assess the challenged removal restriction with reference to the liberty of financial services providers, and not more broadly to the liberty of the individuals and families who are their customers.” Kavanaugh wrote a dissenting opinion that closely tracked his earlier panel opinion.

Although PHH’s journey is over (no party sought Supreme Court review), the constitutional issue it presents may well find its way to the Supreme Court one day soon. Several pending cases in other federal courts of appeals raise the same challenge, including an appeal in the U.S. Court of Appeals for the 2nd Circuit from a district court decision that expressly adopted portions of Kavanaugh’s en banc dissent in PHH and declared the CFPB’s structure to be unconstitutional. And at least one challenge to the Federal Housing Financial Agency — which, like the CFPB, was established in part to respond to the 2008 financial crisis and is headed by a director who is removable only for cause — is working its way through the federal courts. It is safe to say that we can predict how a Justice Kavanaugh would approach those cases.

More generally, we can discern from Kavanaugh’s opinions in PHH a deep skepticism of independent agencies, which he describes as “a headless fourth branch of the U.S. Government” that collectively “pose a significant threat to individual liberty and to the constitutional system of separation of powers and checks and balances.” His opinions also reveal a hostility to the idea of an executive branch official who can exercise authority without answering to the president — even when the whole point of that official’s job is to act independently. In PHH, Kavanaugh described the now-defunct “independent counsel experiment” at issue in Morrison as “a mistake,” “an unconstitutional departure from historical practice and a serious threat to individual liberty.” That skepticism could come into play if Kavanaugh were presented with a case involving the special counsel, whom the president cannot fire directly and who is subject to removal by the acting attorney general only for cause.

Kavanaugh’s PHH opinions also shed light on his views about liberty. He plainly views liberty as freedom from regulation, even when that regulation is directed at corporations with the stated purpose of protecting individuals. Pillard explained in her en banc opinion that Congress designed the CFPB based on the view that “markets’ contribution to human liberty derives from freedom of contract, and that such freedom depends on market participants’ access to accurate information, and on clear and reliably enforced rules against fraud and coercion.” That is certainly not Kavanaugh’s view; he sees a threat to liberty in any executive branch official who can act unilaterally and who is not the president.

If Kavanaugh is confirmed to the Supreme Court, we are certain to hear more from him about executive branch authority and individual liberty. And when we do, the themes that run through his PHH opinions are likely to guide his decision-making.

Recommended Citation: Sarah Harrington, Kavanaugh on the executive branch: PHH Corp. v. Consumer Financial Protection Bureau, SCOTUSblog (Aug. 8, 2018, 10:25 AM),