D.C. Circuit Review – Reviewed: Circuit Split!

by Aaron Nielson — Wednesday, Dec. 28, 2016@Aaron_L_Nielson

Extra, extra — Tenth Circuit explicitly disagrees with D.C. Circuit regarding SEC administrative law judges.

This is a special, midweek edition of D.C. Circuit Review — Reviewed. The Tenth Circuit just created a circuit split with the D.C. Circuit about an important constitutional question. Earlier this year, the D.C. Circuit held that SEC Administrative Law Judges (or ALJs) are employees, not “officers” for purposes of Article II of the Constitution. Today, the Tenth Circuit considered that analysis and explicitly rejected it.

By way of background, here is the Appointments Clause from Article II:

[The President] shall nominate, and by and with the advice and consent of the Senate, shall appoint ambassadors, other public ministers and consuls, judges of the Supreme Court, and all other officers of the United States, whose appointments are not herein otherwise provided for, and which shall be established by law: but the Congress may by law vest the appointment of such inferior officers, as they think proper, in the President alone, in the courts of law, or in the heads of departments.

The Supreme Court has explained that an “officer” is “any appointee exercising significant authority pursuant to the laws of the United States.” The dividing line between “inferior” and “principal” officers can be tricky (though it seems that the Court has landed on whether the officer has a supervisor, which test makes a lot of sense), but for purposes here, it is largely* irrelevant because the SEC concedes that its ALJs are not appointed by the President, a court of law, or a head of a department. Instead, quoting the Tenth Circuit, “[t]he SEC’s Chief ALJ hires” ALJs from a list prepared elsewhere “subject to approval and processing by the [SEC’s] Office of Human Resources.” Accordingly, the constitutional question is whether SEC ALJs are mere employees, which are not subject to the restrictions set out in Article II.

The D.C. Circuit looked at this scheme and said it was constitutional because SEC ALJs are not “officers” at all. In Raymond J. Lucia Companies, Inc. v. SEC, Judge Rogers (joined by Judges Pillard and Wilkins) concluded that “the Commission’s ALJs neither have been delegated sovereign authority to act independently of the Commission nor, by other means established by Congress, do they have the power to bind third parties, or the government itself, for the public benefit.” In other words, because SEC ALJs do not issue final decisions, they are not “officers of the United States.” The panel’s analysis largely tracked the analysis from an earlier D.C. Circuit case called Landry v. FDIC, which held that certain ALJs were not “officers” because they lacked “power of final decision.”

Judge Randolph, relying on the Supreme Court’s decision in Freytag v. Commissioner (which held that “special trial judges” in the Tax Court are officers), disagreed with that analysis in Landry. Although acknowledging that the Supreme Court in Freytag mentioned the fact that the “special trial judges” there could sometimes issue final decisions, Randolph reasoned that “the [Supreme] Court clearly designated this as an alternative holding.” Since Landry, Randolph has continued to hold to his view that ALJs can be “officers”; indeed, he concurred in PHH Corp. v. CFBP to make that very point: “The majority opinion in Landry disagreed with my position, but petitioners have preserved the issue for review by this court en banc or by the Supreme Court on certiorari.”

Today, in a case called Bandimere v. SEC, the Tenth Circuit (per Judge Matheson) disagreed with the D.C. Circuit’s decisions in Lucia and Landry. Although there is more going on in the Tenth Circuit’s decision, this strikes me as the heart of the analysis:

This past August, the D.C. Circuit addressed the same question we face here. Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277, 283 (D.C. Cir. 2016). The D.C. Circuit followed Landry and concluded that SEC ALJs are employees and not inferior officers. Id. at 283-89. The holding was based on the court’s conclusion that SEC ALJs cannot render final decisions. Id. at 285 (“[T]he parties principally disagree about whether [SEC] ALJs issue final decisions of the [SEC]. Our analysis begins, and ends, there.”). We disagree with the SEC’s reading of Freytag and its argument that final decision-making power is dispositive to the question at hand.

First, both the agency and Landry place undue weight on final decision-making authority. Freytag stated the government’s argument that STJs should be deemed employees when they lacked the ability to enter final decisions “ignore[d] the significance of the duties and discretion that [STJs] possess.” 501 U.S. at 881. The Supreme Court held STJs are inferior officers because their office was established by law; their duties, salaries and means of appointments were “specified by statute”; and they “exercise[d] significant discretion” in “carrying out . . . important functions.” Id. at 881-82.

….

After stating its holding that STJs are inferior officers based on their duties, the Freytag Court responded to the government’s standing argument. 501 U.S. at 882. The Court stated, “Even if the duties of special trial judges under subsection (b)(4) were not as significant as we and the two courts have found them to be, our conclusion would be unchanged.” Id. (emphasis added). This sentence reaffirms what the Court previously concluded: it “found” the duties of the STJs are sufficiently significant to make them inferior officers. Id. That conclusion did not depend on the STJs’ authority to make final decisions.

….

The SEC reads Freytag as elevating final decision-making authority to the crux of inferior officer status. But properly read, Freytag did not place “exceptional stress” on final decision-making power. To the contrary, it rebutted the government’s argument that STJs were inferior officers when they lacked final decision-making power (i.e., § 7443A(b)(4) cases) because the argument “ignore[d] the significance of the duties and discretion that [STJs] possess.” Freytag, 501 U.S. at 881.

Final decision-making power is relevant in determining whether a public servant exercises significant authority. But that does not mean every inferior officer must possess final decision-making power. Freytag’s holding undermines that contention. In short, the Court did not make final decision-making power the essence of inferior officer status. Nor do we.

Judge McKay opened his dissent this way: “Notwithstanding the majority’s protestations otherwise, today’s opinion carries repercussions that will throw out of balance the teeter-totter approach to determining which of all the federal officials are subject to the Appointments Clause.” Judge Briscoe (agreeing with Judge Randolph) concurred to specifically address the dissent.

It is not often to see such a sharp split between the circuits, especially about such an important question. It is safe to say that the Supreme Court will pay attention. I suspect that Judge Randolph is pleased. (For what it is worth, Randolph’s reading of Freytag is pretty compelling, though, alas, Freytag obviously is not as clear as it could be.)

* The 10th Circuit did rely on the distinction to show that the Supreme Court “consider[s] final decision-making power as relevant to the difference between a principal and inferior officer, not the difference between an officer and an employee.”

While still at Bancroft PLLC, Paul D. Clement, Jeffrey M. Harris, and Christopher G. Michel filed an amicus brief in the Tenth Circuit’s case. They are now at Kirkland & Ellis LLP, where I am of counsel.

 

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About Aaron Nielson

Professor Nielson is an associate professor at Brigham Young University Law School, where he teaches and writes in the areas of administrative law, civil procedure, federal courts, and antitrust. He currently serves as a public member of the Administrative Conference of the United States, a federal agency that studies the administrative process and makes recommendations on ways to improve it. He also co-chairs the Rulemaking Committee of the American Bar Association’s Section of Administrative Law & Regulatory Practice. Previously he chaired the Section's Antitrust & Trade Regulation Committee. Before joining the academy, Professor Nielson was a partner in the Washington, D.C. office of Kirkland & Ellis LLP (where he remains of counsel). He also has served as a law clerk to Justice Samuel A. Alito, Jr. of the U.S. Supreme Court, Judge Janice Rogers Brown of the U.S. Court of Appeals for the D.C. Circuit, and Judge Jerry E. Smith of the U.S. Court of Appeals for the Fifth Circuit. Follow him on Twitter @Aaron_L_Nielson.

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