Fallout from Lucia – Radioactive?, by William Funk

by Guest Blogger — Wednesday, Oct. 24, 2018

Readers of Notice & Comment are undoubtedly familiar with Lucia v. Securities and Exchange Commission, in which the Supreme Court held that Administrative Law Judges (ALJs) in the SEC were inferior officers, not employees. As a result, they had to be appointed in accordance with the Appointments Clause of the Constitution. In relevant part, that clause states that “Congress may by law vest the appointment of such inferior officers, as they think proper, . . . in the heads of departments.” The Court did not appear to believe its decision would cause any particular problem. After all, Congress has provided by statute for agencies to appoint ALJs, and the Court had previously held that the SEC is a department for purposes of the Appointments Clause, see Free Enterprise Fund v. Public Company Accounting Oversight Board. Accordingly, all the SEC needed to do was to have the Commission formally appoint the ALJs who were already working there. The fact that its opinion effectively made unconstitutional almost all the ALJs in the whole government did not give the Court pause. Should it have?

Justice Breyer in dissent noted one problem raised by the decision. In Free Enterprise Fund, the Court had found that a double for-cause removal limitation – when an inferior officer can only be removed for cause by a principal officer who also can only be removed for cause – is unconstitutional, and the remedy there was to strike the removal limitation on the inferior officer. Many ALJs, including those in the SEC, actually have triple for-cause removal protection. They can only be removed for cause by the Merit Systems Protection Board, whose members can only be removed for cause, upon a complaint by the employing agency, whose members can only be removed for cause. If Free Enterprise Fund’s conclusion was applied to ALJs, ALJs could be removed at will by the head of their agency. However, the independence of ALJs from supervision by their agency was integral to their creation in the APA. To remove that independence would make an essential change to APA adjudication, indeed, so extreme that it would raise the serious question whether elimination of the statutory independence is not severable from the use of ALJs in APA adjudication altogether. In other words, the effect might well be to require all APA adjudications to be made initially by the agency itself, not by ALJs.

There are work-arounds to avoid applying Free Enterprise Fund’s conclusion to ALJs. The more radical was argued by the government in Lucia despite the Court’s failure to grant certiorari on the question. The government suggested that the “for cause” limitation should be narrowly construed to allow the removal of ALJs for “misconduct or failure to follow lawful agency directives or to perform his duties adequately.” Such a standard probably describes for-cause removal protections for civil service employees, but leaving to the agency to decide whether an ALJ is adequately performing his duties in terms of his decisions would seriously erode the independence of ALJs. A less radical solution would be simply to distinguish ALJs from the PCAOB board members in Free Enterprise Fund. The Court took pains to point out that the PCAOB engaged in rulemaking, enforcement, and adjudication. ALJs, however, only engage in adjudication, and the Court has in the past given special consideration to the need for independence by persons whose sole job is adjudication. See Wiener v. United States.

But the effect of Free Enterprise Fund on ALJs’ tenure is hardly the only problem arising from Lucia. The analysis in Lucia rested on the correspondence between ALJs and Special Trial Judges of the United States Tax Court. In Freytag v. Commissioner, the Supreme Court held that the responsibilities involved in presiding over adversarial hearings as well as the significant discretion involved in carrying out those functions meant that the Special Trial Judges exercised “significant authority pursuant to the laws of the United States” – the test for being an officer of the United States as explained in Buckley v. Valeo. It was the fact that ALJs essentially had the same responsibilities and discretion that led the Court to declare them officers, rather than employees. Well, then, what about all the other administrative judges in the executive branch, who outnumber ALJs by a wide margin?

For example, Immigration Judges in the Executive Office for Immigration Review of the Department of Justice are not ALJs, but like ALJs they exercise like responsibilities in presiding over adversarial hearings and exercise discretion in doing so. To classify them as inferior officers rather than employees, which is what they have always been considered, should not cause a problem. Their office is created by law and requires appointment by the Attorney General.

Not so, the administrative judges within the Environmental Protection Agency (EPA). Regional Administrators designate a Regional Judicial Officer to preside over hearings carried out under certain statutory provisions that do not require APA adjudication. Nevertheless, EPA regulations authorize the officer to perform all the responsibilities that ALJs perform, so it would appear these presiding officers also must be officers of the United States and therefore to be appointed by the Administrator of EPA, not Regional Administrators.

The Department of Interior by regulation has created several different appeals boards. As appeals boards, they do not exercise those judge-like functions described by the Court in Freytag and Lucia. However, they review the decisions of ALJs and “hear, consider, and decide . . . matters as fully and finally as might the Secretary.” It would be passing strange if the officials who review the decisions of inferior officers are not themselves at least inferior officers. It does not appear that the members of the appeals boards have been appointed by the Secretary of Interior, but even if he they are, there still would be a problem. The Appointments Clause states that in order for someone to be an “officer,” one must hold an office “established by law,” and no statute creates these appeals boards. One might argue that a regulation creating the appeals boards is “law” for purposes of the Appointments Clause, but this is not likely the correct interpretation. Immediately following the Appointments Clause’s reference to offices “established by law,” it continues by saying “Congress may by law” vest appointment of inferior officers in heads of departments. The clear implication is that “by law” in the Clause refers to a statute passed by Congress.

Interior is not alone in this. Other agencies have similar problems. For example, the Environmental Protection Agency (EPA) has an Environmental Appeals Board, which likewise hears appeals from cases heard by EPA ALJs. The Administrator of EPA “designates” persons, apparently from existing EPA employees, to serve as members of the Board. Whether “designating” an employee to serve on the Board qualifies as “appointing” an officer is an open question. And again, no statute creates the Board, so this office has not been “established by law.”

The Federal Energy Regulatory Commission (FERC) presents a different problem. The Chairman of FERC has appointed FERC’s ALJs, but is the Chairman of FERC a “head of a department” within the meaning of the Appointments Clause. In both Free Enterprise Fund and Lucia the Court said with respect to the SEC’s ALJs that the whole Commission would qualify as the head of a department. At least one lower court case has also referred to appointment by the entire body of the agency, see Jones Brothers, Inc. v. Secretary of Labor. These cases would suggest that only the entire FERC could constitute the head of a department for purposes of appointments of inferior officers. After all the head of a single-headed department has all the authority of the agency, but only the whole Commission has all the authority of the agency. Nevertheless, the Department of Energy Organization Act specifically makes the Chairman “responsible on behalf of the Commission for . . . the appointment and employment of [ALJs] in accordance with the provisions of title 5, United States Code.” 42 U.S.C. § 7171(c). This provides a good argument for the Chairman to be the head of the department under the Constitution, at least for appointing ALJs.

But wait, FERC has another problem. The Supreme Court has said that a “department” is “a freestanding component of the Executive Branch, not subordinate to or contained within any other such component.” See Free Enterprise Fund. FERC, however, is not a freestanding component of the Executive Branch, and it is contained within another component; specifically, it is “established within the Department [of Energy].” 42 U.S.C. § 7171(a). Thus, it might be argued that it is the Secretary of Energy who is the “head of the department” who must appoint FERC ALJs. Congress, however, established FERC as “an independent regulatory commission.” Id. Moreover, its statute says that in the performance of its functions FERC shall not be responsible to or subject to the supervision of the Department of Energy (DOE). 42 U.S.C. § 7171(d). So, FERC is not subordinate to DOE. Given the Court’s seeming general willingness to read “department” broadly in the Appointments Clause, FERC’s effectively independent status should probably suffice to render it such a department. But who knows?

Finally, Lucia’s rendering unconstitutional virtually all then existing ALJs predictably gave rise to a wide range of new appeals from agency decisions based on the claim that the ALJ in the case was unconstitutionally appointed. More often than not, however, the claim had not been raised before either the ALJ or the agency, because the party was unaware of the issue until Lucia brought it to their attention. At this point, it appears that the lower courts are split on whether to enforce issue exhaustion against the parties. Compare Jones Brothers, Inc. v. Secretary of Labor, with Davidson v. Commissioner, 2018 WL 4680327 (M.D. Tenn. 2018).

In short, Lucia spawned a host of questions that will likely take years to sort out. And in the mean time, we can ponder whether the invitation made by Justices Thomas and Gorsuch in Lucia to totally rewrite (and broaden) the notion of what is an officer of the United States will be taken up by three other justices.

William Funk is the Lewis & Clark Distinguished Professor of Law, Emeritus, at Lewis & Clark Law School

Cite As: Author Name, Title, 36 Yale J. on Reg.: Notice & Comment (date), URL.

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One thought on “Fallout from Lucia – Radioactive?, by William Funk

  1. William M Yeatman

    Very cool! Inter alia, I had no idea FERC was in the Energy Department, and it perplexes me how an independent agency could exist within an executive department.

    Been reading a bunch of your work recently in course of learning about FERC & SEC’s enforcement regimes for market manipulation, which are two terribly broken e.g.s of administrative adjudication.

    Reply

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