The Untold Story of Lucia v. SEC: The Constitutionality of Agency Adjudications, by Ilan Wurman

by Guest Blogger — Friday, Apr. 6, 2018

In this symposium on Lucia v. SEC, most of the posts have, quite rightly, discussed what Lucia is actually about—whether ALJs are inferior officers for purposes of the appointments clause to the Constitution. And although the question is not before the Court, if they are inferior officers then that raises intriguing questions about for-cause removal under Free Enterprise Fund v. PCAOB, in which the Court held that two layers of for-cause removal (at least in that context) was unconstitutional.

These are incredibly interesting issues. But it is worth pausing to consider what Lucia v. SEC is not about, or rather could have been about. The issue is considered so settled and commonplace that there is virtually no hope litigating it today: the constitutionality of the agency adjudication that imposed a $300,000 fine on Mr. Lucia and a lifetime ban on his participation in the securities industry. Administrative agencies routinely adjudicate such cases and can even order one private party to pay another, as the NLRB frequently does.

The cases and the literature are confused about what exactly makes the adjudication of such claims in administrative agencies constitutional. Is it because they involve “public rights” instead of “private rights”—the “stuff of Westminster” that must be adjudicated in an Article III court? And what about the Seventh Amendment’s guarantee of a jury trial—foreign to administrative adjudications—in suits at common law?

What I propose to do in this post is attempt to synthesize the Court’s cases in this area of law—a notoriously difficult one—and sharpen the constitutional arguments respecting the kind of agency adjudication at issue in Lucia. If I am right that such adjudications at least as a matter of the Constitution’s original meaning are constitutionally suspect, I would like to propose a kind of scheme that might remedy the constitutional infirmities without abandoning the use of administrative expertise.

Because the nature of this forum requires that I keep this post (relatively) short, consider the following as merely my tentative view of the cases, the constitutional issues, and the proposed solution. All comments welcome.

The Easy Cases: Public Rights and Crimes

In CFTC v. Schor, Justice O’Connor famously noted that “our precedents in this area do not admit of easy synthesis.” However, there are at least some “easy” cases.

There is no dispute that the some classes of cases can be adjudicated by the Executive because they relate to “public rights.” Although there is disagreement as to the full extent of such public rights, they at minimum include claims for money against the government and the adjudication of rights actually belong to the public, like the disposal of public lands. The constitutional basis for the Executive’s right to adjudicate such cases is the government’s sovereign immunity. If the government need not consent to be sued—or if the government need not grant privileges at all—then this greater power to deny consent includes a lesser power to consent on certain conditions.

On the other hand, there’s also no dispute, or almost no dispute, that an agency cannot adjudicate a case that results in the deprivation of someone’s life or liberty, in the sense of imposing a prison or death sentence. These are a core part of the exclusively judicial power. Article III, § 3 of the Constitution provides that all trials for crimes shall be by jury; the Fifth Amendment’s Due Process Clause provides that the federal government shall not deprive any person of “life, liberty, or property without due process of law”; and, because federal criminal cases arise out of the laws of the United States, Article III, §§ 1-2 provide that such cases are part of the “judicial power” which must be vested in a Supreme Court or any inferior court that Congress ordains and establishes—either of which will have judges with salary and tenure protections.

The real debate in administrative law is between these two extremes—in the cases, like Lucia, which do not seem to be about public rights and which do not involve the deprivations of life or physical liberty. Day after day, administrative agencies assess a variety of fines, penalties, forfeitures, and assessments against private individuals, force them to pay money to other private parties, or deny them economic liberties all without affording them a day in a proper court. It is these cases that concern modern-day opponents of administrative adjudications.

Common-Law Claims

To assess the strength of the constitutional arguments against such adjudications, we must first understand the scope of this apparent exception to the Article III requirement. Often it is said that the Supreme Court permits private disputes to be adjudicated in administrative agencies, but not legislative courts, and the student of this field of law is left to ponder what can possibly be the difference between the two. I do not think that is the real distinction. Rather, the better reading of the cases is that there is a distinction (whether there should be a distinction is a matter we will come to subsequently) between legal actions that exist by virtue of the common law, and those that exist by virtue of new statutory rights and obligations.

I believe a fair reading of the cases shows that if the dispute involves an action that actually exists at common law, it cannot be adjudicated in a legislative court or administrative agency. That is the import of the Court’s seminal cases Northern Pipeline and Stern v. Marshall—notwithstanding the thorny exception of CFTC v. Schor.

In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., the Supreme Court held unconstitutional a provision of the Bankruptcy Act of 1978 that purported to give final judgment authority to non-Article III bankruptcy courts over state-created common-law private rights to recover contract damages because such private-rights disputes “lie at the core of the historically recognized judicial power.” In the words of Justice Rehnquist, seeking “damages for breach of contract, misrepresentation, and other counts which are the stuff of the traditional actions at common law tried by the courts at Westminster in 1789” must be tried in an Article III court.

In Commodity Futures Trading Commission v. Schor, however, the Court backtracked. The Court held that the CFTC could hear a state common-law counterclaim that was a “necessary incident to the adjudication of [the] federal claims” and that was “willingly submitted by the parties for initial agency adjudication.” And then in the more recent Stern v. Marshall, the Supreme Court reiterated its previous position and held that a bankruptcy court could not constitutionally adjudicate a defamation suit brought by a third party against the estate because it was a suit “under state common law between two private parties.” Of course, so was the suit at issue in Schor. Thus, to distinguish Schor, the Court in Marshall explained that Schor was a unique exception because there the common-law counterclaim and the administrative claim involved a “single dispute” in a “narrow class of common law claims” in a “particularized area of law” governed by a “specific and limited federal regulatory scheme” in which the agency has “obvious expertise,” and whose orders could only be enforceable by a district court.

Yet those are not very persuasive reasons to distinguish Schor. I know of no case other than Schor in which the Supreme Court has approved the adjudication of an actual common-law claim in any non-Article III tribunal. It is more likely that Schor was simply wrongly decided. Indeed, it must have been—because in actions that actually exist at common law, the right to a jury trial is preserved by the Seventh Amendment, which provides, “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved.”

Administrative agencies, of course, do not empanel juries; indeed the very point of administrative adjudications is for the administrative experts, not the juries, to be the factfinders. How is it, then, that the CFTC came to adjudicate the private common-law dispute in Schor? Because both parties consented to the jurisdiction of the CFTC, and the right to a jury is waivable. The petitioner in Schor only got sour on the constitutionality of the proceedings after he lost in the agency adjudication. In other words, there simply would have been no Article III holding in Schor had the petitioner requested a trial. Had he requested a trial, there would have been no choice but to have the adjudication in an Article III court that could empanel a jury.

Statutory Proceedings

If neither administrative agencies nor other non-Article III legislative courts may adjudicate private common-law disputes, where do they get power to adjudicate private disputes or those that lead to deprivations of property or economic liberty in cases like Lucia, involving the Occupational Safety and Health Act or the National Labor Relations Act or the Securities and Exchange Act?

In the seminal cases NLRB v. Jones & Laughlin Steel Corp. and Atlas Roofing v. Occupational Health and Safety Administration, the Supreme Court approved of administrative proceedings for civil fines and penalties brought by the United States against individuals for violations of newly created statutory obligations, notwithstanding the requirements of Article III and the Seventh Amendment. Jones & Lauhglin involved a proceeding by which the NLRB could determine whether there had been an unfair labor practice and could order backpay to wronged employees where appropriate; Atlas Roofing involved a proceeding by which OSHA could impose fines and penalties even if no employee had been harmed by any unsafe practice.

 The Court held that these cases involved a “public right”—the government was suing “in its sovereign capacity to enforce public rights created by statutes.” As explained, the extent of public rights is disputed, but extending public rights this far does not seem a convincing reason to avoid Article III adjudication. Ordinarily when we think of public rights, the right at issue belongs to the public as a whole, for example the public lands or the right to use an invention. Alternatively, the right belongs specifically to the government, as when there is a claim against the government. There was no such public right at issue in either Jones & Laughlin or Atlas Roofing; rather, there was an obligation created by a statute. Perhaps it can be argued that the “public right” was the right of others to safe working conditions or particular treatment by employers; but these do not seem to be rights belonging to the public as such, but rather statutory rights belonging to the specific individual employees.

If I am right that these adjudications do not involve public rights in the sense in which such rights are ordinarily understood, then these remain cases “arising under the laws of the United States” to which the judicial power of the United States extends—and which therefore require Article III adjudications. Indeed, that is why most federal laws that are violated in some way can only be enforced by bringing a proceeding in court. The “public rights” exception, even if it somehow applies to administrative statutes, surely does not apply to other civil federal statutes the can lead to monetary penalties, like the Sherman Act; yet there is nothing in principle distinguishing such statutes from “administrative” statutes, as both equally “arise under the laws of the United States.”

What about the right to a jury? Once it is determined that an Article III adjudication is required, I suppose there is no need to decide whether the Seventh Amendment would independently apply because the right to a jury is preserved in these courts in any event (unless the remedy is merely equitable). Conversely, if the suit need not be adjudicated in an Article III court, then perhaps it is not a “suit at common law” to which the Seventh Amendment applies. In other words, to the extent such suits must be heard by an Article III court, hearing them instead in an administrative proceeding would probably violate the Seventh Amendment as much as it would violate Article III, but it’s not clear that the Seventh Amendment does any independent work.

There is, however, yet another reason why these cases might pose a constitutional problem: because they are inconsistent with the historical understanding of the Due Process Clause of the Fifth Amendment. That Amendment provides that no one shall be deprived of life, liberty, or property without due process of law. In a recent and important article, Nathan Chapman and Michael McConnell argue that due process of law meant that an individual could be deprived of life, liberty, or property only after (1) Congress has enacted a general and prospective rule prohibiting particular conduct; (2) an independent Executive brings an enforcement proceeding; and (3) that proceeding occurs in an Article III court with all its procedural protections.

It is certainly not apparent what the distinction is between statutory rights and obligations and those deriving from common law for purposes of the Due Process Clause: liberty and property are equally at stake when the rules of obligation are derived from either source. Indeed, as explained, usually statutory rights and obligations are determined by federal courts—it’s merely under the “administrative” statutes that the Court permits an agency adjudication of such rights and obligations. Why administrative statutes are different from other statutes is also not clear for purposes of the Due Process Clause, as one can cause a deprivation of liberty or property as much the other.

In sum, there are certain classes of adjudication that are easy to characterize—truly public rights cases, criminal cases, and those existing at common law. The question of constitutionality of administrative adjudications arises with respect only to the permissibility of a non-Article III adjudication of rights and obligations arising from “administrative” statutes. But there does not seem to be anything distinguishing “administrative” statutes from common law claims for purposes of the Due Process Clause; and certainly nothing distinguishing such statutes from other federal statutes for purposes of all three relevant constitutional provisions.

A Proposed Solution: Agencies as Adjuncts

Critics of administrative adjudications on constitutional grounds usually argue that such adjudications must go out the window entirely. Apologists for administrative government, on the other hand, tend to see nothing wrong with such adjudications. What I want to suggest is that there is an unexplored solution to the problem of these agency adjudications—a middle way between the two standard positions.

The solution lies in the holding of Crowell v. Benson, the seminal administrative law case in which the Court held that an administrative tribunal could adjudicate questions of non-jurisdictional fact even in a private dispute between two private parties (there, an employer and employee under the federal workers’ compensation statute). Read most narrowly, the Court justified its holding by analogy to court adjuncts such as special masters, magistrates, and commissioners.

To be sure, the implication of the Court’s holding goes farther than merely justifying the Commission’s fact-finding on the basis of these historical analogs. The Court upheld the constitutionality of judicial deference to the factual findings of the Commission. In contrast, in the historical analogs the courts always could determine the factual matters de novo, simply relying on the expertise of the special masters or other court adjuncts.

Whatever the historical accuracy of the “adjunct” reading of Crowell, it is the reading to which the Supreme Court itself now adheres. In Stern v. Marshall, the majority of the Court explained: “[In Crowell,] the administrative adjudicator had only limited authority to make specialized, narrowly confined factual determinations regarding a particularized area of law and to issue orders that could be enforced only by action of the District Court. In other words, the agency in Crowell functioned as a true ‘adjunct’ of the District Court.”

Thus cabined, Crowell might supply a way forward for administrative adjudications. Perhaps agency fact-findings in specialized areas could be treated the same way as fact-findings by magistrate judges or special masters. The judges can rely on the expertise of the adjuncts, but ultimately must make the factual judgments as well as the legal ones for themselves.

The Court did something just like this in the bankruptcy context after Stern v. Marshall was decided. In Executive Benefits Insurance Agency v. Arkison, the Court allowed bankruptcy courts to continue hearing private-rights claims, but their findings of fact and conclusions of law would have to be submitted to a district court for de novo review through the traditional streamlined process for the reports and recommendations.

The exact same process could apply to agency adjudications of statutory rights and obligations. This may seem like a radical idea and a waste of administrative and judicial resources, but it is neither. We already permit such reports and recommendations not only in bankruptcy cases, but in nearly all civil cases by magistrate judges. A magistrate judge’s findings do not get deference, but the process is very much streamlined. The parties must make specific objections to particular parts of the findings, and the district judge need only address those particular objections. This creates a significantly streamlined process while preserving the core of the judicial power. And we already permit Article III judicial review of almost all administrative adjudications in any event at some level. The proposal here would simply require a streamlined process of de novo review of the factual findings (as well as the legal findings—but that is another matter).

Allowing ALJs like the one in Lucia to serve as adjuncts seems like the best solution. That way they can make specialized factual findings in areas of their administrative expertise, but courts will have ultimate decisional authority over questions of both fact and law. Although this may seem like a blending of executive and judicial power, there has never been any obstacle to judicial officers also holding executive appointments, with John Jay providing a famous example. This solution would be workable and more constitutional, while preserving an important role for administrative expertise.

Ilan Wurman is a nonresident fellow at the Stanford Constitutional Law Center and the author of A Debt Against the Living: An Introduction to Originalism. He will be joining the Sandra Day O’Connor College of Law at Arizona State University this Fall, where he will be teaching administrative law and constitutional law. You can follow him on twitter @ilanwurman.

This post is part of a symposium on Lucia v. SEC. All of the posts can be read here.

One thought on “The Untold Story of Lucia v. SEC: The Constitutionality of Agency Adjudications, by Ilan Wurman

  1. Nick Dranias

    This is an outstanding analysis and a good proposal in theory. I just wonder about implementation. How would ALJs be conscripted into Article III service? By statute (ala the Federal Magistrates Act)? Or could the Supreme Court simply “deputize” them by ruling in an appropriate case, based on an application of the constitutional avoidance doctrine to construing whatever statute created the ALJ’s authority, that they are acting in such capacity? Or could the agency itself promulgate a rule subjecting its ALJs to the contemplated Article III oversight as a type of procedural protection? If the underlying premise of the solution is that Article III authority is required constitutionally for the ALJs to act on certain case types, it would seem like the latter two implementations would be possible.

    Reply

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