SEC ALJs Before the Supreme Court: Will the Court Take The Issue?

The validity of the SEC ALJs’ under the Constitution’s Appointments Clause is a critical issue the Supreme Court is considering for addition to its docket this term which will begin on the first Monday in October. Petition for Writ of Certiorari, Raymond J. Lucia v. SEC, No. 17-130). The issues at stake are significant in view of the potential impact and remedies that might flow from a decision adverse to the Commission as discussed here.

To date the Tenth Circuit has held that the appointments for SEC ALJs fail Constitutional muster. Brandimere v. SEC, 844 F. 3d 1168 (10 Cir. 2016). The D.C. Circuit reached the opposite conclusion earlier. Landry v. FDIC, 204 F. 3d 1125 (D.C. Cir. 2000). When the question was recently heard en banc, the Circuit Court split, leaving the prior panel decision which upheld the appointment of SEC ALJs in place, following Landry. Raymond J. Lucia Cos. Inc. v. SEC, 2017 WL 2727019 (D.C. Cir. June 26, 2017)(en banc). A recent decision by the Fifth Circuit court of appeals may add to the pressure on the High Court to grant certiorari and resolve the question. Cornelius Campbell Burgess v. FDIC, No. 17-60579 (5th Cir. Sept. 7, 2017).

Mr. Burgess is a director and former officer of Herring Bank. He was investigated by the FDIC for improper expense practices and the misuse of bank property. A hearing was held before an FDIC ALJ who subsequently issued findings of fact and conclusions of law. The FDIC Board largely adopted those findings and conclusions. An order was entered assessing a civil penalty and requiring the withdrawal of Mr. Burgess from the banking industry. In seeking review by the Circuit Court, Mr. Burgess requested a stay of the agency order. The Court granted the stay.

While the question of whether a stay should be issued depends on a multi-prong test, the critical factor is the merits. To obtain a stay the proponent must make a “’strong showing’ that . . . [he] is likely to succeed on the merits of his petition for review, not just a ‘mere possibility of relief.’” Here the merits hinge on a question under the Constitution’s Appointments Clause and whether the FDIC ALJ was appointed in accord with its requirements.

The Appointments Clause divides federal government personnel into three categories: principal Officers, inferior Officers, and non-Officer employees. Principal Officers must be appointed by the President with the advice and consent of the Senate. Inferior Officers may be appointed by the President, the Courts of Law or the Heads of Departments. Non-Officer employees are classified as lesser functionaries. Their appointment is not governed by the Constitution.

A government worker is an Officer of the U.S. subject to the Clause if “he or she exercises ‘significant authority pursuant to the laws of the United States,’ quoting Freytag v. Commissioner of Internal Revenue, 501 U.S. 868, 880 (1991). There the Court held that a Special Trial Judge in the Article I U.S. Tax Court was an inferior officer subject to the Clause. Later the Court on Landry concluded that FDIC ALJs were not – the same issue raised by Mr. Burgess here. That Circuit reached the same conclusion as to SEC ALJs in Raymond J. Lucia Companies.

In this case, based on Freytag, the Court concluded “that Burgess has made a ‘strong showing’ that he is likely to succeed on the merits of his petition for review. In Freytag the Supreme Court considered the Appointments Clause question as to Special Tax Court Judges. Under the applicable statute, in some cases the STJ had the authority to decide the case; in others they did not. In the case before the Supreme Court the STJ did not have the authority to enter a final judgment. Nevertheless, the Supreme Court concluded that the appointment of the STJ was subject to the clause. “In reaching this conclusion, the Court noted that (1) the position was ‘established by law;’ (2) its ‘duties, salary, and means of appointment . . . are specified by statute;’ and (3) the officeholder was empowered to ‘exercise significant discretion’ over ‘important functions.’” Key was “the ‘independent authority’ that STJs exercised when authorized to enter a final judgment in some cases [which] rendered them ‘inferior Officers’ for all purposes.”

Based on Freytag the Court rejected the holding of Landry “that final decision-making authority” is a necessary condition for Officer status. Rather, the Court concluded that a government worker is an “inferior Officer” subject to the Appointments Clause if his office entails significant duties and discretion. To assess this question the court must consider: 1) if the office was established by law; 2) if the duties, salary and means of appointment are specified by statute; and 3) if the office holder can exercise significant discretion is carrying out important functions.

In this case the “broad authority to preside over agency functions . . . to preside over agency adjudications and issue recommendations closely resembles the authority wielded by United States Commissioner – the forerunners of Magistrate Judges – who the Supreme Court held were officers,” citing Go-Bart Importing Co. v. U.S., 282 U.S. 344, 352 (1931). Viewed in this context, Petitioner has made the required substantial showing on the merits necessary to support an application for a stay.