(Reuters) - The 5th U.S. Circuit Court of Appeals last week deepened a circuit split on the constitutionality of administrative law judges who oversee enforcement proceedings – just weeks before a pair of crucial U.S. Supreme Court deadlines for the Justice Department in cases raising constitutional challenges to the Securities and Exchange Commission’s appointment process for ALJs.
The new 5th Circuit decision probably increases the odds that the Supreme Court will take up one or both of the SEC ALJ cases. It also shows that the justices’ ultimate answer to the question of whether the Appointment Clause covers ALJs will resound beyond the SEC.
In the new case, a motions panel at the 5th Circuit stayed a Federal Deposit Insurance Corporation order barring Amarillo, Texas banker Cornelius Burgess from the banking business. Judges Edith Jones, Edith Brown Clement and Priscilla Owen held that Burgess was likely to succeed in his claim that the administrative law judge who oversaw his hearing was unconstitutionally appointed so the FDIC order cannot stand.
That conclusion is in line with the 10th Circuit’s ruling last May in Bandimere v. SEC but directly conflicts with a 2016 decision from the D.C. Circuit in Lucia v. SEC. The Lucia case, as I’ll explain, is already up for Supreme Court review. Bandimere will quite probably head to the Supreme Court later this month.
To recap the ALJ Appointments Clause issue briefly: Article II of the Constitution requires that “inferior officers” of the executive branch be appointed either by the president, the courts or agency heads who are themselves directly accountable to the president. Administrative law judges at most federal agencies are hired through a bureaucratic process, not by agency principals. So the big debate is whether ALJs are inferior officers covered by the Appointments Clause or mere employees whose appointment is not a matter of constitutional concern.
The 10th Circuit held in Bandimere that SEC ALJs exercise significant discretion in enforcement proceedings, much like the special Internal Revenue Service trial counsel the Supreme Court considered in 1991’s Freytag v. Commissioner of Internal Revenue. The Supreme Court found the IRS judges to be subject to the Appointments Clause. So, the 10th Circuit reasoned, SEC ALJs must also be appointed by agency heads accountable to the president.
The D.C. Circuit’s contrary holding in the Lucia case rested on D.C. Circuit precedent in 2000’s Landry v. FDIC. In that case – which, like the 5th Circuit’s new decision, involved ALJs at the FDIC – the appeals court concluded that administrative law judges are not inferior officers because their determinations are subject to review by agency heads. Without the power to render final decisions, the D.C. Circuit has held, ALJs are glorified employees.
That court came close to changing its mind in the Lucia case. The D.C. Circuit agreed to hear en banc the one-time “Buckets of Money” radio host’s challenge to his lifetime ban by the SEC, but in June, the en banc court split evenly on the constitutionality of SEC administrative law judges and did not issue an opinion on the merits of the issue.
Lucia’s lawyers at Gibson Dunn & Crutcher filed his petition for Supreme Court review in July, highlighting the split between the 10th and D.C. Circuits. The SEC’s response to the Lucia petition (which will presumably be handled by the Justice Department) is due on Sept. 25. Meanwhile, the SEC faces a Sept. 29 deadline to file its own petition for a Supreme Court hearing in the Bandimere case from the 10th Circuit.
Mark Perry of Gibson Dunn, Supreme Court counsel for Raymond Lucia, told me in an email that the new 5th Circuit ruling in Burgess v. FDIC highlights the split amongst the circuits, “thus increasing the likelihood of Supreme Court review.” It’s possible, he said, that the government will agree the Supreme Court needs to resolve the split and acquiesce to the Lucia petition, though Perry added that he has had no hint from the Justice Department.
“But given Bandimere, they cannot really dispute that the issue warrants Supreme Court resolution - the only possible debate is whether the D.C. Circuit case or the 10th Circuit case is the better vehicle,” Perry said. “So I expect the government to file simultaneously (or nearly so) in both cases, arguing that the ALJs are not officers but agreeing that the court should resolve the conflict in one case or the other.”
Would a ruling that ALJs have to be accountable to the president wreak havoc across executive branch administrative proceedings? Not necessarily, according to Perry. There are about 2,000 administrative law judges in the federal government, but the vast majority work for the Social Security Administration and would not, Perry said, be affected by a Supreme Court ruling on the Appointments Clause. Only about 142 ALJs, by Gibson Dunn’s calculation, exercise significant power in enforcement proceedings and could be subject, in Lucia’s theory, to the Appointments Clause.
That’s still, of course, a lot of judges. Collectively, they oversee hundreds of administrative proceedings a year at agencies ranging from the Consumer Financial Protection Bureau to the Federal Mine Safety Commission. It’s going to be interesting to see later this month how eager the government is to put their constitutionality to a test.