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U.S. Supreme Court Holds That SEC Administrative Law Judges Are "Inferior Officers"

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On June 21, 2018, the U.S. Supreme Court, in Lucia v. SEC, — S. Ct. —, 2018 WL 3057895 (U.S., June 21, 2018), held that Administrative Law Judges (“ALJs”) of the SEC are “inferior Officers” such that they must be appointed by the President, “Courts of Law,” or “Heads of Departments” under the Constitution’s Appointments Clause. This decision likely will cause significant ripple effects beyond the SEC and affect the way in which other administrative agencies must appoint ALJs. This decision also will impact numerous proceedings currently pending before administrative agencies or currently being reviewed by federal courts of appeals.

The SEC charged Raymond Lucia with violating the Investment Advisers Act. The administrative action against him was assigned to an ALJ who had been appointed by the SEC staff rather than by the SEC Commission. The ALJ, after a nine-day hearing, issued an “initial decision,” which concluded that Lucia had violated the Investment Advisers Act. The ALJ’s initial decision imposed civil penalties of $300,000 and a lifetime bar from participating in the investment industry. After Lucia filed objections to the initial decision with the SEC Commission, the Commission remanded the matter for the ALJ to make additional factual findings. The ALJ made those additional factual findings and issued a revised initial decision, imposing the same sanctions.

The SEC Commission reviewed the ALJ’s revised initial decision, found Lucia had violated the Investment Advisers Act, and imposed the same sanctions. In issuing its decision, the SEC Commission also rejected Lucia’s argument that the administrative proceeding was unconstitutional because the ALJ was not appointed in accordance with the Appointments Clause, relying on the D.C. Circuit’s previous opinion in Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000). On appeal, a panel of the D.C. Circuit agreed with the SEC Commission and similarly relied on Landry in holding that the ALJ was a mere employee and not an “inferior Officer.” Lucia then petitioned for rehearing en banc. After granting that request and hearing argument en banc, however, the D.C. Circuit — by an equally divided court — denied Lucia’s claim. Both before and after the D.C. Circuit decided this issue on rehearing, other courts of appeals issued decisions holding that SEC ALJs and similar FDIC ALJs were “inferior Officers” such that they had to be appointed in accordance with the Appointments Clause. See Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016) (SEC ALJs); Burgess v. FDIC, 871 F.3d 297 (5th Cir. 2017) (FDIC ALJs). The Supreme Court granted Lucia’s petition for the writ of certiorari to resolve this conflict in the courts of appeals.

The Majority Opinion, authored by Justice Kagan, resolved this circuit split by holding that SEC ALJs are “inferior Officers” such that they must be appointed by the President, “Courts of Law,” or “Heads of Departments” under the Constitution’s Appointments Clause. And because the ALJ involved in the administrative proceedings against Lucia was not appointed in this manner, the Court held that the underlying proceeding was constitutionally defective, requiring a new proceeding before a different and properly appointed ALJ.

The Court applied a two-part test to determine “inferior Officer” status. First, it stated that the individual must occupy “a continuing position established by law.” Slip Op. at 6 (citation omitted). The Court held that SEC ALJs obviously met that prong. Second, the Court stated that the individual must “exercise[] significant authority pursuant to the laws of the United States.” Id. (citation omitted). The Court’s analysis of the second prong focused on the Court’s prior decision in Freytag v. Commissioner, 501 U.S. 868 (1991). Indeed, the Court noted that, in Freytag, it applied the “significant authority” test “to adjudicative officials who are near-carbon copies of the [SEC] ALJs.” Id. Specifically, the Court noted that SEC ALJs — like the Special Trial Judges (“STJs”) in Freytag — (1) “take testimony,” (2) “conduct trials,” (3) “rule on the admissibility of evidence,” and (4) “have the power to enforce compliance with discovery orders.” Slip Op. at 9 (citations omitted). As in Freytag, the Court concluded that SEC ALJs met the second prong.

In reaching its conclusion on the second prong, the Court addressed the underlying basis for the split among the courts of appeals: whether an ALJ must exercise “final” decision-making authority in order to qualify as an “inferior Officer.” The Court held that “final” decision-making authority was not a prerequisite to being classified as an “inferior Officer” under Freytag, noting that the fact that the SEC ALJs have some “last-word capacity makes this an a fortiori case” compared to Freytag. Slip Op. at 10; see also id. at 8 n.4 (stating that Freytag “reject[ed] [the] theory that final decision-making authority is a sine qua non of officer status”).

Finally, the Court held that additional proceedings against Lucia had to be conducted by a properly appointed ALJ and added a new requirement that the properly appointed ALJ must be different than the ALJ that presided over Lucia’s original proceedings. Slip Op. at 12. The Court did not address whether the SEC Commission’s ratification of its prior ALJ appointments during the litigation was proper. Id. at 13 n.6.

Justice Thomas filed a concurring opinion joined by Justice Gorsuch. Justices Thomas and Gorsuch stated that the “significant authority” prong of the “inferior Officer” analysis should be removed because “the importance or significance of [one’s] statutory duties is irrelevant” to the Appointments Clause analysis. Slip Op. (Thomas, J., concurring) at 3. Rather, “[t]he Founders considered individuals to be officers even if they performed only ministerial statutory duties.” Id. 

Justice Breyer concurred in the judgment in part and dissented in part. Justice Breyer stated that this case should have been decided as a matter of statutory interpretation rather than as a constitutional matter because the Administrative Procedure Act does not permit the SEC Commission to delegate its power to appoint ALJs to its staff. Slip Op. (Breyer, J., concurring in the judgment in part) at 2. Importantly, Justice Breyer expressed concern that the Majority’s decision to address the constitutional issue may cause unintended consequence vis-à-vis the Court’s prior holding in Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010) — specifically, that “[i]f the Free Enterprise Fund Court’s holding applies equally to [ALJs] . . . then to hold that the [ALJs] are ‘Officers of the United States’ is, perhaps, to hold that their removal protections are unconstitutional.” Id. at 6. Justice Breyer (along with Justices Ginsburg and Sotomayor) also disagreed with the Majority that, on remand, the same ALJ — assuming he was appointed constitutionally in the interim — could not preside over the new proceedings. Id. at 13.

Justice Sotomayor filed a dissenting opinion joined by Justice Ginsburg. The dissenting Justices would have held that “one requisite component of ‘significant authority’ is the ability to make final, binding decisions on behalf of the Government,” and that the SEC ALJs, who they viewed as “merely advis[ing] and provid[ing] recommendations to an officer[,] would not . . . qualify . . . .” Slip Op. (Sotomayor, J., dissenting) at 2.

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