The Supreme Court announced Friday that it will hear Lucia v. Securities and Exchange Commission, a case that could potentially hobble many federal agencies’ ability to enforce much of federal law.
The case involves both a very obscure constitutional provision and a fairly technical question about who within the government is authorized to take certain actions. Should the Court side against the SEC, much of the federal government could grind to a near halt.
The SEC is an independent agency charged with regulating many major investments and with enforcing federal securities laws. Some of the laws overseen by the SEC are enforced through ordinary litigation in federal courts. Others are typically enforced through proceedings before an administrative law judge (ALJs), a kind of agency-specific judge chosen by the agencies themselves from candidates who survived a merit selection process.
Cases involving certain kinds of sanctions are heard by ALJs, while cases seeking other sanctions must be heard in federal court. According to the SEC’s website, for example, “the Commission may bar someone from the brokerage industry in an administrative proceeding, but an order barring someone from acting as a corporate officer or director must be obtained in federal court.”
Lucia involves a claim that these ALJs are themselves unconstitutional.
The case is based on Article II of the Constitution, which establishes that certain federal workers are “officers of the United States.” Some high-ranking “officers” must be nominated by the president and confirmed by the Senate. Others are labeled “inferior officers” by the Constitution, which stipulates that the power to appoint them may be vested “in the President alone, in the courts of law, or in the heads of departments.” The petitioners in Lucia claim that ALJs qualify as inferior officers — and that the SEC’s ALJs were therefore not lawfully appointed because they were not hired by the president, a court of law, or a department head.
Meanwhile, the United States Court of Appeals for the District of Columbia Circuit, which heard Lucia before it reached the Supreme Court, concluded that the SEC’s ALJs are merely “employees” of the agency — a category that places fewer restrictions on agencies’ hiring practices. If the ALJs qualify as “employees,” then they don’t violate the Constitution.
That’s a lot of fairly technical detail about how the federal government manages human resources, but here’s why it matters. The SEC employs five ALJs. If those ALJs are declared unconstitutional, their work could potentially be picked up by the SEC’s five commissioners, but those commissioners are the agency’s senior-most officials and have significant other responsibilities.
An SEC ALJ’s decision is not final until it is ratified by the Commission itself. Last November, the SEC released a list of all the cases recently decided by an ALJ that were awaiting further review by the commissioners. There are more than 100 cases on the list, and that’s just a subset of all the cases pending before the SEC. Simply put, it would place a massive new burden on the commissioners if they had to personally adjudicate all these cases while also performing their other duties.
As a result, enforcement of federal securities law would likely grind to a standstill — and Wall Street could potentially have a field day.
This isn’t limited to the SEC. There are nearly 2,000 ALJs strewn across various federal agencies. The vast bulk of these ALJs — 1,655, according to the U.S. Office of Personnel Management — are employed by the Social Security Administration, where they spend much of their time adjudicating disputes over Social Security benefits. If these 1,655 ALJs are declared unconstitutional, it is far from clear how the Social Security Administration will process claims that someone was wrongly denied benefits.
Having laid out this fairly bleak possible future, it is worth noting that the case against these ALJs is not frivolous. There is a very strong argument that many ALJs were, indeed, appointed unconstitutionally. Though the D.C. Circuit upheld the SEC’s ALJs in Lucia, a panel of the Tenth Circuit struck them down in a 2016 case called Bandimere v. Securities and Exchange Commission. Both of the judges who joined the Tenth Circuit’s decision were appointed by Democratic presidents, so this is not simply a case of nihilistic, anti-government judges lighting federal agencies on fire just to watch them burn.
Without diving too deep into the weeds of the legal distinctions between “inferior officers” and “employees,” the primary difference between the D.C. Circuit’s decision in Lucia and the Tenth Circuit’s decision in Bandimere is that the D.C. Circuit thought it was important that the SEC’s ALJs do not have final decision-making power, while the Tenth Circuit did not.
According to the Supreme Court, a government worker qualifies as an officer if they exercise “significant authority pursuant to the laws of the United States.” The D.C. Circuit effectively held that an ALJ’s non-final decision is not an exercise of significant authority. The Tenth Circuit disagreed.
There is one more wrinkle in this case that is worth noting. Some time after the Tenth Circuit’s decision in Bandimere, the SEC’s commissioners released an unusual order. “To put to rest any claim that administrative proceedings pending before, or presided over by, Commission administrative law judges violate the Appointments Clause,” the order reads, “the Commission—in its capacity as head of a department—hereby ratifies the agency’s prior appointment of” its five ALJs.
The Constitution does permit heads of departments to appoint “inferior officers,” so if the SEC’s commissioners count as department heads, that may be enough to save the Commission’s five ALJs. But it is unclear that the SEC’s commissioners are, indeed, department heads. A federal statute defines “The Executive departments” as the 15 cabinet departments — the Departments of State, Treasury, Defense, and so forth. The SEC is not on this list. Nor, for that matter, is the Social Security Administration.
That’s good news for ALJs employed by these 15 departments, but it may offer the Supreme Court a reason to say that the SEC’s commissioners cannot appoint ALJs.