SCOTUS Overturns SEC Judge Appointments: What You Need to Know

By Joshua Drian, Associate, Litigation

Many cases involving federal regulatory law are largely decided by judges appointed by the staffs of federal agencies—administrative law judges (ALJs). In a case closely watched for its securities and white-collar crime significance, on June 21, 2018, the United States Supreme Court in Lucia v. Securities & Exchange Commission held that this widely used practice is unconstitutional. The Securities and Exchange Commission’s (SEC or the Commission) ALJs, the Court found, are “Officers of the United States” who, under the Appointments Clause of the Constitution, can only be appointed by the President, “Courts of Law” or “Heads of Departments.” Because SEC staff members, rather than the Commission itself, appointed the ALJ in question, his appointment was invalidated, and the Supreme Court ordered that the petitioner be provided a new hearing before a different, properly appointed ALJ, or before the Commission itself.

Why it matters: The ruling has injected considerable uncertainty into the administrative adjudicatory process—both before the SEC and, even though noted as limited to the SEC, potentially other government agencies.

The narrow question was whether ALJs are “Officers of the United States,” who must be appointed under the Appointments Clause, or employees, who need not be so appointed. The majority held that ALJs are “Officers of the United States” because they (1) occupy a “continuing” position established by law, and (2) exercise “significant authority pursuant to the laws of the United States.” Analogizing SEC ALJs to “special trial judges” of the U.S. Tax Court (which had already been determined to be “Officers of the United States”), the Supreme Court held that SEC ALJs meet this two-part test. Specifically, the Court found that SEC ALJs (1) hold a continuing office created by statute, and (2) exercise significant discretion and authority “needed to ensure fair and orderly adversarial hearings,” including the authority to take testimony, conduct trials, rule on the admissibility of evidence, enforce compliance with discovery orders, and prepare initial decisions containing factual findings, legal conclusions and appropriate remedies, which become final after the Commission reviews them. Thus, because there are no functional differences between SEC ALJs and special trial judges, the Court found its prior precedents dispositive and concluded that SEC ALJs are “Officers of the United States”—subject to the Appointments Clause. As such, they may only be appointed by the President, “Courts of Law” or “Heads of Departments.” Some had argued that ALJs could not be “Officers of the United States” because they lack the authority to issue “final decisions” absent the Commission’s involvement, but the Court found that the ALJs had enough authority to be officers even without final decision authority.

As a result of this holding, the Supreme Court found that the SEC ALJ in question (who had been appointed by SEC staff and not the SEC itself) decided the petitioner’s case “without a constitutional appointment.” Because the petitioner made a “timely challenge to the constitutional validity of the [ALJ’s] appointment,” the Court found that he was entitled to a “new ‘hearing before a properly appointed’ official.” The Court further found that, upon remand, the case must be heard by either the Commission itself or by a different, properly appointed ALJ in order to “cure the constitutional error.”

This holding is important both for what it says and for what it does not say. First, the Supreme Court’s decision appears to hold that any ALJ or equivalent federal decision maker imbued with significant discretion and authority may be considered an “Officer of the United States” and, therefore, must be appointed by the head of the department he or she serves, regardless of whether that individual has final decision-making authority. Depending on how such individuals currently are appointed, this may allow for challenging a wide array of administrative adjudications throughout multiple agencies. Second, the Supreme Court declined to address a potential side effect of its holding—whether declaring ALJs “Officers of the United States” potentially raises constitutional deficiencies based on an ALJ’s protection from termination without “cause.” Accordingly, the Court’s holding may provide future litigants—both before the SEC and similar adjudicatory bodies—with another constitutional challenge capable of overturning an unfavorable ruling. Finally, the Court’s ruling appears to have left the current state of the SEC’s ALJs in flux. In reaching its decision, the Supreme Court declined to address the constitutionality of the SEC’s recent order ratifying its prior appointment of ALJs. While the SEC will likely take the position that this order constitutes a constitutionally valid “appointment,” until this theory is tested, there is the possibility of overturning any decision rendered by any SEC ALJ who was retained by “ratification” rather than by appointment. All of this inserts considerable uncertainty into administrative adjudicatory proceedings in multiple arenas, the ramifications of which will be tested in future proceedings.