A recent decision by the U. S. Court of Appeals for the Second Circuit suggests that an attempt by a company or individual that is the target of a CFPB administrative enforcement action to bring a separate action in federal court challenging the constitutionality of the CFPB’s use of an administrative law judge (ALJ) is likely to face a significant jurisdictional hurdle. A divided Second Circuit ruled that an individual and several of her investment firms (Appellants) against whom the SEC had commenced an administrative proceeding conducted by an ALJ could not bring a separate lawsuit in federal court challenging the constitutionality of the SEC’s use of ALJs. Affirming the district court and resolving a split within the New York federal district courts, the Second Circuit held that the Appellants could not raise their constitutional claims in federal court until there was a final SEC decision. Under SEC procedures, a party can petition for review of a recommended ALJ decision by the SEC and can then seek review of the SEC’s final order by a federal court of appeals. According to the Second Circuit, the Appellants’ constitutional claims would be subject to meaningful judicial review within the SEC’s administrative scheme and were not “wholly collateral” to that scheme. The Second Circuit’s ruling agrees with similar rulings by the D.C. and Seventh Circuits.
Last summer, we blogged about a decision by an Atlanta federal court in which the court issued a preliminarily injunction enjoining an SEC administrative proceeding based on a constitutional challenge. The court found that the plaintiff had established a substantial likelihood of success on the merits of his claim that “the SEC has violated the Appointments Clause [of Article II of the U.S. Constitution].” The court found that the ALJs’ powers made them “Inferior Officers” under Article II because they exercise “significant authority pursuant to the laws of the United States.” Such authority included the power to issue subpoenas, make evidentiary rulings, and recommend decisions.
The court rejected the SEC’s argument that the ALJs were “mere employees” in part because they could not issue final orders. As “inferior officers,” the court concluded that the ALJs were subject to the Appointments Clause, which vests the power to appoint all “inferior officers” in “the President alone, in the Courts of Law, or in the Heads of Departments.” Since the ALJ was hired by the SEC’s Office of Administrative Law Judges and not appointed by an SEC commissioner, the court ruled that the ALJ’s appointment was “likely unconstitutional.” In its appeal to the Eleventh Circuit, the SEC has argued that the district court did not have jurisdiction to hear the constitutional challenge. In the Second Circuit case, the Appellants were also seeking to enjoin the SEC’s enforcement action based on a similar Appointments Clause challenge.
In our blog post, we discussed why the CFPB’s use of an ALJ could be subject to a similar Appointments Clause challenge. However, a company or individual that is the target of a CFPB administrative enforcement action seeking to assert such a challenge in a separate federal court action can be expected to face the argument that, for the same reasons on which the Second Circuit based its decision, the constitutional claim cannot be raised in federal court until there is a final decision by the CFPB Director. Under CFPB procedures, a party can seek review of an ALJ’s recommended decision by the CFPB Director and can then seek review of the Director’s final decision by a federal court of appeals. (In PHH Corporation et al. v. CFPB, PHH has sought the D.C. Circuit’s review of Director Cordray’s June 2015 decision affirming an ALJ’s recommended decision that concluded PHH had violated RESPA. While PHH’s challenge to the constitutionality of the CFPB’s structure was front and center at the April 2016 oral argument, PHH indicated in its brief that it was preserving an Appointments Clause challenge to the CFPB’s use of an ALJ for review by the en banc D.C. Circuit or the U.S. Supreme Court.)