Last Thursday, on remand from the U.S. Supreme Court, the U.S. Court of Appeals for the Ninth Circuit heard oral argument in Seila Law. The members of the three judge panel were Judge Susan Graber and Judge Paul Watford from the Ninth Circuit and Judge Jack Zouhary from the U.S. District Court for the Northern District of Ohio. Judge Graber was appointed by President Clinton, Judge Watford was appointed by President Obama, and Judge Zouhary was appointed by President George W. Bush.
After ruling that the CFPB’s structure was unconstitutional because its Director could only be removed by the President “for cause,” the Supreme Court remanded the case to the Ninth Circuit to consider the CFPB’s argument that former Acting Director Mulvaney’s ratification of the CID issued to Seila Law cured any constitutional deficiency. Because it had ruled that the CFPB’s leadership structure was constitutional, the Ninth Circuit had not previously considered the CFPB’s ratification argument. Following the Supreme Court’s decision, the CFPB filed a declaration with the Ninth Circuit in which Director Kraninger stated that she had ratified the Bureau’s decisions to: issue the CID to Seila Law, deny Seila Law’s request to modify or set aside the CID, and file a petition in federal district court to enforce the CID.
On remand, Seila Law argued that the appropriate remedy is for the Ninth Circuit to reverse the district court and deny the CFPB’s petition to enforce the CID. Seila Law urged the Ninth Circuit to conclude that because of its structural constitutional defect, the CFPB lacked the authority to issue and enforce the CID, its actions in doing so were void, and the ratifications of the CID by former Acting Director Mulvaney and Director Kraninger were invalid. Relying on U.S. Supreme Court precedent, Seila Law argued that for a valid ratification to occur, the party ratifying must be able to do the act ratified both at the time the act was done and at the time of ratification. According to Seila Law, the CFPB could not satisfy either requirement because, as principal, the CFPB did not have the authority to issue the CID at the time it was issued and as a result, ratification was unavailable to its agent, the CFPB Director. Seila Law also asserted that the CID was invalid because the applicable three-year statute of limitations for bringing an enforcement action against Seila Law for the alleged violations to which the CID relates had expired by the date of Director Kraninger’s ratification.
Seila Law’s arguments encountered considerable skepticism from all three panel members. With regard to Seila Law’s argument that denying enforcement of the CID was necessary to provide it with meaningful relief, Judge Graber observed that a constitutional violation will not entitle a defendant to reversal of a criminal conviction where no harm or prejudice is found to have resulted from the violation.
With regard to Seila Law’s argument that there could not be a valid ratification of the CID, the questions asked by both Judge Watford and Judge Zouhary suggested that they were not persuaded that the cited Supreme Court precedent necessarily supported Seila Law. Judge Zouhary commented that the Supreme Court had implicitly rejected Seila Law’s argument, citing to the following language in Chief Justice Robert’s opinion: “If [Seila Law] is correct [that the removal provision cannot be severed], and the offending removal provision means that the agency is unconstitutional and powerless to act, then a remand would be pointless.”
With regard to Seila Law’s argument that the three-year SOL for bringing an enforcement action barred the CFPB from ratifying the CID, Judges Graber and Watford both pressed Seila Law’s to explain the SOL’s relevancy in the context of a petition to enforce a CID and why it would make the CID invalid. Seila Law’s counsel asserted that because the potential violations sought to be investigated through the CID related to Seila Law’s involvement with Morgan Drexen in 2015 and earlier, an enforcement action based on that activity would have been time-barred as of the date the CID was ratified. The judges highlighted the investigatory purpose of CIDs and suggested that the CID might reveal other violations as to which the CFPB could still bring an enforcement action.
The CFPB’s counsel did not face as rigorous questioning as did Seila Law’s counsel. In countering Seila Law’s argument that the CFPB did not have the authority to issue the CID due to the constitutional violation, the CFPB’s counsel highlighted language in Chief Justice Robert’s opinion stating that “[t]he provisions of the Dodd-Frank Act bearing on the CFPB’s structure and duties remain fully operative without the offending tenure restriction.” According to the CFPB’s counsel, because the CFPB, as principal, had the authority to conduct investigations at the time the CID was issued despite the constitutional violation and Director Kraninger was removable at will by the President when she ratified the CID, the CID was validly ratified and remains enforceable.
In responding to Seila Law’s SOL argument, the CFPB’s counsel contended that the SOL had no application outside of an enforcement action, the CFPB had not alleged any specific violations by Seila Law, and it would be premature to adjudicate the application of the SOL. He asserted that even if the CFPB could not bring an enforcement action now for Seila Law’s 2015 conduct, it would still be entitled to gather information about Seila Law’s conduct going back to that time, which might shed light on subsequent developments and still could be relevant to the CFPB’s investigation.
The CFPB’s counsel also argued that the Ninth Circuit should follow its decision in CFPB v. Gordon that involved former Director Cordray’s ratification of the CFPB’s enforcement action against Gordon. Director Cordray ratified the action after his recess appointment was called into question by the U.S. Supreme Court’s Canning decision and he was reappointed and confirmed by the Senate. In that case, the Ninth Circuit ruled that the enforcement action was validly ratified by Director Cordray. Seila Law’s counsel argued that Gordon was not controlling because it did not involve a “structural” constitutional violation and instead only involved the authority of an agent to act on behalf of the principal.
In response, the CFPB’s counsel asserted that Seila Law’s emphasis on the “structural” nature of the violation in Gordon was merely a label and missed that the Supreme Court’s problem with the removal provision was that it put the Director outside the President’s ability to supervise. According to the CFPB’s counsel, both Seila Law and Gordon called into question the authority of an agent who first authorized a CFPB action because of an Article II problem—insufficient accountability to the President in Seila Law and an improper appointment in Gordon. As a result, both constitutional defects could be cured through ratification of the challenged action by a Director not subject to the original Article II problem.
Given the strong headwinds faced by Seila Law’s counsel during the oral argument, we would be surprised if Seila Law prevails in its efforts to invalidate the CID.