administrative law judge

Just before year-end, the U.S. Court of Appeals for the Tenth Circuit, in Bandimere v. United States Securities and Exchange Commission, set aside an SEC decision finding the petitioner liable for violating various securities law on the grounds that the SEC’s administrative law judge (ALJ)  who conducted the proceeding was unconstitutionally appointed.  The Tenth Circuit held that the ALJ was an “inferior officer” who, pursuant to the Appointments Clause of Article II of the U.S. Constitution, could only be appointed by the President, a court, or the head of a “Department.”  The parties agreed that the process used by the SEC to hire ALJs in which an ALJ is selected by the SEC’s Chief ALJ did not qualify as an appointment by the President, a court, or the head of a “Department.”

In holding that the SEC’s ALJ was an “inferior officer” who must be appointed in accordance with the Appointments Clause, the Tenth Circuit created a circuit split, thus making the case a good candidate for U.S. Supreme Court review.  In August 2016, the U.S. Court of Appeals for the D.C. Circuit, in Raymond J. Lucia Companies, Inc. et al. v. Securities and Exchange Commission, rejected a similar constitutional challenge and ruled that the SEC’s ALJ was an “employee” rather than “inferior officer.”  As a result, the D.C. Circuit held that the ALJ’s appointment by the SEC’s Office of Administrative Law Judges rather than an SEC commissioner was constitutional.  

The Tenth Circuit’s ruling might be used to support an Appointments Clause challenge to the CFPB’s use of ALJs.  As we have previously noted, because the CFPB is housed within the Federal Reserve, it could be argued that Director Cordray is not a “Department” head who can appoint “inferior Officers” under the Appointments Clause.  Thus, if the CFPB were unable to establish that its ALJ was an employee rather than an inferior officer, its ALJ might be deemed unconstitutionally appointed.

A challenge to the constitutionality of the SEC’s use of administrative law judges (ALJ) was rejected by the U.S. Court of Appeals for the D.C. Circuit.  In Raymond J. Lucia Companies, Inc. et al. v. Securities and Exchange Commission, the petitioners contended that the SEC’s decision imposing sanctions for violations of the Investment Advisors Act should be vacated because the ALJ rendering the initial decision was an “inferior Officer” who, pursuant to the Appointments Clause of Article II of the U.S. Constitution, could only be appointed by the President, a court, or the head of a “Department.”  Since the ALJ was hired by the SEC’s Office of Administrative Law Judges and not appointed by an SEC commissioner, the petitioners argued that the ALJ’s appointment was unconstitutional.

Pointing to statutory language which provides that an ALJ’s “action,” when not reviewed by the SEC, shall “be deemed the action of the Commission,” the petitioners argued that SEC ALJs were Officers and not employees because they had the ability to issue final decisions of the SEC.  The court rejected this argument, observing that under SEC rules, an ALJ’s decision does not become final until the SEC determines not to review the decision.  The court noted that even if a petition for review is not filed, the SEC “can always grant review on its own initiative, and so it must consider every initial decision, including those in which it does not order review.”

As we have previously noted, because the CFPB is housed within the Federal Reserve, it could be argued that Director Cordray is not a “Department” head who can appoint “inferior Officers” under the Appointments Clause.  Thus, if an Appointments Clause challenge were made to the CFPB’s use of an ALJ, it might be necessary for the CFPB to establish that its ALJ was an employee rather than an Officer.

We reported earlier this week that the CFPB had recently posted a job opening for an administrative law judge (ALJ) and that the government jobs website indicated that the position was closed.  We saw this as suggesting that the position has been filled.

In response to our blog post, Judge James G. Gilbert, Chief Administrative Law Judge with the United States Postal Service Judicial Office, contacted us to advise that it is unlikely that the position has been filled and that the closing of the position most likely means only that the application period has ended.  Judge Gilbert advised that the CFPB will presumably now interview candidates before selecting an ALJ.  He also commented that it normally takes about 6 to 8 weeks after the close of the application period for a selection to be made, and often takes longer.

In our blog post, we also reported on the recent decision of an Atlanta federal court calling into question the constitutionality of the SEC’s use of ALJs.  The court issued a preliminary injunction enjoining an SEC administrative proceeding, having found that the appointment of the ALJ in question was “likely unconstitutional” under the Appointments Clause of Article II of the U.S. Constitution.  Judge Gilbert commented that the Appointments Clause issue is being closely watched by all federal ALJs.

The CFPB recently posted a job opening for an administrative law judge (ALJ).  According to the government jobs website, the position is closed which suggests that it has been filled.  A recent Politico article indicated that the CFPB posted the opening because it has ended its arrangement with the SEC to borrow ALJs.  (The Politico article also indicated that the CFPB has needed to borrow SEC judges for two administrative cases.)

The constitutionality of the SEC’s use of ALJs was recently called into question by an Atlanta federal court in Hill v. Securities Exchange Commission.  In Hill, the court issued a preliminarily injunction enjoining an SEC administrative proceeding, finding 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 in Hill 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.”

Assuming the CFPB now has its own ALJ, it might face a similar constitutional challenge.  Under the CFPB’s Rules of Practice for Adjudication Proceedings, which are modeled on the SEC’s Rules of Practice, the CFPB’s ALJs have powers similar to those of SEC ALJs, including the power to issue subpoenas, make evidentiary rulings, and recommend decisions.  Thus, a CFPB ALJ might also be deemed an “inferior officer” subject to the Appointments Clause.  As such, the ALJ would need to be appointed by for the President, a court, or the head of a “Department.”  However,  because the CFPB is housed within the Federal Reserve, Director Cordray’s status as a “Department” head who can appoint ALJs might be called into question.  See, e.g., Barnett, The Consumer Financial Protection Bureau’s Appointment with Trouble, American University Law Rev. (2011)