MATHESON, Circuit Judge.
When the Framers drafted the Appointments Clause of the United States Constitution in 1787, the notion of administrative law judges ("ALJs") presiding at securities law enforcement hearings could not have been contemplated. Nor could an executive branch made up of more than 4 million people,
Based on Freytag v. Commissioner of Internal Revenue, 501 U.S. 868, 111 S.Ct. 2631, 115 L.Ed.2d 764 (1991), we conclude the SEC ALJ who presided over an administrative enforcement action against Petitioner David Bandimere was an inferior officer. Because the SEC ALJ was not constitutionally appointed, he held his office in violation of the Appointments Clause. Exercising jurisdiction under 15 U.S.C. §§ 77i(a) and 78y(a)(1), we grant Mr. Bandimere's petition for review.
The SEC is a federal agency with authority to bring enforcement actions for
The SEC reviewed the initial decision and reached a similar result in a separate opinion. David F. Bandimere, SEC Release No. 9972, 2015 WL 6575665 (Oct. 29, 2015). During the SEC's review, the agency addressed Mr. Bandimere's argument that the ALJ was an inferior officer who had not been appointed under the Appointments Clause. Id. at *19. The SEC conceded the ALJ had not been constitutionally appointed, but rejected Mr. Bandimere's argument because, in its view, The ALJ was not an inferior officer. Id. at *19-21.
Mr. Bandimere filed a petition for review with this court under 15 U.S.C. §§ 77i(a) and 78y(a)(1), which allow an aggrieved party to obtain review of an SEC order in any circuit court where the party "resides or has his principal place of business." In his petition, Mr. Bandimere raised his Appointments Clause argument and challenged the SEC's conclusions regarding securities fraud liability and sanctions.
The SEC rejected Mr. Bandimere's argument that the ALJ presided over his hearing in violation of the Appointments Clause. We review the agency's conclusion on this constitutional issue de novo. Hill v. Nat'l Transp. Safety Bd., 886 F.2d 1275, 1278 (10th Cir. 1989). We first explain why we must address Mr. Bandimere's constitutional argument and then address its merits.
Federal courts avoid unnecessary adjudication of constitutional issues. City of Mesquite v. Aladdin's Castle, Inc., 455 U.S. 283, 294, 102 S.Ct. 1070, 71 L.Ed.2d 152 (1982). Here, we must consider the Appointments Clause issue.
In its opinion, the SEC concluded Mr. Bandimere committed two securities fraud violations and two securities registration violations.
Appointments Clause Overview
The Appointments Clause states:
U.S. Const. art. II, § 2, cl. 2.
The Appointments Clause embodies both separation of powers and checks and balances. Ryder v. United States, 515 U.S. 177, 182, 115 S.Ct. 2031, 132 L.Ed.2d 136 (1995) ("The Clause is a bulwark against one branch aggrandizing its power at the expense of another branch....").
The Appointments Clause also promotes public accountability by identifying the public officials who appoint officers. Edmond v. United States, 520 U.S. 651, 660, 117 S.Ct. 1573, 137 L.Ed.2d 917 (1997). And it prevents the diffusion of that power by restricting it to specific public officials. Ryder, 515 U.S. at 182, 115 S.Ct. 2031; Freytag, 501 U.S. at 878, 883, 111 S.Ct. 2631.
Inferior Officers and Freytag
Inferior Officers and the Supreme Court
The Supreme Court has defined an officer generally as "any appointee exercising significant authority pursuant to the laws of the United States." Buckley v. Valeo, 424 U.S. 1, 126, 96 S.Ct. 612, 46 L.Ed.2d 659 (1976) (per curiam). The term "inferior officer" "connotes a relationship with some higher ranking officer or officers below the President: Whether one is an `inferior' officer depends on whether he has a superior." Edmond, 520 U.S. at 662, 117 S.Ct. 1573.
This description of "inferior" may aid in understanding the distinction between principal and inferior officers. But we are concerned here with the distinction between inferior officers and employees. Like inferior officers, employees — or "lesser functionaries" — are subordinates. Buckley, 424 U.S. at 126 n.162, 96 S.Ct. 612.
Justice Breyer has provided this summary of the different ways the Supreme Court has described inferior officers:
Free Enter. Fund v. PCAOB, 561 U.S. 477, 539, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010) (Breyer, J., dissenting) (citation style altered and some citations omitted).
The list below contains examples of inferior officers drawn from Supreme Court cases spanning more than 150 years:
We think these examples are relevant and instructive. Although the Supreme Court has not stated a specific test for inferior officer status, "[e]fforts to define [`inferior Officers'] inevitably conclude that the term's sweep is unusually broad," Free Enter. Fund, 561 U.S. at 539, 130 S.Ct. 3138 (Breyer, J., dissenting), and the Freytag opinion provides the guidance needed to decide this appeal.
The question in Freytag was whether the Tax Court had authority to appoint special trial judges ("STJs") under the Appointments Clause. 501 U.S. at 877-92, 111 S.Ct. 2631. As a threshold matter, the Court addressed whether STJs were inferior officers or employees. Id. at 880-82, 111 S.Ct. 2631. That question strongly resembles the one we face here. In our view, Freytag controls the result of this case.
Under the then-applicable 26 U.S.C. § 7443A(b), the Tax Court could assign four categories of cases to STJs. Id. at 873, 111 S.Ct. 2631. For the first three categories, § 7443A(b)(1), (2), and (3), "the Chief Judge [could] assign the special trial judge not only to hear and report on a case but also to decide it." Id. In other words, STJs could make final decisions in those cases. But in the fourth category, § 7443A(b)(4), STJs lacked final decisionmaking power: "the chief judge [could] authorize the special trial judge only to hear the case and prepare proposed findings and an opinion. The actual decision then [was] rendered by a regular judge of the Tax Court." Id.
The Court first expressly approved prior decisions from the Tax Court and the Second Circuit that held STJs were inferior officers. Id. "Both courts considered the degree of authority exercised by the special trial judges to be so `significant' that it was inconsistent with the classifications of `lesser functionaries' or employees." Id. (discussing Samuels, Kramer & Co. v. Comm'r of Internal Revenue, 930 F.2d 975 (2d Cir. 1991); First W. Gov't Sec., Inc. v. Comm'r of Internal Revenue, 94 T.C. 549 (1990)).
The Court then turned to the government's argument that the STJs were employees because they "lack[ed] authority to enter a final decision" under § 7443A(b)(4). Id. The Court said the argument "ignore[d] the significance of the duties and discretion that special trial judges possess." Id. First, the STJ position was "established by Law." Id. (quoting U.S. Const. art. II, § 2, cl. 2). Second, "the duties, salary, and means of appointment for that office are specified by statute." Id. "These characteristics," the Court stated, "distinguish special trial judges from special masters, who are hired by Article III courts on a temporary, episodic basis, whose positions are not established by law, and whose duties and functions are not delineated in a statute." Id. Third, STJs "perform more than ministerial tasks. They take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders. In the course of carrying out these important functions, the [STJs]
Next, the Court addressed a standing argument from the government. Id. at 882, 111 S.Ct. 2631. The government had conceded STJs act as inferior officers when hearing cases under § 7443A(b)(1), (2), and (3), but argued petitioners "lack[ed] standing to assert the rights of taxpayers whose cases [were] assigned to [STJs] under [those three categories]." Id.
The Court stated, "Even if the duties of [STJs] under [§ 7443A(b)(4)] were not as significant as we and the two courts have found them to be, our conclusion would be unchanged." Id. (emphasis added). The Court explained that an inferior officer does not become an employee because he or she "on occasion performs duties that may be performed by an employee not subject to the Appointments Clause." Id. "If a special trial judge is an inferior officer for purposes of subsections (b)(1), (2), and (3), he is an inferior officer within the meaning of the Appointments Clause and he must be properly appointed." Id. The Court thus rejected the government's standing argument as "beside the point." Id.
In the end, the Freytag majority held the Tax Court was a "Cour[t] of Law" with authority to appoint inferior officers like the STJs. Id. at 890, 892, 111 S.Ct. 2631. Justice Scalia's partial concurrence, joined by three other justices, agreed with the majority's conclusion regarding the STJs' status: "I agree with the Court that a special trial judge is an `inferior Office[r]' within the meaning of [the Appointments Clause]." Id. at 901, 111 S.Ct. 2631 (Scalia, J., concurring) (first alteration in original). Thus, a unanimous Supreme Court concluded STJs were inferior officers.
The SEC conceded in its opinion that its ALJs are not appointed by the President, a court of law, or the head of a department. SEC Release No. 9972, 2015 WL 6575665, at *19. The sole question is whether SEC ALJs are inferior officers under the Appointments Clause. Under Freytag, we must consider the creation and duties of SEC ALJs to determine whether they are inferior officers. 501 U.S. at 881-82, 111 S.Ct. 2631.
The APA created the ALJ position. 5 U.S.C. § 556(b)(3); see also Mullen v. Bowen, 800 F.2d 535, 540 n.5 (6th Cir. 1986) ("[T]he ALJ's position is not a creature of administrative law; rather, it is a direct creation of Congress under the [APA]."). Section 556 of the APA describes the duties of the "presiding employe[e]" at an administrative adjudication. 5 U.S.C. § 556. It states, "There shall preside at the taking of evidence ... (1) the agency; (2) one or more members of the body which comprises the agency; or (3) one or more administrative law judges appointed under section 3105 of this title." Id. § 556(b).
Under 5 U.S.C. § 3105, "Each agency shall appoint as many administrative law judges as are necessary for proceedings required to be conducted in accordance with [5 U.S.C. §§ 556, 557]." Agencies hire ALJs through a merit-selection process administered by the Office of Personnel Management ("OPM"), which places ALJs within the civil service (i.e., the "competitive service"). 5 U.S.C. § 1302; 5 C.F.R. § 930.201. ALJ applicants must be licensed attorneys with at least seven years of litigation experience. 5 C.F.R. § 930.204; Office of Pers. Mgmt., Qualification Standard for Administrative Law Judge Positions, https://perma.cc/2G7J-X5BW. OPM administers an exam and uses the results to rank applicants. 5 C.F.R. § 337.101. Agencies may select an ALJ
The SEC has authority to delegate "any of its functions" except rulemaking to its ALJs. 15 U.S.C. § 78d-1(a). And SEC regulations task ALJs with "conduct[ing] hearings" and make them "responsible for the fair and orderly conduct of the proceedings." 17 C.F.R. § 200.14. SEC ALJs "have the authority to do all things necessary and appropriate to discharge [their] duties." 17 C.F.R. § 201.111.
Duty Provision(s)Administer oaths and affirmations 5 U.S.C. § 556(c)(1) 17 C.F.R. § 200.14(a)(1) 17 C.F.R. § 201.111(a) Consolidate "proceedings involving a common 17 C.F.R. § 201.201(a) question of law or fact" "Determin[e]" the "scope and form of evidence, 17 C.F.R. § 201.326 rebuttal evidence, if any, and cross-examination, if any" Enter default judgment 17 C.F.R. § 201.155 Examine witnesses 17 C.F.R. § 200.14(a)(4) Grant extensions of time or stays 17 C.F.R. § 201.161 Hold prehearing conferences 17 C.F.R. § 200.14(a)(6) Hold settlement conferences and require attendance of 5 U.S.C. § 556(c)(6) the parties 5 U.S.C. § 556(c)(8) 17 C.F.R. § 201.111(e) Inform the parties about alternative means of dispute 5 U.S.C. § 556(c)(7) resolution 17 C.F.R. § 201.111(k) Issue protective orders 17 C.F.R. § 201.322 Issue, revoke, quash, or modify subpoenas 5 U.S.C. § 556(c)(2) 17 C.F.R. § 200.14(a)(2) 17 C.F.R. § 201.111(b) 17 C.F.R. § 201.232(e) Order and regulate depositions 17 C.F.R. § 201.233 Order and regulate document production 17 C.F.R. § 201.230 Prepare an initial decision containing factual findings 5 U.S.C. § 556(c)(10) and legal conclusions, along with an appropriate order 17 C.F.R. § 200.14(a)(8) 17 C.F.R. § 200.30-9(a) 17 C.F.R. § 201.111(i) 17 C.F.R. § 201.360 Punish contemptuous conduct by excluding a person 17 C.F.R. § 201.180(a) from a deposition, hearing, or conference or by suspending a person from representing others in the proceeding Regulate the course of the hearing and the conduct of 5 U.S.C. § 556(c)(5) the parties and counsel 17 C.F.R. § 200.14(a)(5) 17 C.F.R. § 201.111(d) Reject deficient filings, order a party to cure 17 C.F.R. § 201.180(b). (c) deficiencies, and enter default judgment for failure to cure deficiencies Reopen any hearing prior to filing an initial decision 17 C.F.R. § 201.111(j) or prior to the fixed time for the parties to file final briefs with the SEC Rule on all motions, including dispositive and 5 U.S.C. § 556(c)(9) procedural motions 17 C.F.R. § 200.14(a)(7) 17 C.F.R. § 201.111(h) 17 C.F.R. § 201.220 17 C.F.R. § 201.250 Rule on offers of proof and receive relevant evidence 5 U.S.C. § 556(c)(3) 17 C.F.R. § 200.14(a)(3) 17 C.F.R. § 201.111(c) Set aside, make permanent, limit, or suspend 17 C.F.R. § 200.30-9(b) temporary sanctions the SEC issues 17 C.F.R. § 201.531 Take depositions or have depositions taken 5 U.S.C. § 556(c)(4)
E. SEC ALJs Are Inferior Officers Under Freytag
Following Freytag, we conclude SEC ALJs are inferior officers under the Appointments Clause. As the SEC acknowledges, the ALJ who presided over Mr. Bandimere's hearing was not appointed by the President, a court of law, or a department head. He therefore held his office in conflict with the Appointments Clause when he presided over Mr. Bandimere's hearing.
Freytag held that STJs were inferior officers based on three characteristics. Those three characteristics exist here: (1) the position of the SEC ALJ was "established by Law," Freytag, 501 U.S. at 881, 111 S.Ct. 2631 (quoting U.S. Const. art. II, § 2, cl. 2); (2) "the duties, salary, and means of appointment ... are specified by statute," id.; and (3) SEC ALJs "exercise significant discretion" in "carrying out ... important functions," id. at 882, 111 S.Ct. 2631.
They also have authority to issue initial decisions that declare respondents liable and impose sanctions.
Further, SEC ALJs have power to enter default judgments
In sum, SEC ALJs closely resemble the STJs described in Freytag. Both occupy offices established by law; both have duties, salaries, and means of appointment specified by statute; and both exercise significant discretion while performing "important functions" that are "more than ministerial tasks." Freytag, 501 U.S. at 881-82, 111 S.Ct. 2631; see also Samuels, 930 F.2d at 986. Further, both perform similar adjudicative functions as set out above.
This holding serves the purposes of the Appointments Clause. The current ALJ hiring process whereby the OPM screens applicants, proposes three finalists to the SEC, and then leaves it to somebody at the agency to pick one, is a diffuse process that does not lend itself to the accountability that the Appointments Clause was written to secure. In other words, it is unclear where the appointment buck stops. The current hiring system would suffice under the Constitution if SEC ALJs were employees, but we hold under Freytag that they are inferior officers who must be
The SEC's Arguments
Final Decision-Making Power
In rejecting Mr. Bandimere's Appointments Clause argument during agency review, the SEC's opinion concluded the ALJs are not inferior officers because they cannot render final decisions and the agency retains authority to review ALJs' decisions de novo.
The SEC makes similar arguments here. It contends the Freytag Court relied on the STJs' final decision-making power when it held they were inferior officers. The agency draws on Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), in which the D.C. Circuit attempted to distinguish Freytag and held that FDIC ALJs were employees. 204 F.3d at 1134. In Landry, the D.C. Circuit stated Freytag "laid exceptional stress on the STJs' final decisionmaking power." Id. The court therefore considered dispositive the FDIC ALJs' inability to render final decisions. Id.
This past August, the D.C. Circuit addressed the same question we face here. Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277, 283 (D.C. Cir. 2016). The D.C. Circuit followed Landry and concluded that SEC ALJs are employees and not inferior officers. Id. at 283-89. The holding was based on the court's conclusion that SEC ALJs cannot render final decisions. Id. at 285 ("[T]he parties principally disagree about whether [SEC] ALJs issue final decisions of the [SEC]. Our analysis begins, and ends, there."). We disagree with the SEC's reading of Freytag and its argument that final decision-making power is dispositive to the question at hand.
Moreover, Freytag agreed with the Second Circuit's Samuels decision, id. which held that STJs are inferior officers because they "exercise a great deal of discretion and perform important functions" in § 7443A(b)(4) cases, Samuels, 930 F.2d at 986. The Second Circuit did not rely on the STJs' ability to enter final decisions under § 7443A(b)(1), (2), and (3). Id. at 985-86. Rather, it said STJs are inferior officers even though "the ultimate decisional authority in cases under section 7443A(b)(4) rests with the Tax Court judges." Id. at 985. Like Freytag, Samuels hinged on the STJs' duties and not on final decision-making power.
After stating its holding that STJs are inferior officers based on their duties, the Freytag Court responded to the government's standing argument. 501 U.S. at 882. 111 S.Ct. 2631. The Court stated, "Even if the duties of special trial judges under subsection (b)(4) were not as significant as we and the two courts have found them to be, our conclusion would be unchanged." Id. (emphasis added). This sentence reaffirms what the Court previously concluded: it "found" the duties of the STJs are sufficiently significant to make them inferior officers. Id. That conclusion did not depend
Further, the Court's "even if" argument was a response to (1) the government's concession that STJs are inferior officers in § 7443A(b)(1), (2), and (3) cases, where they had final decision-making authority,
The Court's rejection of the government's standing argument is a far cry from holding that final decision-making authority is the predicate for inferior officer status. Indeed, the Court did not hold that STJs are inferior officers because they have final decision-making authority in § 7443A(b)(1), (2), and (3) cases. Rather, it accepted the government's concession that STJs are inferior officers in those cases for the purpose of responding to the standing argument. Thus, the Court's "even if" argument did not modify or supplant its holding that STJs were inferior officers based on the "significance of [their] duties and discretion." Id. at 881, 111 S.Ct. 2631.
The SEC reads Freytag as elevating final decision-making authority to the crux of inferior officer status. But properly read, Freytag did not place "exceptional stress" on final decision-making power.
Final decision-making power is relevant in determining whether a public servant
In Buckley, the Court held FEC commissioners were inferior officers because they exercised "significant authority," including the "responsibility for conducting civil litigation in the courts of the United States for vindicating public rights." 424 U.S. at 125-26, 140, 96 S.Ct. 612. The Buckley Court analyzed significant authority as a matter of degree without discussing final decision-making power. Id.; see also Ass'n of Am. Railroads v. U.S. Dep't of Transp., 821 F.3d 19, 38 (D.C. Cir. 2016) (stating Edmond "clarified [that] the degree of an individual's authority is relevant in marking the line between officer and nonofficer, not between principal and inferior officer" (citing Edmond, 520 U.S. at 662, 117 S.Ct. 1573)).
The Court has not equated significant authority with final decision-making power in Buckley, Freytag, Edmond, or elsewhere. Nor has it indicated that each of the officers it has deemed inferior possesses that power.
Deference to Congress
The SEC further contends Congress intended its ALJs to be employees. It urges us to "accor[d] significant weight" to congressional intent in determining whether the ALJs are inferior officers. Aplee. Br. at 41.
The SEC overstates its arguments. In its brief, it has not cited statutory language expressly stating ALJs are employees for purposes of the Appointments Clause. Nor has it cited legislative history indicating Congress has specifically addressed the question whether ALJs are inferior officers. And to the extent the SEC seeks to infer congressional intent from congressional action, the evidence is mixed.
On the one hand, the SEC stresses that Congress was "deliberate" in constructing the statutory framework governing the hiring of ALJs and the powers ALJs have in relation to their agencies. Aplee. Br. at 27. This includes placing the position within the civil service and tasking the OPM to prescribe rules governing ALJ hiring. 5 U.S.C. §§ 1302, 3105, 3313; 5 C.F.R. § 930.201. The SEC argues this suggests congressional intent to classify ALJs as employees. But, on the other hand, and as detailed previously, Congress granted significant authority to SEC ALJs in the APA and the Exchange Act and has authorized the agency to delegate "any of its [non-rulemaking] functions" to ALJs. 5 U.S.C. §§ 556, 557; 15 U.S.C. § 78d-1(a).
When it has faced a case or controversy concerning separation of powers, the Supreme Court has determined whether the legislative or executive branches or both have violated the Constitution. See, e.g., Bowsher v. Synar, 478 U.S. 714, 106 S.Ct. 3181, 92 L.Ed.2d 583 (1986); INS v. Chadha, 462 U.S. 919, 103 S.Ct. 2764, 77 L.Ed.2d 317 (1983); Buckley, 424 U.S. at 1, 96 S.Ct. 612; Marbury v. Madison, 5 U.S. (1 Cranch) 137, 2 L.Ed. 60 (1803). This has been so even when a congressional scheme was carefully devised and effective. Bowsher, 478 U.S. at 736, 106 S.Ct. 3181.
Moreover, the Supreme Court's treatment of the government's deference argument in Freytag is instructive here. The government contended the Supreme Court should "defer to the Executive Branch's decision that there has been no legislative encroachment on Presidential prerogatives under the Appointments Clause." 501 U.S. at 879, 111 S.Ct. 2631. The Court rejected
The Dissent's Arguments
We address three of the dissent's main arguments.
In Ballard, a case the dissent mistakenly relies on to attempt to differentiate STJs and SEC ALJs,
The dissent is left with its argument that in certain cases the STJs "had the power to bind third parties and the government itself." Id. at 1196 n.2. But, as previously explained, Freytag did not regard this ground as dispositive to hold the STJs are inferior officers.
Moreover, even if the STJs exercise more authority than the SEC ALJs, it does not follow that the former are inferior officers and the latter are employees or that the latter do not exercise significant authority. We agree that ALJs are not identical to STJs. But, as explained in detail above, STJs and ALJs closely resemble one another where it counts. SEC ALJs can still be inferior officers without possessing identical powers as STJs, just like STJs can still be inferior officers without possessing identical powers as FEC commissioners and assistant surgeons. See Buckley, 424 U.S. at 125-26, 96 S.Ct. 612; Moore, 95 U.S. at 762.
We recognize that our holding potentially implicates other questions. But no other issues have been presented to us here, and we therefore cannot address them. Nothing in this opinion should be read to answer any but the precise question before this court: whether SEC ALJs are employees or inferior officers. Questions about officer removal, officer status of other agencies' ALJs, civil service protection, rulemaking, and retroactivity, see Dissent at 1199-1201, are not issues on appeal and have not been briefed by the parties. Having answered the question before us, and thus resolved Mr. Bandimere's petition, we must leave for another day any other putative consequences of that conclusion.
SEC ALJs "are more than mere aids" to the agency. Samuels, 930 F.2d at 986. They "perform more than ministerial tasks." Freytag, 501 U.S. at 881, 111 S.Ct. 2631. The governing statutes and regulations give them duties comparable to the STJs' duties described in Freytag. SEC ALJs carry out "important functions," id. at 882, 111 S.Ct. 2631, and "exercis[e] significant authority pursuant to the laws of the United States," Buckley, 424 U.S. at 126, 96 S.Ct. 612. The SEC's power to review its ALJs does not transform them into lesser functionaries. Rather, it shows the ALJs are inferior officers subordinate to the SEC commissioners. Edmond, 520 U.S. at 663, 117 S.Ct. 1573.
The SEC ALJ held his office unconstitutionally when he presided over Mr. Bandimere's hearing. We grant the petition for review and set aside the SEC's opinion.
BRISCOE, Circuit Judge, concurring.
I write not to differ with the rationale of the majority opinion, but rather to fully join it. My focus here is on the dissent. I group my concerns in two categories: (I) the dissent's predictions about speculative "repercussions" of the opinion, by which it reaches what appear to be several erroneous conclusions; and (II) its application of a truncated legal framework to a misstated version of the facts of record.
Underlying the dissent's position is a concern about the next case, and the one after that. The dissent suggests that a "probable consequence" of the opinion is that "all" 1,792 "federal ALJs are at risk of being declared inferior Officers." Dissent at 1199 & n.5. But this was no less true when
Further, the majority has not affected "thousands of administrative actions,"
Relatedly, the dissent errs when it suggests that the majority is operating without "much precedent." Dissent at 1201. The majority simply applies
The D.C. Circuit erroneously suggested as much in
The dissent also contends that the majority's opinion "will be used to strip all ALJs of their dual layer for-cause protection." Dissent at 1200. This troubling statement calls for a response because the dissent essentially predetermines the holdings of hypothetical cases not before this court.
In some future case, a litigant may argue that all ALJs are inferior Officers. But as the majority here explains — and
The dissent also does not stop after incorrectly stating that the majority has addressed an issue not before us. It instead
Specifically, the dissent worries that the consequence of the majority's opinion is that all federal ALJs are inferior Officers, that all federal ALJs are thus afforded the double-for-good-cause-removal protection forbidden by
First, it may well be that within the Social Security Administration ALJs are removable in a manner that does not run afoul of
Second, even assuming that all federal ALJs are Officers who are removable only for good cause and that they are all selected by Officers who are also removable only for good cause, the dissent knocks down a straw man by suggesting that
The D.C. Circuit just recently employed this principle in
Thus, contrary to the dissent's suggestions, the majority's opinion portends no change to any ALJ's robust protections.
Additionally, the dissent is incorrect when it argues that the majority is not showing appropriate "deference to Congress," Dissent at 1201, on this structural constitutional question, as when it states: "Whether federal ALJs should receive such dual for-cause protections is perhaps a question that could be debated, but Congress has already decided this question in favor of protecting ALJs...."
In any event, the dissent's dire predictions about hypothetical consequences of the majority's holding are exaggerated.
Turning to the dissent's proposal for deciding this case on the facts here, the dissent appears to sub silentio urge this court to adopt
But as the majority points out, this mode of analysis — and the D.C. Circuit's repeated application of it — is wrong.
Likewise, final decision-making authority is but one sovereign power, albeit an important one that is typically sufficient to render an employee an Officer.
Further, even as to its analysis of the SEC's ALJs' decision-making authority, the dissent mischaracterizes the factual record in a manner that it is imperative to correct. Specifically, the dissent states and then repeatedly relies on the fact that the SEC is not required to afford its ALJs any deference and that it conducts de novo review of their decisions to conclude that the ALJs do not "have the sovereign power to bind the Government and third parties." Dissent at 1194. The dissent also calls this a "difference that makes all the difference" between the SEC's ALJs and "the special trial judges at issue in"
The dissent additionally states that "even where special trial judges" in
The dissent rightly points out that if an agency deferred to its personnel on such critical issues, "the Appointments Clause would be offended." Dissent at 1196 n.1. But the dissent then applies these statements in an attempt to distinguish the special trial judges imbued with that authority from the SEC's ALJs: "The Securities and Exchange Commission, by contrast, is not required to give its ALJs any deference" and "may review its ALJs' conclusions of law and findings of fact de novo."
This characterization of the SEC's actual process of reviewing its ALJs' decisions is wrong, notwithstanding its attempt to characterize its review as "de novo." David F. Bandimere, SEC Release No. 9972, 2015 WL 6575665, at *20 (Oct. 29, 2015). In footnotes 83 and 114 of its opinion in Mr. Bandimere's case, the SEC reveals the full effect of affording its ALJs the very deference that the dissent explains runs afoul of the Appointments Clause.
The SEC admitted as much when it addressed Mr. Bandimere's Appointments Clause challenge. It professed to review its "ALJs' decisions de novo."
But that proviso is cold comfort to a defendant, like Mr. Bandimere, whose liability for massive civil penalties depends in no small part on the United States's assessment of his credibility during live testimony, credibility determined by the only government employee designated to preside over that testimony — an ALJ. And whatever the SEC means by its disclaimer, it does not equate to de novo review. Rather, whether the SEC disagrees with its ALJs' credibility determinations triggers its own rule that an ALJ's evaluation of a witness's live testimony is entitled to "considerable weight."
As the dissent concedes, affording bureaucrats such deference permits them to exercise the sovereign authority of the United States in an often-outcome-determinative fashion that is incompatible with
McKAY, Circuit Judge, dissenting
Notwithstanding the majority's protestations otherwise, today's opinion carries repercussions that will throw out of balance the teeter-totter approach to determining which of all the federal officials are subject to the Appointments Clause. While the Supreme Court perhaps opened the door to such an approach in Freytag v. Commissioner, 501 U.S. 868, 111 S.Ct. 2631, 115 L.Ed.2d 764 (1991), I would not throw it open any further, but in my view that is exactly what the majority has done. I do not believe Freytag mandates the result proposed here, and the probable consequences are too troublesome to risk without a clear mandate from the Supreme Court. I respectfully dissent.
The majority compares SEC ALJs to the Tax Court's special trial judges, and it reasons that because the duties of an ALJ are enough like those of a special trial judge, ALJs must be "Officers" too. But the similarities between Freytag and this case matter far less than the differences. Most importantly, the special trial judges at issue in Freytag had the sovereign power to bind the Government and third parties. SEC ALJs do not. And under the Appointments Clause, that difference makes all the difference. See Officers of the United States Within the Meaning of the Appointments Clause, 31 Op. O.L.C. 73, 73-74 (2007); Raymond J. Lucia Companies v. SEC, 832 F.3d 277, 285-87 (D.C. Cir. 2016).
The requirements of the Appointments Clause are "designed to preserve political accountability relative to important Government assignments." Edmond v. United States, 520 U.S. 651, 663, 117 S.Ct. 1573, 137 L.Ed.2d 917 (1997). It ensures that members of the executive branch cannot "escape responsibility" for significant decisions by hiding behind unappointed officials or otherwise "pretending that" those decisions "are not [their] own." Free Enter. Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477, 497, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010). Such government officials — "those who exercise the power of the United States" — must be "accountable to the President, who himself is accountable to the people." Dep't of Transp. v. Ass'n of Am. R.Rs., ___ U.S. ___, 135 S.Ct. 1225, 1238, 191 L.Ed.2d 153 (2015) (Alito, J., concurring).
It is not surprising, then, that the Tax Court's special trial judges were held to be officers in Freytag. 501 U.S. at 881-82, 111 S.Ct. 2631. It is clear from the context, if not the Freytag opinion, that these special trial judges had been delegated significant authority — much more authority than SEC ALJs. In some cases, special trial judges could enter final decisions on behalf of the Tax Court. Freytag, 501 U.S. at 882, 111 S.Ct. 2631. In those cases, it was conceded in Freytag that the special trial judges acted as inferior officers. Id. But even where special trial judges could not enter final decisions, their initial decisions had binding effect.
Where the special trial judges did not issue a final decision, the Tax Court was still required to presume correct the special trial judge's factual findings, including findings of intent, and to defer to the special trial judge's determinations of credibility. See Landry v. FDIC, 204 F.3d 1125, 1133 (D.C. Cir. 2000). Such deference was a delegation of significant authority to the special trial court judges. Many cases before the Tax Court, including the ones at issue in Freytag, "involve critical credibility assessments, rendering the appraisals of the [special trial] judge who presided at trial vital to the Tax Court's ultimate determinations."
The majority barely mentions that the Tax Court was "required to defer" to the special trial judges' factual and credibility findings "unless they were clearly erroneous." Landry, 204 F.3d at 1133. But the powers of the special trial judges must be understood in context. As Freytag illustrates, a special trial judge's initial decision is not like an ALJ's — it is the difference between chiseling in stone and drafting in pencil.
The majority also fails to appreciate that the Tax Court appeared to defer to its special trial judges on conclusions of law as well. But this point was squarely before the Supreme Court. As the Freytag petitioners argued, "[i]n practice, special trial judge factual findings and legal opinions are routinely adopted verbatim by the regular Tax Court judges to whom they are assigned." Brief for Petitioner, supra, at 7. Between 1983 and 1991, when Freytag was decided, every initial report submitted by a special trial judge was purportedly adopted verbatim — a fact made known to the Freytag Court. See Pet'rs' Br., supra, at 6-10.
Every reported decision, including the Tax Court's decision in Freytag, "invariably beg[an] with a stock statement that the Tax Court judge `agrees with and adopts the opinion of the special trial judge.'" Ballard, 544 U.S. at 46, 125 S.Ct. 1270 (citation omitted) (original brackets omitted); see, e.g., Freytag v. Comm'r, 89 T.C. 849, 849 (1987) ("The Court agrees with and adopts the opinion of the Special Trial Judge that is set forth below."). Following that disclaimer was an opinion issued in the name of the special trial judge.
Freytag thus illustrates another point that the majority misses: the Tax Court may not have even reviewed the supposedly nonfinal decisions of its special trial judges. As the Freytag petitioners argued before the Supreme Court, that case was "a perfect example of how special trial judges routinely do the Tax Court's work with only the most cursory supervision, if any." Pet'rs' Br., supra, at 23. There, "after one of the longest trials in Tax Court history," which involved "14 weeks of complex financial testimony spanning two years of trial" and which produced "9,000 pages of transcript and ... 3,000 exhibits," the Tax Court purported to adopt the special trial judge's report — verbatim — and filed it as the Tax Court's decision on the very same day it received the report. Id. at 23, 9. As the Freytag petitioners argued to the Supreme Court, "[t]he special trial judge's filing of his report and its verbatim adoption by [Tax Court] Chief Judge Sterrett appear from the record to have been virtually simultaneous." Id. at 8. That decision resolved several unsettled, important legal questions. Yet, according to the docket, the Tax Court judge filed the decision as his own on the same day that the special trial judge filed his proposed findings and opinions. See id.
On appeal, the Commission is not limited by the record before it. It "may expand the record by hearing additional evidence" itself or it may "remand for further proceedings." Bandimere, SEC Release No. 9972, 2015 WL 6575665 (Oct. 29, 2015) (internal quotation marks and brackets omitted). The Commission "may affirm, reverse, modify, set aside" the initial decision or remand, "in whole or in part," and it "may make any findings or conclusions that in its judgment are proper" and on the basis of the record." 17 C.F.R. § 201.411(a). If "a majority of participating Commissioners do not agree to a disposition on the merits, the initial decision shall be of no effect." Id. § 201.411(f).
The majority says that, like special trial judges, SEC ALJs also "exercise significant discretion." Maj. Op. at 1179. But again the majority misses the point. It is not about day-to-day discretion — the Appointments Clause does not care about that. Special trial judges "exercise[d] significant discretion" in setting the record because the Tax Court was required to defer to its special trial judges' findings. We say, for example, that a "district court has significant discretion in sentencing" because we "review for abuse of discretion." United States v. Tindall, 519 F.3d 1057, 1065 (10th Cir. 2008); see also, e.g., Murphy v. Deloitte & Touche Grp. Ins. Plan, 619 F.3d 1151, 1164 (10th Cir. 2010) (recognizing that a district court has "substantial discretion in handling discovery requests," because our standard of review is highly deferential). Similarly, a special trial judge had "significant discretion" because the Tax Court had to review its findings equally deferentially. The Commission, by contrast, does not have to review its ALJ's opinions with any deference. An SEC ALJ, thus, does not exercise "significant discretion" in any meaningful way.
SEC ALJs, then, possess only a "purely recommendatory power," Landry, 204 F.3d at 1132, which separates them from constitutional officers. The Supreme Court has suggested as much. See Free Enter. Fund, 561 U.S. at 507, 130 S.Ct. 3138. In Free Enterprise Fund, the Court explained that its holding "does not address that subset of independent agency
The results speak for themselves: Unlike the Tax Court, which purported to adopt its special tax judges' opinions verbatim in 880 out of 880 cases between 1983 and 2005, the Commission followed its ALJs' recommendations in their entirety in only 3 of the 13 appeals decided thus far in 2016.
In the end, then, it is the Commission that "ultimately controls the record for review and decides what is in the record." Lucia, 832 F.3d at 288 (citation omitted); see also Nash v. Bowen, 869 F.2d 675, 680 (2d Cir. 1989) (recognizing that, under 5 U.S.C. § 557(b), the agency "retains `all the powers which it would have in making the initial decision'"). It is the Commission that enters the final order — in all cases — and it is the commissioners who shoulder the blame.
The majority argues that the current process for selecting ALJs "does not lend itself to ... accountability," Maj. Op. at 1181, but it is quite clear where the buck stops. Because the Commission is not bound in any way by its ALJ's decisions, unlike the Tax Court, the blame for its unpopular decisions will fall squarely on the commissioners and, in turn, the president who appointed them. So long as the commissioners have been validly appointed, the Appointments Clause is satisfied.
Putting aside that the Commission is not bound — in any way — by an ALJ's recommendations, amici's attempt to analogize SEC ALJs to magistrate judges only serves to highlight the difference between ALJs and constitutional officers. Unlike ALJs, magistrate judges have been delegated sovereign authority and have the power to bind the government and third parties. Magistrate judges are authorized to issue arrest warrants, 18 U.S.C. § 3041; determine pretrial detention, id. §§ 3141, 3142; detain a material witness, id. § 3144; enter a sentence for a petty offense, without the consent of the United States or the defendant, 28 U.S.C. § 636(a)(4); and issue final judgments in misdemeanor cases and all civil cases with the consent of the parties, id. § 636(a)(5), (c); 18 U.S.C. § 3401. Magistrate judges may also impose sanctions for contempt. 28 U.S.C. § 636(e). SEC ALJs can do none of these things.
The majority's reliance on Supreme Court decisions from the nineteenth century and early twentieth century is equally problematic. The majority's casual citation to these cases might lead one to believe there is a body of caselaw to which we can
Finally, I began this dissent by expressing my fears of the probable consequences of today's decision. It does more than allow malefactors who have abused the financial system to escape responsibility. Under the majority's reading of Freytag, all federal ALJs are at risk of being declared inferior officers. Despite the majority's protestations, its holding is quite sweeping, and I worry that it has effectively rendered invalid thousands of administrative actions. Today's judgment is a quantitative one — it does not tell us how much authority is too much. It lists the duties of SEC ALJs, without telling us which, if any, were more important to its decision than others and why. And I worry that this approach, and the end result, leaves us with more questions than it answers.
Are all federal ALJs constitutional officers? Take, for example, the 1,537 Social Security Administration (SSA) ALJs,
If a claimant is dissatisfied with an SSA ALJ's decision, he may seek the SSA's Appeals Council's review. The Appeals Council may then deny or dismiss the request for review or grant it. Id. §§ 404.967, 416.1467. Like the Securities and Exchange Commission, the Appeals Council may also review an ALJ's decision on its own motion. Id. §§ 404.969(a), 416.1469(a). After it has reviewed all the evidence in the ALJ's hearing record and any additional evidence received, the Appeals Council will make a decision or remand the case to an ALJ. Id. §§ 404.977, 404.979, 416.1477, 416.1479. The Appeals Council may affirm, modify or reverse the ALJ's decision. Id. If no review is sought and the Appeals Council does not review the ALJ's decision on its own motion, the
This should all sound familiar. SSA ALJs have largely the same duties as SEC ALJs, and the appeals process appears similar as well. But the parallels between SEC ALJs and SSA ALJs do not end there. Like SEC ALJs, SSA ALJs can hold prehearing conferences, id. § 405.330; punish contemptuous conduct by excluding a person from a hearing, see Social Security Administration Hearings, Appeals and Litigation Law Manual (HALLEX), I-2-6-60 (Jan. 15, 2016)
This is all to say that SEC ALJs are not unique. I cannot discern a meaningful difference between SEC ALJs and SSA ALJs under the majority's reading of Freytag. Indeed, litigants have already begun drawing this precise comparison between SEC ALJs and SSA ALJs. See, e.g., Manbeck v. Colvin, No. 15 CV 2132, 2016 WL 29631 (S.D.N.Y. Jan. 4, 2016). Insofar as SSA ALJs are not appointed by the president, a court of law, or the head of a department, cf. O'Leary v. Office of Pers. Mgmt., No. DA-300A-12-0430-B-1, 2016 WL 3365404 (M.S.P.B. June 17, 2016), today's decision risks throwing much into confusion. "Does every losing party before an ALJ now have grounds to appeal on the basis that the decision entered against him is unconstitutional?" Free Enter. Fund, 561 U.S. at 543, 130 S.Ct. 3138 (Breyer, J., dissenting). It certainly seems that way.
And what of the ALJs going forward? When understood in conjunction with Free Enterprise Fund, I worry today's opinion will be used to strip ALJs of their dual layer for-cause protection. In Free Enterprise Fund, the Supreme Court held that "dual for-cause limitations on the removal" of some inferior officers is unconstitutional. 561 U.S. at 492, 130 S.Ct. 3138. Presently, SEC ALJs (and SSA ALJs) have such dual for-cause protection: An SEC ALJ may only be removed by the Merit Systems Protection Board and only for good cause. See 5 U.S.C. § 7521(a), (b). The members of the Merit Systems Protection Board are themselves protected from at-will removal. Id. at § 1202. I appreciate that this issue is not before the court, but today's decision makes it more likely that either ALJs or the Board, or both, will lose this civil service protection. See Free Enter. Fund., 561 U.S. 477, 542, 525, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010) (Breyer, J., dissenting).
I am similarly concerned about what the majority's decision portends for untold rules and regulations. "Although almost all rulemaking is today accomplished through informal notice and comment, the APA actually contemplated a much more formal process for most rulemaking. To that end,
Formal rulemaking proceedings must be presided over by an agency official or an ALJ. An ALJ's function in formal rulemaking is nearly identical to its function in formal adjudications. See 5 U.S.C. §§ 556, 557. So, if ALJs are officers for purposes of formal adjudication, as the majority so holds, they must also be officers for formal rulemaking. See also Freytag, 501 U.S. at 882, 111 S.Ct. 2631 ("Special trial judges are not inferior officers for purposes of some of their duties under § 7443A, but mere employees with respect to other responsibilities.... If a special trial judge is an inferior officer for purposes of subsections (b)(1), (2), and (3), he is an inferior officer within the meaning of the Appointments Clause and he must be properly appointed."). Though formal rulemaking is much rarer today, see Perez 135 S.Ct. at 1222 n.5, this was not always the case. And I worry that rules and regulations that were promulgated via formal rulemaking before an agency ALJ and are still enforced today are now constitutionally suspect.
Today's holding risks throwing much into disarray. Since the Administrative Procedures Act created the position of administrative law judge in 1946, the federal government has employed thousands of ALJs to help with the day-to-day functioning of the administrative state. Freytag, which was decided 25 years ago, has never before been extended by a circuit court to any ALJ. And yet, the majority is resolved to create a circuit split. When there are competing understandings of Supreme Court precedent, I would prefer the outcome that does the least mischief.
Furthermore, faced with such uncertainty, "we must hesitate to upset the compromises and working arrangements that the elected branches of Government themselves have reached." NLRB v. Noel Canning, ___ U.S. ___, 134 S.Ct. 2550, 2560, 189 L.Ed.2d 538 (2014). Judicial review must fit the occasion. In a close case regarding the application of a constitutional rule in a discrete factual setting, and without much precedent to guide us, deference to Congress seems particularly relevant. I respectfully dissent.
In Weiss v. United States, 510 U.S. 163, 114 S.Ct. 752, 127 L.Ed.2d 1 (1994), the Supreme Court stated the Framers structured "an alternative appointment method for inferior officers" to promote "accountability and check governmental power: any decision to dispense with Presidential appointment and Senate confirmation is Congress's to make, not the President's, but Congress's authority is limited to assigning the appointing power to the highly accountable President or the heads of federal departments, or, where appropriate, to the courts of law." 510 U.S. at 187, 114 S.Ct. 752.
Statements from Alexander Hamilton and James Madison also indicate "inferior" means subordinate. In Federalist No. 81, Hamilton described inferior courts as those "subordinate to the Supreme." The Federalist No. 81, at 484 (Alexander Hamilton) (Clinton Rossiter ed., 1961). In the brief debate about the Excepting Clause at the Federal Constitutional Convention in 1787, Madison "mention[ed] (as in apparent contrast to the `inferior officers' covered by the provision) `Superior Officers.'" Morrison v. Olson, 487 U.S. 654, 720, 108 S.Ct. 2597, 101 L.Ed.2d 569 (1988) (Scalia, J., dissenting) (citing 2 The Records of the Federal Convention of 1787 627-28 (M. Farrand ed., rev. ed. 1966)). He also referred to "subordinate officers" in contradistinction to "principal officers" when explaining the appointment power during the Virginia ratification convention. 3 The Debates in the Several State Conventions on the Adoption of the Federal Constitution 409-10 (Jonathan Elliot ed., 2d ed. 1836); see also Tuan Samahon, Are Bankruptcy Judges Unconstitutional? An Appointments Clause Challenge, 60 Hastings L.J. 233, 251 (2008) (discussing Madison's remarks at the Virginia convention).
Id. at 985-86 (quoting Buckley, 424 U.S. at 126, 96 S.Ct. 612).
In First Western, the Tax Court concluded STJs are inferior officers: "Because [they] may be assigned any case and may enter decisions in certain cases, it follows that special trial judges exercise significant authority." 94 T.C. at 557.
Although a factor, final decision-making power was not the linchpin of the Tax Court's analysis. Id. And in any event, the Freytag Court endorsed the Second Circuit's and Tax Court's analyses because they relied on "the degree of authority" STJs possessed. Freytag, 501 U.S. at 881, 111 S.Ct. 2631.
Further, an SEC ALJ's authority to issue an initial decision is significant because, even if reviewed de novo, the ALJ plays a significant role as detailed above in conducting proceedings and developing the record leading to the decision, and the decision publicly states whether respondents have violated securities laws and imposes penalties for violations. Id. § 201.360(c) (requiring the agency to publish the initial decision on the SEC docket).
Mr. Bandimere argues, "[The SEC ALJ] is an inferior officer whose unconstitutional appointment is a structural constitutional error that invalidates the proceeding." Aplt. Br. at 18. The SEC does not dispute that an Appointments Clause error here is structural and that there is no need to show prejudice.
Landry, 204 F.3d at 1142 (Randolph, J., concurring).
478 U.S. at 736, 106 S.Ct. 3181 (ellipsis omitted) (quoting Chadha, 462 U.S. at 944, 103 S.Ct. 2764).
In other words, Freytag appears to be an example of the collaborative process at work — the STJ provided the Tax Court judge a "report," and the Tax Court judge later adopted the STJ's "opinion" that resulted from the joint efforts of the STJ and Tax Court judge. Nevertheless, the dissent infers the Tax Court judge adopted the STJ's recommendation "verbatim," Dissent at 1196 n.1, even though the Supreme Court declined "to assume `rubber stamp' activity on the part of the [Tax Court judge]," Freytag, 501 U.S. at 872 n.2, 111 S.Ct. 2631.
The majority next states that there is "no indication" the Tax Court judge in Freytag adopted the STJ's report "verbatim" — but the Tax Court judge purported to do just that. Freytag, 89 T.C. at 849. Indeed, "[i]n the 880 cases heard between ... 1983 and ... 2005, there appear to be no instances in which a special trial judge issued a report and recommendation that the Tax Court publicly modified or rejected." Christopher M. Pietruszkiewicz, Conflating Standards of Review in the Tax Court: A Lesson in Ambiguity, 44 Houston L. Rev. 1337, 1360 (2008). What's more, after Ballard was decided, the Tax Court tried to make good by releasing the undisclosed reports from every case heard initially by a special trial judge since 1983. Louise Story, Tax Court Lifts Secrecy, Putting Some Cases in New Light, N.Y. Times, Sept. 24, 2005, at C6. It could find initial reports in only 117 of the 923 cases. Id. Of those 117 cases, the Tax Court modified the special trial judges' recommendations only 4 times. Id. Such figures demonstrate the level of deference afforded to special trial judges.
Following its lengthy discussion of the Tax Court's purported collaborative practice, the majority says "[w]hat really counts ... are the STJs features the Supreme Court relied on" in Freytag. Maj. Op. at 1187. But Freytag did not "rely" on this purported practice — indeed; it had not yet been disclosed by the Tax Court. Taking the majority at its word, its own reliance on Ballard seems out of place. Instead, we should look to what was actually before the Freytag Court.
In any event, whether the Tax Court in practice deferred to the special trial judges on both facts and law, or whether it directed the outcome of a case while escaping responsibility by disclaiming the decision is a distinction without a difference. Either way, the Appointments Clause would be offended.