by Gregory Morvillo
This is the time of year for sequels. June rolls around and the summer movie slate starts to hit local theatres. Guardians of the Galaxy, Vol 2. This year, sequels are the big thing: everything from the second Guardians of the Galaxy, to the fourth Pirates of the Caribbean film, to the umpteenth Alien movie and more. Tis the season … for sequels.
With that in mind, I thought I’d do my own sequel. Back in February, I wrote a blog piece on the state of the law as it relates to the litigation over SEC Administrative Law Judges. As, I’m sure you know, all good sequels recap the previous incarnation without belaboring the point so here goes: a circuit split is brewing. In Lucia v SEC, the D.C. Circuit held that SEC ALJs are not inferior officers and do need not be constitutionally appointed. Thereafter, the Tenth Circuit, took the exact opposite position in Bandimere v. SEC. ALJ’s are inferior officers under Article III and if not appointed by the head of a department, are unconstitutionally presiding over cases before them. While it is not as exciting as seeing an old Luke Skywalker at the end of Star Wars: The Force Awakens, it is, in fact, where we left off in February.
Another rule about sequels is that to be any good something new has to happen. Staying true to my theme here, that means something must be new in the fight over the constitutionality of the administrative law process? The new here are dueling petitions for re hearing en banc in both the D.C. and Tenth Circuits. In the most basic terms, it means that the loser in both appeals wanted a sequel of their own on the appellate level; before proceeding to the Supremes.
Lucia petitioned the D.C. Circuit for rehearing in September 2016. The court granted rehearing in late February 2017. This has the effect of vacating the D.C. Circuit’s previous opinion. The D.C. Circuit granted on two issues: (1) “Is the SEC administrative law judge who handled [Lucia] an inferior officer rather than an [SEC] employee for the purposes of the Appointments Clause of Article II of the Constitution?”; and (2) “Should the court overrule Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000)?”. Landry is one of the D.C. Circuit’s own cases it relied upon when it originally held that ALJs were not presiding over cases in an unconstitutional manner. It is not a shock for the Court to ask whether it should overrule Landry, because it flows naturally from the first question. If the D.C. Circuit determines that the Constitution requires the appointment of SEC ALJs, it would have to overrule Landry. This is because Landry held that the most important (and some would say only) issue in the ALJ analysis is whether an ALJ has final decision making authority. In the absence of final decision making authority, Landry held, ALJ hirings were not constitutionally infirm. The argument for the en banc proceeding took place at the end of May; and a decision is likely months away. Lest anyone conclude rehearing signals that the D.C. Circuit will reverse itself and find in favor of Lucia and against the SEC, it is noteworthy that this Court has granted three rehearings in the past four years, and affirmed its original decision each time.
Shifting to the Tenth Circuit, weeks after the D.C. Circuit granted rehearing, on March 14th, 2017, the SEC petitioned the Tenth Circuit to rehear the Bandimere case. On May 3, in a 9-2 decision, the Tenth Circuit declined to rehear the matter. Two judges wrote a dissent. The dissent concluded: (1) the majority opinion lacked deference to the “structure of checks and balances”; (2) the original panel expanded the U.S. Supreme Court’s holding in Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991) (the seminal case on this issue); (3) it will disrupt the entire government to maintain that the ALJs have been unconstitutionally appointed; and (4) the opinion disregarded congressional intent of the Administrative Procedure Act. No other opinions issued, presumably the majority believed the original panel opinion spoke for itself.
One additional plot point. Lynn Tilton, charged in and SEC Administrative Porceeding, sought relief from the Supreme Court on an issue that is similar but not identical. She sought intervention from the High Court because she tried to have her Administrative Proceeding removed to federal court and lost. Tilton sought cert on the issue. Last week, the Supreme Court declined to hear the case. This does not, however, signal that the Supremes are disinterested in the appointments clause issue, merely that in order to have the ability to challenge the SEC process, one must first go through said process. This in and of itself is a reason some observers feels the process is biased against respondents and in favor of the SEC. But that is a different story, less of a sequel and more of a spin-off franchise all its own.
In February, I noted the existence of a circuit split and predicted resolution at the Supreme Court level. Technically, there is no longer a split, unless and until the en banc panel of the D.C. Circuit comes back and affirms its previous position. Because the D.C. Circuit vacated its original panel decision, the Tenth Circuit is the only appellate court to have an opinion “on the books”. Nevertheless, I am still predicting the circuit split will ripen and an eventual fight before the Supreme Court is inevitable. In the end, I am comfortable saying that this blog post will be back for another sequel, making it a trilogy.
Gregory Morvillo is a partner in the New York office of Morvillo LLP. He specializes in insider trading and securities fraud cases.
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