Supreme Court Tells SEC to Appoint ALJs (Even Though SEC Already Did)

by Gregory Morvillo

They say the third time’s a charm, whoever “they” are.  If that’s the case, then this must be a most charming article because it is the third time I have had the opportunity to write about the battle over whether an SEC Administrative Law Judge is an inferior officer who the Commission must appoint to the position or a mere employee who the human resources department can simply hire to preside over cases.  This will be the last time I write about this issue because the U.S. Supreme Court just weighed in and resolved the dispute.  The answer is definitive but the impact, practically speaking, will not be far reaching.  Nevertheless, the Supreme Court has held that SEC ALJs are inferior officers of the United States subject to the Appointments Clause of the Constitution.

What does this mean?  It means that the Commission must appoint its ALJs to their positions and cannot allow the HR department to hire them.  This is, for 99% of present respondents in administrative proceedings, a big fat “so what” because, in November 2017, the Commission appointed its ALJs to their positions.  It then stated: “To put to rest any claim that administrative proceedings pending before, or presided over by, Commission administrative law judges violate the Appointments Clause, the Commission — in its capacity as head of a department — hereby ratifies the agency’s prior appointment of Chief Administrative Law Judge Brenda Murray and Administrative Law Judges Carol Fox Foelak, Cameron Elliot, James E. Grimes, and Jason S. Patil.”  See In re Pending Administrative Proceedings.  From that moment forward, the ALJs were appointed to their positions by the Commission, and it thwarted any future litigants from raising this as a constitutional challenge. 

That did not, however, resolve the issue for all litigants.  There existed numerous respondents who, before the Commission acted in 2017, challenged the ability of an unappointed ALJ to preside over their cases.  Litigants brought the matter to various Federal District Courts and Courts of Appeal.  The DC Circuit and the Tenth Circuit split on the issue, causing the Supreme Court to grant certiorari and hear the matter. 

Having dispensed with the background, the real import of the decision is related to cases where the respondent had challenged the constitutionality of the ALJ to preside over a case prior to the moment the Commission officially appointing the judges to their posts.  Litigants who preserved the issue, by objecting to and going through the administrative process or declining to participate in the constitutionally infirm process at all, should all have a new day in court.  The High Court stated that “one who makes a timely challenge to the constitutional validity of the appointment of an officer who adjudicates his case” is entitled to relief. Ryder v. United States, 515 U. S. 177, 182.  The relief granted reversed the ALJs decision in Lucia v SEC and remanded to a new ALJ for a new hearing. 

The Court’s analysis came straight out of United States v. Germaine, 99 U. S. 508, Buckley v. Valeo, 424, U.S. 1, and Freytag v. Commissioner, 501 U. S. 868.  The former two established the distinction between officers and employees, and the latter, applied that structure to special tax judges (“STJ”) in tax court.  Freytag concluded that the STJs had significant discretion to resolve disputes.  STJs “take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders.”  Freytag, at 881–882.  The Court was unmoved by the argument that STJs had no final authority over the cases they heard.  Freytag held that in carrying out the above described duties, STJs exercised significant authority.  That authority made them inferior officers subject to the strictures of the Appointments Clause. 

The analysis in Lucia is virtually identical.  Indeed, Justice Kagan stated that in Freytag “we applied the unadorned ‘significant authority’ test to adjudicative officials who are near-carbon copies of the Commission’s ALJs.” Lucia.  The majority opinion saw little to no difference between the STJs and the ALJs.  Both had significant authority.  Both served on an ongoing basis.  Both could take testimony, try cases, and rule on discovery issues.  Neither could, of their own volition, render a final opinion.  These similarities carried the day for Lucia, put an end to the circuit split, and should apply to any respondent who preserved the issue allowing him/her another bite at the apple before a properly appointed ALJ.  It is a very straightforward opinion and analysis.  It is, frankly, a little surprising it had to go all the way to the Supremes. 

Even in this relatively non-controversial opinion, there are two points worthy of note.  First, the Solicitor General sided with Lucia and not the SEC.  Once Lucia petitioned for cert, the Solicitor General, which had defended the SEC’s position to that point, switched sides.  In responding to Lucia, it apparently concluded he was correct and the SEC was wrong.  This is no small change of heart mid-case.  When it changed sides, it requested that the Supreme Court appoint an Amicus Curiae for the SEC.  The Court obliged.  Thus, the SEC’s position was put forth by Anton Metlitsky as an Amicus, and not by the Department of Justice.  This does not often happen. 

The second interesting point comes from the remand.  The Court held that because the ALJ in question, Cameron Elliot, had heard the matter before and found against Lucia, the respondent was entitled to a new ALJ on remand.  “In this case, that official cannot be Judge Elliot, even if he has by now received a constitutional appointment.  Having already both heard Lucia’s case and issued an initial decision on the merits, he cannot be expected to consider the matter as though he had not adjudicated it before.  To cure the constitutional error, another ALJ (or the Commission itself) must hold the new hearing.” Lucia, at 12–13.  It ruled that ALJ Elliot could not be placed in the position where he could be expected to hear the matters anew as if he had never done so before.  Id.  This is a big win for Lucia, because as of the start of Lucia’s matter before ALJ Elliot, he had never ruled against the Commission in any case. 

It has been a long road to this point … years, in fact.  There have been multiple challengers, dozens of briefs and hundreds of hours spent working the issue.  Moreover, multiple District and Appeals Courts have weighed in on the subject.  The truth is, however, that in the end not much will change.  The SEC will still bring cases as administrative proceedings, the ALJs will still preside over those cases, and respondents will still complain that ALJs that are now appointed by (as opposed to employed by) the Commission will be biased in favor of the SEC.  Unfortunately, the Supreme Court could not resolve that issue.

Gregory Morvillo is a partner at Orrick, Herrington and Sutcliffe LLP.


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