The Post-Lucia Executive Order on ALJs

by Daniel Walfish

Last week, the White House, reacting to the Supreme Court’s June 21, 2018 decision in Lucia v. SEC, issued an Executive Order exempting Administrative Law Judges, or ALJs, from the competitive civil service. This post considers what the order might mean for the Securities and Exchange Commission and other agencies that use ALJs to adjudicate enforcement cases. Lucia held that the SEC’s ALJs are “officers” subject to the Constitution’s Appointments Clause, which means they have to be appointed by (as relevant here) the head of the agency – that is, the SEC’s Commissioners. Previously ALJs were hired through an examination-based process handled by the Office of Personnel Management, or OPM (effectively the human resources department of the federal government). OPM typically presented an agency with a list of eligible candidates ranked on the basis of the examination, among other things, and the agency selected an ALJ from among the top three candidates on the list.

The effect of the Executive Order is to take OPM out of the process and to vest complete control of ALJ hiring in the agency employing the ALJ. That is effectively how federal agencies currently fill many other positions, including those for attorneys, who are generally in the “excepted service” as opposed to the “competitive service” and do not need to sit for an examination in order to work for the federal government. Arguably this result, if not required by Lucia, at least makes it easier for an agency to comply with Lucia. If an agency head’s role in hiring ALJs had mostly been limited to signing off on one of three candidates at the top of a list presented by OPM, the appointment power would not have much meaning.

Some commentators have said that the ALJs will now be “political appointees.” But that phrase normally connotes someone installed by the political apparatus, who leaves an agency when the administration, or potentially the installing official’s own time in office, comes to an end. The ALJs, by contrast, are tenured positions, by statute (dating back to the Administrative Procedure Act of 1946, or APA) removable only for “good cause” as found by the Merit Systems Protection Board, or MSPB, another independent agency. The Executive Order (contrary to some early reporting on Twitter and elsewhere) does not, and cannot, alter these important protections on removal, which are designed to ensure the ALJs’ decisional independence. Even after the Executive Order, ALJs are career civil servants and there is no reason to expect them to turn over with each administration.

The question is how direct agency hiring will impact the ALJ role. Concerns have been voiced that ALJs directly appointed by agency heads, at least in the current administration, are likely to be unduly pro-corporate and anti-regulation. I submit that this concern is probably (mostly) misplaced, at least in the case of the SEC. (The analysis here might be different for ALJs in other agencies who adjudicate entitlement to benefits or something other than alleged legal violations.) SEC ALJs adjudicate cases that (oddly, but entirely lawfully given US administrative law) the SEC Commissioners themselves institute and then review on appeal from the ALJ decision. If a relatively deregulatory SEC were to hire deregulatory-minded ALJs and then (so the worry goes) these ALJs were to go soft on securities-industry participants in contested enforcement proceedings, for example by dismissing the charges, the end result would be embarrassment for the Commissioners. In bottom-line terms, the SEC has relatively little institutional incentive to hire ALJs who are philosophically opposed to securities regulation and enforcement.

Like much else in this area, the above comes with an “on the other hand.” One could imagine a more business-friendly SEC selecting ALJs who, while perhaps not especially disposed to dismiss cases brought by the agency heads who hired them, are likely to impose comparatively light sanctions for the violations alleged by the agency and found by the ALJ. (An ALJ who finds a violation and imposes relatively light sanctions is less likely to embarrass the agency than an ALJ who completely dismisses charges.) And one could imagine the inverse: an SEC in a more pro-regulation administration selecting ALJs comparatively likely to impose more severe sanctions.

But these effects, if any, will be subtle. I suspect that the SEC Commissioners will delegate the process of identifying candidates to other officials, including the SEC’s Chief ALJ (who also oversaw the SEC’s hiring of ALJs in the pre-Lucia regime), who will probably recommend candidates to the Commissioners for their approval. The Commissioners likely have better things to do than overrule the Chief ALJ’s recommendations, and it is in their interest to accept those recommendations, lest they be vulnerable to the charge that they injected personal preferences or politics into the selection of what are supposed to neutral adjudicators. On top of that, with no reason to expect ALJ turnover with each new administration, the typical SEC Commissioner might only ever vote on the hiring of at most a small number of ALJs.

It is worth noting, too, that the extent of agency input into ALJ hiring has varied over time (PDF: 1,310 KB). At certain times in the seventy-plus year history of ALJs, agencies (including the SEC) were allowed to insist that their own ALJs have relevant subject-matter expertise. A traditional argument against taking subject-matter expertise into account was that it would lead agencies to select ALJs who had worked as staff at the agency and therefore would be unduly inclined to side with the agency. That is certainly a possible consequence of the Executive Order: enforcement agencies like the SEC and Federal Trade Commission may well wind up hiring as ALJs enforcement staff or other agency lawyers looking for a job change.

If such hiring produces ALJs more likely to side with the agency, it would be of a piece with the ironies in the recent spate of Appointment Clause challenges at the SEC. One of the largest ironies was that defending parties challenged the SEC’s administrative enforcement proceedings as unfair, but also asserted constitutional challenges the fixes for which could only diminish the independence of the adjudicator. (There was a mirror image irony in that the SEC defended the proceedings as fair because the ALJs are independent – even though the SEC’s pre-Lucia resistance to the Appointments Clause challenge was based on the idea that the ALJs were subordinate employees whose work is subject to de novo review by the Commissioners.)

In all events, contrary to what some critics fear, it is at least possible (though not certain) that the revised hiring procedures will actually enhance the prestige of the ALJ position. By having agency heads (comparatively prominent figures) rather than human resources personnel (who are sometimes caricatured as faceless bureaucrats) oversee the hiring, and by removing an examination requirement that is arguably ill-fitting, the government perhaps sends the signal that ALJs are important – too important to be hired through a routine bureaucratic procedure. That is, after all, the central message of the Lucia decision that the authority ALJs wield is significant and so their hiring should be overseen at the highest levels of an agency. Instead of delegitimizing ALJs, Lucia and the new hiring system could enhance their aura of authority.

What would tend to delegitimize ALJs is to erode their longstanding protections against removal, which are at the core of the APA. In Lucia, the Trump Administration’s Solicitor General asked the Supreme Court to opine on – and weaken – the ALJs’ removal protections, and the Court understandably declined because no court of appeals had addressed the issue. (Although the Lucia majority opinion said in a footnote that “no court had addressed” the issue, two district judges have considered the challenge, with one of them rejecting it, and the other expressing “serious doubts” that the challenge has merit.) If an ALJ’s protections against firing were weakened, he might worry that he could be removed if he ruled too often against the agency, or took positions that agency heads do not agree with. That is why Congress enacted the removal protections (and other guarantees of ALJ independence) in 1946: to make proceedings more fair to those caught up in agency adjudications. It would be yet another irony if a generally deregulatory administration provoked the courts to resurrect features of pre-APA agency adjudication that were once perceived as unfair to the regulated community.

It also is interesting to consider how a Supreme Court that includes recent nominee Brett Kavanaugh would rule on ALJ removal protections. In 2008, as a D.C. Circuit judge, Judge Kavanaugh wrote a dissent in Free Enterprise Fund v. Public Company Accounting Oversight Board. Judge Kavanaugh argued that the PCAOB was unconstitutional because its members were “officers” removable only for cause by the SEC Commissioners, who themselves were assumed to be removable only for cause. Judge Kavanaugh’s position in dissent became the law when a 5-4 majority of the Supreme Court led by Chief Justice Roberts reversed the D.C. Circuit, holding that this “dual layer” of for-cause protection for constitutional officers provided too much insulation from the President’s power under Article II of the constitution to direct the Executive Branch. The fix was to make the PCAOB members removable at the pleasure of the SEC Commissioners.

The ALJs also enjoy at least two layers of removal protection. (They can be removed only for cause as found by the MSPB, whose members are also removable only for cause.) Crucially, both Judge Kavanaugh and Chief Justice Roberts went out of their way to carve ALJs out of their opinions. At least one of their reasons for doing so was that ALJs perform only adjudicative functions, which arguably are not a core executive activity. It is practically axiomatic that independence is more important for adjudicative functions than executive functions. It is not clear that even a Court that includes Judge Kavanaugh would have five votes for making ALJs removable at will.

On the other hand, the Trump Administration’s basic position, as articulated in Lucia, is not necessarily that ALJs should be removable at will, but rather that, in order to avoid a constitutional problem, the statutory “for cause” standard should be treated as a comparatively low bar that could be satisfied by (for example) an ALJ’s issuing substantive rulings at odds with agency policy. It is possible that five justices on a Court that includes Judge Kavanaugh would be sympathetic to that kind of reading of the APA. If they are, presumably the result would be (as the Administration urged in Lucia) to facially uphold, not strike down, the ALJs’ statutory tenure protections, albeit in a weakened form. It is hard to say whether such a ruling would require, as Lucia did, the rehearing of cases pending when the decision was announced. If they construe the APA in a way that avoids a constitutional issue, the justices may be able to send a signal about ALJ tenure protections without actually invaliding ALJ rulings across the federal government.

Daniel Walfish, a former SEC Enforcement senior counsel, is a partner in Walfish & Fissell LLP.


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