By Adam J. White
Wednesday, June 29, 2022
Abortion will surely define the Supreme Court’s 2021–22
term. But lately the justices have been reconsidering more than just Roe
v. Wade. In case after case, they are reconsidering the modern
administrative state’s place in the rule of law. At stake is nothing less than
the basic structure and sensibility of modern American government.
Administrative law tends to be the stuff of “a pretty
dull lecture,” as Justice Scalia once quipped. But recent regulatory cases have
brought the Court back to fundamental questions, not just in sleepy cases about
esoteric technical statutes, but in front-page conflicts over high-stakes
policies. That is especially true this year, in challenges to the Occupational
Safety & Health Administration’s Covid-19 vaccine mandate and the
Environmental Protection Agency’s climate regulations.
These are the latest in a years-long run of cases across
Democratic and Republican administrations alike. Those cases raise questions
about the assertions of power on the part of executive agencies of government
and the procedures by which they assert their right to power. On matters
ranging from the Obama administration’s own environmental regulations to the
Trump administration’s actions on immigration and the Census to Covid-era
regulations issued by states and cities, the justices seem keenly interested in
reconsidering or at least recalibrating legal doctrines that once afforded
agencies great discretion and independence in creating and enforcing regulatory
programs.
Nothing in these scattered debates over abstruse legal
doctrines such as “Chevron deference” or the “nondelegation
doctrine” would come close to Trump henchman Steve Bannon’s threatened
“deconstruction of the administrative state.” But each of them could contribute
some constitutionally informed limits on the power, discretion, and
independence of unelected administrators. Together they might help to
reconstruct a more republican, constitutional state.
These issues have even begun to affect the decision of
whom to appoint to the Court in the first place. Trump’s first two appointments
to the high court—Neil Gorsuch and Brett Kavanaugh—were two of the nation’s
leading judicial minds on administrative law, and White House Counsel Don
McGahn made clear that this was no coincidence. So too with Trump’s
appointments to the lower courts, which included administrative-law experts
such as the D.C. Circuit’s Neomi Rao and Greg Katsas, and the Fifth Circuit’s
Andrew Oldham.
Before a case reaches the Supreme Court, the circuit
judges’ own decisions help to refine and elevate the issues at stake. And the
latest example comes from Judge Oldham and his Fifth Circuit colleague Judge
Jennifer Walker Elrod in a wide-ranging challenge to the Securities and
Exchange Commission.
In 2013, the Securities and Exchange Commission issued an
administrative order against George Jarkesy Jr., a Texas-based hedge-fund
manager, and Patriot28, an investment advisor company. It alleged that they had
committed securities fraud in connection with the offer, purchase, and sale of
securities, and it instituted “cease-and-desist” proceedings against them,
seeking to prohibit their activities and recoup monetary damages from them.
Rather than filing its case directly in federal court,
the SEC filed its case in … the SEC itself. It was able to make this choice due
to the Dodd-Frank Act of 2010, which expanded the Commission’s power to choose
either a federal trial court or the SEC’s own internal court-like proceedings
as the forum to punish any person’s violations of certain securities laws. In
the latter category, SEC lawyers file their case with an “administrative law
judge” or ALJ—not a traditional life-tenured judge, but an agency official who
is insulated partly from the agency’s control. The ALJ’s initial decision is
subject to appeal to the SEC’s five-commissioner leadership body, which issues
the agency’s final decision. And the SEC has made free use of that option.
The Wall Street Journal reported in 2015
that the SEC “decided in their own agency’s favor concerning 53 out of 56
defendants in appeals—or 95%—from January 2010 through [March 2015],” a win
rate that was “markedly higher than the 69% success the agency obtained against
defendants in federal court over the same period, based on SEC data.”1
A defendant who loses before the SEC can appeal its final
decision to an actual federal court. But on appeal, the courts hear such cases
under very deferential standards of review. Invoking the Administrative
Procedure Act, the SEC says that courts should “uphold an agency’s decision
unless it is ‘arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law.’” And under doctrines of judicial deference to
agencies’ legal interpretations, the courts generally defer to the SEC’s
interpretations of the federal securities laws, so long as the SEC’s
interpretation is not contrary to clear legal text or otherwise unreasonable.
Jarkesy, the Texas hedge-fund manager, tried to preempt
the SEC’s approach. He filed his own lawsuit in the U.S. Court of Appeals for
the D.C. Circuit, arguing that the entire process was unconstitutional. But
that court, in a unanimous opinion for three judges (including future justice
Brett Kavanaugh), concluded in 2015 that Jarkesy needed to let the SEC complete
its own process before litigating his constitutional issues in federal court.
The SEC’s in-house judge eventually found Jarkesy guilty.
The Commission’s leadership upheld the judgment in 2020, ordering him to cease
and desist and to pay a $300,000 penalty, and barring him various
securities-related activities. It ordered Patriot28 to disgorge nearly $700,000.
They, in turn, appealed to the U.S. Court of Appeals for
the Fifth Circuit. And in May 2022, the Fifth Circuit produced a very different
kind of cease-and-desist decision.
The SEC “often acts as both prosecutor and judge, and its
decisions have broad consequences,” wrote Judge Jennifer Walker Elrod at the
outset of the Fifth Circuit’s decision. “But the Constitution constrains the
SEC’s powers by protecting individual rights and the prerogatives of the other
branches of government,” she continued. “This case is about the nature and
extent of those constraints in securities fraud cases in which the SEC seeks
penalties.”
Joined by Judge Andrew Oldham (over the dissent of a
third colleague), Judge Elrod concluded that the SEC’s in-house adjudication
process violated the U.S. Constitution in three ways. First, she wrote, the
SEC’s prosecution of securities-fraud cases in its own administrative
proceedings violated the Seventh Amendment’s right to civil trial by jury.
Second, by giving the SEC unbounded discretion to pursue such cases either in
federal court or in the agency’s own proceedings, Congress had improperly
delegated its own legislative power to the agency. And third, the SEC
administrative law judges’ substantial independence from the SEC’s leadership,
and thus from the president himself, impairs the president’s constitutional
duty to “take Care that the Laws be faithfully executed.”
Each of these conclusions reflects a longstanding debate
in the Supreme Court.
The first issue concerns federal agencies wielding
quasi-judicial powers. The Seventh Amendment guarantees a limited right to
trial by jury in civil (that is, noncriminal) cases: “In Suits at common
law” with more than $20 at stake, “the right of trial by jury
shall be preserved….” This right follows the Sixth Amendment’s “right to a
speedy and public trial by an impartial jury” in criminal trials, and the
Constitution’s overarching commitment of “the judicial power” to federal courts
staffed by life-tenured judges independent of political officials.
Yet from the republic’s earliest years, the Supreme Court
has recognized that not all legal controversies need be committed exclusively
to the courts, particularly when Congress itself has created the “public
rights” at issue. The Court explained this as early as 1855. Congress cannot
“withdraw from judicial cognizance any matter which, from its nature, is the
subject of a suit at the common law, or in equity, or admiralty,” the Court
held. But if Congress creates other new “public rights,” then it “may or may
not bring [them] within the cognizance of the courts of the United States, as
it may deem proper.”
This became a much more significant issue in the New Deal
era, when Congress began creating many new regulatory and benefits programs and
committed their adjudication to federal agencies instead of courts. In recent
decades, the Court had to decide the constitutionality of adjudicatory powers
Congress had vested in the Commodity Futures Trading Commission, the Patent and
Trademark Office, and in the federal Bankruptcy Court (which is a “court” in
name but not in actual substance).
In Jarkesy’s case, the Fifth Circuit held that the SEC’s
adjudication process was unconstitutional because the agency was deciding the
modern equivalent of common-law fraud claims, which is in the proper purview of
civil juries. Now, it must be said that Congress had written legislation prohibiting
securities fraud, and the SEC argued that this made them “public rights” that
could be decided by the SEC itself instead of juries. But the Fifth Circuit saw
those laws as doing little more than codifying the old fraud claims that
private parties had long litigated in civil lawsuits. The mere fact that
Congress took a common-law claim and wrote it into the U.S. Code cannot be
enough to remove the common-law claim from the courts, the Fifth Circuit held.
Its conclusion on this point echoed recent concerns about
both the decline of juries and the rise of administrative adjudicators. Judge
Jed S. Rakoff, a prominent member of Manhattan’s federal district court and the
recent author of Why the Innocent Plead Guilty and the Guilty Go Free—and
no one’s idea of a Federalist Society poster child—warned in a 2014 speech that
the SEC’s in-house adjudication of fraud cases was making the agency “a law
unto itself.”
Both an opinion in the case involving the bankruptcy
court written by Chief Justice Roberts, and a dissent by Justice Gorsuch (which
Roberts joined) in the Patent and Trademark Office case, raised alarms about
the state of agency adjudication more broadly. “Ceding to the political
branches ground they wish to take in the name of efficient government may seem
like an act of judicial restraint,” they warned in Gorsuch’s dissent, “but
enforcing Article III [of the Constitution] isn’t about protecting judicial
authority for its own sake. It’s about ensuring the people today and tomorrow
enjoy no fewer rights against governmental intrusion than those who came
before. And the loss of the right to an independent judge is never a small
thing.”
The second issue in the Jarkesy case, the “nondelegation
doctrine,” is arguably the most significant administrative-state issue
percolating in the Supreme Court today. The theory is premised upon the
Constitution’s Article I, which provides that all legislative powers herein
granted shall be vested in Congress. This grant of power, the argument goes,
cannot be redelegated to the executive branch. If Congress grants an agency
effectively unlimited discretion, then it violates the constitutional
“nondelegation” rule.
Though sensible in principle, the nondelegation doctrine
has proved extremely difficult to reduce to a simple judicially enforceable
rule, let alone one clearly commanded by the Constitution’s own broad terms. In
1825, the Marshall Court observed that Congress cannot “delegate to the courts
or to any other tribunals powers which are strictly and exclusively legislative,”
but it also conceded that “the line has not been exactly drawn which separates
those important subjects which must be entirely regulated by the legislature
itself from those of less interest in which a general provision may be made and
power given to those who are to act under such general provisions to fill up
the details.”
Nearly two centuries later, that line has proved
incredibly difficult to draw. Only twice in its history has the Supreme Court
held that a statute unconstitutionally delegated legislative power to an
agency. In those cases—both decided in 1935—the Court held that Congress’s
legislation lacked an “intelligible principle” to limit the agency’s
discretion. Finding such an “intelligible principle” is actually an extremely
low bar for Congress and agencies to clear; in an era when the U.S. Code is
replete with provisions empowering agencies to regulate “in the public
interest” or in similarly vague terms, a statute must have virtually no
substantive meaning to fail the “intelligible principle” test.
But that is what the Fifth Circuit found here, in the
securities laws that empower the SEC to choose either a federal court or the
SEC’s own tribunal as the forum for litigating fraud cases. “Congress
offered no guidance whatsoever,” the court emphasized. “It
instead effectively gave the SEC the power to decide which defendants should
receive certain legal processes (those accompanying Article III [judicial]
proceedings) and which should not.”
It will be interesting to see how the Supreme Court
grapples with this point if it takes the case. Administrative agencies have
long enjoyed significant discretion in choosing among possible procedural
vehicles. In a seminal ruling as far back as 1947, the Court held that the
SEC’s decision to use either in-house adjudication or rulemaking as its vehicle
for policymaking “is one that lies primarily in the informed discretion of the
administrative agency.” It is not hard to imagine the Court giving agencies the
same discretion to choose between in-house adjudication and the federal courts
as the vehicle for punishing securities fraud.
But that was 1947. In recent years, five of the current
justices have signaled their interest in bolstering the nondelegation doctrine.
Justice Thomas has been calling for at least some kind of reform since 2001; he
was joined, to varying degrees, by Gorsuch and Roberts and by Alito in 2019,
and by Kavanaugh a year later. Meanwhile, lower-court judges and conservative
legal scholars have been writing vigorously on the subject. Indeed, the Fifth
Circuit’s Judge Oldham was writing on the subject as far back as 2006.
It is unclear how this debate will sort out, and
conservatives should take heed of Justice Antonin Scalia’s own longstanding
wariness of judges striking down legislation under a constitutional doctrine
that is merely inspired, not spelled out, in the Constitution’s specific words.
“A doctrine so vague, it may be said, is no doctrine at all, but merely an
invitation to judicial policy making in the guise of constitutional law,”
Scalia wrote in a 1980 essay that later echoed through his judicial opinions.
Yet in an era when administrative agencies are wielding
their power in ever more significant and unprecedented ways—such as the
financial agencies’ new climate policies—the justices and judges will continue
to hear arguments to reinvigorate the nondelegation doctrine, or at least to
apply the gentle “intelligible principle” standard more rigorously, as the
Fifth Circuit has here.
And the Fifth Circuit’s third ruling against the SEC also
echoed recent Supreme Court trends. The lower court held that the SEC officers
responsible for hearing the agency’s in-house cases are unconstitutional,
because they enjoy too much legal independence from the president and the SEC’s
leadership.
The officers are called “administrative law judges.” As
noted earlier, they are not actually “judges” in the constitutional sense,
appointed by the president and confirmed by the Senate with life tenure.
Rather, they are agency personnel who enjoy a measure of independence from the
agency’s control. Initially such positions at the SEC and other agencies were
called “examiners” or “hearing examiners,” until Congress gave them the more
imposing title of “administrative law judges.” (Scalia recounted this history
in another of his pre-judicial writings on the administrative state, titled
bluntly, “The ALJ Fiasco—A Reprise.”)
When agencies have the power to decide significant
matters in their own in-house proceedings, there is great sense in wanting to
insulate the adjudicators from political pressure. Of course, that is precisely
why the Constitution gives real independence to actual judges. But for
executive-agency personnel, the Constitution prioritizes accountability.
Thus the Constitution empowers the president to appoint
agency “officers” with the Senate’s advice and consent, though Congress can
empower the agency heads to appoint mere “inferior officers.” And the Court has
read the president’s constitutional “executive power” and his duty to “take
Care that the Laws be faithfully executed” as requiring that the president or
the agency’s head retain full power to fire officers who wield significant
power.
Along those lines, in 2018 the Supreme Court struck down
a statute governing the appointment of the SEC’s ALJs. Justice Kagan, joined by
the Court’s conservatives, concluded that the ALJs’ powers rendered them
“officers” under the Constitution, and not merely employees; thus their
appointment by SEC staff was unconstitutional. Similarly, on the removal issue,
the Court held in 2009 that it was unconstitutional for Congress to create
another independent agency within the SEC itself; if the SEC enjoys some
independence from the president, then the ensuing double layer of independence
between the sub-agency and the president actually impedes the president’s
ability to use his own constitutional executive powers.
The Fifth Circuit found that these two lines of cases
pointed together toward the unconstitutionality of the SEC administrative law
judges’ independence from political oversight. If the ALJs are “officers” who
can be appointed only by the constitutional process (per the 2018 precedent),
and if the SEC cannot have independent officers within it (per the 2009
precedent), then the ALJ’s independence must be
unconstitutional. As the Fifth Circuit put it, “two layers of insulation
impedes the President’s power to remove ALJs based on their exercise of the
discretion granted to them.”
Ever since the Supreme Court struck down the process for
appointing SEC administrative law judges in 2018 (in the Lucia v.
SEC case, authored by Kagan), there has been broad recognition that
the ALJs’ removal protections might be found similarly unconstitutional. Of all
the Fifth Circuit’s three holdings in the May 2022 case, this seems the one
most likely to be affirmed by the Supreme Court, should it take up the matter.
Again, if the cases coming before these ALJs need a truly neutral and
independent decision-maker, then the Constitution offers a simple solution:
Send those cases to the fully independent judges of the federal courts.
***
The combat over these three issues—transferring the legal
claims to officers instead of courtroom juries, making those officers
independent of the president, and delegating the agency unbounded discretion to
choose to pursue its cases either in court or before its own officers—reflects
a recent judicial unease with decades-old doctrines that empowered the
agencies.
Other current debates reflect similar concerns. For many
years, precedents have directed judges to give great “deference” to an agency’s
interpretation of statutes or regulations. Indeed, those precedents long
enjoyed the support of conservative judges, who saw the dangers in judicial
micromanagement of complex or political policy judgments. But now conservative
judges are more immediately concerned with agency overreach. Similarly, Chief
Justice Roberts and perhaps others are increasingly concerned with the
disruptive uncertainty fostered by the wild swings in regulatory policy from
one presidential administration to the next.
Earlier agency-friendly doctrines reflected a much
different zeitgeist in the New Deal era and subsequent years. Particularly with
enactment of the Administrative Procedure Act of 1946, Congress attempted to
standardize the agencies’ process for making regulations or deciding cases; it
made the former look more legislative, and the latter more judicial. It did so
for laudable reasons, including efficiency and accountability.
But nearly eight decades later, we see that era’s deeper
effects. Congress made agencies increasingly a substitute for actual
legislatures and actual judges. Congress, meanwhile, increasingly recedes into
an oversight role—less a legislature than a supreme court of public opinion.
And while we tend to think of this trajectory in terms of
presidential and executive power, it is important to note how many of the new
cases are coming from the so-called independent regulatory
commissions—bipartisan, multi-member institutions including the SEC, the
Federal Trade Commission, and more. Nearly one and a half centuries ago,
Congress created their forerunner, the Interstate Commerce Commission, to serve
not as an arm of executive power, but as an adjunct to the judicial power. Its
purpose was to resolve railroad disputes through case-by-case adjudication,
akin to a court but with expert commissioners instead of general-duty judges.
Congress later gave the ICC power to make regulations, and it soon created the
Federal Trade Commission to play similar quasi-judicial and quasi-legislative
roles.
Surely these commissions were never genuinely free from
politics or ideology. But their basic structure, their independence from
presidential administrations, and (at first) their tendency toward
case-specific adjudication instead of sweeping rulemaking, did set them apart
from the more political, more energetic agencies directly under the president’s
control.
Today, however, the independent commissions seem
keen to become the most powerful and politically consequential
agencies of our time. The SEC, chaired by Gary Gensler, is asserting sweeping
authority over corporate governance, even asserting itself as a climate
regulator. Meanwhile the FTC, chaired by Lina Khan, is undertaking an
unprecedented set of new rulemaking initiatives, seeking to transform much more
than just antitrust policy, and in increasingly political tones.
Watching these and other independent regulatory
commissions assert the right to impose controls along partisan lines, one gets
the impression that their current leaders see themselves playing with house
money—the only question being how far they might push their policy line before
a court limits their gains.
The Fifth Circuit’s decision, and others like it in
recent cases, ought to remind them that the agencies might wind up with less
power than they started with. Until recently, these matters were considered
well settled. Now they are being unsettled—by newly ambitious agencies and by
judges alarmed at the scope of their ambitions.
1 It is not
easy to parse the numbers, or to interpret them. A single case might include
many claims, any of which can produce partial wins and losses, making win-loss
rates hard to pin down. Furthermore, it’s hard to compare the relative merits
of cases that the SEC brings to an actual court as opposed to the ones it keeps
in-house. If the SEC sends easier cases to actual courts but keeps the harder
cases for its internal process, then the relative win rates might actually
understate the SEC’s home-court advantage.
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