A number of cases have been filed recently against the Securities and Exchange Commission (SEC), challenging its use of in-house administrative law judges (ALJs).  As I discussed in my earlier post on this topic, the SEC’s use of ALJs has come under close scrutiny lately because of concerns that, in the wake of a provision in Dodd-Frank expanding ALJs’ power, the SEC has elected to use its in-house procedures more frequently and that this use may have increased the SEC’s ability to prevail in enforcement actions.  Of particular concern is the fact that administrative proceedings lack many of the protections for defendants that litigation in federal courts provide, including: the option of having the case decided by a jury; access to the government’s evidence; and the ability to exclude certain evidence traditionally believed to be unreliable (such as hearsay).    

While a number of these cases have been dismissed, Monday finally garnered a win: Charles Hill succeeded in getting a federal court to issue an injunction that prohibits the SEC from continuing its case against him using its in-house ALJ.  Having been charged with insider trading and brought before an SEC ALJ, Hill filed suit against the SEC in federal court claiming the administrative proceeding was unconstitutional on three different grounds.  Although the court disagreed with two of his arguments, it found in his favor on the third – that the ALJs’ appointment violates the appointments clause because ALJs are “inferior officers.”

The constitution states: “the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”  Inferior officers are those who “exercis[e] significant authority pursuant to the laws of the United States[.]”  Because this person is “invested by legal authority with a portion of the sovereign powers of the federal Government,” the constitution requires that the person remain accountable at least indirectly to the head(s) of one of the three branches of the federal government.

Administrative Law Judges (ALJs) preside over the hearings, issuing subpoenas, hearing witness testimony, and making findings of law and fact – just like judges in courts established under Article III of the constitution (what we typically think of as “federal judges”).  Unlike Article III judges, which require presidential appointment and senate confirmation, ALJs are hired as employees of their respective agencies.  Although labeled simple “employees,” the court found that ALJs are in fact  “inferior officers” and therefore must be appointed in accordance with the constitution, which states: “the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.” 

As the judge noted in her opinion, there is a fairly easy fix available to the SEC: the five commissioners can simply appoint the existing ALJs to their current positions.  There may be some procedural hurdles to clear in other cases pending before SEC ALJs in ironing out their appointments, but these should not be too difficult to overcome.  As for Hill, the SEC can wait to re-appoint its own ALJs or it can refile the case against him in federal court.  The injunction doesn’t get him off the hook.

Although the problem may have an easy fix for the SEC, other agencies could face greater difficulties.  The constitution states that inferior officers may be appointed by “heads of departments.”  This clearly includes the 15 cabinet-level departments, and it has been found to include the SEC, but the question remains unsettled for several other agencies, including several with ALJs.  It’s unclear at this point whether other agencies will take any action in response to this ruling.  Judge May is in the Northern District of Georgia and her jurisdiction is limited to that district.  This means that other districts are not bound in any way by her ruling.  At the same time, the issue has gotten a fair amount of attention recently and agencies may already be examining their internal processes.  It’s very likely that more defendants in ALJ proceedings will file similar claims in federal court, hoping for a similar result.