May 24, 2017 6:08PM

Lucia and PHH: Two Cases, Two Arguments for Constitutional Principles

It’s not often an appellate court agrees to re-hear a case en banc—that is, reexamine a decided case with all active judges participating—and when it does, usually it’s because the case is of particular importance.  Today the federal appeals court in D.C. heard two such cases, and both address fundamental issues of due process and constitutional integrity.  Heavy and exciting stuff.  Cato filed amicus briefs in both cases, given their potential impact on core principles of liberty and the rule of law.

The first case, Lucia v. SEC, considers the role of the Administrative Law Judge (ALJ).  While the case was nominally about whether ALJs are inferior officers, and therefore subject to certain constitutional appointment and removal proceedings, at its heart is the question: what makes a judge a judge?

Most Americans expect that if the government is going to haul them in for alleged wrongdoing, they’ll at least have their case heard by an impartial judge, with all the usual legal protections.  And this is what Americans should expect.  Unfortunately, some federal agencies operate differently, using their own internal administrative proceedings, with their own ALJs, to determine if someone has broken the rules, and to impose a fine or other punishment.

The vast majority of ALJs work for the Social Security Administration, determining whether individuals are eligible for benefits.  As Lucia’s lawyer pointed out in argument today, there is a big difference between ALJs determining whether someone will receive something from the government, as the Social Security Administration’s ALJs do, and determining whether the government will take something from someone.

ALJs who oversee adversarial proceedings, such as those at the SEC along with a handful of other agencies, exercise a level of discretion and carry out responsibilities almost indistinguishable from those of judges in federal court.  The SEC has argued that the crucial difference is that ALJs’ decisions are not technically final until the Commissioners themselves have signed off on them.  But while the Commissioners review the ALJs’ application of the law, they do not review what is known as “findings of fact” or the admissibility of evidence.  That means that the ALJs are the only people who decide what documents and testimony will be used to prove the case, listen to the witnesses and decide whether they’re telling the truth, and determine what “really” happened.

That is a huge amount of control for a “mere employee” to have over people’s lives.  Finding that ALJs are indeed officers and therefore subject to the constitutional appointment and removal requirements might have consequences that ripple through other agencies that use ALJs to oversee adversarial hearings.  But as Lucia’s counsel said at argument today, “if following the constitution has consequences, then those consequences must be faced.”

The other case considers not just the constitutionality of one position within an agency, but of the agency as a whole.  PHH Mortgage has challenged the constitutionality of the Consumer Financial Protection Bureau (CFPB), the new and highly controversial agency created in the wake of the 2008 financial crisis.  This agency, unlike almost every other financial regulator, has a single director at its head, instead of a bi-partisan commission.  This director can be removed by the president only for cause—and no official has ever actually been removed “for cause” successfully.  Last year, a three-judge panel decided the case in favor of PHH, finding that the CFPB’s structure is unconstitutional because it is insufficiently accountable to the people.

I will not be surprised if both Lucia v. SEC and PHH v. CFPB wind up before the Supreme Court.  But it seemed today that PHH’s counsel was already preparing for the Supreme Court argument.  There are a number of independent agencies in the federal government.  These agencies have principals who can be removed by the president only “for cause.”  While these agencies have existed since the New Deal, they remain constitutionally suspect since there is no provision in the constitution for their creation.  In 1935, President Roosevelt fired an FTC commissioner because he felt the commissioner, William Humphrey, was not sufficiently supporting Roosevelt’s policies.  Humphrey challenged his firing and the Supreme Court ruled in his favor (or rather, in favor of his estate as Humphrey himself died while the case was pending). 

This case, known as Humphrey’s Executor, was the heart of today’s argument.  If the Supreme Court has ruled that the head of an agency can be removable only for cause without imperiling the separation of powers, does that apply to the Director of the CFPB?  If not, how is the CFPB different from the FTC? 

PHH’s counsel presented several arguments for why the CFPB presents constitutional concerns.  However, as the appeals court noted, it is bound by Supreme Court precedent.  Either the CFPB is meaningfully different from the FTC—and therefore this court is free to rule its structure is unconstitutional—or it’s not and therefore this court, whatever its constitutional concerns, must rule in favor of the CFPB since it cannot overrule the Supreme Court.

As I’ve noted previously, this case, in addition to its glitziness as the case deciding the future of the CFPB, is also notable for the fact that the Department of Justice filed a brief in support of PHH.  It is not at all common for one part of the government to file a brief in opposition to another.  An attorney for the Department of Justice argued against the CFPB today as well.  He argued that if it’s fine to make a single director removable only at will by the president, why stop there?  What prevents congress from making every agency head in the federal government removable only for cause, effectively barring the president from having any policy influence at all?

Before argument today, there was a lot of chatter in the legal community about whether the court would wade into the constitutional waters in PHH v. CFPB at all.  But this morning, everyone dove headfirst into that ocean.  The court could simply punt, claim Humphrey’s Executor is controlling and pass the mess to the Supreme Court.  Humphrey’s Executor is itself constitutionally problematic and I would welcome the chance to review it.

Both of these cases consider the scope of the government’s power, and the strength of the safeguards erected to contain it.  I hope the court will hew to constitutional principles and reinforce these strictures.  But no matter what this court decides in either case, I doubt we’ve seen the last of either Lucia or PHH.