A June 21 U.S. Supreme Court ruling invalidating a decision by an SEC administrative law judge could have major implications not only for the regulated financial industry but also for energy industry participants subject to Federal Energy Regulatory Commission decisions.
The case at issue made its way to the Supreme Court after the U.S. Court of Appeals for the District of Columbia Circuit and the U.S. Court of Appeals for the 10th Circuit issued conflicting rulings on the constitutionality of decisions made by the SEC's law judges.
Much like FERC and some other federal regulatory agencies, the SEC uses law judges to help decide disputes, especially those for which the facts are unclear. After a hearing ends, the law judge issues an "initial decision” laying out the facts of the case and the judge's findings. In the case of the SEC, the commission can review the law judge's decision or simply issue an order announcing that the ruling has become final.
Unlike the judges that sit on federal courts, who are appointed by the president subject to Senate confirmation, federal agencies select their own law judges. In FERC's case, the agency's chair makes those appointments, but the SEC's chief judge appoints that agency's law judges.
At issue in the June 21 Supreme Court ruling was an SEC proceeding charging Raymond Lucia, who marketed a retirement savings strategy called "Buckets of Money," with violating certain securities laws. After directing a law judge to hold a hearing on the matter, SEC Administrative Law Judge Cameron Elliot issued an initial decision concluding that Lucia had violated the law and imposing sanctions: $300,000 in civil penalties and a lifetime ban from the investment industry.
Crying foul, Lucia argued that Elliot's decision was invalid because the judge was not constitutionally appointed. Asserting that SEC law judges are "officers of the United States," Lucia said they are subject to the Appointments Clause of the U.S. Constitution and therefore must be appointed by the president, the courts or a department head.
The SEC and the D.C. Circuit rejected Lucia's argument after finding that SEC law judges are not "officers of the United States" but instead are "mere employees" with lesser responsibilities who therefore fall outside the Appointments Clause. But that was at odds with an earlier decision by the 10th Circuit, which ruled in a December 2016 opinion involving an SEC administrative action against Colorado executive David Bandimere that SEC law judges indeed are federal officers because their decisions can have significant implications.
After Lucia asked the Supreme Court to resolve the conflicting rulings, the U.S. Department of Justice, which under the Obama administration defended the position that SEC law judges are not officers, switched sides and supported Lucia's petition.
The court's opinion
In a 7-2 ruling, the Supreme Court found that the SEC's law judges are "officers of the United States" and therefore subject to the Appointments Clause.
Justice Elena Kagan, who wrote the court's opinion, cited a previous ruling that "special trial judges" with the United States Tax Court are officers and not mere employees. And since the SEC's law judges "have equivalent duties and powers as [special trial judges] in conducting adversarial inquiries" and "nearly all the tools of federal trial judges," the court directed the SEC to have a different, properly appointed law judge or the commission itself hold a new hearing in the matter.
In a concurrence, Justice Stephen Breyer suggested that the decision's impact might be relatively limited.
"The analysis may differ for other agencies that employ administrative law judges. Each agency's governing statute is different, and some, unlike the [SEC's], may allow the delegation of duties without a published order or rule," Breyer wrote.
Breyer continued: "Similarly, other agencies' administrative law judges perform distinct functions, and their means of appointment may therefore not raise the constitutional questions that inform my reading of the relevant statutes here. The upshot … is that for statutory, not constitutional, reasons, the commission did not lawfully appoint" the law judge at issue here.
Dissenting, Justice Sonia Sotomayor, joined by Justice Ruth Bader Ginsburg, lamented the lack of jurisprudence guidance on who qualifies as an officer of the United States and, in particular, the types of powers that constitute "significant authority" and therefore make a position subject to the Appointments Clause.
Sotomayor suggested that one requisite should be the ability to make final, binding decisions on behalf of the government. But here, she said, SEC law judges' initial decisions are not final until the agency takes action, either to review the decision de novo or to issue an order declining to review the decision. She therefore concluded that the SEC law judge is not an officer.
Ramifications for FERC?
The same mostly is true with FERC in that its law judges' decisions generally cannot take effect unless the full commission affirms, reverses or remands them, or some combination of the three. However, a FERC law judge's initial decision does become final if no exceptions are filed 10 days after they are due and the agency does not issue an order staying the effectiveness of the initial decision pending review.
In addition, FERC law judges are appointed by the agency's chair and thus such action may fall under the Administrative Clause's reference to appointments by a "department head" as cited in the Supreme Court's decision.
Nevertheless, Bill Scherman, former FERC general counsel and partner at Gibson Dunn, said in an email that the court's decision "raises substantial questions about whether the FERC's [law judges] are properly appointed."
In an October 2017 blog post written in response to the Supreme Court litigation, David Perlman, a partner at the law firm Bracewell, said whether FERC is a "department" whose head can appoint inferior officers also is unclear. He noted that FERC, which is an independent agency, is a component of the U.S. Department of Energy. And if FERC is a department, the full FERC — not just the chair — may need to appoint law judges, he said. Finally, Perlman noted that FERC law judges often preside over technical ratemaking proceedings rather than adversarial disputes or enforcement proceedings for which there is no federal court corollary.
Given all those questions, Perlman said further litigation would be likely if the Supreme Court upholds the 10th Circuit ruling, which it has now done. Lucia v. Securities and Exchange Commission (No. 17-130)