High Court Dispute Over SEC Judges Could Affect Other Agencies

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By Jennifer Bennett

Administrative law judges throughout the federal government could be affected by a case the U.S. Supreme Court will hear April 23 on the constitutionality of those appointed at the SEC.

At issue in the case is whether the Securities and Exchange Commission properly followed the procedures laid out in the Constitution for appointing government officials deemed “officers.” Investment adviser Raymond J. Lucia challenged the lifetime bar and $875,000 fine levied against him in 2013 for securities violations on the grounds that the agency didn’t follow the proper procedures in appointing the ALJ who heard his case.

Approximately 150 ALJs who preside over “adversarial enforcement proceedings” at agencies including the Department of Labor, the Federal Energy Regulatory Commission, and the Occupational Safety and Health Administration could qualify as officers and be affected by the court’s decision, according to a brief Lucia filed with the court in February. The estimate is based on the number of ALJs “authorized to perform ‘on-the-record’ adjudications,” Mark A. Perry, a partner at Gibson, Dunn & Crutcher LLP who represents Lucia, told Bloomberg Law.

“Once there’s a ruling from the Supreme Court in regards to the SEC administrative law judge appointments, then certainly litigants may be likely to raise that issue elsewhere,” Judge Michael Devine, president of the Federal Administrative Law Judges Conference, told Bloomberg Law. “But until we actually have a ruling from the Supreme Court, it’s kind of hard to analyze what the result will be.”

The SEC’s five ALJs are a tiny fraction of the 1,931 employed throughout the federal government as of March 2017. Nearly 90 percent preside in cases for the Social Security Administration or Medicare hearings and appeals for the Department of Health and Human Services.

Appointments Clause Problems

How an ALJ is appointed isn’t always obvious, which makes it difficult to determine constitutionality. The appointments clause mandates that officers be appointed by the president and confirmed by the Senate, while inferior officers — called that due to their more junior status — must be appointed by the president, a federal judge, or the head of their agency.

The appointment process for SEC ALJs wasn’t clear until recent litigation required the SEC to disclose its selection methods, according to Lucia’s February brief.

In the past, the SEC didn’t consider its ALJs officers, and didn’t follow appointment clause procedures in appointing them. The U.S. Solicitor General, who is representing the SEC at the Supreme Court, perhaps surprisingly sided with Lucia and said ALJs were officers who hadn’t been properly appointed, according to a November 2017 brief. The next day, the SEC ratified the appointments of its ALJs and directed them to reconsider the record in each of their pending cases and ratify their past decisions.

“That’s the problem — there’s multiple different agencies and a variety of different ways to make appointments,” Devine said. In addition to heading the Federal Administrative Law Judges Conference, a voluntary professional organization that advocates for the interests of the federal administrative judiciary, Devine has served as an ALJ at multiple agencies. His group filed an amicus brief in the case but chose not to support either party.

Risk for Social Security Judges

This ambiguity over different agencies’ appointment processes might make the court “more likely to limit its ruling to the SEC,” Ruthanne Deutsch, founding partner of Washington-based appellate firm Deutsch Hunt PLLC. Her firm prepared the Association of Administrative Law Judges’ amicus brief in this case. The union represents Social Security Administration ALJs, and its brief supported the appellate court’s decision in favor of the SEC.

A narrow ruling in Lucia’s favor but limited to SEC ALJs would still “leave the door open to further challenges in other agencies,” Deutsch said. “On the other hand, an affirmance of the ruling below would likely close the door to further Appointments Clause litigation.”

Deutsch said it “seems unlikely” a decision in Lucia’s favor would affect the nonadversarial proceedings at the Social Security Administration, where 86 percent of federal ALJs worked as of March 2017. “SEC ALJs arguably exercise more authority than other ALJs, even those that preside over adversarial enforcement proceedings,” she said.

Still, the constitutionality of ALJ appointments has already come up in a handful of SSA cases, Barbara Silverstone, executive director of the National Organization of Social Security Claimants’ Representatives, told Bloomberg Law. Silverstone’s group represents the interests of disability and supplemental security income claimants’ attorneys and advocates. It filed an amicus brief supporting the appellate court’s decision.

SSA’s press office declined to comment, citing the pending litigation.

Uncertainty over whether SSA ALJs were constitutionally appointed could exacerbate existing hearing delays, Silverstone said.

“Already, people wait years to have a hearing, and there’s almost a million people waiting,” Silverstone said. Anything else to slow the hearing process “would be devastating” for claimants, many of whom lack income and insurance while waiting for benefits determinations, she said.

The case is Lucia v. SEC , U.S., No. 17-00130, arguments to be heard 4/23/18 .

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com

To contact the editor responsible for this story: Seth Stern at sstern@bloomberglaw.com

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