Balkinization: The Solicitor General's Baffling Brief in <i>Lucia v. SEC</i>

The Solicitor General's Baffling Brief in Lucia v. SEC

Marty Lederman

In a series of recent posts (most recent here), I’ve been sharply critical of filings by the Solicitor General in the Hargan v. Garza abortion litigation, involving HHS’s efforts to deny minors in their de facto custody the ability to exercise their constitutional rights. Last month, for example, I wrote that the Solicitor General’s nominal “Petition for Certiorari” in No. 17-654 “[i]n many respects . . . departs, sometimes dramatically, from the justly lauded, traditional standards and practices of [the Office of the Solicitor General].”

Unfortunately, it appears that the Hargan litigation is not a singular aberration. Three weeks after his petition in Hargan, the Solicitor General filed another extraordinary brief in No. 17-130, Lucia v. SEC, about a topic far removed from (and less heated than) abortion rights—namely, whether the Administrative Law Judges (ALJs) who work in the Securities and Exchange Commission (SEC) are hired in a manner that violates the Appointments Clause of the Constitution, Art. II, § 2, cl. 2.

In his Lucia brief, filed on behalf of the Respondent SEC, the SG urges the Court to grant Lucia’s petition for certiorari, even though the government prevailed below. As I’ll discuss, SG Francisco failed to offer a compelling reason why the government was switching its longstanding legal position in Lucia; but that’s not what makes the brief especially concerning. Such a reversal is unusual, but it’s not, in and of itself, problematic. Indeed, one of the most laudable practices of the Office of Solicitor General is the confession of error.

What makes the brief extraordinary, from the perspective of the Office’s usual standards, are two other things:

-- First, the SG did not explain why, under the government’s new view, the proper response was not for the defendant agency—the SEC—to change its practices to conform to the government’s new view of what the Constitution requires, rather than (as the SG has urged) for the Court to grant cert. What’s more, the brief failed to inform the Court that the SEC was about to take steps, the very next day, to cure the alleged constitutional infirmity identified in the petition and thereby also eliminate the purported basis for the Court to grant the petition. The SG’s stated justification for the Court to grant the petition is no longer operative—yet the SG has not whispered a word to the Court about that decisive change of circumstance.

-- Second, the SG not only asked the Court to grant cert. on the Appointments Clause question where there was no longer any factual predicate for it; he also asked the Court to expand the Question Presented to include an additional constitutional challenge to a federal statute (regarding ALJs’ “for cause” removal protections) that no court has accepted, on which no court of appeals has opined, and that the petitioners themselves have not raised.

* * * *

Some background: Petitioners Lucia, et al., were registered investment advisers who marketed a wealth-management strategy called “Buckets of Money.” The SEC instituted administrative proceedings against them based upon allegations that they had used misleading slideshow presentations to deceive prospective clients about how the “Buckets of Money” strategy would have performed under historical market conditions, in violation of three federal statutes.

The Commission assigned the initial stages of the proceeding to ALJ Cameron Elliot. After a hearing, Elliot concluded that the petitioners had willfully and materially misled investors in violation of the Investment Advisers Act, and ordered a variety of sanctions. Such an ALJ decision does not itself operate by force of law: It becomes final only upon an order issued by the SEC itself, and the SEC reviews the ALJ’s decision de novo. In this case, the Commission conducted an independent review of the record, except with respect to the findings not challenged on appeal, and the Commission determined that the ALJ had correctly found that the petitioners had willfully made fraudulent statements and omissions in violation of the Investment Advisers Act. With limited exceptions, the Commission also affirmed the sanctions that ALJ Elliot had proposed.

Lucia and the other petitioners challenged the SEC process on the ground that ALJ Elliot was an “inferior” “Officer[] of the United States” who had not been appointed in conformity with the Appointments Clause. The Appointments Clause provides that such inferior Officers must be appointed in one of four ways: by the President, by and with the advice and consent of the Senate; by the President alone; by a court of law; or—as most relevant here—by the head of a Department.

The five-member Commission is the head of a Department, and the relevant statute would permit the Commissioners to appoint ALJs. See 5 U.S.C. 3105 (“Each agency shall appoint as many administrative law judges as are necessary . . . .”). If the Commission had done so, such an appointment would have satisfied the Appointments Clause even if ALJ Elliot is an inferior “Officer.” The SEC, however, for some reason had not itself directly appointed its ALJs. Most of them were, instead, chosen by the Commission’s Office of Human Resources, based upon recommendations by the SEC’s Chief ALJ and an interview committee, who in turn selected individuals from among three candidates identified by the U.S. Office of Personnel Management. ALJ Elliot, too, appears to have been hired by the Office of Human Resources, albeit perhaps not pursuant to the OPM “Rule of Three” (see this transcript at pp. 4470-72).

Everyone agrees that if ALJ Elliot is an “Officer of the United States,” his hiring by the SEC’s Office of Human Resources violated the Appointments Clause, because the Commission itself did not (as of the date of the ALJ’s hearing) approve the appointment. (As the Office of Legal Counsel has explained, the appointment process can largely be delegated to officials other than the head of the Department, such as the Human Resources Department, as long as the “ultimate decision” on the appointment remains with the head of the Department. Here, however, the SEC did not (until recently—see below) confirm the appointment of ALJ Elliot.)

The question presented by the Lucia petition thus is whether ALJ Elliot is an “Officer” for purposes of the Appointments Clause, or whether he is, instead, a mere “employee,” who may constitutionally be appointed as Mr. Elliot was here.

There’s a circuit split on that question: The U.S. Court of Appeals for the D.C. Circuit says that the SEC ALJs are employees for Appointments Clause purposes, whereas the Court of Appeals for the Tenth Circuit says they’re “Officers.” Until a few weeks ago, the longstanding view of the SEC itself, and of the United States, was that these ALJs are employees, and thus that it is not constitutionally necessary for the SEC Commissioners themselves to appoint them. That is the position the government argued to the en banc D.C. Circuit in the Lucia case in May. The court of appeals affirmed the judgment against Lucia by an equally divided 5-5 vote (with Chief Judge Garland recused).

In his Lucia brief in the Supreme Court, however, SG Francisco, on behalf of the SEC, now reverses the United States’s traditional view: He argues that the ALJs are “Officers” and therefore were hired in violation of the Appointments Clause.

I tend to think the government’s previous, traditional view was correct—that the SEC’s ALJs are employees rather than officers, primarily because they do not have the independent power, without the action of the Commission itself, to bind third parties or the government itself for the public benefit. See 31 Op. O.L.C. 73, 87 (2007). Concededly, however, it’s a close and unresolved question, owing in part to the somewhat cryptic and imprecise opinion of the Court in Freytag v. Commissioner (1991). Reasonable minds can differ.

And apparently SG Francisco does: His view, after “further consideration” of the question (p.9), is that the ALJs are “Officers” and thus must be appointed by the SEC itself. Fair enough. Just because a new SG does not agree with the traditional view of the United States on a legal question, however, does not mean that the government should therefore change its legal position in court—particularly not where, as here, the Trump Administration itself pressed the traditional view before an en banc court of appeals just six months earlier (reply brief here; oral argument here); and where the new view would impose greater constraints on the flexibility of the client agency. The traditional understanding is that the core of the Solicitor General’s responsibility is, in the words of former SG Seth Waxman, “to ascertain and represent the interests of the United States in litigation.” And, obviously, it is not in the interests of the United States to flip its views every time a particular Solicitor General happens to personally think that the prevailing U.S. position is not the one he would have arrived at on a clean slate. Such convulsive shifts, based entirely on the person who happens to be SG at a given time, would undermine the credibility of OSG’s representations to the Court.

This doesn’t mean that such shifts are always inappropriate, however. Sometimes, for instance, major changes in the Supreme Court’s own jurisprudence might warrant a reconsideration of the government’s views. And in still other cases, a Solicitor General, Attorney General, and/or the President might conclude that the traditional U.S. position was insufficiently protective of constitutional rights—such as the switch in positions of the George W. Bush Administration on the Second Amendment, or President Obama’s conclusion that Section 3 of the Defense of Marriage Act was unconstitutional. The SG’s Lucia brief, unfortunately, fails to offer any such compelling reason for the about-face, apart from the fact that the new SG undertook “further consideration” of the question. (The brief also refers (pp.9-10) to “the implications for the exercise of executive power under Article II”—but it doesn’t say what those “implications” might be. Indeed, executive power is enhanced if the agency may choose among different means of appointing ALJs—a flexibility that the government’s new view would foreclose.)

* * * *

The failure to offer a good explanation for the shift in the government’s traditional view, however, is not what makes the brief so troubling. What’s much more inexplicable is the SG’s failure to offer a persuasive reason why certiorari is warranted in light of the new position of the United States, and his failure to inform the Court of intervening developments undertaken by the Respondent agency itself that eliminate the need for the Court to resolve the Question Presented.

The SG argues (p.10) that the Court should grant cert. because “[t]he question presented has arisen frequently across the courts of appeals on petitions for review of the Commission’s decisions, and it will continue to arise absent this Court’s intervention.” Indeed, the SG represents (p.25) that “the Commission’s ability to enforce the nation’s securities laws has, in significant respects, been put on hold pending this Court’s resolution of the question presented.”

This is simply untrue, however—or, more to the point, it was something entirely within the Respondent agency’s own power to prevent. The upshot of the SG’s brief for the SEC is this: “We have been acting unconstitutionally.” OK, then, if that's the case—if the SEC’s new view is that its ALJs are “officers”—then why wouldn’t the Commission now simply appoint ALJs in conformity with the Appointments Clause, by making the appointments itself, thereby curing the constitutional defect? (The federal statute allows the SEC to do so. The SG’s view of the constitutional question, that is to say, does not mean that any federal statute is unconstitutional.) One would expect the brief to say something about that possibility—about whether and how the SEC was responding to its new view that the appointments had been unconstitutional. Yet on this crucial question, the brief is silent.

Worse yet, the brief does not mention the critical fact that the SEC was, indeed, about to cure the constitutional defect. The very next day after the brief was filed, the Commission— in its capacity as head of a department—“ratified” the appointment of Elliot and its other ALJs. The Commission further ordered that all pending cases, including those that had already been appealed from an ALJ to the Commission itself, must be reconsidered before a properly appointed ALJ, with an opportunity for the parties to submit new evidence.

Because of this action by the SEC, the question presented will not “continue to arise absent this Court’s intervention,” nor will “the Commission’s ability to enforce the nation’s securities laws [be] put on hold pending this Court’s resolution of the question presented.” There is no longer any reason for the Court to consider the merits of an agency practice that no longer exists and that the agency and the Solicitor General have concluded cannot be revived.[1]

The SG’s failure even to identify, let alone discuss, this development, is indefensible, best I can tell.

* * * *

Perhaps that failure can be explained by the other remarkable aspect of the SG’s new brief: the SG’s eagerness for the Court also to consider an additional constitutional question, concerning the ALJs’ statutory protection from removal, that is not affected by the SEC’s recent appointment of the ALJs.

Only the Commission itself can remove ALJs from office, and then “only for good cause established and determined by the Merit Systems Protection Board.” 5 U.S.C. 7521(a). Moreover, the President can only remove the members of the MSPB and (probably) Commissioners on the SEC itself for “good cause,” e.g. (as to the MSPB), “only for inefficiency, neglect of duty, or malfeasance in office.” 5 U.S.C. 1202(d). After the Court’s decision in Free Enterprise Fund v. Public Co. Accounting Oversight Bd., it is an open question whether this multi-layer “for cause” removal protection for ALJs is constitutional. See FEF, 561 U.S. at 507 n.10; id. at 542-43 (Breyer, J., dissenting).

The SG’s brief urges the Court to resolve this removal question, too. “It is critically important,” writes Francisco (p.21), “that the Court, in considering whether the Commission’s ALJs are ‘Officers of the United States,’ address whether the restrictions imposed by statute on their removal are consistent with the constitutionally prescribed separation of powers.” Yet not only doesn’t the SG offer any reasons why the Court’s consideration of that question would be “critically important” now, he does not even offer any good reason why the Court should do so. And there are plenty of good reasons—reasons the Solicitor General himself typically invokes, but that he disregards here—why the Court should not grant the petition in order to review that question.

For one thing, the petitioners themselves have not raised it in the case, let alone in their petition, and, as they explain in their reply brief, they do not want the Court to address it. Indeed, as the reply brief notes (pp. 10-11), even if the petitioners did take the view that they have a right to appear before an ALJ who is not protected by such removal restrictions, that question might never arise in their case—if, for example, “the proceeding is dismissed, or petitioners are afforded a new trial in an Article III forum.”

Moreover, not only is there not a circuit split on the question, but no federal court has ever held that the ALJ removal protections are unconstitutional, and no court of appeals has even opined on the question, one way or the other. (The question has been raised in a D.C. Circuit case (Timbervest v. SEC, No. 15-1416) that the court of appeals is holding in abeyance pending the Supreme Court’s disposition of Lucia.) Thus, as petitioners note (p.10), “[t]he Solicitor General . . . asks this Court to break new ground”—to address the constitutionality of a federal statute, no less!—“without the benefit of a decision from the court below or any other court of appeals.” (It's not surprising that there's no immediate prospect of a petition cleanly raising the question: It is far from obvious that most actors in the regulated community would be keen on a Supreme Court holding that the SEC can remove ALJs at will.)

Finally, the SG does not even suggest, let alone argue, that the ALJ “good cause” removal provisions of the federal law are unconstitutional—and there are very good reasons to believe that they are not, because an ALJ’s principal role is, of course, to “perform adjudicative rather than enforcement or policymaking functions.” FEF, 561 U.S. at 507 n.10; see also Wiener v. United States, 357 U.S. 349 (1958).[2]

Obviously, then, if the Solicitor General were applying his Office’s usual standards, he would never have urged the Court to consider the merits of the removal question. In this respect, too, he has starkly deviated from the traditional practices of the Office.

* * * *

The Justices are scheduled to discuss Lucia at their conference this coming Friday, January 5. For the reasons I’ve set out here, the case is not cert.-worthy: In light of the Respondent’s new view of what the Appointments Clause requires, and the SEC’s recent appointments of its ALJs, there’s no reason for the Court to consider the merits of the agency’s past practice, which it has now repudiated and abandoned.

Nevertheless, Lucia notes in its reply brief that the SEC’s action to fix the problem going forward does not remedy the petitioners’ own injuries (p.5): “Although the government now agrees that SEC ALJs are Officers, it has afforded petitioners no redress for having subjected them to trial before an unconstitutionally constituted tribunal.” It further asserts (p.6) that “[a]bsent review by this Court, the judgment below will stand uncorrected notwithstanding the Justice Department’s confession of error.” I’m not sure that’s right. It might be the case that the SEC can now order the petitioners’ own case to be reopened before a properly appointed ALJ, just as it has done with respect to cases that remain pending before the Commission. If so, the Commission obviously should do so right away. If it does not do so, however—or if the agency no longer has jurisdiction to so “reopen” the petitioners’ case because the appeal is pending in an Article III court (a question I haven’t researched)—the Court should grant Lucia’s petition, vacate the judgment below, and remand the case to the court of appeals, with an order for that court to remand the case to the agency for reconsideration before a newly appointed ALJ (or some other lawful disposition).

[1] In its reply brief, Lucia offers two reasons why the Court should hear the case, even after this curative action by the Commission. Neither reason is persuasive, however.

First, Lucia suggests (p.6) that perhaps the SEC itself—in contrast to the SG—might actually refuse to appoint the ALJs, and “continu[e] to assert that its ALJs are employees. . . . [T]he Commission will not actually acknowledge that petitioners were tried by an unconstitutional adjudicator or provide an appropriate remedy for that constitutional violation.” The SEC, however, already has acknowledged that a Commission appointment is necessary to cure a constitutional defect: That is precisely the argument of the brief that the Solicitor General filed on behalf of the SEC. Even if there might be certain officials at the SEC who do not personally agree with the view in the brief, the Commission itself is now formally on record as conceding that an appointment by the “Head” of the “Department” is constitutionally required—and it has taken steps to comply with that requirement.

Second, Lucia argues (p.8) that the SEC’s purported “ratification” does not do the (constitutional) trick, because the SEC used the wrong nomenclature: Instead of saying that the SEC “hereby appoints” the existing ALJs, or words to that effect, the Commission stated that it was ratifying the “agency’s prior appointment” of the five identified ALJs—and the agency, as such, had not, in fact, made the prior appointments. Surely, however, the Commission’s failure to use any special “magic words”—or, more to the point, its insertion of the word “agency’s” to refer to the actions of the SEC’s Human Resources Department—should not make any constitutional difference. The Commission has expressed its will to appoint Elliot and the other ALJs through an open and unequivocal public act, which is all the Constitution requires. See Marbury, 5 U.S. at 156-57. (And even if some clerical correction were required to confirm the new appointments, that would hardly be reason for the Court to grant cert.)

[2] The SG writes, in passing (p.20), that “the status of the Commission’s ALJs as constitutional ‘Officers’ . . . has implications for whether the statutory restrictions on their removal are consistent with separation-of-powers principles.” That’s not correct: It’s mixing apples and oranges. Whether or not ALJs are “officers” for purposes of the Appointments Clause is a question entirely distinct from whether Congress’s prescribed method for removing ALJs “impermissibly burdens the President's power to control or supervise” such actors “in the[ir] execution of . . . duties under the Act” and thereby “interfere[s] impermissibly with his constitutional obligation to ensure the faithful execution of the laws.” Morrison v. Olson, 487 U.S. at 692-93. To be sure, evaluation of the ALJ’s particular functions, and of the SEC’s supervisory authority over such ALJs, is relevant to both questions, and it’s difficult to imagine any “employee,” not covered by the Appointments Clause, for whom Congress may not provide “for cause” removal protection; nevertheless, the answer to the “officer/employee” question for Appointments Clause purposes does not resolve, or even affect, the question of whether particular removal restrictions are constitutional.

Posted 6:12 AM by Marty Lederman [link]