Court Says that SEC ALJs are "Officers" and Lack Valid Appointment

Steven D. Schwinn, John Marshall Law School

The Supreme Court ruled today in Lucia v. SEC that SEC Administrative Law Judges are "Officers," and that their appointment by SEC employees violates the Appointments Clause. The ruling invalidates the ALJ decision before the Court and sends the case back for another hearing (before a different, validly appointed ALJ, or before the SEC itself). (The SEC "ratified" the appointment of its ALJs while this case was working its way up. But the Court didn't address the significance of the ratification, so we don't know whether this action makes the ALJs' appointments valid. The Court said it didn't matter to this case, though, because the SEC might assign the case to a validly appointed ALJ (outside the ratification) or the SEC itself.)

The ruling may affect the appointments, and decisions, of the many ALJs across the executive branch. (This depends on how they were appointed, and under what authority.) Under the Court's ruling, going forward, ALJs who exercise authority similar to the SEC ALJs will satisfy the Appointments Clause so long as they are appointed by the President, a court, or the head of a department. (The parties agreed that SEC ALJs were "inferior officers," and therefore didn't require presidential nomination and Senate advice and consent, as "principal officers" do. More on that below.)

Justice Kagan wrote for the Court, joined by Chief Justice Roberts and Justices Kennedy, Thomas, Alito, and Gorsuch.

The Court, relying on Freytag v. Commissioner, said that an "Officer" under the Appointments Clause is someone who (1) holds a continuing office and (2) exercises "significant authority" pursuant to the laws of the United States. (The Court distinguished between "Officer" and "employee," who is not covered by the Appointments Clause at all.) The Court said that SEC ALJs easily meet these two requirements. As to the first, it held that they plainly occupy a continuing office. As to the second, it said that Freytag "says everything necessary to decide this case":

the Commission's ALJs exercise the same "significant discretion" when carrying out the same "important functions" as STJs do [in Freytag]. Both sets of officials have all the authority needed to ensure fair and orderly adversarial hearings--indeed, nearly all the tools of federal trial judges. . . . So point for point--straight from Freytag's list--the Commission's ALJs have equivalent duties and powers as STJs in conducting adversarial inquiries.

And at the close of those proceedings, ALJs issue decisions much like that in Freytag--except with potentially more independent effect. . . . By contrast [to Freytag], the SEC can decide against reviewing an ALJ decision at all. And when the SEC declines review (and issues an order saying so), the ALJs decision itself "becomes final" and is "deemed the action of the Commission." That last-word capacity makes this an a fortiori case: If the Tax Court's STJs are officers, as Freytag held, then the Commission's ALJs must be too.

Because the ALJs are "Officers," they have to be appointed by the President, the courts, or the head of the department, here the SEC. And because they were appointed by SEC employees, and not the SEC itself, their appointment was invalid, as was the ALJ's ruling in this case.

Importantly, the Court assumed, as agreed by the parties, that the ALJs were "inferior officers," not "principal officers." This means that they can be appointed by the President, the courts, or the head of a department. This, in turn, means that SEC ALJs--and any other ALJs who weren't appointed by the head of a department--have to be reappointed by the head of a department under law. It also means that this case says nothing about the line between inferior officers and principal officers; it only speaks to the difference between "Officers" and "employees" (which are not covered by the Appointments Clause at all and are therefore not at all subject to Appointments Clause requirements).

The Court ordered the SEC to grant a new hearing to the petitioner, with a different and validly appointed ALJ or with the SEC itself.

Justice Thomas, joined by Justice Gorsuch, concurred, and argued that "Officer," under an original understanding, should sweep much, much more broadly, to "all federal civil officials 'with responsibility for an ongoing statutory duty.'"

Justice Breyer argued that the Court could've resolved the case under the Administrative Procedure Act (which provides for the appointment of ALJs) and Free Enterprise Fund:

I would not answer the question whether the Securities and Exchange Commission's administrative law judges are constitutional "Officers" without first deciding the preexisting Free Enterprise Fund question--namely, what effect that holding would have on the statutory "for cause" removal protections that Congress provided for administrative law judges. If, for example, Free Enterprise Fund means that saying administrative law judges are "inferior Officers" will cause them to lose their "for cause" removal protections, then I would likely hold that the administrative law judges are not "Officers," for to say otherwise would be to contradict Congress' enactment of those protections in the Administrative Procedure Act. In contrast, if Free Enterprise Fund does not mean that an administrative law judge (if an "Office[r] of the United States") would lose "for cause" protections, then it is more likely that interpreting the Administrative Procedure Act as conferring such status would not run contrary to Congress' intent. In such a case, I would more likely hold that, given the other features of the Administrative Procedure Act, Congress did intend to make administrative law judges inferior "Officers of the United States."

Justice Breyer, joined by Justices Ginsburg and Sotomayor, also would have allowed the same ALJ to re-hear the case on remand.

Justice Sotomayor, joined by Justice Ginsburg, dissented, arguing that "Commission ALJs are not officers because they lack final decisionmaking authority."