Supreme Court Holds that SEC ALJs are “Officers” Who Need Constitutional Appointment

0 Flares Filament.io 0 Flares ×

Frequent guest blogger Carlton Smith brings us an important development in Appointments Clause litigation that could have implications for employees of the IRS Office of Appeals. Christine

In Lucia v. Securities and Exchange Commission (June 21, 2018), in a 6-3 ruling, the Supreme Court held that Securities and Exchange Commission (SEC) Administrative Law Judges (ALJs) are “Officers of the United States” under the Constitution’s Appointments Clause (Art. II, Sec. 2, cl. 2), so need to be properly appointed by the SEC, not merely hired by SEC staff. In an opinion authored by Justice Kagan that was joined by all five Conservative Justices on the Court, the Court said that its holding was simply one required as a result of the holding in Freytag v. Commissioner, 561 U.S. 868 (1991), that Tax Court Special Trial Judges (STJs) are constitutional officers who need to be appointed pursuant to the Appointments Clause.

Since September 2015, I have been doing posts on the litigation leading up to the Lucia ruling (in chronological order, here, here, here, here, here, here, and here). In those posts, I have pointed out that the litigation leading to Lucia might have a significant impact on the ALJs that the Treasury uses to conduct Circular 230 violation hearings. Although I am not sure, I suspect that only Treasury staff, and not the Secretary of the Treasury (or any other Secretary) has hired those ALJs and that none has been appointed. I also noted that a ruling holding that SEC ALJs need to be appointed may cause the revisiting of the Tax Court’s holding in Tucker v. Commissioner, 135 T.C. 114 (2010), affd. on different reasoning, 676 F.3d 1129 (D.C. Cir. 2012), that Appeals Settlement Officers and their Team Managers conducting Collection Due Process (CDP) hearings need not be appointed.

read more...

In Freytag, the Court held that STJs are “Officers of the United States” who need to be appointed and that the Tax Court Chief Judge was one of “the Courts of Law” to which Congress could delegate this power, since the STJs were “inferior Officers” under the Clause. In making its ruling in Freytag, the Court noted numerous powers of STJs that were similar to those of district court judges (who everyone conceded were officers under the Clause).

However, the Court created confusion in Freytag by also noting that Tax Court judges could enter final decisions in certain Tax Court cases, without review by a regular Tax Court judge. See section 7443A(c). This led to a split by lower courts as to whether SEC ALJs had to be appointed, since the SEC ALJs lacked power to make final decisions. An SEC ALJ’s ruling becomes final only if the SEC declines to hear an appeal from the ruling. In the Lucia case, the D.C. Circuit had followed its ruling in Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000), concluding that Freytag held that STJs needed to be appointed only because they entered final decisions in some cases. In Lucia, the Supreme Court (in footnote 4) called the finality mention in Freytag an “alternative holding”, with the primary holding being that STJs needed to be appointed based on their other powers. The Lucia footnote states that Freytag’s “primary analysis explicitly rejects JUSTICE SOTOMAYOR’s theory that final decision making authority is a sine qua non of officer status.” Thus, the Lucia Court rejected Landry’s interpretation of Freytag.

This point is important, since in its opinion in Tucker, the Tax Court held that Appeals Settlement Officers and their Team Managers conducting CDP hearings need not be appointed because they do not (in the Tax Court’s view) have the power to enter final decisions, as required by Landry’s interpretation of the holding of Freytag. The D.C. Circuit in Tucker, however, disagreed with the Tax Court and stated that the IRS personnel had effective final ruling authority in CDP. Instead, the D.C. Circuit in Tucker held that the Appeals personnel need not be appointed because the collection matters they ruled on were not important enough to need a constitutional officer and the tax liability determinations that they made were so restricted by Counsel’s supervisory authority that little discretion was exercised by Appeals personnel in CDP.

In Buckley v. Valeo, 424 U.S. 1 (1976) (per curiam) (involving the Federal Election Commission), the Supreme Court had held that an “Officer” under the Appointments Clause is one who exercises “significant authority” on behalf of the United States. The Lucia Court acknowledged that the “significant authority” standard provides little concrete guidance for how to decide other cases, and the Court did not want to provide more general guidance in Lucia as to what “significant authority” encompassed.

Instead, the Court in Lucia held that the SEC ALJs were so like Tax Court STJs that the holding of Freytag inevitably extended to make SEC ALJs Officers under the Clause. The Court in Lucia noted four powers of the SEC ALJs that were similar to those of Tax Court STJs: (1) taking testimony, (2) conducting trials, (3) ruling on the admissibility of evidence, and (4) having the power to enforce compliance with discovery orders. The Court held that these four powers alone were enough to make the ALJs constitutional officers, without deciding whether each of those four powers was necessary to a determination of officer status. The Court acknowledged that there were some differences between the two types of adjudicators (e.g., the STJs can enforce their discovery orders by contempt, whereas the ALJs can enforce those orders only by lesser means – such as barring the person from the hearing), but did not find these differences of constitutional significance.

This led to the question of remedy: The SEC has since appointed the various ALJs (including the one who decided Lucia’s case) and has purported to ratify all prior rulings entered by ALJs before they were appointed. But, the Court held that a person who brings a successful Appointments Clause challenge is entitled to a remedy, which, it in the past, the Court had held was a trial before an appointed officer. The Lucia Court wanted to make the remedy here one that encourages the brining of successful Appointments Clause challenges. Accordingly, the Court expanded on its prior case law and ordered a new hearing by either a now-appointed ALJ or the SEC itself, but not by the ALJ who originally decided Lucia’s case. The Court thought that the ALJ who decided Lucia’s case, whose underlying rulings had never yet been even criticized in a judicial opinion, would be too likely to simply reissue his opinion unchanged.

Justices Thomas and Gorsuch had joined the majority opinion, but Justice Thomas wrote a concurrence, joined in by Justice Gorsuch, in which he rejected Buckley’s significant authority test. He would have a less restrictive test: Anyone who held a continuing position in the government should be an officer, since that would have been the understanding of the drafters of the Constitution in 1787 as to what they meant by “Officer”.

Justice Breyer wrote a partially dissenting opinion in which he refused to decide the constitutional Appointment Clause issue. He thought that the language of the Administrative Procedure Act that authorized the SEC to appoint ALJs was simply enough to decide the case and that the SEC had not complied with its statutory mandate to appoint, rather than have the staff hire, the ALJs. Justice Breyer felt he could not decide the Appointments Clause issue without also deciding whether, in the event appointment was required, there would be another constitutional issue created concerning the limited for cause removal powers of those ALJs that the SEC possessed. The SG, when he changed the government’s Lucia position to argue that the SEC ALJs need to be appointed, had asked the Court to also decide whether a removal power issue was created if the ALJs needed appointment. The Court explicitly declined to write on removal power issues that might have been created by its ruling. The Court desired that lower courts consider any removal power issue before the Supreme Court is asked to consider it.

It is not clear to me that the Appointments Clause powers need to mesh constitutionally with removal power issues. However, in Kuretski v. Commissioner, 755 F.3d 529 (D.C. Cir. 2014), as counsel for the taxpayers, I had argued that another holding of Freytag – that the Tax Court exercised a portion of the Judicial Power of the United States – means that a for cause removal power applicable to regular Tax Court judges at section 7443(f) violates the separation of powers doctrine and so should be eliminated. There is clearly a reason for harmonizing the appointment and removal power questions, but it is not a foregone conclusion that anyone who exercises a portion of the Judicial Power of the United States, and so who needs to be appointed, cannot be removed by the President under a for cause removal power.

Justice Breyer also disagreed with the majority’s holding that the remedy should be a rehearing by an appointed ALJ or the SEC, but not by the ALJ who ruled after the original hearing. He thought that the remedy chosen by the Court was excessive. A rehearing before any appointed officer, he thought, would be enough of a remedy.

Justice Sotomayor wrote a dissent in which she was joined by Justice Ginsburg. Those two Justices also joined that part of Justice Breyer’s dissent that descried the remedy as excessive. But, Justice Sotomayor, in her dissent, also argued that the ability to render a final decision was a sine qua non of constitutional officer status under her reading of Freytag (which matched that of the D.C. Circuit both in Landry and Lucia). She wrote:

In Freytag, the Court suggested that the Tax Court’s special trial judges (STJs) acted as constitutional officers even in cases where they could not enter final, binding decisions. In such cases, the Court noted, the STJs pre­sided over adversarial proceedings in which they exercised “significant discretion” with respect to “important func­tion,” such as ruling on the admissibility of evidence and hearing and examining witnesses. 501 U. S., at 881–882. That part of the opinion, however, was unnecessary to the result. The Court went on to conclude that even if the STJs’ duties in such cases were “not as significant as [the Court] found them to be,” its conclusion “would be un­changed.” Id., at 882. The Court noted that STJs could enter final decisions in certain types of cases, and that the Government had conceded that the STJs acted as officers with respect to those proceedings. Ibid. Because STJs could not be “officers for purposes of some of their duties . . . , but mere employees with respect to other[s],the Court held they were officers in all respects. Ibid. Freytag is, therefore, consistent with a rule that a prerequisite to officer status is the authority, in at least some instances, to issue final decisions that bind the Government or third parties.

As noted above, though, the Lucia majority rejected this interpretation of Freytag.

As to the direct impact of Lucia on pending Tax Court cases, in my last post on Lucia on January 19, 2018, I noted that Florida attorney Joe DiRuzzo is again raising the Tucker issue (i.e., whether CDP Appeals personnel need to be appointed) in multiple Tax Court cases that would be appealable to other Circuits. Rulings on this issue have in essence been postponed (though not officially) pending the ruling of the Supreme Court in Lucia. Those rulings are now ready for the Tax Court to make.

I don’t know if there are any Circular 230 adjudications going on, so I can’t tell whether or how the Lucia opinion will affect current Circular 230 matters. I am not sure that future Circular 230 sanctions litigants will want to raise issues concerning the ALJs and Appointments Clause. And, of course, it is too soon for the Treasury to have decided whether to change its procedures and appoint its ALJs.

Comments

  1. Karen L Hawkins says:

    I thought I might help clarify the Circulr 230 part of this discussion. Treasury does not hire or appoint the ALJs who hear Cir 230 cases. There are no “Treasury” ALJs. On an annual basis, OPR advises OPM that it needs ALJs to hear Cir 230 cases. OPM then notifies all other federal agencies of the opportunity to “loan out” ALJs for Cir 230 hearings. Interested agencies identify themselves and OPR contracts (through OPM) with one or more of those agencies to be available for such hearings. When I left OPR, the contracting agencies were the US Coast Guard
    and HUD. During my term as Director, OPR rejected only one “bid” from an agency because it was unwilling to sign a contract requiring adherence to 6103 provisions. From the discussion in this article, it would appear that any “legitimacy” of ALJs for Cir 230 hearings will require examination of the manner in which the specific federal contracting agency has acquired its ALJs.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind

*