Lucia v. Securities and Exchange Commission

Case Year: 2018

Case Ruling: 7-2

Opinion Justice: Kagan

FACTS

 

One way the Securities and Exchange Commission (SEC) enforces the nation’s securities laws is by instituting an administrative proceeding against an alleged wrongdoer. Typically, the Commission delegates the task of presiding over such a proceeding to an administrative law judge (ALJ). The SEC currently has five ALJs. Other staff members, rather than the Commission itself, selected them all. An ALJ assigned to hear an SEC enforcement action has extensive powers—the “authority to do all things necessary and appropriate to discharge his or her duties” and ensure a “fair and orderly” adversarial proceeding. Those powers “include, but are not limited to,” supervising discovery; issuing, revoking, or modifying subpoenas; deciding motions; ruling on the admissibility of evidence; administering oaths; hearing and examining witnesses; generally “[r]egulating the course of” the proceeding and the “conduct of the parties and their counsel”; and imposing sanctions for “[c]ontemptuous conduct” or violations of procedural requirements. In short, an SEC ALJ exercises authority “comparable to” that of a federal district judge conducting a bench trial.

The Commission can review the ALJ’s decision, but if the Commission decides against review, it issues an order that the initial decision is final. The initial decision is then “deemed the action of the Commission.”

This case began when the SEC instituted an administrative proceeding against petitioner Raymond Lucia and his investment company. Lucia marketed a retirement savings strategy called “Buckets of Money.” In the SEC’s view, Lucia used misleading slideshow presentations to deceive prospective clients. The SEC charged Lucia with violating the Investment Advisers Act, and assigned ALJ Cameron Elliot to adjudicate the case. After Judge Elliot found that Lucia had violated the Act, he imposed a $300,000 fine and barred Lucia from the investment industry for life.

On appeal to the SEC, Lucia argued that the administrative proceeding was invalid because Judge Elliot had not been constitutionally appointed. According to Lucia, the Commission’s ALJs are “Officers of the United States” and so are subject to the Appointments Clause. Under that Clause, only the President, “Courts of Law,” or “Heads of Departments” can appoint “Officers.” And none of those actors had made Judge Elliot an ALJ. The Commission had left the task of appointing ALJs, including Judge Elliot, to SEC staff members. As a result, Lucia contended, Judge Elliot lacked constitutional authority to do his job.

The Commission rejected Lucia’s argument. It held that the SEC’s ALJs are not “Officers of the United States.” Instead, they are “mere employees”—officials with lesser responsibilities who fall outside of the Appointments Clause. When the Court of Appeals for the D.C. Circuit too rejected his argument, Lucia took his case to the Supreme Court.

 

OPINION

 

Justice Kagan delivered the opinion of the Court

The sole question here is whether the Commission’s ALJs are “Officers of the United States” or simply employees of the Federal Government. The Appointments Clause prescribes the exclusive means of appointing “Officers.” Only the President, a court of law, or a head of department can do so. See Art. II, §2, cl. 2. And as all parties agree, none of those actors appointed Judge Elliot before he heard Lucia’s case; instead, SEC staff members gave him an ALJ slot. So if the Commission’s ALJs are constitutional officers, Lucia raises a valid Appointments Clause claim. The only way to defeat his position is to show that those ALJs are not officers at all, but instead non-officer employees—part of the broad swath of “lesser functionaries” in the Government’s workforce. For if that is true, the Appointments Clause cares not a whit about who named them

Two decisions set out this Court’s basic framework for distinguishing between officers and employees.  Germaine held that “civil surgeons” (doctors hired to perform various physical exams) were mere employees because their duties were “occasional or temporary” rather than “continuing and permanent.”  Stressing “ideas of tenure [and] duration,” the Court there made clear that an individual must occupy a “continuing” position established by law to qualify as an officer.  Buckley then set out another requirement, central to this case. It determined that members of a federal commission were officers only after finding that they “exercis[ed] significant authority pursuant to the laws of the United States.” The inquiry thus focused on the extent of power an individual wields in carrying out his assigned functions.

Both the amicus and the Government urge us to elaborate on Buckley’s “significant authority” test … And maybe one day we will see a need to refine or enhance the test Buckley set out so concisely. But that day is not this one, because in Freytag v. Commissioner (1991), we applied the unadorned “significant authority” test to adjudicative officials who are near-carbon copies of the Commission’s ALJs. As we now explain, our analysis there (sans any more detailed legal criteria) necessarily decides this case.

The officials at issue in Freytag were the “special trial judges” (STJs) of the United States Tax Court. The authority of those judges depended on the significance of the tax dispute before them. In “comparatively narrow and minor matters,” they could both hear and definitively resolve a case for the Tax Court.  In more major matters, they could preside over the hearing, but could not issue the final decision; instead, they were to “prepare proposed findings and an opinion” for a regular Tax Court judge to consider.  Ibid.  The proceeding challenged in Freytag was a major one, involving $1.5 billion in alleged tax deficiencies. After conducting a 14-week trial, the STJ drafted a proposed decision in favor of the Government. A regular judge then adopted the STJ’s work as the opinion of the Tax Court. The losing parties argued on appeal that the STJ was not constitutionally appointed.

This Court held that the Tax Court’s STJs are officers, not mere employees. Citing Germaine, the Court first found that STJs hold a continuing office established by law. They serve on an ongoing, rather than a “temporary [or] episodic[,] basis”; and their “duties, salary, and means of appointment” are all specified in the Tax Code.  Court then considered, as Buckley demands, the “significance” of the “authority” STJs wield. In addressing that issue, the Government had argued that STJs are employees, rather than officers, in all cases (like the one at issue) in which they could not “enter a final decision.”  But the Court thought the Government’s focus on finality “ignore[d] the significance of the duties and discretion that [STJs] possess.”  Describing the responsibilities involved in presiding over adversarial hearings, the Court said: STJs “take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders.”  And the Court observed that “[i]n the course of carrying out these important functions, the [STJs] exercise significant discretion.” That fact meant they were officers, even when their decisions were not final.

Freytag says everything necessary to decide this case. To begin, the Commission’s ALJs, like the Tax Court’s STJs, hold a continuing office established by law …

Still more, the Commission’s ALJs exercise the same “significant discretion” when carrying out the same “important functions” as STJs do.  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 …

And at the close of those proceedings, ALJs issue decisions much like that in Freytag—except with potentially more independent effect. As the Freytag Court recounted, STJs “prepare proposed findings and an opinion” adjudicating charges and assessing tax liabilities. Similarly, the Commission’s ALJs issue decisions containing factual findings, legal conclusions, and appropriate remedies. And what happens next reveals that the ALJ can play the more autonomous role. In a major case like Freytag, a regular Tax Court judge must always review an STJ’s opinion. And that opinion counts for nothing unless the regular judge adopts it as his own. By contrast, the SEC can decide against reviewing an ALJ decision at all. And when the SEC declines review (and issues an order saying so), the ALJ’s 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 …

The only issue left is remedial … This Court has also held that the “appropriate” remedy for an adjudication tainted with an appointments violation is a new “hearing before a properly appointed” official.  And we add today one thing more. That official cannot be Judge Elliot, even if he has by now received (or receives sometime in the future) a constitutional appointment. Judge Elliot has already both heard Lucia’s case and issued an initial decision on the merits. He cannot be expected to consider the matter as though he had not adjudicated it before. To cure the constitutional error, another ALJ (or the Commission itself) must hold the new hearing to which Lucia is entitled.⁶

We accordingly reverse the judgment of the Court of Appeals and remand the case for further proceedings consistent with this opinion.

It is so ordered.

Justice Thomas, with whom Justice Gorsuch joins, concurring

I agree with the Court that this case is indistinguishable from Freytag v. Commissioner (1991). If the special trial judges in Freytag were “Officers of the United States,” Art. II, §2, cl. 2, then so are the administrative law judges of the Securities and Exchange Commission. Moving forward, however, this Court will not be able to decide every Appointments Clause case by comparing it to Freytag. And … our precedents in this area do not provide much guidance. While precedents like Freytag discuss what is sufficient to make someone an officer of the United States, our precedents have never clearly defined what is necessary. I would resolve that question based on the original public meaning of “Officers of the United States.” …

The Founders likely understood the term “Officers of the United States” to encompass all federal civil officials who perform an ongoing, statutory duty—no matter how important or significant the duty. “Officers of the United States” was probably not a term of art that the Constitution used to signify some special type of official. Based on how the Founders used it and similar terms, the phrase “of the United States” was merely a synonym for “federal,” and the word “Office[r]” carried its ordinary meaning. The ordinary meaning of “officer” was anyone who performed a continuous public duty … The Founders considered individuals to be officers even if they performed only ministerial statutory duties—including recordkeepers, clerks, and tidewaiters (individuals who watched goods land at a customhouse). Early congressional practice reflected this understanding. With exceptions not relevant here, Congress required all federal officials with ongoing statutory duties to be appointed in compliance with the Appointments Clause.

Applying the original meaning here, the administrative law judges of the Securities and Exchange Commission easily qualify as “Officers of the United States.” These judges exercise many of the agency’s statutory duties, including issuing initial decisions in adversarial proceedings. [T]he importance or significance of these statutory duties is irrelevant. All that matters is that the judges are continuously responsible for performing them.

Justice Breyer, with whom Justice Ginsburg and Justice Sotomayor join as to Part III, concurring in the judgment in part and dissenting in part.

I agree with the Court that the Securities and Exchange Commission did not properly appoint the Administrative Law Judge who presided over petitioner Lucia’s hearing. But I disagree with the majority in respect to two matters. First, I would rest our conclusion upon statutory, not constitutional, grounds … Second, I disagree with the Court in respect to the proper remedy.

The relevant statute here is the Administrative Procedure Act. That Act governs the appointment of administrative law judges. It provides (as it has, in substance, since its enactment in 1946) that “[e]ach agency shall appoint as many administrative law judges as are necessary for” hearings governed by the Administrative Procedure Act. In the case of the Securities and Exchange Commission, the relevant “agency” is the Commission itself. But the Commission did not appoint the Administrative Law Judge who presided over Lucia’s hearing. Rather, the Commission’s staff appointed that Administrative Law Judge, without the approval of the Commissioners themselves …

I do not believe that the Administrative Procedure Act permits the Commission to delegate its power to appoint its administrative law judges to its staff. We have held that, for purposes of the Constitution’s Appointments Clause, the Commission itself is a “Hea[d]” of a “Departmen[t].”  Thus, reading the statute as referring to the Commission itself, and not to its staff, avoids a difficult constitutional question, namely, the very question that the Court answers today: whether the Commission’s administrative law judges are constitutional “inferior Officers” whose appointment Congress may vest only in the President, the “Courts of Law,” or the “Heads of Departments.” …

I have found no other statutory provision that would permit the Commission to delegate the power to appoint its administrative law judges to its staff …

Separately, I also disagree with the majority’s conclusion that the proper remedy in this case requires a hearing before a different administrative law judge.  The Securities and Exchange Commission has now itself appointed the Administrative Law Judge in question, and I see no reason why he could not rehear the case. After all, when a judge is reversed on appeal and a new trial ordered, typically the judge who rehears the case is the same judge who heard it the first time. The reversal here is based on a technical constitutional question, and the reversal implies no criticism at all of the original judge or his ability to conduct the new proceedings. For him to preside once again would not violate the structural purposes that we have said the Appointments Clause serves, nor would it, in any obvious way, violate the Due Process Clause.

Justice Sotomayor, with whom Justice Ginsburg joins, dissenting

The Court today and scholars acknowledge that this Court’s Appointments Clause jurisprudence offers little guidance on who qualifies as an “Officer of the United States.” The lack of guidance … can undermine the reliability and finality of proceedings and result in wasted resources.

As the majority notes, this Court’s decisions currently set forth at least two prerequisites to officer status: (1) an individual must hold a “continuing” office established by law and (2) an individual must wield “significant authority.” The first requirement is relatively easy to grasp; the second, less so. To be sure, to exercise “significant authority,” the person must wield considerable powers in comparison to the average person who works for the Federal Government. As this Court has noted, the vast majority of those who work for the Federal Government are not “Officers of the United States.” But this Court’s decisions have yet to articulate the types of powers that will be deemed significant enough to constitute “significant authority.”

To provide guidance to Congress and the Executive Branch, I would hold that one requisite component of “significant authority” is the ability to make final, binding decisions on behalf of the Government. Accordingly, a person who merely advises and provides recommendations to an officer would not herself qualify as an officer.

There is some historical support for such a requirement … In 1899, a Report of the Judiciary Committee of the House of Representatives noted … a person who possesses the “mere power to investigate some particular subject and report thereon” or to engage in negotiations “without [the] power to make binding” commitments on behalf of the Government is not an officer.

Confirming that final decision making authority is a prerequisite to officer status would go a long way to aiding Congress and the Executive Branch in sorting out who is an officer and who is a mere employee. At the threshold, Congress and the Executive Branch could rule out as an officer any person who investigates, advises, or recommends, but who has no power to issue binding policies, execute the laws, or finally resolve adjudicatory questions.

Turning to the question presented here, it is true that the administrative law judges (ALJs) of the Securities and Exchange Commission wield “extensive powers.” … [But] I would hold that Commission ALJs are not officers because they lack final decision making authority … Commission ALJs can issue only “initial” decisions. The Commission can review any initial decision upon petition or on its own initiative …

As a final matter, although I would conclude that Commission ALJs are not officers, I share Justice Breyer’s concerns regarding the Court’s choice of remedy, and so I join [that part] of his opinion.