Courthouse Steps: Lucia v. SEC

Administrative Law and Regulation and Litigation Practice Group Teleforum

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In Lucia v. SEC, the SEC fined the petitioner Raymond J. Lucia $300,000 and barred him from working as an investment advisor for anti-fraud violations of the anti-fraud provisions of the Investment Advisers Act. The petitioner requested SEC review, arguing that the administrative proceedings were invalid, as the administrative law judge (ALJ) who decided his case was unconstitutionally appointed. ALJs are appointed by SEC staff in a manner that Lucia claimed violated the Appointments Clause under Article II, Section 2, Clause 2 of the Constitution. When the SEC ruled against Lucia, he appealed to the D.C. Circuit which denied the petition for review by a divided court, issuing a new decision affirming the SEC's decision as required under D.C. Circuit Rule 35(d).

Kevin Muhlendorf of Wiley Rein and Professor Gregory Dolin of the University of Baltimore School of Law join us to give their impressions of the oral argument of this important case.


Professor Gregory Dolin, Co-director of the Center for Medicine and Law, University of Baltimore School of Law

Kevin B. Muhlendorf, Partner, Wiley Rein LLP


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Event Transcript

Narrator:                             Welcome to the Federal Society's Practice Group podcast. The following podcast, hosted by the Federal Society's administrative law and regulation and litigation practice groups, was recorded on Monday April 23rd 2018 during a live courthouse steps teleform conference call held exclusively for Federal Society members.

Wesley:                                Welcome to the Federal Society's teleform conference call. This afternoon, we are holding a courthouse steps discussion on Lucia V SEC following the oral argument which was held earlier today. My name is Wesley Hodges, and I'm the associate director of practice groups at the Federal Society. As always, please note that all expressions of opinion are those of the experts on today's call. Today we are fortunate to have with us Professor Gregory Dolan, who is the co-director of the Center for Medicine and Law and the University of Baltimore School of Law.

                                                Also with us is Kevin B Muhlendorf, who is a partner at Wiley Ryan law firm. After hearing from our speakers today, we'll move to an audience Q and A, so as they're speaking please keep in mind what questions you would have for them or for the case in general. Thank you both for speaking with us today.

                                                Professor, the floor is yours to begin.

Greg Dolin:                          Thank you so much, it's always a pleasure to be back in one of these conference calls, so thank you so much for hosting me, and I look forward to talking about this case and potential to any questions. I will give just one quick disclaimer that I was not able to attend the oral argument in person so I'm going off of a transcript that I did get a chance to read from start to finish.

                                                So let me, just before we dive into the actual arguments, let me just set up the question of the issue presented to the court in this case. The question before the court was who is an officer of the United States versus who is an employee of the United States. And the reason that matters is that the constitution provides for a particular mode of appointment of officers. And furthermore, there are two types of officers. The principal officer is the one that's kind of often in the news, the attorney general, the secretary of commerce, so all the cabinet officials, ambassadors, judges, heads of various independent agencies like CFPB or obviously in this case the SEC.

                                                And there appointed in the way we oftentimes notice. They're appointed by the president with they advise and consent of the senate. But there are also inferior officers that the constitution allows the president to appoint without senatorial consent, and even allows these appointments to be made not just by the president but by the heads of the department, or by the judges. So for example, magistrate judges are these types of inferior officers, they're appointed with presidential authority, without senatorial consent by various judges in their districts.

                                                And so the question of this case was whether administrative law judges, which are types of judges that adjudicate matters arising out of the administrative state between usually the government and the citizens. Whether these are officers or employees. In the context of the SEC, these judges conduct hearings, so whenever SEC decides to take any enforcement actions because they think someone committed fraud upon the public or violated any other SEC rules or statutes, they can choose to take that person to court, or the company to court, or they can bring action internally within their agency and seek enforcement there.

                                                And if they go with option number two, the case is usually heard first by the administrative law judge, and then when the decision is made, it can be reviewed by the commission overall. The bipartisan commission. Sometimes they're argued, sometimes they're not. And if they're not, the decision of the administrative law judge becomes final.

                                                The way this case came up is because the administrative law judges are appointed not by the commission itself. So the commissioners don't take. But instead they're appointed from a list of qualified individuals provided by the mayor assistance protection board to the chief administrative judge. And the chief administrative judge who is obviously not a commissioner, gets to pick who will serve and who will adjudicate matters for the commission. These judges are vested with powers to hold hearings, take evidence, rule on objections, enter default judgements and enter reports. Sort of write the reports and including findings and facts of conclusions of law, which becomes final unless the commission decides to modify them in whole or in part.

                                                And so the question presented to this court was whether or not exercising such power is ... makes the ALJ in fact, an officer which has to be appointed not by a chief administrative law judge but by the commission or by some other superior officer of the United States. The petition has relied on the oral case called Freytag which concluded in a similar situation that certain judges of the tax court, even though the decisions could be reviewed by the primary judges were in fact officers and had to be appointed by ... in consistence with the appointments clause of the constitution. The government actually, after the election of President Trump, changed its position and agreed with the petitioners saying that in fact these are officers whereas before he took the position that they are not.

                                                And so the supreme court appointed a [inaudible 00:05:48] to argue in defense of the judgment below, arguing that these ALGs are not officers based on the theory that they are not acting in their own name. They don't find anyone [inaudible 00:06:00] until the commission issues an order of finality. Additional argument was presented as to why the LGAs are not in fact officers was because the statute creating the SEC allowed the commissioner to delegate his authority to either a single commissioner or to ALJs. So the argument was presented that in any case, because of either the review possibility or because of the statutory language, the ALG is not acting in his own name or in the name of his own office, but in the name of the commission which makes [inaudible 00:06:37] make the defendant judgment below, makes all the difference.

                                                I'll make one more point before I turn it over to my colleague about how this case came up. This appointment was challenged in front of the commission, which decided that they could not adjudicate such matters, and so ultimately the petitioner's review was followed in the DC circuit. The petitioners lost in this circuit obviously. They filed an [inaudible 00:07:03] petition. The court split five to five. This was the time when chief judge Garland was not participating, because I think at that time his nomination to the Supreme Court was still pending so the court split five to five leaving the [inaudible 00:07:17] decision standing. A Supreme Court petition for review was filed, and in the mean time, the tenth circuit reached the exact opposite conclusion. So these circuits held that ALJs are not officers, they're merely employees and therefore do not need to be appointed in consistence with the appointments clause. For the tenth circuit held the exact opposite. And of course, tenth circuit is Justice [inaudible 00:07:43] old circuit, petition for [inaudible 00:07:46] hearing was filed there, but a lot of that was pending, so Justice [inaudible 00:07:49] did not participate in that matter either because that point it was already elevated to the Supreme Court.

                                                And so now we have a circuit split coming to the Supreme Court from the tenth circuit and from the DC circuit. It was, I think a lively argument, but at least to begin to describe it, I think I'll turn it over to Kevin.

K. Muhlendorf:                 Yeah, thanks. It's Kevin Muhlendorf again with Wiley Ryan. It was a good argument, I was grateful to get to attend. One of the things that was just pointed out was that the government has switched sides, the cynic in me says it's because the SEC has a 9-0 losing streak in the last three cases before the Supreme Court. You could look at [inaudible 00:08:34] and then [inaudible 00:08:34] and then Digital Royalty Trust, and they lost all of those. So the cynic in me says that they switched sides so they could win one.

                                                But I think the arguments were sort of fascinating. And there were a couple times throughout the arguments where you could see ... at least I could see where the court was heading. There is a case out there, the Freytag case which is about the tax court judges, the special tax court judges, and at one point during the government's argument ... I believe it was during [inaudible 00:09:10] argument, Justice Kagan asked, well if you line up the top ten attributes of the Freytag judges and the ALGAs here, aren't you nine for ten? And I don't know how she calculated that, but her point was, how are the ALJs here different from the Freytag judges that were found to be officers. And I don't think there was a very good argument in response. The response was, well, the ALJs can't bind, and the Freytag judges had the ability to bind. Although, I think the judge in that case or at least the part Freytag in that case, there was an issue. Didn't bind, didn't bind anyone.

                                                But in then devolved into a discussion about the Warren Commission, and the Warren Commission, how clearly those commissioners weren't officers even though they could do the same sort of things the ALJs could. And it just seemed to be off point. And I think that was Justice Kagan's point there, and if Justice Kagan is going this way, it was siding with the petitioners here. I think that's a good indication of where we're going.

                                                Another sort of point in rebuttal that was raised was Chief Justice Roberts asking ... while the court has never held that an adjudicatory official is not an officer, would you agree? And the [inaudible 00:10:40] was forced to agree that that's actually correct. And again, in sort of trying ... in what I would think is sort of a fade away from where the Chief Justice was going, compared it to the situation of a court of appeals case where [inaudible 00:10:56] denied, and said, well, you know, that's not a ... you wouldn't think that ... your denial of sort where the court of appeals case stands is it leaves the court of appeals opinion in place, that court of appeals opinion is not the Supreme Court's opinion.

                                                Sort of trying to analogize that to, well, if the ALJ's decision is not addressed by the commission, which it isn't 90 percent of the time, then it becomes the final law. That didn't seem to track very well, so I think again, Chief Justice Roberts was onto something there by saying, well, every time we've looked at this it's come out that someone who makes the adjudication is in fact an inferior officer. That issue of adjudication seemed to come up a lot during the argument. It came up a lot in what several of the justices wanted to know is how an ALJ is different than just your average civil servant.

                                                Several times during the discussion, there were lengthy back and fourths about, well, what about this kind of civil servant, and what about that kind of civil servant. And how do we draw the line, and the petitioner's answer made some inherent sense. It's that the difference between an employee, someone, some civil servant who goes out and does inspections or investigations, or someone who can summon you in against your will and make you ... and find against you. And ban you for life as was the case with Mr. Lucia. That is a far more serious thing, and more of a sovereign ... acting like a sovereign than just acting like an employee.

                                                Any questions so far? Greg, you want to ...

Greg Dolin:                          So let me, I guess just add some more things that perhaps ... to try to rehabilitate the [inaudible 00:12:59] because I think there were some questions that were also very hard for the petitioner. And I think while it's true that if Justice Kagan goes with the petitioner that's a good indicator of how the court will go. On the other hand, Justice Kennedy I suppose goes with the response, or with the [inaudible 00:13:16] with the SEC, that is also potentially an indicator.

                                                And so I think at least Justice Bryer and Kagan and Kennedy ... one of the questions they kept coming back to, and of course it's a fool's errand to predict whether any of this will matter in terms of final opinion, but it was sort of an interesting refrain I suppose ... is this question of independence of the ALJs, independence in rendering decisions. So the concern was that if the ALJs become more closely associated, more closely tied with the commission or any other similar body, they become appointed by that body, that they may feel as if their jobs depend on their appointing authority, and therefore will be less likely to be independent and rule against the commission or to any sort of entity that actually appointed them, and that was a work in cross purposes to Mr. Lucia's argument suggesting that he got a raw deal in the hearing.

                                                Now, on the facts of this particular case and perhaps on the facts of ALJs in front of SEC, generally I think commissioners did a good job on their briefing. It didn't come up in the argument, but the briefing saying that this independence is somewhat illusory. The commission wins over 90 percent of the cases that they bring before the ALJs which is why they stop pretty much going to Federal Court, they only go internally, but since the Supreme Court obviously decides matters, not just for Mr. Lucia but overall, I think this concern about independence which both the government and the commissioner tried to [inaudible 00:15:03] saying there's a difference appointment independence and adjudicatory independence, the idea that the commission will never be able to interfere with any given case, but they can choose to hire and fire people in a somewhat different manner was raised.

                                                But I think this concern about independence and whether it's better overall for adjudication for litigants the fairness of the system to have ALJs be kind of separate, and not the appointed by the very body that they have to rule potentially against, was I think fairly palpable. How it ultimately comes out, of course, like I said, it's a losing proposition to predict, but I thought that that was an important point that several justices kept coming back to.

K. Muhlendorf:                 I think that's definitely correct. I think the quote from Justice Kagan, or at least what I wrote down was "wouldn't greater political accountability make your perception of bias worse?" In other words, aren't we better off with them being more independent rather than being tied to the commission itself. And I think the response to that, though, was pretty powerful. The notion that you could have someone adjudicate a decision, ban you for life or issue a fine, and then have the SEC say, we didn't hire him. He was hired by OPM was the response. Which has some inherent appeal, I thought. On that 90 percent figure I cited ... one thing that was, I think, if I'm remembering it right, the first time that Justice Sotomayor jumped in was to challenge that 90 percent figure. The 90 percent figure that most of the ALJ opinions are summarily finalized. Commissioner Jackson, who I think is the newest SEC commissioner has done some fiscal analysis on that and found of course that's true, but most of those cases are 12J actions from the SEC where they're getting rid of shell companies and things like that where nobody appears.

                                                And so that statistic of the 90 percent approval rate for ALJ decisions I think is probably not right. That does seem a little inflated if you take the 12J actions into account.

Greg Dolin:                          I think there are two 90 percent figures, I think they're both in the high 90's. The one is, I think that you just mentioned, I think that was a good catch. Both again, in the briefs and also by Justice Sotomayor that 90 percent ... so the petitioners argued that ALJs are really officers in part because 90 percent of the time, their opinion is not reviewed and becomes final kind of its own. But as was just mentioned, that's part of the reason's because of those 90 percent of the time, most of the time review has not been sought because nobody appears to either shell companies and so on. But conversely, every time review is sought it is granted.

                                                But there's a second 90 percent figure sort of separate, apart from that. Whether or not something is ultimately reviewed later on, the question how often in a contested case does ALJ rule for the government versus for the party that's brought before the commission. And I think that's also somewhere in the lower 90s or maybe high 80s, I don't remember the exact percentage but it was sited in one of the briefs. And so what I was saying earlier was that on one hand there's this real concern as to if you bring these ALJs, if you have commissioners, hire them. And Justice Kagan did bring it up as saying there are several ways to control decisions.

                                                One is saying you must rule X and that obviously will be the most blatant one. The other kind of next down the line is, if you rule ... if you don't rule X we're going to dock your pay, and so that obviously would be fairly blatant. But then Justice Kagan suggested if you give the commission power to hire people, and they only hire the quote unquote right type of people. The people who they are confident how they are going to rule, the message will get out so that, although it may not necessarily affect every case immediately, but it was affect cases down the line and that's bad for judicial independence. And so I think the response to it may be, as it wasn't really brought up in the argument but as the court [inaudible 00:19:31] opinion, it may be that this independence may very well be ephemeral because what decisions actually do come down, whether or not they're ultimately reviewed by the commission or whether or not they're modified by the commission, ALJ seems to be consistently ruling in favor of the investigatory arm of the commission.

                                                Now, it could all be, of course, selection bias. The answer could be well because investigators don't bring bad cases, they only bring cases that are very solid, and of course so they're going to win most of the time. But that does sort of give pause, I think, to ... or give at least ... raise some sort of doubt about the claims that this adjudicatory independence is that important because it does not seem to actually be playing out in the real world.

K. Muhlendorf:                 Yeah, I mean I used to work at the commission, and now defense in those cases, and I can assure you that there's definitely some bad cases brought out there, which is why the appearance of the independence is fairly important. After Dodd Frank passed there was ... and the ALJs were given more power, sort of more remedies were available to the enforcement division through the ALJs, there was I think a noticeable increase in how many cases went there. But I'm not sure the statistics [inaudible 00:20:50] that those turn out to be a better place for them. I think in fact recently, the SEC has done better in district court in insider trading cases then they have in the commission.

                                                But one of the things that you and I talked about before the call that I think was really interesting, and that came up throughout the argument was this notion of, well, okay, if it's about the ability to bind the government, if that's one of the parts of the test, then what happens with your average AUSA, your line attorney or an FBI agent? And an AUSA can be in a litigating position and have the ability to bind the government. You make a decision whether to call a witness, you make a decision to drop a charge. That ... or not make an argument, that's certainly fine for the government and does that then a line AUSA an officer, because ... inferior officer, because though he's supervised, he has the ability to do something to bind the government. And I think the answer probably is, it was funny. If you look at ... I'm looking at my appointment when I was at DOJ, I'm looking at the stick on the wall, and it specifically says I'm appointed by the attorney general to do such and such and such and such to try cases so it looks like that was an official delegation by the attorney general.

                                                Within the limited parameters that I was allowed to do things, but every time I filed something and every indictment was, I signed it but it was on behalf of the chief of the section or the AAG or whatever the document said. So it was always sort of based on a delegated authority. I never really had the authority to do anything outside of my lane. And that came up throughout the argument which I thought was kind of interesting.

Greg Dolin:                          And I thought so too, and I think the argument ... so it went back and forth again with I think Justice Kagan and Justice Alito as well, and there was this question as to what do we do with line attorneys, and I think [inaudible 00:22:46] judgment below was saying just that, that it's a question of in whose name are you speaking? Are you speaking in your own name, are you speaking for somebody, a superior officer. But what's interesting was that Justice Alito to pressing on is where do we look at for this delegation? In other words, is it because the attorney general on his own [inaudible 00:23:12] has to delegate to this person or that person or this office or that office. And is it how much the AG delegated on his own accord that makes somebody an officer? Or is it based on what the statute allows the AG to delegate?

                                                And so because if it's the former, then everything is somewhat ... the concern was that everything was somewhat manipulatable because the AG or whoever's the head of the relevant department can basically decide today I'm going to delegate this much and tomorrow I'm going to delegate that much and basically the course of all of the chasing their own tail because you'll never know exactly who is the officer and who is not. Conversely, if it's statutory, permission for the head of the department delegates something, then it'll be just easier, you can just look at the statue and say, well, the statue allows this much delegation, you're an officer but it's only that much. You're an employee. But there was no real clear resolution. And what also I found interesting about the AUSA is that there's actually a statute that makes AUSA appointable specifically by the attorney general, the head of the department, because they aren't [inaudible 00:24:23] 28USC542. And yet everybody seemed to concede that AUSAs are not officers, which is somewhat odd in light of the statue and in light of the way they're appointed.

                                                But I think the concern was actually broader. It's not just about AUSAs, it's also about what happens down the line in terms of if Lucia wins, what happens to other ALJs? And what happens to other government attorney and people who can take significant powerful steps. So, I think there was some concern as to what will happen if Lucia wins, and that's actually, although the government and the petitioner were on the same side, that's where they parted company. So the government thought that, or argued that the SEC can simply ratify the appointment of ALJs that were previously improperly appointed. That's how the court goes, whereas the petitioner though that because the initial proceeding was held by someone who was not authorized to hold the whole proceeding is void, and they should either go back and have another proceeding or really should have the whole case dismissed as a kind of a [inaudible 00:25:40] to the government. Saying you just can't violate the constitution and expect no real consequences to your cases. But that was not very heavily explored in the argument, so what happens if Lucia wins.

K. Muhlendorf:                 Yeah, the remedy portion really wasn't. But one thing you said there that was, it did come up several times and it seemed to focus on the Social Security Administration, I'm not sure why, but the issue of what to do with the ALJs throughout the government was ... there was real concern about that, and the petitioner tried to distinguish, and the government too, tried to distinguish the ALJs we're dealing with here, the SEC ALJs from some other types of ALJs. Veteran's administration and social security again kept coming up. And one of the distinguishing factors was that when you go to a Social Security Administration ALJ, you're petitioning for release. Whereas an SEC ALJ is summoning you in there to essentially punish you for behavior you've done. And that seems more like the sovereign on doing something than petitioning for release.

                                                The petitioner took great pains, I think in the end and rebuttal even had some specific numbers of cases that would be effected. His argument was that well, our case obviously isn't final so it makes perfect sense that you could void our case because it isn't final. There are 13 similarly situated cases, and I think you said in the SEC's brief there were 105 cases in some sort of ... some form like this. But he specifically declined to address the ALJs, what would happen across the country. He replied to Justice Roberts that we're really only focused on our case.

Greg Dolin:                          Right. And I think there are some defensible things he's saying. Look, cases that are final, they're final. We sort of had the very similar question arise when the Supreme Court was addressing a recess appointment power when President Obama attempted to appoint in the recess, then director of the CFBP Richard Courdray, and two or three members to the NORB which the Supreme Court ultimately held was illegal because Senate was not in recess, but one of the questions I recall from the oral argument was, well if we hold this, that these are not legal appointments, what happens to a bunch of cases that they've already adjudicated. And ultimately kind of the same answer was given, that there's [inaudible 00:28:13] et cetera. So ultimately I think that was a concern, but ultimately probably that question is easiest to get around.

                                                The last point that at least I want to make before I think we will open up for question unless Kevin has some other thoughts is, what I found fascinating - again, something not heavily explored in oral argument although touched upon was the government's second argument which was not really invited, which was not part of the question presented, but the question of, assuming that Lucia would win, once ALJ are appointed, they're under the current statute they're removed but only for cause. And so that creates essentially a double insulation. Because they're appointed by as I said, the opening mayor assistant protection board, they're selected. And mayor assistant protection board members are themselves removable only for cause. And then you can remove the ALGs for questioning. So you have this double layer of insulation similar to what Supreme Court held to be illegal and invalid under [inaudible 00:29:19]. And of course that was a five four case, with Justice Bryant kept reminding people that he disagreed with it then and probably was right then. In part because of what makes this case so difficult.

                                                But what the government has argued is that this double, for-cause removal is probably unconstitutional in light of PCOB, and that instead, for cause should include refusal to follow agency policy and directive. Which again, goes back to this question of independence, what kind of directive? Does it have to be in the formal rule or merely a commissioner directing you to do something? Who exactly gets to remove, how will that effect your decisional independence in any given case? And ultimately why is the government making this argument in this case when this was not part of the question presented.

                                                And so I suspect, although again we'll see how this case comes out, but I suspect that this was a strategic decision on the part of the government as part of the kind of preview of coming attractions and when a petition for [inaudible 00:30:22] is going to be filed and PHH, which is the CFTB structure. Because obviously CFTB directors removable only for cause. And so I think if the court addresses this question, assuming Lucia wins in question one, [inaudible 00:30:40] what for cause means. And actually interprets the word cause broadly, meaning the cause doesn't just mean failed to show up to the job, or taking bribes, or doing things like that. Actual active malfeasance, but cause means refusing to follow lawful directives. I think that will be a much bigger take home message, a much bigger revolution in administrative law, then deciding whether or not ALJs are or not officers. Because ultimately, that problem is fairly easily curable. You don't have chief ALJ appoint them, you have the SEC commissioners appoint them.

                                                But the removal, if the court ever gets to it, and like I said there was some discussion but not too much. But that I think is a much bigger to do if the court addresses it.

K. Muhlendorf:                 Yeah, I think that's right. There seems to be a divergence between the petitioner and the [inaudible 00:31:39] on whether the ALJs has decisional independence and structural independence. The petitioner though the decisional independence was guaranteed by the APA, but the structural independence sort of came from the appoints clause, and that was the crux of their argument. Was that you have to follow the appointments clause, and the APA is what guarantees the decisional independence. The [inaudible 00:32:01] thought that they don't have decisional independence, that that was the compromise of the APA and that the fact that the commission has to essentially approve their recommendations is almost what he said although he didn't use that term. Means that they didn't actually have decisional independence.

                                                So should we open it up to questions?

Greg Dolin:                          I think so!

Wesley:                                Okay, wonderful. Let's go in and open the floor then. In a moment, you'll all hear a prompt indicating the floor mode has been turned on. After that, to request the floor and present your question, just enter the star key and the pound key on your telephone. Okay, let's go ahead and move to our first audience question.

Question 1:                         Well I think it's time to cite Richard Epstein again, who says that there is no article 3A in the constitution that gives an agency ... creates a fourth branch of government which has both the power to write regulations, enforce the regulations, and then judge the enforcement. So of course if we did have article three judges hearing these cases, we would not have all this trouble with the administrative law judge who has a tendency to be either supervised or affirmed by the commissioner, or reversed be the commissioner, or not hired depending on what the commissioner feels is the proper way to hire judges. Does anyone want to comment on that?

Greg Dolin:                          Well, first I think it's always time to cite Richard Epstein, I don't think there's an area of the law which Richard has not written or opined on, so there's never a bad time to cite Richard. But I think obviously it's a much bigger question as to whether or not Supreme Court got it right when it blessed back in during the new deal administrative ... stand alone independent administrative agencies. I don't have ... I don't think this is the time or the place to bring it up, but I think that's an issue that will eventually bubble up, but that the court will sort of stick ... I mean obviously, over time the administrative has grown and it will be to the extent the court feels they've got it wrong would be extraordinarily difficult to dismantle it.

                                                But, so that's ... so those caveats aside, I think there have been some times talk about it including from Federal studies on the chairman of the board, Steven Calibraise, the suggested that ALJ should be article three judges. Now that paticular proposal got a lot of play in the media as an attempt to pack the courts, but in theory you can have article three judges, meaning that they serve for life and they have salary protection, but whose jurisdiction is limited for example to SEC cases only, in a similar way that for example federal circuit jurisdiction is limited. They don't do habeas cases. They don't do anti trust cases generally with some exceptions. So you can say that these are article three judges that are nominated by the president, confirmed by the senate. But they will only hear SEC cases, and they'll serve for life. And they may be enough to satisfy the concerns that you've raised but also sort of the appointments clause concern as well as the decisional independence concern.

K. Muhlendorf:                 Yeah but if you assume that ... I don't know how many ALJs are around the country, there's a lot. Imagine trying to get that many article three judges confirmed.

Greg Dolin:                          Oh sure, I mean that's the actual political realities given the fact that it is so difficult to confirm judges as it is. You add another couple hundred of them to the ranks, and have them ... I think that's absolutely true, but that's the trade off. So do we want them to be administrative whether officers or employees who are appointed without senatorial consent and serve with some modicum of protection, however much that is, depending on again, whether the government's position on removal prevails? Or not, and ... but that's really sort of the trade off.

Question 1:                         Also the deference issue that the article three courts tend to give great deference to these decisions based on the administrative law judge who is basically an employee of the people whos cases he's judging.

Greg Dolin:                          Right, I mean I think although again, so this also came up in argument, there was an issue like how much deference is actually given. So example Justice Sotomayor brought up a point that in theory commission reviews all the ALJ decisions [inaudible 00:36:49] ... now, again, this doesn't address this particular concern because the commission, again, ultimately sits as a judge in its own case. But the commissioner have used things [inaudible 00:36:58] but in reality, it was pointed out in one of the reply briefs, while that could be ... while that is the standard, it's very hard to [inaudible 00:37:09] that were excluded from evidence by the ALJ. They're just not in the record. It's hard to review things [inaudible 00:37:18] the commission just general goes on paper and not in ... it doesn't actually judge credibility because they've been hearing live testimony.

                                                So, and then of course once it gets to the court of appeals, for on a petition for review, then you also get this double level of deference. First is the trail judge, or to the ALJ who made various findings of facts as well as a credible determination, and then to the agency under various doctrines of deference that one agency can step aside. So that does create some problems for litigants in terms of getting their cases heard on a blank slate by an article three judge. But I don't think this is the case that will address administrative [inaudible 00:38:02] at large.

Question 1:                         Yeah, that's also another ... your arguments are very good arguments for making all these judges article three judges.

Wesley:                                Thank you, caller, for your question.

Question 2:                         Hi, this is Ken Cucinelli, and I wanted to just ask each of you what you think the most likely outcomes of this are?

Greg Dolin:                          Kevin, you want to take this first?

K. Muhlendorf:                 Yeah, I mean I ... look. I think going into it, the Freytag case sort of laid the groundwork for where this is going to end up. I think that the commission will win this one this time, because they've switched sides. I think that they're going to find the ALJs are inferior officers. I think really in my mind the debate is what happens and what's the remedy. I think they'll make it very limited. There's some authority out there for staying a lot of current ALJ decisions to try and figure out what to do. Let the government, maybe congress come up with a statue. But I think based on what I heard today and what I saw, it's going to end up that way. I know it's a fool's errand to try and predict what the court's going to do, but Justice Kagan's question about aren't we almost ... basically, she said isn't this almost on all fours with Freytag, says to me that's where she's going to go.

Greg Dolin:                          So I don't play the lottery for the same reason I generally don't predict Supreme Court decisions because it's just very hard especially in cases that are ultimately fairly complex. But since I'm not being charged for playing this game right now, I'll give my two cents. So I think Kevin is right. So Justice Kagan did seem to recognize that this is very similar to Freytag. At the same time, she did say that the [inaudible 00:39:51] test the one that actually defends the status quo made sense to her if she was writing on a blank slate. So then the question is, is she more going to be pulled by the [inaudible 00:40:06] features of our system or more by the original understanding of what an employee is, what a government agent ... Or for that matter by the functional understanding as to whether or not the system can work the way it was intended with all these ALJs becoming officers.

                                                But I think what's more interesting, and I think actually more interesting but also more murky, is not how this case will come out in terms of top line, who is going to win, is it going to be affirmed or reversed, but I think what's more interesting is, if it's reversed, is these ALJs are going to be held to be inferior officers, is going to be the question of remedy. And whether or not it's just going to be anything more than a hollow victory where the court will say yes, the inferior officers know they were not properly appointed, but guess what? It's a very easy fix. Have the commission get together, vote to essentially reappoint them or appoint them properly to ratify the previously improper appointment and that would bless everything they had done up til now.

                                                If that's the outcome, then yes, the top line is from now on these individuals have to be appointed differently, but nothing really will change on the ground. And I think there's some kind of precedent for that, perhaps not judicial, but there was a few years ago, Professor John Duffy noticed the similar problem in the patent and trademark office. Where the patent judges were not appointed by the head of the patent office, nor by the Department of Commerce. Actually published a law review article before it got to the court to kind of update any challenges they were kind of retroactively appointed by the head of the department. So there's some precedent for this kind of backwards looking blessing of previously improper appointments. Whether the court will endorse it or not I think is going to be a much more consequential part of this decision then whether or not, what the top line is.

Wesley:                                Thank you for your question, caller. Looks like we do have one more question, let's go ahead and move to the next caller.

Question 3:                         Yes, John Burl of Competitive Enterprises with you, how are you doing? I'm just, as far as not just appointments clause cases but separation of powers cases when something was unconstitutionally structured, I think the maybe more recent precedent is the Nole Canning case and what actually happened there when they ruled that the NLRB was structured ... had a de facto structure because of the illegal recess appointments. Did that have any bearing on the cases that had been decided by the NLRB?

Greg Dolin:                          My recollection is ... well Kevin if you want to you can go ahead ...

K. Muhlendorf:                 No, I was glad you were starting with your recollection, because I was ...

Greg Dolin:                          So my recollection is that once the court decided ... so two things happened. One is the cases that had already been decided and were final, I think they remained final. I do remember in the oral argument in the case there was some concern not only what's going to happen to in the last two years or year and a half before, between the [recess appointment [inaudible 00:43:30] to the court, but also what's going to happen to the previous hundred years. Because I don't know if you recall, but one of the arguments was that it's not just that senate was in recess at that time, but also recess only means inter session recess, not in cross session recess. And actually four justices bought that argument. So Justice Scalia writing for the four justice minority on that.

                                                So there was a concern as to what's going to happen to the last hundred odd years of people who acted perhaps improperly appointed. And the court said, look, there's way for [inaudible 00:44:05] and so on. But what happened to the cases that were still pending in front of the improperly [inaudible 00:44:11] NLRB is that those cases were basically had to go back and start from scratch. And NLRB was, new people were nominated, then Majority Leader Reed struck a deal with senate republicans that they will not filibuster nominees in exchange for the improperly appointed nominees being withdrawn and resubmitted. Conversely, what happen with CSPB is that because [inaudible 00:44:40] the same guy, so Richard Courdray was nominated and held the offices and a recent appointment, whose appointment was obviously also illegal under the logic of Nole Canning. But that ultimately was confirmed by the senate. And he basically ratified his own prior decision unsurprisingly.

                                                And so that was not really ... but those were not really adjudicatory, those were kind of ... he had made a bunch of rules as a recent appointee and [inaudible 00:45:10] all the rules made as a recent appointee are now reconfirmed. Remade them as a properly appointed and confirmed individual. And that has not been, if I remember, I could be wrong but I don't think that has been challenged, that's kind of this backwards looking ratification. But again those were the rules versus adjudications and so that may play out a little differently on cases that are not yet final. But that's my recollection.

Question 3:                         So do pending cases have to go back and start from scratch again if it's ruled unconstitutional, if the structure's unconstitutional?

Greg Dolin:                          Again, it might, but the commission has already. And this was actually brought up and this was in the briefs as well. The commission has already, as this case is winding its way up, the commission has already, as of today, they have ratified appointments of ALJs as if they had been appointed by the commission. Whether that's enough, whether they can do it, not just going forward but going backwards. The case had already been heard by ALJs but not yet final. I think that's what I was talking about in response to the last question. What will be the remedy? Can a hearing in front of an improperly appointed official hearing that has serious consequences or the evidence excluded included in terms of credibility judgements. Can that be ratified backwards? So on that issue we'll see.

K. Muhlendorf:                 Yeah, it's sort of an odd thing, right? If it's determined to have been constitutionally feeble the way they did it, it seems odd that you could just ratify something and say, my bad, and move on. But it may be the practical reality of what has to happen.

Greg Dolin:                          But it also is potentially it's silly the other way too. So there are really no good answers, right? Because in theory, they can ratify them going forward, and then say well I have to do the hearing again, but essentially assign it to the same person and of course the same person will probably take the same view that he did two months ago, three months ago or a year ago. There's no physical reason why he said well, before I was unconstitutionally appointed, so I viewed this evidence in this light. But now that I have been appointed be the commission itself, I have a totally different view of the same evidence. So it ultimately may play out much the same no matter what, except perhaps in Lucia's own case, because at least [inaudible 00:47:28] the justices with their briefs whether a justice will take the invitation or not. But they've [inaudible 00:47:34] adjusted their briefs as a punishment for the commission to kind of show the commission and the government that the constitution actually means something to outright dismiss their case even though in theory it could be heard before a properly appointed ALJ.

Question 3:                         Thank you.

Wesley:                                Thank you caller, for your question. Kevin, is there anything that you would like to comment on that you haven't yet or any closing remarks that you'd like to make before we finish today?

K. Muhlendorf:                 No, just thanks very much for the opportunity, I enjoyed the teleform and certainly gave me a reason to go sit and listen to the arguments which I really enjoy.

Wesley:                                Wonderful, well thank you. And Professor Dolan, do you have anything that you'd like to say, any comments or closing remarks?

Greg Dolin:                          Like I said before, I think what I would be looking for as this decision comes down is much less of a top line and any hint on what's going to ... like I said, the coming attractions, the PHH case, so the general removal of power, and the scope of executive authority to supervise the executive branch and whether or not the true independence of agencies is potentially on deck to be reviewed by this court in future cases. That's going to be a much more interesting thing to look for. But other than that, I once again am very grateful for the Federal Society for inviting me. It's always fun to do these, and for the questions, as well as for Kevin for helping me along with this. And being a great partner.

Wesley:                                On behalf of the Federal Society, I'd like to thank our experts for the benefit of their valuable time and expertise today. We welcome all listener feedback by email, at info at fed soc dot org, thank you all for joining us today. This call is now adjourned!

Narrator:                             Thank you for listening. We hope you enjoyed this practice group podcast. For materials related to this podcast and other Federal Society multimedia, please visit the Federal Society's website at fed soc dot org slash multimedia.