Courthouse Steps Preview: Seila Law LLC v. Consumer Financial Protection Bureau (CFPB)

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society’s Federalism & Separation of Powers Practice Group, was recorded on Tuesday, February 18, 2020, during a live teleforum conference call held exclusively for Federalist Society members.     

 

Wesley Hodges:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is a Courthouse Steps Preview discussion on Seila Law LLC v. Consumer Financial Protection Bureau, known as the CFPB. My name is Wesley Hodges, and I am the Associate Director of Practice Groups at The Federalist Society.

 

      As always, please note that all expressions of opinion are those of the expert on today's call.

 

      Today, we are very fortunate to have with us Professor John Eastman, who is the Henry Salvatori Professor of Law and Community Service at the Chapman University Fowler School of Law. He is also a Senior Fellow at the Claremont Institute, and the Claremont Institute has submitted an amicus brief for this case. Thank you very much for sharing with us today. Professor Eastman, the floor is yours.

 

Prof. John Eastman:  Thanks very much, and thanks to The Federalist Society for hosting this call in an extremely important separation of powers case, Seila Law v. Consumer Finance Protection Bureau. For those of you that don’t know what the CFPB is, that’s the completely independent agency to manage the entire consumer finance industry that was dreamed up in the classroom of Elizabeth Warren back before she became a U.S. senator and presidential candidate. It was an agency crafted for her hope to head it herself, I think, when it was designed.

 

      But they wanted to insulate it from any accountability to the American people or to political figures, and they did that in a number of ways. They gave it its own funding mechanism. It doesn’t have to get appropriations from Congress. They gave it its own regulatory power, consolidating the regulatory authority in a number of different agencies and bringing it all under one roof. They gave it its own investigative authority, the ability to issue subpoenas for almost anybody in the country. And they gave it its own enforcement authority, both adjudicative, which means they could do administrative law judging in-house, and then enforcement authority before the courts as well where they can impose fines and all sorts of things. In other words, it had legislative authority and executive authority and judicial authority all combined into one.

 

      Now, the Supreme Court had previously upheld an independent agency like that in a case called Humphrey’s Executor way back in the height of the New Deal, but that was headed by a multi-member commission. This agency is headed by a single member. He can’t be removed by the President except for cause. And so the independence on steroids has created a real serious concern about the constitutionality of this agency. The modern Supreme Court, the current Supreme Court has even begun to question the old precedent that allowed independent agencies in the first place. So all of these things combined to really make a constitutional challenge to this agency, one that had a very strong prospect for success.

 

      When the group Seila Law, which is a law firm that assists consumers in consumer finance issues, received an investigative request for documents, they challenged the constitutionality of the agency itself. They lost at the trial court. They lost at the court of appeals. But the Supreme Court granted review of their case back on October 18. Now, this is when things got really interesting because the Consumer Finance Protection Board represented by the Office of Solicitor General of the United States agreed with Seila law that agency was unconstitutional as constituted. And so that all but assured the Supreme Court would take the case, and they did on October 18.

 

      Only one question was presented at the time. Does the single agency head structure of the CFPB make it unconstitutional because that person is removable only for cause and not at will? And the reason that’s such an important separation of powers issue is it really does undermine the President’s ability to carry out the executive functions of government. If he has to be saddled with people who are appointed by a prior administration and he can’t remove them at will but only for cause, then he is not conducting the executive power of the Constitution of the country as Article II of the Constitution says, but somebody else is. And so kudos to Noel Francisco and his team over at the Solicitor General’s Office who understood that their job is to faithfully defend the Constitution, not to defend an agency that is constituted illegally or unconstitutionally. So we’re in this position.

 

      Now, the Supreme Court when it granted cert also added a second question presented. If the CFPB is unconstitutional, can that provision of the Dodd-Frank Act of 2010 be severed from the rest, or does the entire section of the Dodd-Frank Act in which the CFPB is a part have to be held unconstitutional? So we’ve got a question of severability and how much of the Dodd-Frank Act might be on the chopping block as well.

 

      Now, just to indicate the interest in this case, not quite a record. We’ve had other cases that had more amicus briefs than this, but this one has 37 amicus briefs that were filed, an additional 9 that were filed at the cert stage itself, including 2 that were filed after the time to file had passed. And the Supreme Court granted those requests to file late as well. That’s rather extraordinary in and of itself. One of those was the House of Representatives that decided to weigh in after the Department of Justice Solicitor General weighed in in defense of the cert petition.

 

      Those 37 amicus briefs represent a whopping 137 different amicus entities. You’ve got a lot of members of Congress on one side or the other. You’ve got 12 states in support of the petition. You’ve got 23 states in opposition to the petitioner. You’ve got constitutional law scholars and regulatory administrative state scholars on both sides of this thing. It’s a high interest case for what just a few years ago was an administrative law thing and technical separation of powers. What kind of interest can there be?

 

      This really does go to the heart of the legitimacy of the administrative state, and it ties back 80 years to the New Deal. Let’s get politics out of governing was the theory and staff our independent agencies with experts who can run our lives for us better than we know how to do ourselves. That was the central premise of the New Deal. And it’s now 80 years in coming, or 90 years in coming, and we’re finally at a point where challenging that old notion -- part of it’s the Trump administration, but part of it is groundwork that has been laid by the conservative and public interest law movement for the last 30 or 40 years to challenge the notion of these administrative agencies that can just rule our lives without any political accountability whatsoever.

 

      So that’s really what’s at stake in the case. Let me now get to a couple of the particulars. Both Seila Law, who’s represented by Kannon Shanmugam -- and congratulations to Kannon for getting this case up to the Supreme Court and orchestrating both the significant separation of powers issues to be confronted by the Court now, but also the significant level of interest in the case on both sides.

 

      Kannon points out in their brief for Seila Law that the Supreme Court, although it has in the past upheld independent agencies, it has never upheld one that had all of the structural components that this one does. Yes, exercising legislative quasi-judicial, quasi-executive power, that was Humphrey’s Executor. But that one was run by a multi-member agency, not by a single agency head. And the difference, of course, is even the agency itself has no internal check on itself as you would get with a multi-member commission. When it’s run by a single head, a single despotic head can do anything. There’s no internal or external check whatsoever.

 

      So that argument is put out there both by Seila Law and by the Solicitor General to try and create some ground to distinguish Humphrey’s Executor, if possible. But significantly, both Seila Law and the Solicitor General’s Office argue that in any event, Humphrey’s Executor was wrongly decided and should be at least narrowed or overruled. And they both urge the Court to overrule it.

 

      Now, Paul Clement was appointed by the Supreme Court as an amicus to defend the decision below, and he has taken issue with every one of those arguments; first, that Humphrey’s Executor covers this case. The distinction between multi-member and single-member headed agencies is not one that goes to the merits of the validity of an independent agency, and the Court should reject any request to overturn Humphrey’s Executor because it’s long established law and perfectly valid, in his view.

 

      Interesting though, he starts off with another argument that because the investigative tool here could have been issued by a validly constituted agency, that Seila Law doesn’t really have standing to challenge the structure of the agency rather than the validity of the investigative demand that was issued to it, and so the whole issue of the agency’s structure should not be before the Court at all. I don’t think that argument’s going to get much grounding at the Supreme Court, but it’s also one that’s repeated by the House of Representatives in their brief as well.

 

      One other indication here of how important the Supreme Court thinks this case is: I mentioned earlier that it granted a request to file amicus brief after the deadline had passed. It almost never does that. It did that on the briefs in support of cert, or at the cert stage to the House of Representatives and one other. But it also granted the House of Representatives’ motion for leave to participate in oral argument on the same side as Paul Clement who they had just appointed to be the amicus arguing the case in defense of the lower court decision, so that’s a little bit odd as well.

 

      And then they allowed split argument on both sides. So Seila Law, the petitioner, gets 20 minutes of oral argument, which is going to be held in two weeks from today on March 3. The Solicitor Generals’ Office, taking the same side, although with slightly different nuances, gets 20 minutes to argue. And then Paul Clement, the court appointed attorney to defend the decision below gets 20 minutes to argue. And the House of Representatives as an amicus gets 10 minutes to argue itself. So four different people arguing the case and a bit of extra time than the hour normally allotted as well. So I think the Supreme Court understands the significance of the case. And I think also, there are at least three justices and perhaps five justices who are prepared if not merely to distinguish Humphrey’s Executor, perhaps even to overrule Humphrey’s Executor.

     

      Let me step back and talk about that historical case in context of what’s been going on, kind of the tectonic rethinking or shifting that’s going on at the Supreme Court right now. A century ago in the 1920s, you had a case, Myers, dealing with the President’s authority to remove a postmaster who had been appointed by the President with Senate confirmation. And the President sought to remove him without having the permission of the Senate. And the Supreme Court upheld his removal on the ground that the postmaster was exercising executive authority. The limitation on the executive authority in the appointment process was a narrow restriction on otherwise executive authority, and it didn’t apply to the removal authority that is also an executive authority.

 

      When Humphrey’s Executor comes along 20 years later, the Court says, “Well, this agency is different than the postmaster. It’s not exercising pure executive powers. It’s doing some regulations. That’s a quasi-legislative power. It’s adjudicating some administrative issues. That’s a quasi-judicial power. And because it’s not purely executive, we will allow it to be somewhat independent of the executive in order to help further those other non-executive functions.” And so at that point, the distinction between purely executive power and not purely executive power seemed to be the governing deciding line on whether an agency was going to be constitutional or not.

     

      Fast forward another 50 years, and we get the independent prosecutor, the independent counsel law, and that case is at issue in Morrison v. Olson, another former Solicitor General of the United States. Ted Olson argues that the independent counsel who exercises prosecutorial powers, which is purely executive but without being answerable to the President, violates that old line, that old line between purely executive and not purely executive powers. The Supreme Court, nevertheless, upheld the independent prosecutor law 8-1.

 

      The one was Justice Scalia in probably his most famous dissent, or his most long lasting and persuasive dissent of his career. This is the case where he said, “Some of our separation of powers issues come to us as a wolf in sheep’s clothing. This wolf comes as a wolf.” And he was right about that. It was a blatant violation of the Article II requirement that the executive power be vested in the President of the United States, and that means any subordinates exercising that power must be answerable to the President of the United States.

 

      Scalia lost in the vote at the Court at that case, but the arguments of his dissent were so persuasive that it revived this notion of distinctly executive powers really have to be exercised by the President. That’s the reason that eventually the independent prosecutor law was allowed to lapse and was not renewed. It’s reason why the latest go around on special prosecutors, Robert Mueller, was not an independent counsel. He was answerable to the Department of Justice rather than independent of the executive chain of command. We have revived the notion that it’s important that the executive power be exercised by the guy at the top of the command chain, which is the President of the United States.

 

      And we now have a number of justices that have spent a significant part of their jurisprudential career talking about and elaborating on the importance of those separation of powers principles. Justice Thomas began a decade ago talking about a whole range of administrative law deference decisions, basic separation of powers being one of the most important. Of course, Neil Gorsuch and Brett Kavanaugh on the lower courts before they got elevated to the Supreme Court were all over these kind of issues. Of course, Justice Alito as well, a very committed separation of powers guy. One suspects, with some anomalies along the way, that Chief Justice Roberts is probably in that camp as well.

 

      So it’s very likely we’re going to get at least five votes, something to revive the importance of this basic separation of powers principle here. I think the big issue is how far they’re going to go. Are they going to just try and distinguish Humphrey’s Executor in some way that makes it less significant than it has been over the last 80 years, or are they going to overrule it outright? In either of those events, how much of the rest of the Dodd-Frank Act has to fall as well, or can we isolate just this one particular piece?

 

      One last aspect of this: A few years ago, we had another agency, PCAOB (“Peekaboo”), though I don’t even remember what the acronym stands for anymore, where it was a double for cause removal. The Public Accounting Board members could be removed only for cause by the Securities and Exchange Commission, which is also composed of members who could be removed by the President only for cause. And that double for cause removal, according to the Court, created a constitutional problem, separation of powers problem. The Court in that PCAOB decision held that while we can reform the statute and take the for cause removal of the Public Accounting Board Commissioner and make it at will removals, and that would cure the problem. And the statute was therefore rewritten, and the agency continued to operate as it always had with this one change that it was at will rather than for cause removal.

 

      The House of Representatives argues in their brief that if you find that the current structure is unconstitutional, then you should reform it like you did there. Not surprisingly, Seila Law and the Solicitor General’s Office both argue otherwise, that this aspect of the agency was pretty critical to what Congress thought they were doing. If it’s unconstitutional, we ought not to reform it. We don’t know what Congress would have wanted to do. Send it back to Congress and let them fix the constitutional infirmity. If they want to have an agency that would pass constitutional muster, it’s up to them to decide how that should look. And so that’s going to be part of the fight as well if the Court agrees with Seila Law and the Solicitor General that the agency as currently constituted is unconstitutional.

 

      And with that, Wes, I’d like to open it up for questions. By the way, I’ll be the first to admit I have not read the 37 amicus briefs from the 135 different amici parties to the nth degree, so if you’re asking me some detail about page 12 of the regulatory scholars in support of the agency brief, I probably won’t be able to answer with that level of detail.

 

Wesley Hodges:  Looks like we do have one question out of the gate. Here’s our first caller.

 

Caller 1:  Thank you. This has been a great topic to talk about. A question I have: If it turns out that the CFPB is determined to be unconstitutional by the Supreme Court, do you think that would open the door to other independent agencies? One that comes to mind is the FDIC. Of course, there’s many others. Would that open the door to taking a look at whether other independent agencies are also unconstitutional?

 

Prof. John Eastman:  I certainly think it would. And there are a lot of agencies that are susceptible to challenge. I tend to agree that the multi-member agencies that are removable only for cause are also problematic. The single agency head is more problematic by a bit, but the constitutional flaw applies equally to both.

 

      When I congratulated Kannon Shanmugam at the outset of my remarks for getting this case up there, it’s because he won a race. There were a lot of cases percolating in the lower courts involving a number of different agencies, one of the fair housing agencies. There were cases out in Texas. And a number of the top constitutional lawyers in the country, seeing the tea leaves that had been set down in the PCAOB case, understood that there was some major tectonic shift going on. And there was a scramble to see how many of these cases we could get and who would get the first one up to the Court. Kannon won that race. We’ll see how far he’s able to take it now that he got over the initial finish line as we move into the next round of the race.

 

      But yeah, there are a number of agencies, and we’ll see what they do with this case. If they overturn Humphrey’s Executor, of course, there’s a whole lot of the administrative state that would be susceptible to challenge. If they narrow or distinguish Humphrey’s Executor on the ground of multi-member agency versus single-member agency head, that would be fewer agencies, but there would still be some.

 

Wesley Hodges:  Looks like we do have one more question. Here’s our next caller.

 

Mike DeGrandis:  Hi, this is Mike DeGrandis with the New Civil Liberties Alliance. I’ve got a question. The Seila Law brief briefly discusses the unconstitutional funding mechanism for the CFPB, that it receives its funding basically by a letter request to the Fed. I was just wondering, do you think that there will be -- that the Court will be inclined to address the funding issue? I realize it’s not central to Seila Law’s argument, but do you think they might address it?

 

Prof. John Eastman:  I think so, and here’s where I think they’ll need to address it. Wesley, in introducing me, announced that we had filed an amicus brief in this case, so I want to just reiterate that for full disclosure. We devote a significant part of our brief to that issue, not on the initial structural violation — although it could be there as Seila Law does in its brief — but on the question of severability, because those financing mechanisms are a broader part of Title 10 of the Dodd-Frank Act. And we do it full scale. If you try and reform this agency so that the head can be removable by the President at will rather than for cause and try and cure the constitutional effect that way, you have then created a different kind of constitutional problem, which means an agency that’s fully accountable to the President, as is appropriate, but without any accountability to the Congress via the appropriation power.

 

      There’s another aspect of separation of powers and checks and balances that comes into play and is extremely important. And it’s because of that funding mechanism that they don’t rely on annual appropriations from Congress. You would take Congress out of the picture entirely. It was one thing for Congress to decide to create this agency that was accountable to no one. I think they would have a different view if it was accountable to the President and not accountable in any way to Congress itself.

 

      Further, that funding mechanism, I believe, violates Article I, Section 9 which says all appropriations are to be by law. Well, creating an agency that gets to fund itself on autopilot and decide for itself how much money it wants to claim from the Federal Reserve system every year up to a cap — there’s a cap on it, but the cap is so large that it’s basically a self-funding at will mechanism — I think that violates Article I, Section 9. That problem would be exacerbated if they try and reform the existing structure to deal with the Article II separation of powers problem. We would have an even bigger Article I separation of powers problem or a checks and balances problem.

 

      While we’re waiting for another question, I would say that the fact that there’s so much interest in this case when 10 years ago, 15 years ago, when the effort of challenging and pushing back some of these administrative law doctrines that had been fixed since the New Deal, when that effort began, you could have fit the number of people that would be interested in a case like this probably in a phone booth. For those of you that are a big younger than me, phone booths are the way we used to make phone calls when you were out on the road rather than a cell phone. And they tended to be very small, one person type operation.

 

      So yeah, 50 people on a call like this and hundreds of entities on amicus front, four people arguing the case, that itself is indicative of the dramatic shift that’s underway in restoring some pretty core constitutional principles that we’ve lost track of or watered down to nothingness ever since the New Deal, and they are now back on the forefront of our jurisprudential thinking. And it’s very exciting to see that tectonic shift underway. We’ll have to see how far it plays out, but one hopes we get back to an actual separation of powers motion.

 

      And we just kind of theoretically -- look, the Founders thought separation of powers and checks and balances was one of their most important structural innovations. They didn’t make it up themselves. The idea of separation of powers came from some very significant political theorists that they relied on heavily, Montesquieu from France and John Locke from England, among others. They fully agreed with Montesquieu’s notion that the combination of the legislative, the executive, and the judicial power all into the hands of one person or a single agency was the very definition of tyranny. Well, that’s what the CFPB is. It makes its own rules, that’s law, investigates and enforces those own rules, and it adjudicates them. That’s legislative, executive, and judicial powers all combined in a single agency headed by a single person. The very definition of tyranny is the way James Madison would have described that.

 

      The counter view that started to take root with the progressive movement at the beginning of the last century in this country was that politics is messy and people really don’t know what’s best for themselves. And if we get the governing bodies out of having to be accountable to politics, we will be better at the science of politics, the science of governing. Those old constitutional restrictions that required separation of powers, that made it hard to get legislation through, stand in the way of perfection of human nature and perfection of governing authority. And so if we can get rid of all of those constitutional constraints, we’ll all be better off. These are the two competing visions of human nature and of government and on the relationship of government to the people it governs.

 

      And they’re being reflected in the current presidential debates. The Bernie Sanders phenomenon is all in on the more radical version of this progressive utopian vision of government by experts. And they can just make life better for all of us. And because we’re better off because they told us how to govern ourselves, we’ll be happy with it. We’ll be happy little minions.

 

      This is the key philosophical fight underlying the modern debate, and it’s been going on -- that debate in one way or another has been going on in this country since the New Deal, but there is now this counter-revolution to restore the older understanding, the Founder’s vision, the one that’s worked well for most of our nation’s history and made us the most successful government in the history of the planet. That’s the fight that’s going on, and it comes to a head with this case involving a challenge to an investigative order issued by the CFPB to Seila Law. Amazing how significant and dramatic a case can be that had such a relatively minor origin.

 

Wesley Hodges:  Looks like we do have one more question. John, here’s our next caller.

 

Ken Masugi:  Hi, John. It’s Ken Masugi. Thanks for your work in all this. My question is, given the outrageousness of this whatever you want to call it, this bureaucracy, what particular models did its creators have, either in America or abroad?

 

Prof. John Eastman:  Thanks, Ken, for that question. This was the dream come to fruition of Elizabeth Warren when she was a professor at Harvard. Let’s go back and put it in historical context. Her predecessor, her theoretical or ideological predecessor on this, the guru of creating agencies that weren’t politically accountable so that the expertise of the agency could govern without the rough and tumble of politics, it’s Felix Frankfurter, also a Harvard professor.

 

      I think it gave rise to the old line about I’d rather be governed by the first people in the Boston phone book than the professoriate at Harvard and Cambridge. They think that they know better than everybody else how they ought to run our lives, and if we can just create an infrastructure that allows them to do that, then we’ll all be better off. The New Deal agencies, the New Deal revolution, the whole notion of independent agencies that got started with Felix Frankfurter, there were still some constraints on it. They still had to get funding from Congress every year. They still had to at least be removable from the President in some capacity. So there was still some politics that played out in their view, and that was bad.

 

      And so let’s try and create an agency that gets rid of even those last few remaining modest checks on these agencies, and that was Elizabeth Warren’s dream. And the agency was created with her in mind to come in and run 10 percent of the nation’s economy from her own office in Washington, D.C., or her professoriate office in Boston. This was the design. Whether she had any particular models in -- there were lots of New Deal agencies that she just was expanding upon. Whether she also had European sources, I don’t know the answer to that. Perhaps you do and can tell us.

 

      This goes back to the fundamental disagreement on how people in a republican form of government — small “r” republican — should govern themselves. Should we have unelected, unaccountable bureaucrats governing us, or do we expect to be governed by people that we choose and that we can remove if they don’t govern us in the way we think appropriate? That’s the fundamental distinction between the Founding Era principles of self-government and the progressive era principles of government by expert agency, not by self-government. And that’s the fundamental distinction between the two, and it’s the fundamental fight we’re still having out today in our presidential election.

 

Ken Masugi:  Yeah, I agree, but it seems that what you just described so well can fit many agencies of the federal government; that is, you’re describing an objection to the administrative state. But this particular agency that now-Senator Warren created is so far out that it’s an extraordinary act of boldness to have created such an entity. So I’m wondering whether there actually is some other agency in our government that she was looking to or perhaps something abroad. I don't know. It’s so outrageous that it’s almost admirable.

 

Prof. John Eastman:  It is. And the question -- and we were very careful in our brief, and I was pleased to see that in Kannon’s brief for Seila Law and also Noel Francisco’s brief for the Solicitor General, they adopted a similar line not to argue exclusively that this was different in kind than the other agencies, and therefore you can strike down this agency and still protect the rest of the administrative state. They went to the fundamental principle underlying it, the separation of powers principle. And yes, this might be the most egregious example that we have before us, but a lot of the other so-called independent agencies suffer one degree or another from the same constitutional infirmity that they are unaccountable to the electorate, either directly or through somebody who is elected, financially to the Congress, regulatory enforcement-wise to the President.

 

      There’s a line in Humphrey’s Executor that’s just blatantly false. When they set up the agency at issue in Humphrey’s Executor, Congress’s intent was to insulate it from accountability to the elected politicians, that it would be accountable to the people only directly. Then you have to ask the question, well, how was that going to happen if the people can’t remove them and nobody that the people elect can remove them? It was a false claim right at the core of that decision in Humphrey’s Executor, and we’ve been living with it for 85 years since.

 

      It’s high time that that erroneous decision be overruled, and I was so pleased to see in both of the principal briefs on the petitioner’s side, particularly in the Solicitor General’s brief, that they both urged the Court to recognize that Humphrey’s Executor was wrongly decided, distinguish a way this case is a first step, but ultimately to overrule that case because it has skewed our separation of powers understanding and our basic governing principles ever since.

 

Wesley Hodges:  Professor Eastman, do you have any closing thoughts for us before we wrap up?

 

Prof. John Eastman:  Only one. I think I pronounced Seila (Say-la) Law Seila (See-la) Law at one point, but it’s Seila (Say-la) Law. And good luck to Kannon Shanmugam and Noel Francisco when they argue this case. It’s an extremely important case, and it’ll be argued on Tuesday morning, March 3, just two weeks from today.

 

Wesley Hodges:  Very good. Well, thank you, John. And on behalf of The Federalist Society, I would like to thank you for the benefit of your valuable time and expertise today. We welcome all listener feedback by email at [email protected]. Thank you all for joining us for this call. We are now adjourned.

 

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