Lucia V. SEC: With Janus And Wayfair, A Herald Of Further Challenges To Administrative Enforcement And Rulemaking?

Author:Mr Kent Knickmeyer
Profession:Thompson Coburn LLP

June 21, 2018, may turn out to be a landmark day in the annals of the effort to dismantle the administrative state. On that date, the U.S. Supreme Court handed down its decisions in Lucia v. SEC1, and South Dakota v. Wayfair, Inc.2 Superficially, the two decisions may appear entirely unrelated, and scarcely likely to lead to the sort of dramatic changes in methods of governance envisioned by those who advocate dismantling the administrative state. Read more closely and particularly in conjunction with the decision handed down a few days later in Janus v. American Federation of State, County and Municipal Employees,3 these decisions give those who advocate for this outcome reason for optimism that they might achieve their objective through the very courts whose decisions have for many years been derided as the product of judicial activism.

In Lucia, the Court held that administrative law judges used by the SEC to initially resolve administrative enforcement actions are "Officers of the United States" rather than mere employees of the Securities and Exchange Commission. It reached that conclusion, at least in part, because "an SEC ALJ exercises authority 'comparable to' that of a federal district judge conducting a bench trial." Because the ALJ — i.e., the Officer of the United States — who presided over the hearing in Lucia's case was not appointed in conformity with the appointments clause (U.S. Const. Art. II, Sec. 2, cl. 2), the Court ordered the case remanded to the SEC for a new hearing conducted before an ALJ (a) different from the ALJ who had presided over the previous hearing in the case, and (b) who was appointed in conformity with the appointments clause.

The Court's decisions in Wayfair and Janus do not deal directly with administrative law issues. But they do suggest that more Justices now on the Court are willing to recognize greater limits on the principle of stare decisis. In both Wayfair and Janus, the Court overruled longstanding precedents that dealt with constitutional issues. In the earlier of these decisions, the Chief Justice wrote a dissenting opinion (in which three other Justices joined) arguing that stare decisis considerations should prevent the Court from overruling two precedents that turned on a constitutional question, even if the majority of now-sitting justices viewed them as wrongly decided. Six days later, the Chief Justice joined a majority that similarly overruled a precedent on the ground the constitutional question at issue had been wrongly resolved when it was previously addressed by the Court. Necessarily, the majorities (comprised of different combinations of Justices) in each case concluded stare decisis was not an insurmountable obstacle to overruling precedents involving constitutional principles.

Why we should feel emboldened by Lucia

If the only thing that happens on remand in the Lucia case is that the case is retried before a different ALJ who has been appointed in conformity with the appointments clause, there is little reason to think the final outcome of the proceeding before the SEC will be materially different from the final SEC Order that preceded the Supreme Court's June 21 decision in Lucia.

In administrative enforcement actions conducted before the SEC, the Commission's enforcement staff is the prosecutor, and the Commissioners ultimately determine both the facts and the law. The new ALJ will be someone appointed to that post by the Commission.4 Even if the new ALJ makes factual findings that (if accepted by the SEC) would lead to a final outcome more favorable to Lucia than that embodied in the now vacated SEC order, the SEC's enforcement staff can presumably ensure that the record developed in the new hearing includes at least the same evidence found in the record created in the prior hearing over which the improperly appointed ALJ had presided.

So long as the record that comes before the Commission includes "substantial evidence" that supports the Commission's original findings, the Commission can once again make the same findings and impose identical sanctions to those previously imposed. Under current law governing judicial review of administrative decisions, the SEC's findings will be affirmed if the case is reviewed by a Court of Appeals and the findings are supported by "substantial evidence" in the record.5

For those concerned with the niceties and nuances of what constitutes the rendition of justice and due process in the course of administrative proceedings, it is worth noting that the "substantial evidence" needn't be evidence that would be admissible against Lucia if the SEC's case against him were presented, in the first instance, in a U.S. District Court. Under the SEC's rules of procedure (which the SEC itself promulgates) the Federal Rules of Evidence don't apply, and the Commission may rely on evidence that would be inadmissible in a court of law.6

But what if, on remand, Lucia makes a more far-reaching constitutional challenge to the SEC's administrative enforcement process? Specifically, what could happen if Lucia (or a respondent in some other federal administrative enforcement proceeding, whether before the SEC or some other federal administrative authority) asserts that the administrative enforcement process represents an unconstitutional exercise of federal judicial power by an administrative body not properly constituted as an "inferior Court" pursuant to Article III of the U.S. Constitution - i.e., a court whose judges hold office "during good Behaviour" and whose compensation "shall not be diminished during their continuance in office" as required by U.S. Const. Art. III, Sec. 1?

The Supreme Court's observation in Lucia that the SEC's ALJs exercise authority comparable to that exercised by federal district judges should embolden Lucia and his lawyers, as well as lawyers defending other persons charged in administrative enforcement proceedings (not only before the SEC, but also before other federal administrative bodies) with violating federal laws to challenge the legitimacy of the administrative enforcement process on precisely these grounds. Such a challenge is now warranted by the plain language of U.S. Const. Art. III, Secs. 1 and 2, which provide, in relevant part:

The judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish. The Judges, both of the supreme and inferior Courts, shall hold their Offices during good Behaviour, and shall, at stated Times, receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office. The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, . . . - to Controversies to...

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