Wachtell Lipton Discusses Supreme Court Ruling on SEC Judges

On June 21, in a much anticipated decision, the Supreme Court held that SEC Administrative Law Judges (“ALJs”), who have historically been appointed by SEC staff, are “Officers of the United States” and, hence, under the Appointments Clause, can be appointed only by the President or by the SEC itself.  Lucia v. SEC.  The Court further ruled that any litigant who has made a “timely challenge” to the validity of an ALJ’s appointment is entitled to a new hearing before a different, properly appointed ALJ or the SEC itself.

In addition to possibly reopening past cases, the Court’s opinion leaves open several important issues that will have to be addressed in pending and future cases. First, in 2017, the SEC issued an order “ratif[ying]” the prior appointments of its ALJs. Lucia, slip op., at 13 n.6. The Court did not address whether that post hoc ratification is sufficient to satisfy the Constitution or whether additional SEC action will be required. Until that issue is resolved, either by the SEC mooting the question by directly appointing all ALJs or by court decision, any future orders issued by an ALJ could be at risk for vacatur and rehearing.

Second, the Court did not address whether the “for cause” removal protections afforded by statute to ALJs are constitutional. In Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U. S. 477 (2010), the Court held that the Constitution forbids “multilevel protection from removal” — thus, if agency heads are subject to “for cause” removal protections, officers appointed by that agency generally may not also be subject to such removal protections. Because both SEC Commissioners and ALJs have removal protections, there is now a significant question whether those protections are permissible. Again, until this issue is conclusively resolved by a court decision or a statute removing those protections, there will likely be uncertainty regarding the validity of ALJ decisions.

Third, the Court’s decision focused on the SEC, but its logic may equally apply to other agencies. Unless all agencies relying on ALJs take steps to directly appoint their ALJs, these issues may arise in other agency proceedings for years to come.

Until these issues are resolved, the Lucia decision may significantly hamper agencies’ ability to litigate before their in-house courts and may give respondents additional leverage in negotiations. Litigants in agency proceedings should carefully consider making appropriate challenges to ALJs’ authority.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “Supreme Court Requires SEC Judges to Be Appointed by the SEC or the President,” date June 21, 2018.