Seila Law LLC v. Consumer Financial Protection Bureau: The Supreme Court Considers Whether an Independent Agency with a Single Director Who Can Be Removed Only “For Cause” is Constitutional

Posted in: Constitutional Law

In Jeopardy format, here is the two-part answer to the question about the case to be discussed in this article:

One, after then-Judge Brett Kavanaugh dissented on the issue currently before the Court when he was a member of the United State Court of Appeals for the D.C. Circuit and then was elevated to the Supreme Court; and, two, when the government agrees with the petitioner’s constitutional challenge to the structure of the regulatory agency.

Now the question: When does the Supreme Court grant a petition for certiorari in the absence of a conflict between the federal circuit courts of appeals on the legal issue in question?

The case is Seila Law LLC v. Consumer Financial Protection Bureau, which will be argued before the Supreme Court on March 3. At issue is whether the structure of the Consumer Financial Protection Bureau (“CFPB”), an independent agency headed by a single director who can be removed by the President only for cause, is an unconstitutional violation of separation of powers.

The Supreme Court will be reviewing the United States Court of Appeals for the Ninth Circuit’s judgment denying this claim brought by Seila Law LLC (“Seila Law”), a California-based law firm. The Ninth Circuit’s decision was unanimous and followed the D.C. Circuit’s en banc decision in PHH Corp v. CFPB rejecting the same contention.

Then-Judge Kavanaugh wrote a powerful dissent in PHH Corp. His elevation to the Supreme Court in 2018 after that case was decided likely helped the prospects of Seila Law’s cert. petition.

Seila Law’s petition also benefited from the fact that the government agreed with the firm’s claim that the structure of the CFPB is unconstitutional and accordingly supported its requests that certiorari be granted and that the Court reverse the Ninth Circuit. The Supreme Court gives substantial weight to the government’s position on a cert. petition, so it was no great surprise that in October 2019, the Court granted the petition.

The Supreme Court Appoints a Former Solicitor General (and Former Law Clerk for Justice Scalia) to Defend the Structure of the CFPB

With the government supporting the petitioner in this case, the Court appointed former Solicitor General Paul Clement to defend the judgment of the Ninth Circuit. Clement, an excellent and experienced Supreme Court advocate, served as a law clerk for Justice Antonin Scalia.

It seems a bit ironic that a former law clerk for the justice who championed a broad approach to executive branch power has been assigned to fend off a challenge claiming that Congress impermissibly infringed upon the President’s removal authority when it set up the CFPB. Clement nonetheless has been superb in his zealous defense of the agency and the Ninth Circuit’s decision.

However, in a sign that may be promising for Seila Law and the government but not for Clement, the Supreme Court included a second question to its order granting certiorari. That question is about the appropriate remedy if the Court agrees with the constitutional challenge and asks if the CFPB “is found unconstitutional on the basis of separation of powers,” can the offending statutory provision be severed from the law creating the agency?

Before addressing this second question, this article will provide a brief summary of the legal background to and procedural history of the case and describe Justice Kavanaugh’s views of the President’s removal authority. It will conclude by offering a prediction on whether the Court is likely to agree with the views of its most recent justice and reverse the Ninth Circuit.

Congress Creates the CFPB, an “Independent” Executive Agency, in Response to the Financial Crisis

In response to the financial crisis of 2008, Congress enacted the Consumer Financial Protection Act (“The Act”). The Act created the CFPB, placing it in the Federal Reserve System. As the Ninth Circuit explained, the agency has “a broad array of powers to implement and enforce federal consumer financial laws.” The CFPB’s powers include “the authority to promulgate rules, conduct investigations, adjudicate administrative enforcement proceedings, and file civil actions in federal court.”

Per the Act, the Ninth Circuit elaborated, the “CFPB is led by a single Director appointed by the President with the advice and consent of the Senate. The Director serves for a term of five years” and “may be removed by the President only for ‘inefficiency, neglect of duty or malfeasance in office’”—that, is only “for cause.”

The CFPB is what is sometimes referred to as an “independent” executive agency. The agency’s independence is due to the fact that Congress has restricted the grounds under which the President may remove its director.

The Legal Lay of the Land: Myers and Humphrey’s Executor

The President’s removal authority essentially was delineated in two cases decided decades ago. In Myers v. United States, decided in 1926, the Court rejected the claim by a postmaster that he could not be removed from his position by the President. Myers, the petitioner, relied on an 1867 law known as the Tenure of Office Act, which required the President to obtain Senate consent before removing certain executive officers.

In rejecting Myers’ claim, the Court held that the postmaster was a subordinate of the President and could be removed unilaterally at will. The Court reasoned that the President has “the exclusive power of removal” so that the President can “take care that the laws [are] faithfully executed.” Myers provides the general rule regarding the President’s removal authority.

Nine years later, in a case decided during the New Deal, the Supreme Court distinguished Myers when it upheld Congress’s restriction on the President’s removal authority in Humphrey’s Executor v. United States. In upholding the claim brought by the estate of a member of the Federal Trade Commission (“FTC”), the Court reasoned that the agency warranted a degree of independence because it was exercising, as the Ninth Circuit summarized in CFPB v. Seila Law LLC, “mostly quasi-legislative and quasi-judicial powers, rather than purely executive powers.”

Humphrey’s Executor was the first of several cases in which the Supreme Court upheld congressional restrictions on the President’s removal authority when Congress creates an independent agency. The Ninth Circuit and the D.C. Circuit relied on Humphrey’s Executor in rejecting the claim that it is unconstitutional for Congress to limit the authority of the President to remove the CFPB Director. As noted earlier, the Director may be removed only for cause and not at will.

In his PHH Corp. dissent, Judge Kavanaugh asserted that Humphrey’s Executor is limited to independent agencies headed by a multi-member commission. He noted that the FTC was (and still is) led by a five-person panel that features a chairperson and four commissioners. The CFPB, by contrast, is headed by a single director. This different leadership structure, he argued, makes all the constitutional difference.

Seila Law’s Path to the Supreme Court

Against this backdrop, how did Seila Law end up as the petitioner in a case pending at the Supreme Court? The law firm provides debt-relief services and, in 2017, was issued a “civil investigative demand” (CID) by the CFPB to determine whether it had violated rules promulgated by the agency.

Seila Law resisted the CID, prompting the agency to bring suit in federal court to enforce the demand. The district court essentially upheld the CID, rejecting the law firm’s contention that the CFPB was “unconstitutionally structured.” The law firm then appealed to the Ninth Circuit, which affirmed the district court’s judgment in a unanimous decision that followed the D.C. Circuit en banc majority’s decision in PHH Corp v. CFPB.

Judge Kavanaugh’s Dissent in PHH Corp. v. CFPB

PHH Corp. was decided in January 2018 by the entire D.C. Circuit and resulted in seven different opinions. Six judges voted to uphold the structure of the CFBP, while three judges, including Judge Kavanaugh, dissented. (Kavanaugh was confirmed as a Supreme Court justice later that year, in October 2018.)

At the core of Judge Kavanaugh’s dissent was his view that “[m]ulti-member independent agencies do not concentrate all power in one unaccountable individual, but instead divide and disperse power across multiple commissioners or board members.” The head of a multi-member independent agency is “accountable to and checked by [] fellow commissioners or board members.”

Judge Kavanaugh argued that the multi-member structure of an independent agency prevents the undue aggregation of power in a single individual, promotes accountability (“in that the President ordinarily retains power to designate the chairs of [independent] agencies”), and thereby protects liberty. He further cited history in support of his views, stating that, “[n]ever before has an independent agency exercising substantial executive authority been headed by just one person.”

Judge Kavanaugh wrote a powerful dissent. However, it failed to persuade a majority of his colleagues on the D.C Circuit or, subsequently in Seila Law, the Ninth Circuit. Essentially the majority in those cases held that Humphrey’s Executor and its progeny applied and authorized Congress to restrict the President’s removal authority of the CFPB Director to the specific grounds set out in the Act even though the agency was led by a single person rather than a multi-member commission.

The CFPB Proposes Possible—But Unlikely—Off Ramps for the Court to Avoid the Constitutional Claim

Conventional wisdom regarding Supreme Court review is that, in the absence of a circuit split, the Court does not review judgments with which it agrees. Hence it seems that if the Supreme Court agreed with D.C. Circuit and Ninth Circuit decisions upholding the Act, it simply would have denied Seila Law’s cert. petition. Instead the Court granted certiorari in Seila Law and asked the parties what remedy should apply in the event that the leadership structure of the CFPB is found unconstitutional.

Aware that an adverse decision on the merits may await, Clement has presented the Court with two different ways to affirm the judgment of the Ninth Circuit without addressing the separation of powers claim.

First, noting that the current Director of the CFPB believes she serves at the pleasure of the President, Clement argues that the Court need not address Seila Law’s constitutional claim: The “Director could drop the [CID] petition and end this case if she thought it were an improper exercise of executive power, and she has made clear that she would honor a presidential direction to do just that.” Accordingly, “traceability”—a requirement for Seila Law to have standing to sue—“is absent,” he argues.

Second, Clement asserts that “the Court can avoid the constitutional issue presented here” by interpreting the language of the “for cause” restriction on removal (“inefficiency, neglect of duty, or malfeasance in office”) in a way “that avoids constitutional difficulty.”

Clement’s efforts to steer the Court away from Seila Law’s separation-of-powers challenge could appeal to Chief Justice Roberts, who at times has championed a minimalist approach to judicial decision making. Far more likely, however, is that the Court—having granted certiorari, received a full set of briefs, and scheduled oral argument—will adjudicate the constitutional claim.

Rubber, Meet Road: If the Challenge is Successful, What Will Be the Remedy?

On the merits, the Court is likely to agree with Judge Kavanaugh’s dissent in PHH Corp. and reverse the judgment of the Ninth Circuit in Seila Law. If the Court reaches this conclusion, then, turning to the second question in the Court’s order granting cert., what remedy will it order for the Act’s separation-of-powers violation?

One remedy—an extreme one, to be sure—would be for the Court to invalidate the Act creating the CFPB. More likely, the Court will sever the “for cause” provision from the Act, meaning that the CFPB will continue to operate, albeit with a director who may be removed at will.

This approach would be appealing to the Court for a number of reasons. First, the Act contains a severability clause, meaning that Congress intended to the CFPB to survive should one of the Act’s provisions be “held to be unconstitutional.”

Second, the remedy of severing the unconstitutional provision would avoid the disruption caused by invalidating the agency—a prudent approach that would seem to appeal to a Court in the midst of a number of cases testing the limits of the President’s authority under Article II of the Constitution.

Finally, the leading case for this approach, Free Enterprise Fund v. Public Co. Accounting Oversight Board, is strikingly familiar for the Roberts Court. In that case, decided in 2010, the Supreme Court agreed with a separation-of-powers challenge brought against an independent agency on the grounds that it was constitutionally unaccountable and remedied the violation by severing the offending provision from the law creating the agency. In doing so, it adopted the reasoning of the D.C. Circuit judge in dissent—Judge Kavanaugh.

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