Unlike SEC, FTC makes quick fix to ward off ALJ constitutional challenges

September 16, 2015

(Reuters) – For the second time this month, a federal agency has declared its in-house judges are mere employees whose hiring is not addressed by the Appointments Clause of the U.S. Constitution. On Monday, four Federal Trade Commissioners denied LabMD’s motion to dismiss the FTC’s data security administrative proceeding against the cancer testing center, ruling that under the District of Columbia U.S. Circuit Court of Appeals’ 2000 decision in Landry v. Federal Deposit Insurance Corporation, its in-house judges are not “inferior officers’ because their initial decisions are reviewed by the commission before becoming final.

That is the same reasoning three commissioners of the Securities and Exchange Commission used in In the Matter of Raymond J. Lucia, the first case in which the SEC commissioners addressed the Appointments Clause theory that has recently caused a commotion among SEC defendants facing administrative law proceedings.

But the FTC also did something the SEC has so far refused to do: The commissioners ratified the appointment of the LabMD in-house judge to ward off “any possible claim that this administrative proceeding violates the Appointment Clause.” In other words, if a federal appeals court eventually decides FTC administrative law judges are covered by the Appointments Clause after all, the FTC’s bases are covered.

The SEC has so far taken a different approach. Last June, U.S. District Judge Richard Berman of Manhattan, overseeing an Appointments Clause challenge to an SEC administrative proceeding against former S&P executive Barbara Duka, asked the agency and its Justice Department lawyers whether the SEC could easily cure any constitutional problem by having the commissions officially appoint ALJs. Berman’s question, you may remember, came in response to a decision by U.S. District Judge Leigh May of Atlanta in yet another case in which an SEC defendant claimed the ALJ hiring process was unconstitutional. Judge May said it likely was, but also said the commissioners could fix it.

In responding to Judge Berman, the SEC and Justice said the government believed Judge May was wrong, intended to appeal her decision and was therefore not obliged to fix anything. “The government believes that the commission should not act precipitously to modify its ALJ scheme,” it said in a June 15 letter to Judge Berman. “This is particularly the case when the SEC has over 100 litigated proceedings at various stages of the administrative process and the ALJ scheme has been in use for seven decades.”

In August, after he denied the government’s motion to dismiss Duka’s constitutional challenge, Berman once again asked the SEC and Justice whether it intended to cure any violation of the Appointments Clause. In an Aug. 10 letter, the agency repeated that it did not.

So why has the SEC so far resisted the easy fix employed by the FTC? Clearly, the government is worried that if it makes any concession suggesting doubt in the constitutionality of its administrative proceedings, defendants in those scores of pending cases will pounce. And as I’ve previously reported, defense lawyers suspect the SEC and Justice may also be concerned about collateral constitutional attacks by defendants whose administrative proceedings are already closed.

Rather than prospectively ratify the appointments of the agency’s ALJs, the SEC seemed to be setting up a future argument that even if the hiring process is flawed, the commissioners’ de novo review of the determinations of its in-house judges corrects any harmless error from their appointment. The SEC’s Lucia opinion includes a footnote quoting the D.C. Circuit’s Landry opinion for the proposition that defendants suffer no prejudice regardless of the manner in which presiding administrative law judges are appointed.

Skadden Arps Slate Meagher & Flom, which represents Lynn Tilton of Patriarch Partners in a case seeking to block the SEC’s administrative proceeding against her, highlighted the prospective “harmless error” argument in a letter last week to the 2nd Circuit, where Tilton is appealing a lower-court decision that it does not have jurisdiction over her case. At oral arguments on Wednesday, a three-judge panel at the 2nd Circuit asked both sides to brief that issue, according to my Reuters colleague Nate Raymond, who was at the argument.

The funny thing is that, according to University of Georgia law professor Kent Barnett, who scrutinized the in-house judge Appointments Clause question in his article Resolving the ALJ Quandary for the Vanderbilt Law Review, the SEC may be overestimating its problem – and teeing up a solution that won’t work. In an interview Wednesday, Barnett said he strongly doubts any defendant in an already concluded SEC administrative proceeding will be able to reopen the case, even if the ALJ hiring process turns out to be flawed. “When it’s done, it’s done,” he said. “I’m just not that worried about retroactivity. I look at the SEC and say, ‘Why are you doing all this?'”

Barnett said he is skeptical of any argument that constitutional deficiencies in administrative proceedings can be cured by the commissioners’ de novo review. The U.S. Supreme Court considered and rejected a similar contention in 1995’s Ryder v. United States, when the justices found Appointments Clause flaws in the process by which the military named civilian judges to the Coast Guard’s Court of Military Appeals.

Meanwhile, Barnett said, litigation against defendants in administrative proceedings may open the SEC and other agencies up to discovery demands for information they would rather not share. The 7th Circuit’s recent holding that it did not have jurisdiction over a constitutional challenge by SEC administrative proceeding defendant Laurie Bebo, Barnett said, suggested that in-house judges have to permit discovery on their hiring and tenure protection systems. “Agencies probably don’t want that out there,” Barnett said.

I emailed SEC spokesman John Nester to ask about the FTC ratifying its in-house judge in the LabMD case but didn’t hear back.

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