The D.C. Circuit’s gratuitous ruling on CFPB constitutionality

October 11, 2016

Judge Brett Kavanaugh, author of the District of Columbia U.S. Circuit Court of Appeals’ majority opinion Wednesday in PHH Corporation v. Consumer Financial Protection Bureau, is a compelling writer. His tour-de-force 13-page summary at the beginning of the court’s 2-1 ruling declares the CFPB unconstitutional in words that will long be quoted by the agency’s critics.

“The director of the CFPB possesses more unilateral authority – that is, authority to take action on one’s own, subject to no check – than any single commissioner or board member in any other independent agency in the U.S. government,” wrote Judge Kavanaugh. “The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency.”

Over about 50 additional pages, Judge Kavanaugh elaborates his theme that the CFPB’s single-director structure violates the constitution’s separation-of-powers doctrine because it rests nearly boundless regulatory power in an official wholly accountable to no one else – not fellow commissioners, not Congress, not the judiciary and not even the president.

The judge’s discussion of the history and judicial application of the constitutional principle of separation of powers, written on behalf of himself and Senior Judge Raymond Randolph, reads like an exceptionally well-crafted treatise on constitutional legal history, spiked with proclamations about the unprecedented angers of the CFPB’s anomalous structure.

Separation of powers is one of Judge Kavanaugh’s specialties, and his scholarship shows. If you ever wanted to understand the interplay between the U.S. Supreme Court’s 1926 recognition in Myers v. U.S. of the president’s power to appoint and dismiss at will the heads of executive-branch agencies and the justices’ 1935 carve-out in Humphrey’s Executor v. U.S. for commissioners appointed to independent executive agencies created by Congress, then this is the opinion you have been waiting for.

Judge Kavanaugh’s solution for the CFPB’s constitutional infirmity is relatively clean and simple. The mortgage lender PHH, represented by the appellate masters at Gibson Dunn & Crutcher, argued that because Congress created the CFPB as part of the Dodd-Frank financial reforms of 2010, the whole law – or, at least the provisions authorizing the consumer protection bureau – must be struck down. PHH called for the entire CFPB to be dismantled.

But the majority, following the road plowed by the U.S. Supreme Court in recent challenges to the Public Company Accounting Oversight Board and to recess appointments to the National Labor Relations Board, said the court need only remove the law’s strictures on the president’s ability to remove the CFPB director. Allowing the president to get rid of the director at will, according to Judges Kavanaugh and Randolph, would make the CFPB akin to an executive agency, like the Department of Justice or Treasury, with a single head accountable directly to the president.

That fix, Judge Kavanaugh emphasized, would leave the CFPB to continue operating as usual, albeit with its director subject to dismissal at the president’s will. Presumably, that change could shorten the CFPB director’s statutory five-year term if, for instance, a new president with a different consumer agenda took office before a CFPB director’s term expired. Otherwise, the D.C. Circuit’s ruling on the agency constitutionality won’t have much practical impact. The decision’s influence will be due to the political power of Judge Kavanaugh’s description of the CFPB director’s unbridled, ahistorical, unconstitutional power.

Here’s the interesting thing, though: According to Judge Karen Henderson, writing in partial dissent, Judge Kavanaugh did not need to engage in his constitutional analysis at all – and, in fact, under the doctrine of constitutional avoidance, should not have reached a conclusion about the constitutionality of the CFPB’s structure.

That’s because the D.C. Circuit also overturned the CFPB’s interpretation of the real estate laws underlying Director Richard Cordray’s $109 million disgorgement decision against PHH, which the CFPB accused of violating anti-kickback regulations via a captive mortgage reinsurance company. The appeals court vacated the ruling and remanded the case to the CFPB for reconsideration in light of the D.C. Circuit’s rejection of the agency’s view of the law (and the statute of limitations).

Judge Henderson, who agreed with that section of Judge Kavanaugh’s opinion, said that statutory interpretation should have been the beginning and the end of the appellate court’s consideration of PHH’s case. “We recognize ‘a well established principle governing the prudent exercise of this court’s jurisdiction that normally the court will not decide a constitutional question if there is some other ground upon which to dispose of the case,'” she wrote. “I believe prudential considerations counsel against our reaching out to invalidate the for cause removal provision.”

The majority opinion addressed Judge Henderson’s constitutional avoidance argument, asserting that because PHH called for dismantling the CFPB as unconstitutional, the relief it sought was broader than what the court’s statutory ruling could provide. “For that reason, we have no choice but to address the constitutional issue,” Judge Kavanaugh wrote. “In our view, failing to decide the constitutional issue here would be impermissible judicial abdication, not judicial restraint.” (The majority said it was showing judicial restraint by not insisting the CFPB be converted into a multi-commissioner independent agency, which would require the CFPB to shut down temporarily while the court created new offices and lawmakers filled them. “All of that ‘editorial freedom’ would take us far beyond our judicial capacity,” the opinion said.)

The D.C. Circuit, as Judge Henderson’s dissent noted, was bound to get a case sooner or later that required it to consider the CFPB’s constitutionality. Not every D.C. Circuit panel, though, would have included Judge Kavanaugh – a noted conservative as well as a separation of powers buff. It’s hard to imagine this judge passing up the opportunity to opine on the shaky constitutionality of an agency deplored by the business lobby. However marginal the opinion’s operating effect on the CFPB, Kavanaugh’s words will warm its opponents.

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