In Split 5-to-5 Decision, En Banc D.C. Circuit Denies Petition for Review in Lucia v. SEC

Kramer Levin Naftalis & Frankel LLP

Decision Sets the Stage for the Supreme Court to Decide Whether the SEC’s Procedure for Appointing Administrative Law Judges Violates the Constitution’s Appointments Clause

On June 26, 2017, the D.C. Circuit, en banc, split 5-to-5 on whether to grant a petition seeking to overturn an August 2016 ruling by a three-judge panel of the D.C. Circuit that determined that SEC administrative law judges are Commission employees and not appointees subject to the Constitution’s Appointments Clause.1

In Lucia v. SEC, the original D.C. Circuit panel concluded that ALJs were not subject to the Appointments Clause,2 relying principally on the fact that decisions issued by ALJs in administrative proceedings are not final and are not binding until the Commission affirmatively issues an order adopting the ALJ’s decision.3 The Lucia court considered this requirement dispositive in determining that ALJs are not “inferior” officers under the Appointments Clause, as ALJs have not “been delegated sovereign authority to act independently of the Commission” nor “do they have the power to bind third parties” and “the Commission’s right of discretionary review and adoption of its regulatory scheme ... ensure[s] that the politically accountable Commissioners have determined that an ALJ’s initial decision is to be the final action of the Commission.”

The D.C. Circuit’s latest decision accentuates the split that already existed between the D.C. and Tenth Circuits regarding this issue. This past December, the Tenth Circuit declined to follow the D.C. Circuit and held in Bandimere v. SEC that SEC ALJs were in fact “inferior officers” within the meaning of the Appointments Clause of the Constitution, and that the manner in which they are installed by the Commission was unconstitutional.4  In contrast to the Lucia panel, the Bandimere court noted that ALJs “exercise significant discretion in performing ‘important functions’” and have the authority to “shape the administrative record by taking testimony, regulating document production and depositions, ruling on the admissibility of evidence, ruling on dispositive procedural motions, issuing subpoenas, and presiding over trial-like hearings,” which are all indicia of an inferior officer.5

Beginning with Gupta v. SEC in 2011,6 parties litigating in the SEC’s administrative forums have increasingly voiced due process and equal protection concerns regarding the Commission’s administrative proceedings.7 These challenges have increased since Dodd-Frank, which enabled the SEC to seek monetary penalties in administrative proceedings against persons not already registered with the SEC.8

Given the split between the D.C. and Tenth Circuits, and the growing number of challenges to the SEC administrative enforcement regime, it appears more likely that the Supreme Court will, in the near future, adjudicate the question of whether the SEC’s procedure for appointing ALJs violates the Constitution’s Appointments Clause.



1  Raymond J. Lucia Cos., Inc. v. SEC, No. 15-1345, Doc. No. 1681304 (D.C. Cir. Jun. 26, 2017). Chief Judge Garland did not participate in the deliberations.  The decision of the original panel is found at Raymond J. Lucia Cos., Inc. v. SEC,  832 F.3d 277 (D.C. Cir. 2016).

2  The Appointments Clause states that the president “shall nominate, and by and with the Advice and Consent of the Senate, shall appoint ... Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.” U.S. Const. art. II. § 2, cl. 2.

3  The thee-judge panel consisted of Circuit Judges Rogers, Pillard and Wilkins.

4  844 F.3d 1168, 1179-82 (10th Cir. 2016).

5  The Bandimere court relied heavily on the Supreme Court’s 1991 decision in Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991). In Freytag, the Court held that “Special Trial Judges” in tax courts were inferior officers subject to the Appointments Clause because special trial judges, not dissimilarly from the SEC’s ALJs, “perform[ed] more than ministerial tasks. They take testimony, conduct trials, rule on the admissibility of evidence, and have power to enforce compliance with discovery orders,” among other duties. Freytag, 501 U.S. at 881-82.

6  796 F. Supp. 2d 503 (S.D.N.Y. 2011). Kramer Levin Naftalis & Frankel LLP represented Mr. Gupta in his successful federal court challenge.

7  See Joseph A. Grundfest, Fair or Foul?: SEC Administrative Proceedings and Prospects for Reform through Removal Legislation, 85 Fordham L. Rev. 1143, 1147 (2016). 

8  See Dodd-Frank Wall Street Reform and Consumer Protection Act § 1055(a)(1), Pub. L. No. 111-203, 124 Stat. 1376, 2030 (2010).

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