On June 29, 2020, the Supreme Court issued its opinion in Seila Law LLC v. Consumer Financial Protection Bureau, slip op. No. 19-7. The decision resolves a long-disputed issue regarding the constitutionality of the structure of the Consumer Financial Protection Bureau (CFPB or the Bureau)—namely, whether the Dodd-Frank Act’s statutory restriction on removal of the CFPB Director is consistent with the President’s powers in Article II of the Constitution. In a 5-4 decision, the Supreme Court held the restriction unconstitutional and invalidated it. At the same time, the Court rejected the argument that the entire CFPB should be invalidated due to the constitutional defect, and it left other remedial issues, such as the effect of the decision on pending Bureau matters, for lower courts to decide.
We think the Seila decision has several practical implications for institutions.
First, the decision makes clear that the CFPB is here to stay. It was always unlikely that the Supreme Court would nullify the CFPB, but Seila puts the issue to rest. However, Seila will give impetus to efforts by the President to exert political control over the CFPB. In particular, we could see efforts to treat the CFPB Director similarly to heads of other executive branch agencies—for example, the CFPB Director may be expected to tender her resignation upon a change in presidential administration, or CFPB rules could be subjected to review by the Office of Information and Regulatory Affairs.
Second, litigation will continue to play out in lower courts regarding the effect of Seila on ongoing Bureau investigations and litigation. However, Director Kraninger is likely to ratify most prior Bureau actions, and any relief to regulated entities could be limited.
Third, the reasoning of Seila opens the door to constitutional litigation challenging the structure of other government agencies, most notably the Federal Trade Commission (FTC) and the Federal Housing Finance Authority (FHFA).
The case arose from a civil investigative demand (CID) issued to Seila Law LLC, a California law firm that provides advice on debt-related issues, regarding possible unlawful advertising, marketing or sale of debt relief services. Seila Law refused to comply with the CID on the ground that the CFPB was led by a single director removable only for “inefficiency, neglect of duty, or malfeasance in office.” 12 U.S.C. §§5491(c)(1), (3). The CFPB filed a petition to enforce the CID in district court, and again raised its constitutional objection. The district court sided with the CFPB and ordered Seila Law to comply with the CID. The court of appeals affirmed, citing PHH Corp. v. CFPB, 881 F.3d 75 (2018), which had rejected a similar challenge to the constitutionality of the CFPB’s structure.
In addition to the question of constitutionality of the removal clause, the Supreme Court directed the parties to brief and argue whether the contested clause can be severed from the rest of the Dodd-Frank Act. The Department of Justice sided with Seila Law on the issue of the President’s authority to terminate the CFPB Director, and argued for the petitioner. The Court invited Paul Clement to brief and argue for the CFPB as amicus, while also allowing the House of Representatives to file a brief as an amicus in favor of the CFPB and participate in oral argument.
The Court’s decision in Seila focused on two key issues: (1) whether the statutory restriction on removal of the CFPB Director is constitutional, and (2) if so, whether the restriction is severable from the rest of the Consumer Financial Protection Act (CFPA), such that the CFPB can continue to exist.
Constitutionality of removal protection. The Court held the removal restriction unconstitutional. Relying on Myers v. United States, 272 U.S. 52 (1926), and Free Enterprise Fund v. Public Company Oversight Board, 561 U.S. 477 (2010), the majority opinion of Chief Justice Roberts focused on the President’s broad power to hold agency officers accountable by removing them from office when necessary. The opinion recognized two “exceptions” to that broad power in the Court’s precedents. First, Humphrey’s Executor v. United States, 295 U.S. 602 (1935), concerned members of a multimember body “who were balanced along partisan lines and served staggered terms” and performed only “quasi-legislative” and “quasi-judicial” functions. Second, Morrison v. Olson, 487 U.S. 654 (1988), protected an inferior officer who had no policymaking authority.
The Chief Justice framed the question before the Court as whether “to extend” these separation-of-powers precedents to “a new configuration” involving an independent agency headed by a single director insulated from removal by the President. Roberts refused to do so. Unlike the FTC at issue in Humphrey’s Executor, the opinion noted, the CFPB Director is an individual with a five-year term, with “significant administrative and enforcement authority.” And unlike in Morrison, the CFPB Director is a “principal officer whose duties are far from limited” and who wields “significant executive power.” The majority further noted that the CFPB’s structure is at odds with “history or tradition,” and the Court expressly distinguished several historical examples in concluding that the CFPB’s structure is “almost wholly unprecedented.”
Severability. Having found the removal provision unconstitutional, the Court proceeded to decide the issue of remedy—in particular, whether the entire CFPA should be invalidated or the removal restriction could simply be excised or “severed” from the act. The Court again looked to Free Enterprise Fund, where the Court had applied a narrow remedy in holding that an unconstitutional removal restriction could be severed and the remaining statutory provisions were capable of functioning independently, notwithstanding the lack of an express severability clause. Thus, the Court had allowed the Public Company Accounting Oversight Board to continue to function. It reached the same result in Seila. Since the provisions of the Dodd-Frank Act bearing on the CFPB’s operation can function without the tenure restriction, and Congress made its intent clear through an express severability clause, the Court allowed the rest of the act to stand.
Chief Justice Roberts, joined by Justices Thomas, Alito, Gorsuch and Kavanaugh, delivered the opinion of the court with respect to the constitutionality of the for-cause-only removal of the CFPB Director. Justices Thomas and Gorsuch dissented on severability, arguing that the question should be reserved for another case. Justices Kagan, Ginsburg, Breyer and Sotomayor concurred with respect to severability but dissented on the constitutionality question.
Other remedial issues. The Court expressly declined to address all the remedial issues presented in the case. Seila Law had requested that the Court deny the CFPB’s petition to enforce the CID in light of the constitutional defect. The Bureau countered that the CID had been ratified by an acting CFPB Director, who is not covered by the removal provision. The Court, however, remanded to the court of appeals to resolve the “case specific” questions of whether this ratification did in fact occur, and if so, whether it sufficiently cured the constitutional defect of the CID.
The Seila decision is likely to have several practical implications for institutions regulated by the CFPB.
First, the Bureau appears to be here to stay, but any individual CFPB Director may not be. One implication of Seila is that it has removed a significant obstacle to presidential control over the Bureau. Even before Seila, both Republicans and Democrats sought to influence the CFPB’s policies and priorities. President Trump’s appointment of Office of Management and Budget director Mick Mulvaney as acting CFPB Director is just one example of an attempt to exert political control over the agency. The Seila decision clears the way for more such efforts. Indeed, it is possible that the CFPB Director will now be expected to tender her resignation upon any change in presidential administration. And regulated institutions could see dramatic shifts in CFPB enforcement and regulatory policy when the White House changes hands.
Second, the effect of Seila on ongoing Bureau investigations and litigation remains to be seen and will be determined by future litigation in lower courts. One important issue is whether Director Kraninger will attempt to ratify prior Bureau actions, which the CFPB would likely argue cures any constitutional defect. The Supreme Court declined to address whether a pre-Seila (or post-Seila) ratification by an acting CFPB Director would be enough to cure the constitutional defect, leaving the validity of Bureau actions for lower courts to resolve based on case-specific considerations. In practice, the issue of relief to regulated institutions is likely to depend on the circumstances of particular cases, and any broad-based relief could be limited.
Finally, the Seila decision could propel challenges to other government agencies, including the FHFA and the FTC, both of which are headed by officials who may be removed only for cause. The director structure of the FHFA was recently held unconstitutional by the Fifth Circuit in Collins v. Mnuchin, 938 F.3d 553 (2019). Seila also appears to undermine Humphrey’s Executor, which upheld the FTC structure, by limiting that holding to the character of the officers considered at the time: “[r]ightly or wrongly, the Court viewed the FTC (as it existed in 1935) as exercising ‘no part of the executive power.’” Indeed, the majority highlighted in a footnote that “the powers of the FTC at the time of Humphrey’s Executor would at the present time be considered ‘executive,’ at least to some degree.”1 Therefore, it is possible that the Supreme Court, when faced with the question, would interpret the FTC’s “character of the office” to reflect executive power that is unconstitutional without the President’s removal authority.