Supreme Court: President May Fire CFPB Director Without Cause

Manatt, Phelps & Phillips, LLP

In a long-awaited ruling, the Supreme Court in Seila Law has ruled, in a 5-4 decision, that the structure of the Consumer Financial Protection Bureau is unconstitutional in that it limits the ability of the President to fire the director, unless with cause. We discuss the decision below.

What happened

In February 2017, the CFPB issued a civil investigative demand (CID) to Seila Law, a California-based law firm that provides legal services, including debt relief services, requesting information and documents. After Seila Law objected to the CID on the grounds that the CFPB was unconstitutionally structured in violation of the separation of powers, the CFPB filed a petition in the U.S. District Court for the Central District of California, seeking to have the court enforce Seila Law’s compliance.

Seila Law renewed its constitutional challenge to the CID, but the court rejected that argument and, after narrowing the scope of the CID in one respect, ordered Seila Law to comply. While Seila Law’s appeal was pending, the D.C. Circuit issued an en banc decision (with now Supreme Court Justice Kavanaugh as a notable dissenter) that the CFPB’s structure did not violate the separation of powers. The Ninth Circuit then followed the D.C. Circuit’s majority and affirmed the lower court’s ruling, concluding that the Supreme Court precedents of Humphrey’s Executor v. U.S. (295 U.S. 602 (1935)) and Morrison v. Olson (487 U.S. 654 (1988)) foreclosed Seila Law’s challenge. Seila Law petitioned the Supreme Court for a writ of certiorari, and the Court granted it.

Today’s Supreme Court decision resolves two important questions about the constitutionality of the CFPB. In a decision authored by Chief Justice Roberts and joined by the remaining conservatives on the bench, the Court rules that Congress exceeded its constitutional authority in restricting the President’s authority to remove the CFPB’s director to circumstances of “inefficiency, neglect of duty, or malfeasance.” Separately, in an opinion joined by Justices Alito and Kavanaugh, and through a concurring opinion authored by Justice Kagan with the liberal wing of the Court, the Court concludes that these unconstitutional protections were severable from the other provisions of Dodd-Frank establishing and empowering the CFPB.

After laying out an expansive view of executive power under Article II, Justice Roberts’ opinion distinguishes Humphrey’s Executor v. U.S., which restricted President Franklin Roosevelt from removing one member of the Federal Trade Commission for purely political reasons, and Morrison v. Olson, which held that the hiring of an independent counsel who could not be directly removed by the President did not violate the separation of powers. The focus of both of these distinctions was the singular and significant, wide-ranging administrative and enforcement authority granted to the director of the CFPB. Justice Roberts and the majority determined that the director had too much executive authority to be shielded from the President, who is subject to accountability through regular elections.

Justice Kagan’s dissent argues that the majority invented this “general rule of unrestricted presidential removal power,” and that the exceptions it used to distinguish the earlier cases were “made up for the occasion—gerrymandered so the CFPB falls outside them.” Justice Kagan writes that the distinction between multimember bodies and single directors put forward by the majority does not “respond to the constitutional values at stake” and that, if anything, multimember bodies outside the control of the President would impede the President’s constitutional functions more than a single director would.

Justice Roberts disposed of the severability question more quickly. He writes that there is only one independent constitutional defect and that the “CFPB’s structure and duties remain fully operative without offending tenure restriction.” Congress also revealed its intention in drafting as part of the statute that, if any of the provisions of Dodd-Frank were deemed unconstitutional, the rest should not be affected. In responding to Justice Thomas’ partial dissent, Roberts writes that the Court should “use a scalpel rather than a bulldozer in curing the constitutional defect we identify today.”

Why it matters

The case has been remanded to the lower courts to consider whether a CID issued by a director who was unconstitutionally insulated from removal could still be enforced where, as here, the CID has been ratified by an acting director accountable to the President. While the Court decided that the director’s removal protection was severable from the other provisions of Dodd-Frank bearing on the CFPB’s authority, there are still open questions about the actions of the CFPB while led by that unconstitutionally protected director. The lower courts will consider these questions for Seila Law, as will other courts that had paused proceedings challenging the constitutionality of the CFPB while awaiting this decision. Expect to see additional challenges filed by institutions that found themselves on the wrong side of a CFPB CID.

The Supreme Court’s decision puts additional weight on the upcoming presidential election, which will decide the future direction of the CFPB. If Joe Biden is elected in November, a new, more aggressive CFPB director will likely be put in place shortly after Biden’s inauguration in January.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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