Under “Damocles’ Sword”: Considering Removal Protections and the Take Care Clause in Light of SEC v. Jarkesy

The Constitution requires judicial independence in Article III. As Hamilton observed in “Federalist 78”: “The standard of good behavior for the continuance in office of the judicial magistracy . . . . is the best expedient which can be devised in any government, to secure a steady, upright, and impartial administration of the laws.

So why would conferring independence on officials within the executive branch whose sole responsibility is to adjudicate disputes between an agency’s enforcement arm and a private party infringe on the President’s duty to take care that the laws are faithfully executed? In SEC v. Jarkesy, targets of SEC enforcement, supported by a long list of amici, argue that they have a constitutional right to administrative enforcement proceedings before officers who are directly removable by the President under the Take Care Clause. This post considers whether absolute removal power by the President would in fact ensure that the laws are more faithfully executed, rather than allowing administrative law judges (ALJs) with removal protections to adjudicate disputes like Article III judges do.

Background

In 2013, the SEC brought an administrative proceeding against a hedge fund founder (George Jarkesy) and his funds’ investment advisory firm, alleging violations of securities laws. The proceeding was assigned to an ALJ, who determined that respondents had committed securities fraud. The SEC Board of Commissioners upheld the decision and imposed civil penalties. Respondents petitioned for review, arguing, inter alia, that SEC ALJs are inferior officers who possess more than one layer of “for cause” removal protection, which violates Article II of the Constitution. Specifically, they contended that since SEC ALJs can only be removed by SEC Commissioners if good cause is found by the Merits Systems Protection Board (MSPB), and the Commissioners and MSPB members must also be removed by the President for cause, ALJs are impermissibly insulated from the President by at least two layers of “for cause” removal.

Of course, convincing the Court to eliminate removal protections is not all that the respondents and their amici want. Their goal is to stop the SEC from using administrative enforcement rather than filing civil enforcement actions in federal court, and the “take care” argument is one of three angles of attack on the practice.1 In Jarkesy v. SEC, 34 F.4th 446 (5th Cir. 2022), a divided panel of the Fifth Circuit vacated the SEC’s decision, agreeing with respondents on their removal argument, as well as the other two grounds.

The Supreme Court last discussed two-layer removal protections in its 2010 Free Enterprise Fund decision. The Chief Justice summed up the reasons for presidential control over subordinate officials, stating:

The Constitution that makes the President accountable to the people for executing the laws also gives him the power to do so. That power includes, as a general matter, the authority to remove those who assist him in carrying out his duties. Without such power, the President could not be held fully accountable for discharging his own responsibilities; the buck would stop somewhere else.2

But the Court stopped short of applying its holding to ALJs, explaining in a footnote that its holding about the unconstitutionality of two layers of protection for policymaking officials in the Public Company Accounting Oversight Board (PCAOB) “does not address that subset of independent agency employees who serve as administrative law judges.”3 Then, in Lucia v. SEC, the Supreme Court determined that ALJs were officers for purposes of the Appointments Clause, but declined to address whether SEC ALJs were subject to presidential removal authority, suggesting that the Court may not view the invalidity of removal restrictions for ALJs as a natural consequence of deciding that ALJs are officers.4

Despite the Court’s restraint in those cases, the Fifth Circuit in Jarkesy read Free Enterprise and Lucia together to mean that SEC ALJs serve sufficiently important executive functions.5 And since ALJs perform executive functions, substantial restrictions on removal would unduly restrict the President’s ability to take care that the laws are faithfully executed vis-à-vis those officers. But the Fifth Circuit’s decision arguably underrates two important principles: first, that limits on removal have historically been permitted where they do not interfere with the Executive Branch’s policymaking function, and second, that removal protections advance the President’s ability to faithfully execute the laws because such protections protect the decisional independence of ALJs.

Adjudicatory vs. Policymaking Functions

Although Free Enterprise Fund answered whether two layers of removal protection would be constitutional for inferior officers who “determine[] the policy,”6 that analysis begs consideration of whether ALJs make policy. The Free Enterprise Court observed in the same footnote that ALJs differ from inferior officers of the PCAOB because they perform adjudicatory rather than enforcement or policymaking functions.7 Many commentators urge the Supreme Court to reverse the Fifth Circuit’s holding for that reason.8

There is a long history of treating officers who adjudicate rather than make policy differently from policymaking officials, in accord with the Framers’ judgment in Article III. In Myers v. United States, 272 U.S. 52 (1926), the Supreme Court rejected a postmaster’s claim that he had been wrongfully removed before the expiration of his term without the consent of the Senate. In holding that the President must have the power to remove the postmaster, the Court noted, “there may be duties of a quasi judicial character imposed on executive officers and members of executive tribunals whose decisions after hearing affect interests of individuals, the discharge of which the President cannot in a particular case properly influence or control.” Id. at 135. The Court went on: “But even in such a case he may consider the decision after its rendition as a reason for removing the officer, on the ground that the discretion regularly entrusted to that officer by statute has not been on the whole intelligently or wisely exercised. Otherwise he does not discharge his own constitutional duty of seeing that the laws be faithfully executed.” Id.

In its later decision in Wiener v. United States, 357 U.S. 349 (1958), the Court read the intervening decision in Humphrey’s Executor as carving out an exception to presidential removal authority for “those whose tasks require absolute freedom from Executive interference.” Id. at 353. The Court unanimously concluded that the War Claims Commission was an adjudicative body requiring independence:

The claims were to be “adjudicated according to law,” that is, on the merits of each claim, supported by evidence and governing legal considerations, by a body that was “entirely free from the control or coercive influence, direct or indirect,” of either the Executive or the Congress. If, as one must take for granted, the War Claims Act precluded the President from influencing the Commission in passing on a particular claim, a fortiori must it be inferred that Congress did not wish to have hang over the Commission the Damocles’ sword of removal by the President for no reason other than that he preferred to have on that Commission men of his own choosing.16

Id. at 355–56 (citation omitted).

The cases illustrate how even beyond the Free Enterprise footnote, the Court has sought to distinguish between inferior officers who engage in purely adjudicatory functions and those who engage in policymaking actions. Do the reasons for demanding accountability of officers to the President as the sole executive official who is accountable to the voters extend to officers whose role is to apply facts proven in a contested hearing to the legal standards in statutes and regulations? The answer depends on the meaning of “faithful” execution.

Meaning of “Faithful” Execution

Even if there were no doctrinal basis for treating adjudicators differently from policymakers, it seems strange as a matter of constitutional principles to include unfettered removal power of adjudicators within the President’s duty to take care that the laws are faithfully executed. Agency supporters argue that two layers of “for cause” protection better serves the function of faithful execution. Broader presidential removal authority could cause an SEC ALJ, for instance, to weigh whether a ruling adverse to the agency would result in the ALJ’s arbitrary removal, which would be antithetical to the notion of faithful execution. From that perspective, removal protection allows ALJs to remain relatively independent and faithful to their own interpretation of the laws, rather than the current President’s.

Such principles are hardly novel—they are, after all, already reflected in our judicial system. There is no reason why the same principles applicable to Article III judges’ capacity to decide cases and controversies cannot apply to adjudicative ALJs’ ability to “take care” of the laws.9Many of the reasons the Framers of Article III deemed judicial independence important to interpreting laws and the Constitution apply to executive adjudications, at least so long as any policy judgments embedded in the adjudication are subject to review by officials accountable to the President. Such protections against even inadvertent policymaking exist at the SEC and other agencies, where ALJs are separated from the officials who pursue enforcement actions, and ALJ decisions are subject to extensive review by officials who are not subject to the same tenure protections that ALJs possess. As the Court has recognized, agency officials should be allowed to make decisions “free from intimidation and harassment” where “legal remedies [are] already available . . . provid[ing] sufficient checks on agency zeal.” Butz v. Economou, 438 U.S. 478, 516 (1978).

Not only do removal protections further the Executive’s ability to faithfully execute laws underlying administrative decisions, but they also provide for faithful execution of the Administrative Procedure Act (APA)’s guarantees of an impartial hearing and procedural fairness. Before the adoption of the APA, agency adjudications were decided by various classifications of quasi-judicial hearing examiners. Ramspeck v. Fed. Trial Exam’rs Conf., 345 U.S. 128, 130 (1953). The provisional status of the examiners led many litigants to complain that the examiners “were mere tools of the agency concerned and subservient to the agency heads in making their proposed findings of fact and recommendations.” Id. at 131. Congress enacted the APA largely in response to these concerns, and with a view toward promoting fairness and transparency by guaranteeing the independence of hearing examiners. Id. For example, a hearing examiner may not consult any person or party, including other agency officials, concerning a fact at issue in the hearing, unless on notice and opportunity for all parties to participate.10 It is fair to question, then, whether adjudications within the executive branch would be more “faithful” to the law if adjudicators were directly responsible to the policy preferences of each administration, or remained protected from their reach.

1 Respondents also argue that the Seventh Amendment right to jury trial precludes administrative adjudication, and that the SEC’s discretion to choose either administrative or judicial enforcement violates nondelegation principles.
2Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 513–14 (2010).
3 Id. at 507 n.10.
4 138 S. Ct. 2044, 2050 n.1 (2018).
5 Specifically, the Fifth Circuit reasoned that ALJs exercise “considerable power” in SEC enforcement actions because they “control[] the presentation and admission of evidence,” “punish contemptuous conduct,” and issue decisions that are often final and binding. Jarkesy, 34 F.4th at 464.
6 Free Enterprise Fund, 561 U.S. at 484.
7 Id. at 507 n.10).
8 See, e.g., Brief for Association of Administrative Law Judges as Amicus Curiae Supporting Petitioner, SEC v. Jarkesy (No. 22-859), at 22–24.
9 Indeed, “faithful execution” has been read as necessitating some “executive deference” to lawmakers’ intent. Andrew Kent, Ethan J. Leib & Jed H. Shugerman, Faithful Execution and Article II, 132 Harv. L. Rev. 2111, 2182–83 (2019). (“The reasonable legal implication here is that the language of faithful execution is for the most part a language of limitation, subordination, and proscription, not a language of empowerment and permission.”).
10 5 U.S.C. § 554(d)(1).

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

Author(s)
Aaron Chou

Aaron Chou
Associate
Email | +1 202.778.1864

As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.