Reining in the Bureaucrats

The courts are getting increasingly skeptical of the ‘administrative state’<

by Adam J. White, COMMENTARY

Abortion will surely define the Supreme Court’s 2021–22 term. But lately the justices have been reconsidering more than just Roe v. Wade. In case after case, they are reconsidering the modern administrative state’s place in the rule of law. At stake is nothing less than the basic structure and sensibility of modern American government.

Administrative law tends to be the stuff of “a pretty dull lecture,” as Justice Scalia once quipped. But recent regulatory cases have brought the Court back to fundamental questions, not just in sleepy cases about esoteric technical statutes, but in front-page conflicts over high-stakes policies. That is especially true this year, in challenges to the Occupational Safety & Health Administration’s Covid-19 vaccine mandate and the Environmental Protection Agency’s climate regulations.

These are the latest in a years-long run of cases across Democratic and Republican administrations alike. Those cases raise questions about the assertions of power on the part of executive agencies of government and the procedures by which they assert their right to power. On matters ranging from the Obama administration’s own environmental regulations to the Trump administration’s actions on immigration and the Census to Covid-era regulations issued by states and cities, the justices seem keenly interested in reconsidering or at least recalibrating legal doctrines that once afforded agencies great discretion and independence in creating and enforcing regulatory programs.

Nothing in these scattered debates over abstruse legal doctrines such as “Chevron deference” or the “nondelegation doctrine” would come close to Trump henchman Steve Bannon’s threatened “deconstruction of the administrative state.” But each of them could contribute some constitutionally informed limits on the power, discretion, and independence of unelected administrators. Together they might help to reconstruct a more republican, constitutional state.

These issues have even begun to affect the decision of whom to appoint to the Court in the first place. Trump’s first two appointments to the high court—Neil Gorsuch and Brett Kavanaugh—were two of the nation’s leading judicial minds on administrative law, and White House Counsel Don McGahn made clear that this was no coincidence. So too with Trump’s appointments to the lower courts, which included administrative-law experts such as the D.C. Circuit’s Neomi Rao and Greg Katsas, and the Fifth Circuit’s Andrew Oldham.

Before a case reaches the Supreme Court, the circuit judges’ own decisions help to refine and elevate the issues at stake. And the latest example comes from Judge Oldham and his Fifth Circuit colleague Judge Jennifer Walker Elrod in a wide-ranging challenge to the Securities and Exchange Commission.

In 2013, the Securities and Exchange Commission issued an administrative order against George Jarkesy Jr., a Texas-based hedge-fund manager, and Patriot28, an investment advisor company. It alleged that they had committed securities fraud in connection with the offer, purchase, and sale of securities, and it instituted “cease-and-desist” proceedings against them, seeking to prohibit their activities and recoup monetary damages from them.

Rather than filing its case directly in federal court, the SEC filed its case in … the SEC itself. It was able to make this choice due to the Dodd-Frank Act of 2010, which expanded the Commission’s power to choose either a federal trial court or the SEC’s own internal court-like proceedings as the forum to punish any person’s violations of certain securities laws. In the latter category, SEC lawyers file their case with an “administrative law judge” or ALJ—not a traditional life-tenured judge, but an agency official who is insulated partly from the agency’s control. The ALJ’s initial decision is subject to appeal to the SEC’s five-commissioner leadership body, which issues the agency’s final decision. And the SEC has made free use of that option.

The Wall Street Journal reported in 2015 that the SEC “decided in their own agency’s favor concerning 53 out of 56 defendants in appeals—or 95%—from January 2010 through [March 2015],” a win rate that was “markedly higher than the 69% success the agency obtained against defendants in federal court over the same period, based on SEC data.”¹

A defendant who loses before the SEC can appeal its final decision to an actual federal court. But on appeal, the courts hear such cases under very deferential standards of review. Invoking the Administrative Procedure Act, the SEC says that courts should “uphold an agency’s decision unless it is ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.’” And under doctrines of judicial deference to agencies’ legal interpretations, the courts generally defer to the SEC’s interpretations of the federal securities laws, so long as the SEC’s interpretation is not contrary to clear legal text or otherwise unreasonable.

Jarkesy, the Texas hedge-fund manager, tried to preempt the SEC’s approach. He filed his own lawsuit in the U.S. Court of Appeals for the D.C. Circuit, arguing that the entire process was unconstitutional. But that court, in a unanimous opinion for three judges (including future justice Brett Kavanaugh), concluded in 2015 that Jarkesy needed to let the SEC complete its own process before litigating his constitutional issues in federal court.

The SEC’s in-house judge eventually found Jarkesy guilty. The Commission’s leadership upheld the judgment in 2020, ordering him to cease and desist and to pay a $300,000 penalty, and barring him various securities-related activities. It ordered Patriot28 to disgorge nearly $700,000.

They, in turn, appealed to the U.S. Court of Appeals for the Fifth Circuit. And in May 2022, the Fifth Circuit produced a very different kind of cease-and-desist decision.

The SEC “often acts as both prosecutor and judge, and its decisions have broad consequences,” wrote Judge Jennifer Walker Elrod at the outset of the Fifth Circuit’s decision. “But the Constitution constrains the SEC’s powers by protecting individual rights and the prerogatives of the other branches of government,” she continued. “This case is about the nature and extent of those constraints in securities fraud cases in which the SEC seeks penalties.”

Joined by Judge Andrew Oldham (over the dissent of a third colleague), Judge Elrod concluded that the SEC’s in-house adjudication process violated the U.S. Constitution in three ways. First, she wrote, the SEC’s prosecution of securities-fraud cases in its own administrative proceedings violated the Seventh Amendment’s right to civil trial by jury. Second, by giving the SEC unbounded discretion to pursue such cases either in federal court or in the agency’s own proceedings, Congress had improperly delegated its own legislative power to the agency. And third, the SEC administrative law judges’ substantial independence from the SEC’s leadership, and thus from the president himself, impairs the president’s constitutional duty to “take Care that the Laws be faithfully executed.”

Each of these conclusions reflects a longstanding debate in the Supreme Court.

The first issue concerns federal agencies wielding quasi-judicial powers. The Seventh Amendment guarantees a limited right to trial by jury in civil (that is, noncriminal) cases: “In Suits at common law” with more than  $20 at stake, “the right of trial by jury shall be preserved….” This right follows the Sixth Amendment’s “right to a speedy and public trial by an impartial jury” in criminal trials, and the Constitution’s overarching commitment of “the judicial power” to federal courts staffed by life-tenured judges independent of political officials.

Yet from the republic’s earliest years, the Supreme Court has recognized that not all legal controversies need be committed exclusively to the courts, particularly when Congress itself has created the “public rights” at issue. The Court explained this as early as 1855. Congress cannot “withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty,” the Court held. But if Congress creates other new “public rights,” then it “may or may not bring [them] within the cognizance of the courts of the United States, as it may deem proper.”

This became a much more significant issue in the New Deal era, when Congress began creating many new regulatory and benefits programs and committed their adjudication to federal agencies instead of courts. In recent decades, the Court had to decide the constitutionality of adjudicatory powers Congress had vested in the Commodity Futures Trading Commission, the Patent and Trademark Office, and in the federal Bankruptcy Court (which is a “court” in name but not in actual substance).

In Jarkesy’s case, the Fifth Circuit held that the SEC’s adjudication process was unconstitutional because the agency was deciding the modern equivalent of common-law fraud claims, which is in the proper purview of civil juries. Now, it must be said that Congress had written legislation prohibiting securities fraud, and the SEC argued that this made them “public rights” that could be decided by the SEC itself instead of juries. But the Fifth Circuit saw those laws as doing little more than codifying the old fraud claims that private parties had long litigated in civil lawsuits. The mere fact that Congress took a common-law claim and wrote it into the U.S. Code cannot be enough to remove the common-law claim from the courts, the Fifth Circuit held.

Its conclusion on this point echoed recent concerns about both the decline of juries and the rise of administrative adjudicators. Judge Jed S. Rakoff, a prominent member of Manhattan’s federal district court and the recent author of Why the Innocent Plead Guilty and the Guilty Go Free—and no one’s idea of a Federalist Society poster child—warned in a 2014 speech that the SEC’s in-house adjudication of fraud cases was making the agency “a law unto itself.”

Both an opinion in the case involving the bankruptcy court written by Chief Justice Roberts, and a dissent by Justice Gorsuch (which Roberts joined) in the Patent and Trademark Office case, raised alarms about the state of agency adjudication more broadly. “Ceding to the political branches ground they wish to take in the name of efficient government may seem like an act of judicial restraint,” they warned in Gorsuch’s dissent, “but enforcing Article III [of the Constitution] isn’t about protecting judicial authority for its own sake. It’s about ensuring the people today and tomorrow enjoy no fewer rights against governmental intrusion than those who came before. And the loss of the right to an independent judge is never a small thing.”

The second issue in the Jarkesy case, the “nondelegation doctrine,” is arguably the most significant administrative-state issue percolating in the Supreme Court today. The theory is premised upon the Constitution’s Article I, which provides that all legislative powers herein granted shall be vested in Congress. This grant of power, the argument goes, cannot be redelegated to the executive branch. If Congress grants an agency effectively unlimited discretion, then it violates the constitutional “nondelegation” rule.

Though sensible in principle, the nondelegation doctrine has proved extremely difficult to reduce to a simple judicially enforceable rule, let alone one clearly commanded by the Constitution’s own broad terms. In 1825, the Marshall Court observed that Congress cannot “delegate to the courts or to any other tribunals powers which are strictly and exclusively legislative,” but it also conceded that “the line has not been exactly drawn which separates those important subjects which must be entirely regulated by the legislature itself from those of less interest in which a general provision may be made and power given to those who are to act under such general provisions to fill up the details.”

Nearly two centuries later, that line has proved incredibly difficult to draw. Only twice in its history has the Supreme Court held that a statute unconstitutionally delegated legislative power to an agency. In those cases—both decided in 1935—the Court held that Congress’s legislation lacked an “intelligible principle” to limit the agency’s discretion. Finding such an “intelligible principle” is actually an extremely low bar for Congress and agencies to clear; in an era when the U.S. Code is replete with provisions empowering agencies to regulate “in the public interest” or in similarly vague terms, a statute must have virtually no substantive meaning to fail the “intelligible principle” test.

But that is what the Fifth Circuit found here, in the securities laws that empower the SEC to choose either a federal court or the SEC’s own tribunal as the forum for litigating fraud cases. “Congress offered no guidance whatsoever,” the court emphasized. “It instead effectively gave the SEC the power to decide which defendants should receive certain legal processes (those accompanying Article III [judicial] proceedings) and which should not.”

It will be interesting to see how the Supreme Court grapples with this point if it takes the case. Administrative agencies have long enjoyed significant discretion in choosing among possible procedural vehicles. In a seminal ruling as far back as 1947, the Court held that the SEC’s decision to use either in-house adjudication or rulemaking as its vehicle for policymaking “is one that lies primarily in the informed discretion of the administrative agency.” It is not hard to imagine the Court giving agencies the same discretion to choose between in-house adjudication and the federal courts as the vehicle for punishing securities fraud.

But that was 1947. In recent years, five of the current justices have signaled their interest in bolstering the nondelegation doctrine. Justice Thomas has been calling for at least some kind of reform since 2001; he was joined, to varying degrees, by Gorsuch and Roberts and by Alito in 2019, and by Kavanaugh a year later. Meanwhile, lower-court judges and conservative legal scholars have been writing vigorously on the subject. Indeed, the Fifth Circuit’s Judge Oldham was writing on the subject as far back as 2006.

It is unclear how this debate will sort out, and conservatives should take heed of Justice Antonin Scalia’s own longstanding wariness of judges striking down legislation under a constitutional doctrine that is merely inspired, not spelled out, in the Constitution’s specific words. “A doctrine so vague, it may be said, is no doctrine at all, but merely an invitation to judicial policy making in the guise of constitutional law,” Scalia wrote in a 1980 essay that later echoed through his judicial opinions.

Yet in an era when administrative agencies are wielding their power in ever more significant and unprecedented ways—such as the financial agencies’ new climate policies—the justices and judges will continue to hear arguments to reinvigorate the nondelegation doctrine, or at least to apply the gentle “intelligible principle” standard more rigorously, as the Fifth Circuit has here.

And the Fifth Circuit’s third ruling against the SEC also echoed recent Supreme Court trends. The lower court held that the SEC officers responsible for hearing the agency’s in-house cases are unconstitutional, because they enjoy too much legal independence from the president and the SEC’s leadership.

The officers are called “administrative law judges.” As noted earlier, they are not actually “judges” in the constitutional sense, appointed by the president and confirmed by the Senate with life tenure. Rather, they are agency personnel who enjoy a measure of independence from the agency’s control. Initially such positions at the SEC and other agencies were called “examiners” or “hearing examiners,” until Congress gave them the more imposing title of “administrative law judges.” (Scalia recounted this history in another of his pre-judicial writings on the administrative state, titled bluntly, “The ALJ Fiasco—A Reprise.”)

When agencies have the power to decide significant matters in their own in-house proceedings, there is great sense in wanting to insulate the adjudicators from political pressure. Of course, that is precisely why the Constitution gives real independence to actual judges. But for executive-agency personnel, the Constitution prioritizes accountability.

Thus the Constitution empowers the president to appoint agency “officers” with the Senate’s advice and consent, though Congress can empower the agency heads to appoint mere “inferior officers.” And the Court has read the president’s constitutional “executive power” and his duty to “take Care that the Laws be faithfully executed” as requiring that the president or the agency’s head retain full power to fire officers who wield significant power.

Along those lines, in 2018 the Supreme Court struck down a statute governing the appointment of the SEC’s ALJs. Justice Kagan, joined by the Court’s conservatives, concluded that the ALJs’ powers rendered them “officers” under the Constitution, and not merely employees; thus their appointment by SEC staff was unconstitutional. Similarly, on the removal issue, the Court held in 2009 that it was unconstitutional for Congress to create another independent agency within the SEC itself; if the SEC enjoys some independence from the president, then the ensuing double layer of independence between the sub-agency and the president actually impedes the president’s ability to use his own constitutional executive powers.

The Fifth Circuit found that these two lines of cases pointed together toward the unconstitutionality of the SEC administrative law judges’ independence from political oversight. If the ALJs are “officers” who can be appointed only by the constitutional process (per the 2018 precedent), and if the SEC cannot have independent officers within it (per the 2009 precedent), then the ALJ’s independence must be unconstitutional. As the Fifth Circuit put it, “two layers of insulation impedes the President’s power to remove ALJs based on their exercise of the discretion granted to them.”

Ever since the Supreme Court struck down the process for appointing SEC administrative law judges in 2018 (in the Lucia v. SEC case, authored by Kagan), there has been broad recognition that the ALJs’ removal protections might be found similarly unconstitutional. Of all the Fifth Circuit’s three holdings in the May 2022 case, this seems the one most likely to be affirmed by the Supreme Court, should it take up the matter. Again, if the cases coming before these ALJs need a truly neutral and independent decision-maker, then the Constitution offers a simple solution: Send those cases to the fully independent judges of the federal courts.

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The combat over these three issues—transferring the legal claims to officers instead of courtroom juries, making those officers independent of the president, and delegating the agency unbounded discretion to choose to pursue its cases either in court or before its own officers—reflects a recent judicial unease with decades-old doctrines that empowered the agencies.

Other current debates reflect similar concerns. For many years, precedents have directed judges to give great “deference” to an agency’s interpretation of statutes or regulations. Indeed, those precedents long enjoyed the support of conservative judges, who saw the dangers in judicial micromanagement of complex or political policy judgments. But now conservative judges are more immediately concerned with agency overreach. Similarly, Chief Justice Roberts and perhaps others are increasingly concerned with the disruptive uncertainty fostered by the wild swings in regulatory policy from one presidential administration to the next.

Earlier agency-friendly doctrines reflected a much different zeitgeist in the New Deal era and subsequent years. Particularly with enactment of the Administrative Procedure Act of 1946, Congress attempted to standardize the agencies’ process for making regulations or deciding cases; it made the former look more legislative, and the latter more judicial. It did so for laudable reasons, including efficiency and accountability.

But nearly eight decades later, we see that era’s deeper effects. Congress made agencies increasingly a substitute for actual legislatures and actual judges. Congress, meanwhile, increasingly recedes into an oversight role—less a legislature than a supreme court of public opinion.

And while we tend to think of this trajectory in terms of presidential and executive power, it is important to note how many of the new cases are coming from the so-called independent regulatory commissions—bipartisan, multi-member institutions including the SEC, the Federal Trade Commission, and more. Nearly one and a half centuries ago, Congress created their forerunner, the Interstate Commerce Commission, to serve not as an arm of executive power, but as an adjunct to the judicial power. Its purpose was to resolve railroad disputes through case-by-case adjudication, akin to a court but with expert commissioners instead of general-duty judges. Congress later gave the ICC power to make regulations, and it soon created the Federal Trade Commission to play similar quasi-judicial and quasi-legislative roles.

Surely these commissions were never genuinely free from politics or ideology. But their basic structure, their independence from presidential administrations, and (at first) their tendency toward case-specific adjudication instead of sweeping rulemaking, did set them apart from the more political, more energetic agencies directly under the president’s control.

Today, however, the independent commissions seem keen to become the most powerful and politically consequential agencies of our time. The SEC, chaired by Gary Gensler, is asserting sweeping authority over corporate governance, even asserting itself as a climate regulator. Meanwhile the FTC, chaired by Lina Khan, is undertaking an unprecedented set of new rulemaking initiatives, seeking to transform much more than just antitrust policy, and in increasingly political tones.

Watching these and other independent regulatory commissions assert the right to impose controls along partisan lines, one gets the impression that their current leaders see themselves playing with house money—the only question being how far they might push their policy line before a court limits their gains.

The Fifth Circuit’s decision, and others like it in recent cases, ought to remind them that the agencies might wind up with less power than they started with. Until recently, these matters were considered well settled. Now they are being unsettled—by newly ambitious agencies and by judges alarmed at the scope of their ambitions.

^{1 It is not easy to parse the numbers, or to interpret them. A single case might include many claims, any of which can produce partial wins and losses, making win-loss rates hard to pin down. Furthermore, it’s hard to compare the relative merits of cases that the SEC brings to an actual court as opposed to the ones it keeps in-house. If the SEC sends easier cases to actual courts but keeps the harder cases for its internal process, then the relative win rates might actually understate the SEC’s home-court advantage.}