Attacks on Agency In-House Judges Heat Up, Blunting Enforcement

Agencies face an increasing number of lawsuits challenging the constitutionality of their administrative law judges, with some companies winning temporary enforcement reprieves as courts wrestle with litigation.

In-house judges at the Labor Department, the Federal Trade Commission, the Drug Enforcement Administration, and several other agencies have been targeted during the past year. The National Labor Relations Board’s ALJs alone have been the focus of about a third of 28 complaints in that period, according to a Bloomberg Law review.

While challengers often bring several constitutional claims against administrative law judges, the most common allegation is that they are improperly shielded from being removed.

Federal appeals courts have divided on the issue, leaving it up to the US Supreme Court to resolve. For now, agencies are being blocked from enforcing the law in some cases while defendants are proceeding under what they argue is an unconstitutional process in others.

“Removal is a very live and very significant issue that must be decided by the Supreme Court, preferably sooner rather than later,” said Anthony Sabino, a law professor at St. John’s University. “This issue will not go away.”

The US Court of Appeals for the Fifth Circuit ruled that the Securities and Exchange Commission’s in-house judges are improperly shielded, creating a precedent that hamstrings agencies in Texas, Louisiana, and Mississippi. More cases are pending that could deepen the split among circuit courts.

SpaceX and an Energy Transfer LP subsidiary are among the companies that have won preliminary injunctions blocking agency enforcement actions after the Fifth Circuit ruling in Jarkesy v. SEC.

The Supreme Court had a chance to settle the debate when it reviewed the Fifth Circuit’s decision, but it ruled on Seventh Amendment grounds without addressing the removal question. The justices in June held that defendants have a right to a jury trial when the SEC seeks civil penalties for securities fraud, effectively prohibiting the agency from bringing those claims before in-house judges.

The number of ALJ challenges has shot up in the months since the high court’s opinion in SEC v. Jarkesy, which left the Fifth Circuit’s removal holding in place. More than half of the lawsuits filed over the past year hit court dockets since Aug. 1.

Dual Layer

The Supreme Court opened the door to contesting ALJ firing protections with its 2018 decision in Lucia v. SEC, which said they’re “officers of the United States” subject to constitutional appointment requirements rather than mere agency employees.

Challenges to ALJ removal protections have been fueled by the high court’s 2010 ruling in Free Enterprise Fund v. Public Company Accounting Oversight Board. The justices held that dual-layered shields for board officials—who can only be fired by agency leaders, who are themselves shielded from removal—violate the Constitution.

The Fifth Circuit in Jarkesy said that Lucia shows that SEC’s in-house judges wield enough power that the president should be able to remove them more easily. But they have an unconstitutional two-part removal shield that interferes with the president’s constitutional authority to control the executive branch, the circuit court said.

Those ALJs can be removed by the SEC only for good cause, as established by the Merit Systems Protection Board—and the president needs good cause to sack members of the SEC and MSPB, thus creating at least two layers of removal protections, the Fifth Circuit said.

But the Ninth and Tenth circuits have found flaws in arguments against firing shields, saying that the ALJs at issue in those cases performed purely adjudicative functions, unlike the PCAOB members in Free Enterprise Fund who perform policymaking and enforcement functions.

Harm Debate

Another point of contention is whether an ALJ’s removal protections—even if unconstitutional—cause an injury that courts can actually remedy.

For companies and individuals defending against agency enforcement actions, the harm can be “very real and very personal,” said Kara Rollins, an attorney with New Civil Liberties Alliance, a legal advocacy group that’s frequently involved in suing the federal government.

“There’s something deeply insulting in an agency moving forward when constitutional violations are actively happening,” said Rollins, who represents a plaintiff challenging Federal Deposit Insurance Corp. in-house judge removal protections.

District courts applying the Fifth Circuit’s Jarkesy ruling to freeze administrative proceedings have found that a party may be harmed by being compelled to participate in a potentially unconstitutional proceeding.

Yet the Sixth and Tenth circuits have said the Supreme Court’s 2021 ruling in Collins v. Yellen requires a challenger to show that the allegedly unconstitutional provision actually affected the agency’s decision or conduct. That would require evidence of an event like the president trying to remove the ALJ at issue.

Litigation over administrative law judge firing shields continues to percolate in the circuit courts. Pending cases pit Walmart Inc. against the Labor Department, Intuit Inc. and H&R Block Inc. against the FTC, and Care One LLC against the NLRB.

High Court Review?

The Supreme Court is considering whether to review a case on the constitutionality of agency board members’ removal safeguards that could also resolve the debate over those protections for ALJs.

The justices are set to consider Oct. 11 whether to grant review in Consumers’ Research v. Consumer Product Safety Commission, a dispute over removal protections for that agency’s members. The case calls into question the high court’s 1935 decision in Humphrey’s Executor v. US upholding FTC members’ protections against the president firing them at will.

While the Supreme Court has rolled back statutory safeguards protecting single independent agency heads from being fired by the president, such shields still exist under Humphrey’s Executor for the leaders of the NLRB, MSPB, and other agencies run by boards or commissions composed of multiple officials.

Ditching Humphrey’s Executor would gut one of the two layers protecting ALJs, thus eliminating the chief legal argument against their firing shields.

Nevertheless, the prospect of empowering the president to fire members of the Federal Reserve Board of Governors at will may keep the Supreme Court from overturning Humphrey’s Executor, said William Araiza, an administrative law professor at Brooklyn Law School.

“What’s really lurking in the background is the Fed,” Araiza said.