Fifth Circuit Bomb on SEC ALJs Raises Questions About DEA ALJs – Securities

In a decision that will likely reverberate across the administrative state, a three-judge panel of the United States Court of Appeals for the Fifth Circuit recently held a Jarkesy v. Securities and Exchange Commission1 that the Securities and Exchange Commission’s use of its internal administrative law judges (“ALJs”) to adjudicate securities fraud actions seeking the imposition of monetary penalties was unconstitutional for three independent reasons. While the first two reasons discussed by the Fifth Circuit are inapplicable to the Drug Enforcement Administration’s administrative hearing process, the third reason is directly relevant.2Specifically, the court found that statutory dismissal protections afforded to SEC ALJs, providing that ALJs cannot be removed from their positions without a Merit Systems Protection Board hearing, violated the SEC’s precautionary clause. Article II of the Constitution by isolating the SEC courts from presidential control. . Because DEA administrative judges enjoy the same statutory protections from removal as those the Fifth Circuit panel has ruled unconstitutional, Jarkesy could be used to invalidate DEA court hearing processes.

The DEA relies on the ALJs to conduct administrative proceedings for the denial, suspension, and revocation of registrations to manufacture, distribute, or distribute controlled substances under the Controlled Substances Act.3 DEA ALJs — like most, if not all, federally employed ALJs — are subject to the same protections from removal that the Fifth Circuit ruled unconstitutional in Jarkesy.4 For this reason alone, the DEA’s current administrative arbitration regime could be fatally flawed.

Double-layered anti-abduction protections

Article II of the Constitution vests “executive power” in the president and gives the president the ultimate authority to remove officers—including judicial officers—from the executive. Congress can impose modest limitations on this removal power, including certain “for cause” limitations on the president’s removal power on multi-member boards and certain lower officers.5However, in 2010, the Supreme Court placed a clear limit on Congress’ power to interfere with the president’s impeachment authority, holding in Free Enterprise Fund v. PCAOB that “dual cause limitations” on the removal of officers violate the separation of powers.6 In other words, an officer cannot constitutionally be protected from dismissal by two levels of protection against dismissal for cause. The determination of “good cause” must rest either with the President or with a department head answerable to the President under Article II. The decision has sparked litigation over the withdrawal protections in place at a myriad of federal agencies. Recently, the Court struck down restrictions on removing for cause directors of the Consumer Financial Protection Bureau in Seila Law vs. CFPB,seven and the Federal Housing Finance Agency in
Collins vs Yellen.8

The current status of removal protections applicable to ALJs is now ripe for a decision following Jarkesy. In an earlier case, Lucia v. DRYthe Court struck down the method by which SEC ALJs were appointed, believing that they were junior officers who should be appointed by the president or department head rather than hired by agency staff. This decision led several federal agencies to review the validity of previous cases that were tried before the ALJs and also caused most departments to invalidate their previous selection process and reappoint their existing ALJs. The DOJ did just that with fanfare in October 2018, when the then-Attorney General signed an order to “ratify the pre-appointment” of the three ALJs then employed at the DEA. Although the Court referred to the issue of remand in Lucythe Court declined to decide.9 Judge Breyer, however, noted in his agreement that ALJs had protections against double-layered deletion – “just what Free Enterprise Fund construed the Constitution as prohibiting in the case of members of the Council.”tenIn line with the Court’s strict approach to the power of removal in
collins in 2021, the Supreme Court appears poised to heed Justice Breyer’s warning whenever a case presents the opportunity to determine that dual-tier protections against dismissal for ALJs, like that of DEA ALJs, are unconstitutional.11
Jarkesy could be this case.

A problem with no obvious remedies

If and when the Supreme Court determines that ALJs enjoy unconstitutional protection from removal, the appropriate remedy remains unclear. Even if the Jarkesy The panel determined that the SEC ALJ’s takedown protections were unconstitutional, its ruling noted that the panel “did not consider whether avoidance would be appropriate based on this flaw alone.”12

In Lucy, the Court determined that the proper remedy would require retrial under a constitutionally appointed ALJ. But the SEC appointment the default involved the agency’s hiring practice, not the legal protection against dismissal. In
collins, the Supreme Court remanded to the Fifth Circuit to determine whether there was prejudice due to unconstitutional agency directors. Justice Gorsuch strongly disagreed with the remand, arguing that the Court should instead “cancel the director’s ultra vires actions as contrary to constitutional rights[.]”13 A litigant who prevails on the issue of protections against ALJ withdrawal might argue that
Lucy spoke clearly about the remedy for unconstitutional ALJs, and it provides that they are entitled to a new proceeding before an ALJ undergoing a constitutional removal process. But with his dismissal, collins adds uncertainty to this remedy, leaving the parties open to the possibility that a court may determine that the issue of remand caused no prejudice to the parties.

An opportunity for DEA registrants

Despite these uncertainties, DEA registrants facing an order as to why their registration should not be denied, suspended, or revoked should consider raising constitutional arguments regarding ALJs assigned to their proceedings. Importantly for DEA enrollees, because protections against ALJ deletion are based in statute, the DEA has no unilateral means of correcting the deletion failure faced by its ALJs. Barring congressional action, the courts will likely have the final say. A series of Roberts Court decisions have revived the focus on the separation of powers doctrine and given impetus to entities subject to administrative enforcement action. These regulated entities are increasingly deploying affirmative constitutional arguments against their regulators. The DEA presents a clear new frontier to these arguments, and the growing body of legal gun registries with a powerful tool for litigation.

Footnotes

1. No. 20-61007, 2022 WL 1563613 (5th Cir. May 18, 2022).

2. Specifically, the Fifth Circuit ruled that 1) the SEC violated the Seventh Amendment guarantee of a trial by jury when it filed the lawsuit administratively because the agency did not seek to assert a “public law”, and therefore the facts underlying the allegations could not be determined by an ALJ without the consent of the defendant; and 2) Congress improperly delegated legislative authority to the SEC by giving it absolute discretion to choose whether to pursue enforcement action either in administrative proceedings or in federal court.

3. See 21 USC § 824 (suspension or revocation proceedings); 21 CFR § 1316.52 (“A presiding officer, appointed by the Administrator, will preside over all hearings.”); 21 CFR § 1316.42(f) (“The term session chairman appoints a qualified administrative law judge appointed in accordance with the Administrative Procedure Act”); 5 CFR § 930.204 (providing for “career appointment” of ALJs). The DEA’s administrative enforcement regime is limited to registration status determinations and as such likely falls well within the “public law” framework https://www.mondaq.com/”private law” used by the Fifth Circuit to determine that the SEC’s enforcement action violated the Seventh Amendment, especially since the DEA does not have the authority to impose monetary penalties administratively. See Jarkesy2022 WL 1563613 at *4 (“Public rights, the Court explained, arise when Congress passes legislation under its constitutional authority that creates a right so tightly integrated into a comprehensive regulatory scheme that the right is appropriate for the resolution of the ‘agency.”) (quoting Granfinanciera, SA c. Nordberg, 492 US 33, 54 (1989)). And, unlike the SEC, Congress has given the DEA no choice but to file the registration actions administratively. See 21 USC § 824(c)(4) (“Denial, revocation, or suspension proceedings shall be conducted pursuant to this Section pursuant to Title 5, Chapter 5, Subchapter II. Such proceedings shall be independent of, and not in lieu of, criminal prosecution or other proceedings under this subchapter or any other law of the United States.”).

4. See 5 USC § 7521(a) (allowing employment actions against ALJs “by the agency in which the administrative law judge is employed only for cause established and determined by the Merit Systems Protection Board on record after possibility of hearing before the Council.” ).

5. See Morrison v. Olson487 US 654, 663 (1988) (upholding the constitutionality of independent attorneys appointed by a special court, exercising the full powers of a prosecutor and subject to removal by the Attorney General only for cause); Humphrey’s Ex’r v. United States295 US 602, 629 (1935) (noting that the Constitution does not give the president “unlimited power of removal” over the heads of independent agencies).

6. 561 US 477, 492 (2010).

7. 140 S.Ct. 2183 (2020).

8. 141 S.Ct. 1761 (2021).

9. Lucia v. DRY, 138 S.Ct. 2044 (2018).

10. 138 S.Ct. to 2060 (Breyer, J., concordant).

11. The Supreme Court recently granted certiorari to hear an appeal from Cochran v SEC, 20 F.4th 194 (5th Cir. 2021), a case concerning the SEC’s power to remove ALJs. But the opinion below – and the question on appeal – deals only with the procedural issue of whether the challenger should await the conclusion of its administrative proceedings before bringing a constitutional challenge. The Court does not examine the merits of the case.

12. 2022 WL 1563613 at *13.

13. 141 S.Ct. to 1795 (Gorsuch, J., concordant).

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