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Abstract
Formal agency adjudication reserves the final decision-making authority to the political leadership of the agency. Many organizations and watchdogs have taken issue with how political officials render decisions akin to appellate judges over disputes of their own policy. As certain agencies accumulate more power for their political leaders, they reserve less decision-making authority and discretion to their administrative law judges.
Administrative law courts (ALC) are quasi-judicial tribunals housed within many executive departments and independent agencies. In recent years, federal courts have ruled against the adjudicatory process of many ALCs, the improper appointment of administrative law judges (ALJs), and denial of jury trial access.
A future constitutional issue that courts may address is the role of Senate-approved political officials overseeing adjudication. In adjudication, ALJs render the initial decision on a legal dispute for their agency. The initial decision typically rests as the final decision on the matter unless appealed by either side.
Administrative process means that political officials have the final say over an ALJ’s initial decision whenever it is appealed to them. While this seems like a straightforward process, there are a number of concerns over political officials acting as unappointed judges over adjudicated matters. We explore some of these concerns below.
In June, the US Supreme Court’s decision in Jarkesy v. SEC restored the Seventh Amendment right to a jury trial whenever the Securities and Exchange Commission (SEC) imposed civil monetary penalties. This reversed 40 years of the SEC’s internal court being the exclusive forum for reviewing monetary sanctions against financial actors. The SEC began reviewing sanctions under the Insider Trading Sanctions Act of 1984, during a time when Congress increasingly afforded other agencies with similar statutory authority.
In 2010, the Dodd Frank Act expanded the SEC’s ability to impose civil penalties in-house before an ALJ. Jarkesy not only reversed that but may produce a cascading effect on the many other agencies that adjudicate similar sanctions.
Last spring, in Axon v. FTC (2023), the Supreme Court provided relief to private parties that feel trapped in the SEC and Federal Trade Commission’s (FTC) adjudicatory process. Private litigants no longer need to spend time and capital challenging an administrative agency within its own tribunal; they can instead raise collateral challenges directly in Article III courts.
The Supreme Court has also designated ALJs as inferior officers in SEC v. Lucia (2018). This required ALJs to be properly appointed by the President, head of the agency, or an Article III court, in accordance with the Constitution.
As the above examples and a number of ongoing cases in lower courts show, the judicial branch is signaling that the original design of formal agency adjudication conflicts with constitutional processes and protections. Traditionally, the focus has been on challenging agency control of ALJs and the unfair denial of private rights within administrative tribunals.
The next frontier of reform may challenge the authority of agency officials rendering the final say over ALJ decisions.
In addressing the issue, the Administrative Conference of the United States (ACUS) recently issued a set of recommendations regarding the proper role of Senate-approved officials in adjudication. In most adjudications, the ALJ renders an initial decision, while the agency’s commissioners, secretary, or appointed judicial officer reserves the final decision for appeals.
Congress intended for the agency’s leadership to oversee legal challenges involving their rules and regulations. However, some agencies, including the SEC, FTC, Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and the National Labor Relations Board (NLRB or “Board”) seem to have taken this political oversight authority even further.
SEC commissioners resolve more adjudication than its own ALJs
Among all ALCs, the SEC seems to face the most consistent opposition in federal court. As previously covered, an overlooked issue with the SEC’s ALC is that its five commissioners reserve the right to “force appeals” for cases that neither side sought to appeal. Commissioners occasionally feel they need to revise or build upon an ALJ’s initial order. In rarer instances, commissioners may seek to overturn and reverse an ALJ’s opinion entirely if it was formed against the agency’s interests.
An example of this can be seen here, where the SEC’s commissioners decided to appeal a case to themselves in order to remove several institutional bars imposed on the respondent by the ALJ. The commissioners otherwise left in place the rest of the ALJ’s opinion. This commissioner-led appeal has been used more frequently since 2015, often as a means of providing some relief from Dodd Frank’s permanent bars on guilty litigants from practicing as registered financial advisors.
This mechanism enables the commissioners to examine an ALJ’s initial decision that neither the SEC attorneys nor the private litigant felt the need to pursue further. In forcing the appeal, SEC commissioners reserve the right to overturn or expand upon the initial ruling, overriding the discretion of both sides involved.
Another issue is in how the commissioners appear to be taking the reins of adjudication away from their ALJs. They do so by initiating and resolving the majority of adjudication on their own, rather than waiting for the SEC’s Enforcement team to present the cases before an ALJ. Especially since 2020, the annual number of ALJ decisions has plummeted year after year, while the proportion of commissioner decisions have skyrocketed during the same period.
Figure 1.
Most of these commissioner-led cases pertain to the revocation of registered securities from financial firms. In adjudication, the ALJ is traditionally the first one to review cases, while the commissioners review appeals. The SEC’s system twists this dynamic when it bypasses ALJ review. Such an issue highlights a lack of procedural due process, as Congress intended for ALJs to serve as adjudicatory officers. SEC commissioners already authorize the rules being adjudicated and vote to initiate most adjudication. Now they represent the default adjudicatory body at the SEC, while the relevance of their ALJs becomes more diminished over time.
FTC Reduces ALJ Powers
The FTC faced controversy when it issued a 2023 rule that reduced an ALJ’s decisions to mere non-binding “recommendations,” with the ultimate decision left to the commission. This came on the heels of the FTC’s adjudicatory winning streak being snapped, as the agency suffered two back-to-back losses for the first time in 25 years. This followed after the Chief ALJ’s pair of rulings against the FTC in the Altria/Juul Labs and Illumina-Grail matters.
The diminishment of ALJ authority may expose the FTC to greater legal challenges. Presently, Meta is suing the FTC in federal district court regarding the constitutionality of its ALC and the bias of the agency’s commissioners during adjudication. The Meta case was originally put on hold pending the outcome of Jarkesy and may resume soon, given that Jarkesy only resolved the jury trial question. The FTC’s tighter control over its ALJs further reinforces the arguments of unfairness that Meta raises.
This tightening of control by the political leadership at the FTC over ALJ decisions touches on a key issue raised in the ACUS report. Specifically, Chris Walker, a Senior Fellow at ACUS, argues in the report that “although the Administrative Procedure Act allows the agency head to preside over an evidentiary hearing, that is not—and should not be—the norm. The standard model for agency adjudication has two key structural features: the possibility of a final decision by a politically accountable agency head, as noted above, and an initial hearing and decision by a decisionally independent, tenure-protected agency adjudicator.”
The ACUS promotes recommendations that favor the latter and not the former. Recommendation #1 of their report encourages federal agencies and departments to appoint independent adjudicators (i.e., a “judicial officer”) to render decisions absent the involvement of any political officials that already govern the agency. This recommendation also directly implicates the SEC’s commissioners’ proclivity to issue initial decisions in absence of their ALJs, as discussed earlier.
CFPB Director's Centralized Authority
Like the FTC’s commissioners, the CFPB’s director reserves the right to review every ALJ recommended decision. This arguably places too much authority on one individual, acting in place of a panel of judges. Despite being an independent agency, the CFPB’s one-person appeals body resembles the ALCs in many executive branch departments, where appeals are also resolved by one secretary or administrative director.
Last year, the CFPB adopted a rule that updated its policies for adjudication. Many of the changes from the rule were intended to reflect district court proceedings. Some changes, however, empower the Director beyond what a federal appeals judge could do. One instance of this is the Director’s discretion to consider unpreserved arguments.
In regular court, if a party lost and appealed their case, the appellate court could only consider arguments that were preserved in the record. In the CFPB’s court, the Director can review arguments raised extemporaneously (beyond the facts of the case). This is more likely to favor the CFPB given how the two cases that ever reached an ALJ were initiated by the agency against the private party and concluded in settlement orders. All other matters were settled under the CFPB’s mediated terms without ever going before an ALJ. This is significant because most of these disputes entail hefty civil monetary penalties brought by the agency against private firms.
To this point, the ACUS report generally recommends (see #11) against the consideration of unpreserved arguments in adjudication. Specifically, they assert that political officials adjudicating matters should not consider new evidence or legal issues unless they are material to the outcome of the case or if it “is necessary to clarify or establish agency policy or law.”
Despite this advantage, the presumption is that every federal agency, including the CFPB, can no longer impose monetary penalties through adjudication as a result of the Jarkesy decision. Rather than being adjudicated by an ALJ or the CFPB Director, such penalties must be processed before Article III jury trials. Jarkesy provides an important avenue of relief, as political officials can no longer reserve the final say over monetary penalties that their subordinates (agency attorneys) pursue against private parties. The Constitution reserves this authority to Article III judges and an accompanying jury.
The ACUS’s recommendation #6 rejects the tendency of agencies like the CFPB and FTC to oversee every ALJ recommended decision. Instead, the ACUS recommends that Senate approved officials only take up ALJ opinions sparingly. Rather than routinely adjudicating cases of fact, agency officials should only intervene in adjudication when it introduces a novel area of policy or when there is a high likelihood that the ALJ erred in their initial reasoning. Most agencies with diminished ALJ decisionmaking fail to conduct such careful scrutiny.
OCC and CFPB share conflict of interest with the FDIC
A glaring issue with the FDIC’s oversight of ALJ decisions lies with the composition of its board. While the agency’s five-person board can review and finalize ALJ decisions, one of its board members, Michael J. Hsu, is simultaneously the Director of the OCC. This means that Hsu can unilaterally manage OCC adjudication while also adjudicating FDIC matters. Hsu renders the final say in all ALJ decisions involving OCC issues.
This raises a worrisome predicament, since financial regulators like the CFPB and FDIC occasionally issue policy that is conjoined or regulates conduct from the same firms. Particularly with the OCC and CFPB, both are tasked with supervising and regulating banks chartered in the U.S.
The CFPB guarantees that its ALJs are “independent, impartial triers of fact.” By contrast, the CFPB Director, Rohit Chopra, oversees ALJ decisions and carries a vote among the five-panel FDIC board. Chopra may feel inclined to render final opinions that are preferential to both the administrative interests of the CFPB and FDIC (and vice versa with Hsu overseeing the OCC). This raises a potential conflict.
The 2024 ACUS report questions whether such Senate approved officials should possess special oversight in adjudication.
In particular, ACUS recommendation #14 seeks to ensure ethical standards are upheld during adjudication, while averting potential conflicts of interests. This applies to the FDIC’s conflicted oversight in adjudication, which undermines the stated “integrity of the decision-making process,” as the directors of other agencies (OCC and CFPB) should recuse themselves from adjudicating for the FDIC.
Additionally, the FDIC ensures that it retains power in administrative proceedings by not granting its ALJs the power to issue rulings themselves. Instead, the first step in the FDIC’s administrative proceedings is conducted through the Office of Financial Institution Adjudication (OFIA).
OFIA also presides over administrative enforcement proceedings that emerge from the OCC, the Board of Governors of the Federal Reserve System, and the National Credit Union Administration.
When resolving an FDIC dispute, the OFIA issues a “recommended decision” which the FDIC can then entirely reject, revise, or uphold. This framework ensures that the FDIC’s political board maintains more power than an independent tribunal—OFIA, which cannot issue final decisions. This framework raises the question of how can appeals of ALJ decisions receive a fair outcome.
NLRB blends powers and tampers with ALJs
The NLRB has faced an array of legal challenges to its ALC. Currently, the NLRB is disputing a suit brought by SpaceX, Trader Joe’s, and Amazon arguing that the agency’s adjudicatory structure is unconstitutional. The political oversight authority of the Board has also raised a number of problems. The companies argue that the Board can unconstitutionally “exercise executive, legislative, and judicial power in the same administrative proceeding.”
One of the special statutory advantages that the Board reserves in adjudication is to have its clerk review the draft opinion of an ALJ and potentially make changes. This is highly controversial, given that the Board already retains the right to decide appeals from the ALJ employed at the agency. As with other agencies, the NLRB may lose its ability to impose monetary sanctions on private parties in-house as a result of Jarkesy. The Board’s supreme authority over adjudication remains an unchecked issue of concern.
Conclusion
The political control that agency officials wield over their ALCs and ALJs post notable constitutional concerns. Some of these concerns have been remedied by the Supreme Court’s recent opinions in Jarkesy and Axon, but there has yet to be a case directly challenging the political review of adjudication.
Various Supreme Court precedent, including Hayburn's Case (1792), suggests that matters of judicial power cannot be subordinate to political review. That is to say, an executive or legislative body cannot subsequently review judicial decisions. The same logic should apply to ALCs.
Another important and more recent Supreme Court case, Butz v. Ecomou (1978), established that ALJs must enjoy decisional independence and protection from political control by other officials at the agency. In specific, the Court majority ruled that:
“In light of the safeguards provided in agency adjudication to assure that the hearing examiner or administrative law judge exercises his independent judgment on the evidence before him, free from pressures by the parties or other officials within the agency, the risk of an unconstitutional act by one presiding at the agency hearing is clearly outweighed by the importance of preserving such independent judgment.”
Despite the above recognition, agencies like the SEC, FTC, CFPB, FDIC, and NLRB have expanded their political control over adjudication in a manner that significantly undermines judicial fairness. They also come into potential conflict with Supreme Court precedent against political review of judicial decisions and protections to ALJ independence.
As Mark Chenoweth, President of the New Civil Liberties Alliance, warned in his recent testimony before the House Judiciary subcommittee, “If judicial power really can be placed in ALJs, then it cannot be reviewable by non-judicial political commissioners. The exercise of judicial power at these agencies is therefore inconsistent with the text of the Constitution on five separate grounds.”
The five grounds that Chenoweth explores in his testimony are:
- Congress cannot delegate judicial power that it lacks to agencies
- The Constitution vests judicial power mandatorily to Article III courts
- The Constitution permits Congress to recognize judicial power exclusively for one Supreme Court and subsequent inferior courts
- The executive branch is limited to executive functions under the vesting clause of Article II
- Judicial review may not be subordinated by political review.
Recommendations for Reform
Executive agencies should not subordinate judicial power to political review. While the ACUS report issued many recommendations on how agencies should adopt practices for the participation of Senate-approved officials in adjudication, it stopped short of questioning how their participation may undermine ALJ independence or judicial review. Future legal challenges over the political control of ALJs may invoke Hayburn and Butz precedent to resolve these issues.
Recommendation #17 from the ACUS report properly advances the need for political officials to delegate decision-making authority to adjudicatory officials within the agency that are better suited to manage certain cases. Currently, only a fraction of agencies appoint judicial officers to render the final say in adjudication, rather than the political leadership of the agency.
One example is the Secretary of Agriculture appointing a Judicial Officer to preside over ALJ decisions, rather than the Secretary presiding over the decisions. We also see this within the Department of Housing and Urban Affairs cases, where the Secretary appoints a designee, known as the “Secretarial Designee.” The designee renders the final say in all appealed Fair Housing Act and program fraud civil remedy cases.
This design ensures a healthier separation between political officials focused on enforcing policy and adjudicators focused on deciding legal matters, which aligns with the end goal of recommendation #17.
This also resolves the problem of non-attorneys rendering legal decisions in agency matters. Many department heads, commissioners, and other officials render final legal decisions through adjudication without possessing any formal legal experience or license to practice law. Appointing separate judicial officers in units detached from the political class of the agency and who possess some degree of legal training may assuage this issue.
Another area of reform should be to ensure that only the agency’s enforcement team, and not the commissioners or secretary, can initiate adjudication. If these political officials serve as a de-facto appeals court for adjudicating agency disputes, they should not also have the authority to launch suits against the parties that are involved in adjudication. The power to prosecute should remain with the agency’s enforcement team and not the political leaders rendering the final say in adjudication.
Lastly, agencies should not have the authority to reduce ALJ decisions to “non-binding” recommendations. This undermines the intent of the Administrative Procedure Act to ensure that ALJs retain their independence as adjudicators, and to prevent the agencies they serve from exercising judicial review. When the political leadership of the agency can determine the outcome of formal adjudication, as is the case at many agencies, ALJ authority becomes fully subordinated to political review. ACUS recommendation #6 speaks out against political officials overseeing every ALJ decision.
Administrative adjudication should become better aligned with Article III judicial review, unburdened by the involvement of Senate-approved political officials. Similar to the separation of powers in the federal government, ALCs should be separated from those who preside over the executive and quasi-legislative functions of the agency. This may ensure a greater degree of fairness for the private parties involved.