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Administrative law judge selections on trial



The issue of the constitutionality of the administrative law judges frequently used by the Securities and Exchange Commission — and also by numerous other federal agencies — to adjudicate issues is expected to be considered by the U.S. Supreme Court in light of a recent appeals court ruling.

A decision from the 10th U.S. Circuit Court of Appeals in Denver says the five administrative law judges working for the SEC are “inferior officers” under the Constitution and therefore fall under its Appointment Clause, which means they should have been appointed by the president, a court or a department head.

Instead, administrative law judges are hired through a merit selection process administered by the Office of Personnel Management, according to the Dec. 27 ruling in David F. Bandimere v. United States Securities and Exchange Commission.

The case had been filed by Mr. Bandimere, a Colorado businessman who was charged by the SEC with violating various securities laws, according to the ruling.

An SEC administrative law judge presided over a trial-like hearing, according to the ruling. The judge’s initial decision concluded Mr. Bandimere was liable and barred him from the securities industry, among other actions, according to the ruling. 

The SEC reviewed the initial decision and reached a similar result. Mr. Bandimere filed a judicial petition for review in which he raised the Appointments Clause issue.

“As the SEC acknowledges, the (administrative law judge) who presided over Mr. Baldimere’s hearing was not appointed by the President, a court of law, or a department head. He therefore held his office in conflict with the Appointments Clause when he presided over Mr. Baldimere’s hearing,” said an appeals court panel in its 2-1 ruling.

The dissenting opinion said the ruling “carries repercussions that will throw out of balance the teeter-totter approach to determining which of all the federal officials are subject to the Appointments Clause” and the “probable consequences are too troublesome to risk without a clear mandate from the Supreme Court … I worry that it has effectively rendered invalid thousands of administrative actions.”

The 10th circuit ruling conflicts with an August 2016 ruling by the U.S. Court of Appeals for the District of Columbia Circuit in Raymond J. Lucia Companies Inc. and Raymond J. Lucia v. Securities and Exchange Commission, which held the appointments are constitutional.

An SEC spokesman had no comment on the issue.

Many experts believe this is an issue that will eventually be heard by the U.S. Supreme Court because of the circuit split. Barring a narrow ruling, a decision could have potentially widespread consequences given that many other federal agencies, including the Equal Employment Opportunity Commission, National Labor Relations Board, Federal Reserve Board and Federal Deposit Insurance Corp., also use administrative law judges, experts note.

Sources say also it is unclear at this point what position the SEC is likely to take on the issue under the Trump Administration.

Sarah A. Good, a partner with Pillsbury Winthrop Shaw Pitman L.L.P.  in San Francisco, said Mr. Baldimere’s attorneys “have made really excellent arguments that administrative law judges have not been appointed in compliance with the Appointments Clause.”

“In particular, looking at the reality that 95% of the administrative law judges’ decisions are undisturbed on appeal to the entire commission, I think there are certainly very good arguments advanced that this is violative of the Appointments Clause.”

Ms. Good said, “There’s been a lot of public outcry within the past few years as the SEC has increased its use of administrative law judges that having the same commission decide who to prosecute, and having their judges decide the outcome of those proceedings, and having the first appeal going back to the commission itself, is an inherently flawed and unfair process.”

“I would be very surprised if this does not get resolved at the Supreme Court level,” said Holly Stein Sollod, a partner with Holland & Hart L.L.P. in Denver.  She said also, though, because it was not a unanimous opinion the SEC may first seek an en banc hearing on the issue.

If it does reach the high court a ruling will ultimately depend upon who gets appointed to the vacant seat, said Joshua Horn, a partner with Fox Rothschild L.L.P. in Philadelphia.

Blake L. Osborn, a managing associate with Orrick, Herrington & Sutcliffe L.L.P. in Los Angeles, said, however, he is unsure how soon the Supreme Court will consider the issue. “The Supreme Court may wait for another circuit, or a few other circuits, to weigh in” before hearing the issue, he said. 

Another uncertainty is the Trump Administration’s position on the issue. The administration may be in favor of reducing administrative courts’ dockets, but “it’s too early to tell ultimately” what it will do on this issue, Mr. Osborn said.

Experts also say, as discussed in the 10th Circuit dissent, that if the Supreme Court does declare the administrative law judges’ selection unconstitutional, it could result in a chaotic situation because of the many cases in which these officials have already ruled.