Seila Law v. CFPB Part 1: From Humphrey’s Executor to Kavanaugh’s DC Circuit Opinions

Today the Supreme Court heard arguments in Seila Law LLC v. Consumer Financial Protection Bureau, a case that will determine the constitutionality of the agency’s leadership structure. Justice Brett Kavanaugh was notably active from the bench, and had some interesting very interesting questions for the litigants.

This was to be expected, as the case involves an issue that is very close to the Court’s newest justice. In the months before then-Judge Kavanaugh’s confirmation to the Supreme Court, when asked by the Senate Judiciary Committee which of his cases he considers most significant, he put two cases involving independent administrative agencies at the top of his list. Today it was evident that Justice Kavanaugh’s enthusiasm has not faded.

Before diving into an analysis of oral arguments--and because it is particularly hard to read any tea leaves since the Supreme Court is unlikely to invalidate the entire agency in this case--it makes sense to first explore some of the context. In doing this, Justice Kavanaugh’s record is a logical guide, as a look back at his two D.C. Circuit opinions explains some of the more relevant cases and legislative history that led us to the courthouse steps today.

By way of background, in 1935 the Supreme Court carved out an exemption to existing precedent by approving independent executive agencies, specifically the Federal Trade Commission (FTC), in Humphrey’s Executor v. United States. The Court’s decision hinged on the structure it outlined of the FTC as an agency headed by multiple commissioners with staggered terms, which is the primary feature that makes it consistent with our constitutional system of checks and balances.

But there is a world of a difference between the CFPB’s structure and independent agency structure described in Humphrey’s Executor (although Justice Sotomayor seemed unable to grasp this concept during today’s arguments). Over the course of the eighty-five years since Humphrey’s Executor, executive agencies have mutated as the administrative state has run amok. These unaccountable independent agencies and the larger problem of an expanding administrative state grew out of the assumption of administrative independence born of the New Deal, combined with a judiciary prone to deference under the Chevron doctrine.

The Chevron doctrine, originating in the 1984 Supreme Court ruling Chevron v. Natural Resources Defense Council, provides that courts must defer to a federal agency's interpretation of a statute when its language is ambiguous. The doctrine allows administrative agencies to hide under the cover of statutory ambiguity to broaden the scope of their own authority and expand their regulatory reach.

Eighteen years after the Court’s decision in Chevron, Congress passed the Sarbanes-Oxley Act of 2002, which created the Public Company Accounting Oversight Board (PCAOB). The Board resided within the existing structure of the Securities and Exchange Commission (SEC). Under Sarbanes-Oxley, the Board’s members were only removable “for cause” by the SEC, whose members, in turn, were only removable “for cause” by the president. The Act essentially created a regulatory Russian nesting doll in the form of an independent agency.

Shortly after the Board’s creation, Sarbanes Oxley was challenged as a violation of the Appointments Clause of the Constitution and separation of powers in Free Enterprise Fund v. PCAOB (2008). The D.C. Circuit held that the Board’s structure was constitutional. Writing in dissent, then-Judge Kavanaugh concluded that provisions of the Act insulating the Board from the executive branch through a double for-cause removal structure violated the President’s Article II authority to supervise the executive branch.

Kavanaugh wrote that “the Act renders this Executive Branch agency unaccountable and divorced from Presidential control to a degree not previously countenanced in our constitutional structure.” Notably, his dissent warned that “upholding the PCAOB here would green-light Congress to create a host of similar entities.”

The Supreme Court ultimately agreed with Kavanaugh and reversed the D.C. Circuit. Chief Justice Roberts authored the Court’s opinion, which certainly touches on many of the issues before the Court in Seila Law v. CFPB today. Roberts, writing for the majority, expounded on Kavanaugh’s dissent:

“In a system of checks and balances, ‘[p]ower abhors a vacuum,’ and one branch’s handicap is another’s strength. (Kavanaugh, J., dissenting). ‘Even when a branch does not arrogate power to itself,” therefore, it must not “impair another in the performance of its constitutional duties.” Loving v. United States (1996). Congress has plenary control over the salary, duties, and even existence of executive offices. Only Presidential oversight can counter its influence. That is why the Constitution vests certain powers in the President that ‘the Legislature has no right to diminish or modify.’” (citations omitted)

Roberts also emphasized the novelty of the PCAOB’s structure, again quoting then-Judge Kavanaugh:

“Perhaps the most telling indication of the severe constitutional problem with the PCAOB is the lack of historical precedent for this entity. Neither the majority opinion nor the PCAOB nor the United States as intervenor has located any historical analogues for this novel structure. They have not identified any independent agency other than the PCAOB that is appointed by and removable only for cause by another independent agency.” (citations omitted)

But Congress is not easily dissuaded from innovative substitutes for legislation: only two years later it created the Consumer Financial Protection Bureau (CFPB) through the Dodd-Frank Act.

Dispensing with the typical multi-member structure that allows leaders of an independent agency to deliberate, the immense power of the CFPB is concentrated in a single director at the top who can only be removed for cause by the President. Dodd-Frank further removed the CFPB from Congressional review by giving it independent funding through the Federal Reserve rather than through the traditional process of Congressional appropriations.

Dissenting again from the D.C. Circuit's holding in PHH Corp. v. CFPB (2018), Kavanaugh found that this structure violates the separation of powers, noting that independent agencies “pose a significant threat to individual liberty and to the constitutional system of separation of powers.”

That separation most certainly does not allow a regulatory behemoth that is insulated from Congressional oversight, judicial review, and executive authority.

To Be Continued...