The U.S. Supreme Court (the "Supreme Court") ruled that the SEC practice of hiring administrative law judges ("ALJs") was unconstitutional. In Lucia v. SEC, the Supreme Court overturned a D.C. Court of Appeals ruling and determined that ALJs are "Officers of the United States" ("Officers") and therefore subject to the Appointments Clause of the Constitution. Under the Appointments Clause, Officers must be appointed "by the President, the head of a department, or a court of law."

The Supreme Court relied on its previous decision in Freytag v. Commissioner, which held that special trial judges ("STJs") of the U.S. Tax Court were Officers because they (i) held a continuing office established by the law, and (ii) exercised significant discretion when carrying out "important functions." The "important functions" relied on by the Court in Freytag included "tak[ing] testimony, conduct[ing] trials, rul[ing] on the admissibility of evidence, and hav[ing] the power to enforce compliance with discovery orders." In Lucia, the Court concluded that the SEC's ALJs performed the same functions as STJs and, therefore, were Officers and subject to the Appointments Clause.

In order to "cure the constitutional error," the Supreme Court ordered a new hearing before a properly appointed ALJ. The Court declined to address whether the SEC's recent ratification of its ALJs resolved the constitutional problems with their appointment.

The Opinion was written by Justice Kagan and joined by Justices Roberts, Kennedy, Thomas, Alito and Gorsuch. Justice Thomas wrote a concurring opinion joined by Justice Gorsuch, and Justice Breyer wrote a concurring opinion partially joined by Justices Ginsberg and Sotomayor. Justice Sotomayor wrote a dissenting opinion joined by Justice Ginsberg.

Commentary / KyleDeYoung

While the Supreme Court's holding that the SEC's ALJs are inferior officers and subject to the Appointments Clause was expected, the decision still leaves some uncertainty for the SEC. Although the Court declined to address the issue, the decision gives the SEC little comfort that its recent ratification of ALJs was sufficient to cure the constitutional error in their appointment. This uncertainty, combined with the Court's requirement that Lucia's rehearing must take place before a different ALJ or the Commission itself, leaves the SEC with important decisions to make on how it wants to proceed with pending and future administrative proceedings.

Commentary / Jodi Avergun

The Lucia decision presents uncertainty for the more than 100 other ALJs who conduct adversary hearings on behalf of their agencies and who were selected in the same manner as the SEC ALJs.

Prior resolutions by agencies as varied as the Drug Enforcement Administration and the Federal Energy Regulatory Commission are likely tainted by illegal appointments as well.

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