The Supreme Court has agreed to hear another case addressing the extent to which administrative agencies can and should exercise power independent of meaningful supervision. In Consumer Financial Protection Bureau v. Community Financial Services Association of America, Ltd., No. 22-448 (cert. granted Feb. 27, 2023), the Court will consider the constitutionality of the funding structure of the Consumer Financial Protection Bureau (CFPB), an independent regulatory agency of the U.S. Government. Specifically, the Court will be asked to decide whether the Appropriations Clause of the Constitution, which requires an appropriation before funds may be "drawn from the Treasury," allows Congress to fund an independent regulatory agency outside of the congressional appropriations process.
A basic principle of our constitutional system is its division of government functions between three separate and co-equal branches: the legislative, executive, and judicial. This separation of powers is a key element of the checks and balances that are essential to ensuing fairness in the exercise of governmental power. As Madison observed in THE FEDERALIST NO. 48, the accumulation of the legislative, executive and judicial powers in the same hands might justly be described as the "very definition of tyranny."
Administrative agencies, sometime referred to as the fourth branch of government, operate in tension with separation-of-power principles. This is particularly true of regulatory agencies. When performing regulatory functions, regulatory agencies typically exercise all three functions of government – they "legislate" through rulemaking authority, they "execute" by investigating and enforcing the laws within their purview, often implemented by their own rules, and they "adjudicate" those controversies, effectively "fill[ing] in for the district court." Axon Enterprise, Inc. v. Federal Trade Commission, 598 U.S. --, 143 S. Ct. 890, 900 (2023).
To justify this aggregation of functions in regulatory agencies, the three constitutionally-constituted branches of government must provide effective and meaningful supervision of these agencies' activities. The Administrative Procedure Act, which provides procedural structure to administrative rulemaking, adjudications, and licensing activities, should not be the sole source of that supervision.
In recent years, the Supreme Court has taken steps to place limits on the independence of regulatory agencies. It formalized the major questions doctrine, a principle of statutory interpretation that limits the deference normally afforded a regulatory agency in the interpretation of its statutes when major questions of national interest are involved, in West Virginia v. Environmental Protection Agency, 597 U.S. --, 142 S. Ct. 2587 (2022) (relying on major questions doctrine to invalidate global warming program and limit EPA's ability to regulate greenhouse gas emissions). It unanimously upheld the right of litigants to bring collateral attacks on the constitutionality of administrative proceedings in federal court, without having first to exhaust the administrative process, in Axon Enterprise, Inc. It also recently granted review of a case challenging Chevron deference, a decades-old precedent that gives federal agencies deference in rulemaking if the rule is based on a permissible construction of an ambiguous statute. Loper Bright Enterprises v. Raimondo, No. 22-451. Chevron deference, as a standard of review, affords agency decision-making substantial deference when the agency is regulating as to an ambiguous statute and the agency's interpretation is reasonable. The principle, at its core, limits the judiciary's ability to supervise adjudicative activities of administrative agencies by promoting an agency's preferred interpretation of a law over a court's power to determine "what the law is." Loper, invites the Court either to overturn Chevron or to clarify whether and how Chevron applies when a statute is silent with respect to the specific issue that is the subject of agency regulation. A reversal of the D.C. Circuit's decision in Loper would further limit the instances in which courts defer to agency decision-making.1
These cases are not alone in raising concern about the extent of the independence of the administrative agencies. More than twenty years ago, in a case argued by Thompson Coburn attorneys, the Court addressed the question whether principles of state sovereign immunity applied to administrative proceedings in South Carolina State Ports Authority v. Federal Maritime Commission, 535 U.S. 743 (2002). Oral argument focused an admittedly "uneasy constitutional area"—what limitations and protections attach to the exercise of regulatory power by executive agencies. The Court's 5-4 decision found that state sovereign immunity protects states from having to answer to private citizens in agency adjudicative proceedings, just as it does in federal court, effectively confirming that the same constitutional protections apply to administrative proceedings.
Now, having granted certiorari in Consumer Financial Protection Bureau v. Community Financial Services Association of America, Ltd., the Court will consider the constitutionality of the CFPB's financial independence from Congress. Established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB is charged with implementing and enforcing federal consumer financial laws and restricting unfair, deceptive, or abusive acts or practices against consumers. Like many other regulatory agencies, the CFPB engages in rulemaking, enforcement, and adjudicatory activities – a trifecta of functions the Founders believed should not be consolidated in the same hands. The CFPB's activities, however, go one step further. The agency determines its own budget without congressional appropriation and obtains that funding from excess user fees collected by the Federal Reserve (another agency that does not receive direct congressional appropriations). The Fifth Circuit held that the CFPB's funding mechanism violated the Appropriations Clause of the Constitution, even though CFPB's funding was not "drawn" from the United States Treasury, because Congress was not in direct or indirect control of the funding (i.e, Congress did not set the agency's budget and also did not control, through the appropriations process, the funding from which the CFPB's budget is paid).2 The case will provide the Court an opportunity to grapple with the broader question of the degree to which Congress can exempt a regulatory agency from its supervision under the Constitution and the implications of relying on the Appropriations Clause, as interpreted by the Fifth Circuit, to further constrain independent regulatory agencies.
The Court also may have the opportunity to consider a counterpoint to the Fifth Circuit's reasoning if certiorari is sought and granted in Consumer Financial Protection Bureau v. Law Offices of Crystal Moroney, P.C., No. 20-3471 (2nd Cir. Mar. 23, 2023). Decided just weeks after the Court granted certiorari in the Fifth Circuit case, the Second Circuit declined to follow the Fifth Circuit. Instead, it held that the CFPB's independent funding mechanism does not violate the Appropriations Clause of the Constitution, because all that is required to comply with the Appropriations Clause is an explicit funding authorization from Congress, which Congress provided to the CFPB when it enacted the Consumer Financial Protection Act.
These cases raise questions about Congress's ability to delegate its legislative function in agency rulemaking without retaining supervision via the appropriations process and the degree to which regulatory agencies should be allowed to "interpret the law" without meaningful supervision by the judiciary. However the Court addresses these questions in the cases before it, it would appear that no regulatory agency should be able to exercise legislative, executive, or judicial powers without effective supervision by the branch of government entrusted with those powers in the Constitution.
The co-chairs of the Firm's Supreme Court practice, Warren Dean and Katie Kraft, together with the co-chairs of the firm's Appellate Practice, Booker Shaw and Douglas Lang, contributed to this commentary.
Footnotes
1. More recently, in Sackett v. Environmental Protection Agency (No. 21-454), without even a mention of Chevron, the Court declined to defer to the EPA's interpretation of the meaning of "waters of the United States" in the Clean Water Act because, in part, the EPA could not point to "clear congressional authorization" to support its interpretation. 598 U.S. – (2023).
2. While the Fifth Circuit's decision limits its conclusion to the CFPB's funding mechanism, its reasoning may raise questions about the similar funding mechanisms for agencies like the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Federal Reserve. However the case is resolved, it is clear that different considerations should apply to the extent these agencies perform functions that are not regulatory in nature.
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