Forgetting Appointments? – Considering the CFPB and the Overlooked Appointments Clause, Contributed by Kent Barnett, University of Kentucky College of Law
President Obama’s recent recess appointment of Richard Cordray as Director of the Consumer Financial Protection Bureau (Bureau), the newest federal agency, has focused attention on the federal appointments process. Practitioners likely overlook federal Appointments Clause issues because they dismiss them as merely theoretical concerns. But potentially invalid appointments are relatively simple to identify and can threaten, for good or ill, federal administrative action. Indeed, aside from the questionable validity of Cordray’s appointment,1 another substantial Appointments Clause issue exists within the Bureau that could lead to the invalidation of the Bureau’s actions.
The second questionable appointment surrounds the Bureau’s Deputy Director, Raj Date, whom Cordray recently appointed.2 The Dodd-Frank Wall Street Reform and Consumer Protection Act3 (Dodd-Frank Act) created the Bureau to coordinate the regulation and enforcement of federal consumer-financial-protection laws.4 The Bureau is “established in the Federal Reserve System,” an independent entity,5 as “an independent bureau.”6 Although “established in” the Federal Reserve, the Bureau has nearly complete autonomy from the Board of Governors of the Federal Reserve System (Federal Reserve).7 The Bureau’s Director heads the Bureau and has significant powers.8 One of his powers includes appointing the Deputy Director, an office that the Dodd-Frank Act expressly establishes.9 The Dodd-Frank Act does not specify the Deputy Director’s duties, but he or she “shall . . . serve as acting Director” if the Director is absent or unavailable.10
The Appointments Clause in Article II of the U.S. Constitution permits “Heads of Departments” to appoint inferior officers like the Deputy Director.11 But, as described below, the Supreme Court’s recent decision in Free Enterprise Fund v. Public Co. Accounting Oversight Board12 and its prior Appointments Clause jurisprudence strongly suggest that the Bureau does not qualify as a “department” and thus the Director cannot appoint the Deputy Director. Although a deputy director’s appointment may seem inconsequential, an invalid appointment could lead to the invalidation of the Bureau’s actions during the Bureau’s formative years.
Ultimately, by considering the Bureau’s status, this article seeks to (1) investigate the Supreme Court’s uncertain Appointments Clause jurisprudence and (2) reveal the importance of considering separation-of-powers issues, including Appointments Clause issues, when seeking to challenge or uphold agency action.
The Court’s Competing Opinions
The Appointments Clause provides how “Officers of the United States” must be appointed. The Appointments Clause’s formal requirements are not mere “etiquette or protocol”13 but instead “prevent the diffusion of the appointment power.”14 To that end, an inferior, as opposed to a principal, officer may be appointed in one of four ways at Congress’s choosing: by having a majority of the Senate consent to the President’s nominee, or by vesting an inferior officer’s appointment “in the President alone, in the Courts of Law, or in the Heads of Departments.”15
Because the Deputy Director is very likely an inferior officer,16 he must be appointed in one of the four methods under the Appointments Clause.17 His appointment by the Director can only arguably constitute an appointment by the “Hea[d] of [a] Departmen[t].”18 Two Supreme Court cases are especially relevant when determining whether the Director heads a department: Freytag v. Commissioner19 and Free Enterprise Fund.20 But these two cases (with three relevant opinions) send contradictory signals as to when an independent entity, like the Bureau, constitutes a department.
In Freytag, the Supreme Court, in a 5-4 decision, determined that the U.S. Tax Court was not a department.21 The Court identified the purpose of the Appointments Clause as mitigating the “manipulation of official appointments.”22 Distributing the appointment power to every organ within the executive branch would have undermined the “Framers’ conclusion that widely distributed appointment power subverts democratic government.”23 Accordingly, the Court reasoned that the Constitution intends only a limited set of executive entities to qualify as departments.24
To define “departments,” the Court turned to its prior decisions that had limited departments to entities that Congress had “expressly creat[ed] and giv[en] . . . the name of a department.”25 Although the Freytag majority expanded the definition of “department” by including “executive divisions like the Cabinet-level departments,”26 the majority otherwise accepted the prior decisions’ cabinet-level distinction.27 The Tax Court was neither named a department nor “like” a cabinet-level department. The majority, however, reserved the question of whether a “principal agency” that is not a cabinet-level department, such as the Securities and Exchange Commission (SEC), was a department.28
In an opinion by Justice Scalia, the four concurring justices in Freytag concluded that the U.S. Tax Court and the SEC were departments. This was because they were “free-standing, self-contained entit[ies] in the Executive Branch.”29 Nothing limited departments to “cabinet-level” agencies; neither Congress nor the Constitution determine which officers are cabinet members.30 Indeed, limiting departments to cabinet-level agencies would invalidate the appointment of many inferior officers in independent agencies because the heads of these independent agencies, not cabinet-level principal officers, appoint them.31 The concurring justices concluded that the Appointments Clause permitted principal officers, inside or outside the President’s cabinet, to appoint their subordinate officers, so that “the term ‘Departments’ means all independent executive establishments.”32
— Free Enterprise Fund
Almost twenty years later in Free Enterprise Fund the Court considered the reserved question of the SEC’s status. The plaintiffs argued that the SEC was not a department and thus that its Commissioners could not, as permitted by the Sarbanes-Oxley Act, appoint the members of the Public Company Accounting Oversight Board.33 Free Enterprise Fund adopted the reasoning of the four concurring justices in Freytag, holding that the SEC was a department.34 The Court noted that the Founders understood a department to be a “separate allotment or part of business; a distinct province, in which a class of duties are [sic] allotted to a particular person.”35 The SEC is a department because it is “a free-standing component of the Executive Branch, not subordinate to or contained within any other component.”36
The Court’s decision is not as clear as it may seem. The Court did not simply state that the SEC qualified because it was a “free-standing, self-contained entity,” as the Freytag concurring justices suggested in one portion of their opinion.37 Likewise, the Court did not say that the SEC was a department only because it was an “independent executive establishment,” as the Freytag concurring justices suggested in another portion of their opinion.38 Instead, the Court considered both independence and noncontainment, without clarifying whether each characteristic was a necessary condition for an entity to constitute a department.39 Free Enterprise Fund also failed to clarify exactly which reasoning in the Freytag concurring opinion it adopted and whether any of the majority opinion in Freytag remains good law. These ambiguities affect the Bureau and other similarly situated entities.
Is the Bureau a “Department?”
The Bureau is an exotic, but not unique, administrative creature. It is an independent establishment that rests within—yet is not accountable to—another independent establishment. The Federal Energy Regulatory Commission (FERC) is similarly situated because it is an “independent regulatory commission” that is “established within” another entity, the Department of Energy.40
These agencies’ placement within another agency may deprive them of departmental status because Free Enterprise Fund does not clarify whether both independence and self-containment are necessary for departmental status. The Bureau, for instance, is not subordinate to the Federal Reserve because, among other things, the Governors cannot appoint, direct, or remove the Bureau’s employees or officers.41 But the Bureau is nevertheless “contained within” the Federal Reserve, itself an independent, free-standing component of the Executive Branch.42 If, on one hand, a department must be both independent and self-contained, the Bureau is not a department. But if a department may be either independent or self-contained, the Bureau is more likely a department.
— The Bureau Should Be Deemed a “Department”
In my view, the Bureau’s independence from other executive components alone should render it a department. The Freytag concurring opinion strongly suggests that a putative department head’s independence from other principal officers should control his status.43 That opinion proposed that “all inferior officers can be made appointable by their ultimate (sub-Presidential) superiors.”44 That proposal makes sense. The superior officer should be able to appoint the officers that he or she supervises. In the Deputy Director’s case, the Director is a principal officer who is not subordinate to any other executive officer and, thus, should be able to appoint his deputy. The executive entity’s subordination, or the lack thereof, to another executive component should be the guidepost.
Refusing to treat the Bureau as a department merely because it is housed within another establishment (and thus not self-contained) is unjustifiable formalism. The Bureau has a specific sphere of duties in which the encasing establishment (the Federal Reserve) cannot intervene. In other words, Congress provided the Bureau a condominium within the Federal Reserve complex, but the Bureau is not beholden to the Federal Reserve merely because they share walls. Requiring Congress to create stand-alone bureaus would be a purely formal gesture that lacks constitutional compulsion and does not change the substance of the Bureau’s powers, affect any potential appointment-power dilution, or otherwise alter the Director’s power, status, or appointment.
Indeed, if self-containment were required, certain independent agencies would be denied departmental status merely because they are “established in” another executive component, despite their similarity to certain “departments.” For instance, both the Bureau and FERC would satisfy the nonsubordination criterion yet fail the self-containment criterion because they are “established in” another executive component. But other independent agencies, such as the National Transportation Safety Board (NTSB)45 and the Social Security Administration (SSA),46 with independent powers similar (if not more limited) in breadth to the Bureau and the FERC’s, would be deemed departments merely because their organic acts do not expressly place them within another executive component (such as the Departments of Transportation or Health and Human Services, respectively). It is hard to fathom why the Free Enterprise Fund Court would have sought to deny departmental status to powerful agencies like FERC, but grant it to the NTSB and the SSA.
— But the Bureau Will Likely Not be Deemed a “Department”
Despite the compelling reasons for deeming the independent Bureau a department, the Freytag and Free Enterprise Fund opinions can be read to require both independence and self-containment. First, the majority in Freytag held that its narrow definition of department was consistent with the purpose of the Appointments Clause to “prevent Congress from distributing power too widely by limiting the actors in whom Congress may vest the power to appoint.”47 Perhaps whether federal business grows or remains static, the Court feared that “holding that every organ in the Executive Branch is a department would multiply indefinitely the number of actors eligible to appoint.”48
Even the concurring justices in Freytag suggested that a department must be self-contained.49 They referred to the Tax Court as “a free-standing, self-contained entity” when deciding its departmental status50 and noted that the Court had in other decisions held that bureaus within traditional executive agencies were not departments.51 Indeed, the concurring justices conceded that the U.S. Tax Court’s predecessor, the Board of Tax Appeals, could not qualify as a department.52 The Board, like the Tax Court, was an “independent agency.”53 The distinguishing feature between the Tax Court and the Board of Tax Appeals was self-containment. The former was self-contained and thus a department,54 while the latter was not.55 And, finally, the Free Enterprise Fund Court did not simply conclude that all independent establishments or “agencies” were departments, despite the ease of doing so.56
Given the ambiguity in the Court’s decisions and uncertainty as to which portions of Freytag are good law, a significant constitutional question exists as to whether the Bureau is a department, and thus whether the Director is a department head who can appoint the Deputy Director.
If the appointment of the Deputy Director is unconstitutional, the Bureau’s actions could be invalidated. Admittedly, we cannot know the consequences of an improper appointment until we learn which powers the Deputy Director will assume. Yet, most matters in which the Deputy Director may participate—such as rulemaking, adjudicatory matters, and enforcement proceedings—would likely be called into question and perhaps even invalidated. Indeed, when invalidating the appointment of the Federal Election Commissioners in Buckley v. Valeo,57 the Court invalidated all of the agency’s powers that were executive in nature.58 Thus, the Deputy Director’s unconstitutional appointment will, at the very least, likely deprive him of prospective executive power. Moreover, although the Buckley Court provided the FEC Commissioners’ past executive actions “de facto” validity,59 the Court has suggested that the “de facto” validity doctrine may have limited future application.60
The better remedy in the context of an Appointments Clause challenge is to invalidate the actions of the improperly appointed officer. If the remedy is not invalidation, Congress or the President has little impetus to establish proper appointments—at least in the first instance. Moreover, “[t]he de facto officer doctrine is designed to address technical defects in officeholding,”61 such as clerical errors or statutory requirements.62 But if the Deputy Director’s actions, despite an unconstitutional appointment, are simply accorded de facto validity, the Appointments Clause will promptly devolve into “etiquette or protocol” for the garden party that will be the federal government. Invalidation, a material possibility and a more suitable remedy, could leave the Bureau paralyzed, especially if the Deputy Director assumes the Director’s duties during the Director’s absence.
The appointment of deputies may seem, perhaps to Congress and practicing lawyers, the stuff of minutiae and abstract technicalities. But separation of powers is more than an interesting topic for the professoriate. For both those who support and oppose regulatory action, structural concerns for agencies can be as important as substantive agency action. An improperly constituted agency may have very limited powers and no ability to enact certain or all substantive regulations. Because of the significant ramifications surrounding an invalid appointment, practicing lawyers, whether seeking to invalidate or uphold agency action, should carefully consider possible structural problems with federal administrative agencies.
Kent Barnett is Visiting Assistant Professor of Law, University of Kentucky College of Law; Assistant Professor of Law, University of Georgia School of Law (starting August 2012). For more exposition of the arguments discussed here, see Kent Barnett, The Consumer Financial Protection Bureau’s Appointment with Trouble, 60 Am. U. L. Rev. 1459 (2011).
© 2012 Kent Barnett
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