Seila Law—What Will Happen Next
Andrew J. Pincus, Mayer Brown LLP
The Supreme Court’s decision last week in Seila Law LLC v. Consumer Financial Protection Bureau resolves a decade-long controversy about the constitutionality of the Consumer Financial Protection Bureau’s single-director structure. The Court held that “the CFPB’s leadership by a single individual removable only for inefficiency, neglect, or malfeasance violates the separation of powers.” (The Court’s constitutional analysis largely paralleled the approach advocated in the Chamber’s amicus brief.)
Seven Justices concluded that the proper remedy for this constitutional violation was to sever the removal restriction—which has the effect of allowing the President to remove the CFPB Director at will—and leave the rest of the statute in place.
While the Court’s decision resolves the constitutional question, it moves into the spotlight two other important issues:
- the validity of all of the prior actions by CFPB directors—approving investigations, instituting enforcement actions, and promulgating regulations; and
- the possible congressional response to the Court’s decision.
Validity of Prior CFPB Actions
Supreme Court precedent makes clear that a government official’s acts are invalid when the official is appointed in violation of the Constitution or the agency is unlawfully constituted. See, e.g., Lucia v. S.E.C., 138 S. Ct. 2044 (2018). And parties who have preserved that argument in pending litigation—or can bring a new lawsuit under the relevant statute of limitations—are generally entitled to relief in the form of invalidation of the challenged agency action.
The Supreme Court did not resolve the specific dispute in Seila Law, which involves a challenge to the enforceability of a civil investigative demand (“CID”) issued by the Bureau. The Bureau argued in the lower courts that even if the limits on removal of the director were unconstitutional, the CID was enforceable because it had been ratified by a director subject to removal by the President at will—Acting Director Mulvaney. (Because Mulvaney was appointed by the President in an “acting” capacity, the President could replace him at will with another eligible official.)
Chief Justice Roberts’ opinion on this point, speaking for a plurality of the Court, observed that the ratification argument “turns on case-specific factual and legal questions not addressed below and not briefed here.” The Court left those questions to be addressed on remand.
Ratification questions have frequently arisen in the wake of prior court decisions holding that government officials had been appointed in violation of the Constitution. Some courts have applied a multi-part test, upholding ratification if the agency had the power to take the action at the time of the initial action, and the ratifying official:
- had the power to take the action at the time of the ratification—for example, there was no statute of limitations or other similar barrier;
- had full knowledge of the decision to be ratified; and
- undertook a full evaluation of the merits of the decision before ratifying it.
E.g., Wilkes-Barre Hosp. Co., LLC v. NLRB, 857 F.3d 364 (D.C. Cir. 2017). All of the appellate decisions, however, involved decisions relating to enforcement actions. None involve ratification of a decision to promulgate a rule.
CFPB Rules and Enforcement Actions
There are significant arguments disfavoring ratification in the rulemaking context—given the forward-looking nature of the rulemaking process and the broad applicability of promulgated rules. Certainly, at a minimum, it would be much more difficult for an agency official to satisfy the ratification standard given the extensive rulemaking record and the need for the official to certify that he or she has fully evaluated the merits of the underlying decision.
That is particularly true with respect to the CFPB. Virtually all of the Bureau’s rules were approved by directors who were subject to removal at will by the President. Administrative Procedure Act challenges are subject to a six-year statute of limitations (see 28 U.S.C. § 2401(a)), and remain subject to challenge beyond that period in the context of an enforcement action. Director Kraninger would have a mountain of work in front of her if she plans to ratify all of those decisions.
Another alternative might be to re-issue these rules as interim final rules, with a 30-day comment period. The need for stability could satisfy the “good cause” standard required for issuance of interim final rules (see 5 U.S.C. § 553(b)(3)(B)). And the additional process would insulate those rules against the uncertainty of the legal challenges that inevitably would accompany a blanket ratification.
Even with respect to enforcement-related decisions, to the extent the Mulvaney ratification was a general statement that did not indicate that the Acting Director had in fact examined the underlying decisions being ratified, his ratification could well be invalid. It will be interesting to see whether Director Kraninger undertakes a more detailed ratification of those acts—as well as whether she attempts to ratify her own enforcement decisions.
Possible Congressional Reforms
The single-director approach was not the first choice of those who created the CFPB. The Obama Administration’s proposal contemplated a multi-member commission; and the bill passed by the Democratic-controlled House of Representatives made the single-director structure temporary—it specified that a multi-member Commission would replace the director thirty months after the law’s enactment.
The structure resulting from the Supreme Court’s decision tilts decidedly in favor of the President: he can remove the director at will, thereby exercising plenary power over all of the director’s actions.
The President’s at-will removal power creates tension with other aspects of the statutory structure. For example, the Bureau is also expressly exempt from “any jurisdiction or oversight” by the Office of Management and Budget. 12 U.S.C. § 5497(a)(4)(E). And the Director is specifically empowered to provide “legislative recommendations, or testimony, or comments on legislation” to Congress without prior review by “any officer or agency of the United States.” Id. § 5492(c)(4). But what if the President directs the Bureau to submit rules, testimony, and her plans regarding the Bureau’s budget to OMB review—and threatens to remove a director who fails to comply?
Congress, by contrast, has few checks once the single director is confirmed—the Bureau is outside the appropriations process, funded based on a demand by the director to the Federal Reserve. And the director serves for a five-year term.
Congress could well decide that adopting a multi-member commission structure, and subjecting the Bureau to the appropriations process, is necessary to provide an appropriate level of congressional influence over the agency—balancing the President’s influence under the structure resulting from the Court’s decision.
NOTE: Shortly after this analysis was posted, the CFPB Director issued a “Ratification” of “the large majority of the Bureau’s existing regulations, as well as certain other actions.” That document states that “[t]he Bureau is considering whether ratifications of certain other legally significant actions by the Bureau, such as certain pending enforcement actions, are appropriate. Where that is the case, the Bureau is making such ratifications separately.”
Andrew J. Pincus is a partner in the Washington, DC office of Mayer Brown LLP.