Federalism: whose law is it anyway. Schor is really about the delegation of authority to decide state law. As Justice O’Connor observed “The counterclaim asserted in this litigation is a ‘private’ right for which state law provides the rule.” Note that Conti’s action in a federal [Article III] court was in diversity. That means that the law, due to the Erie doctrine, would have been state law. Note also that she compares the jurisdiction granted the CFTC to what is now called “supplemental” jurisdiction (former pendent and ancillary jurisdiction). Supplemental jurisdiction empowers federal courts to decide state law related to a federal case. Should Congress be allowed to delegate to a federal agency the power to decide state law? Does such a delegation violate the very fundamental constitutional guarantee of a federal form of government?
4.a. Making hard-to-remove principal officers into easy-to-remove inferior officers. In Intercollegiate Broadcasting System, Inc. v. Copyright Royalty Board, the D.C. Circuit concluded that Copyright Royalty Judges (CRJs) are, as defined by statute, principal officers, and, as such, could not be constitutionally appointed by the Librarian of Congress. 684 F.3d 1332 (D.C. Cir. 2012). Rather than toss out the entire CRJ scheme as unconstitutional, the court instead transformed them into inferior officers by making them easier to remove. Id. at 1340 (relying on Free Enterprise Fund v, Public Company Accounting Oversight Bd., 130 S. Ct. 3138, 3161 (2010). [For further discussion of PCAOB, see below in this Supplement.]
Copyright Royalty Judges (“CRJs”) have authority to set “reasonable” copyright royalty rates where negotiations among the interested parties fail. 17 U.S.C. § 801(b)(1). As a practical matter, CRJs have considerable discretion in determining what is “reasonable.”
The Librarian of Congress, an officer appointed by the President with the advice and consent of the Senate, appoints the three CRJs to staggered six-year terms. The Librarian approves the CRJs procedural regulations, issues ethical rules governing CRJs, and provides CRJs with logistical support. IBS, 684 F.3d at 1338. The Register of the Library of Congress is appointed by the Librarian and subject to his direction. Id. The Register has authority to issue interpretations of law that bind the CRJs and to review their decisions for legal error. Subject to this caveat, CRJ decisions are not subject to correction by any other entity within the executive branch. Id. at 1340.
The D.C. Circuit observed that the law is unclear regarding the role that the “significance” of an officer’s authority plays in determining whether she is a principal or inferior officer. Id. at 1337. To the degree this “metric” matters, however, it supported the conclusion that CRJs are principals as their ratemaking determinations can control “billions of dollars and the fates of entire industries.” Id. at 1338 (citation omitted).
Having made this threshold observation, the court then applied three factors drawn from Edmond v. United States, 520 U.S. 651 (1997), bearing on the principal-inferior divide: (1) the degree of supervision and control exercised by higher executive authorities; (2) removability; and (3) power to render final decisions uncorrectable by other executive authorities.
The first factor suggested that CRJs are principal officers given that the real heart of their power lies in their control over discretionary, fact-bound royalty determinations. The Register’s authority over legal determinations does little to check this practical power.
By statute, the Librarian could remove a CRJ only for cause. Therefore, the second factor, removability, plainly favored principal officer status. (But the court noted that an officer can, under some circumstances, be “inferior” even if there is a good-cause restriction on removal in light of United States v. Morrison, 487 U.S. 654 (1988).)
As for the third factor, no executive authority could review the CRJs’ rate determinations to the degree they rested on facts. Again, the Register’s authority over issues of law did not fundamentally alter the CRJs’ effective power.
Based on these conclusions, the court concluded that vesting the power to appoint CRJs in the Librarian violated the Appointments Clause. The proper fix for this problem was not to hold the entire CRJ statutory scheme unconstitutional and therefore void. Instead, following the lead of the Supreme Court in PCAOB, the court severed the portion of the statute that imposed a good-cause limitation on removal of CRJs by the Librarian. IBS, 684 F.3d at 1340-41 (citing PCAOB, 130 S. Ct. at 3161). Subjecting CRJs to plenary removal authority would enhance the Librarian’s control over CRJs sufficiently to make them “inferior.” Id. at 1341.
7. The Supreme Court’s most recent major pronouncement on appointment and removal: Applying Edmond and Morrison. In Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 130 S. Ct. 3138 (2010), the Free Enterprise Fund (FEF) challenged the constitutionality of statutory provisions governing appointment and removal of members of the Public Company Accounting Oversight Board (PCAOB). Congress had created the PCAOB in the aftermath of the Enron and WorldCom scandals to “oversee the audit of public companies that are subject to the securities laws.” 15 U.S.C. § 7211(a). Chief Justice Roberts offered the following summary of the PCAOB’s structure and powers:
The Board is charged with enforcing the Sarbanes-Oxley Act, the securities laws, the Commission's rules, its own rules, and professional accounting standards. §§ 7215(b)(1), (c)(4). To this end, the Board may regulate every detail of an accounting firm's practice, including hiring and professional development, promotion, supervision of audit work, the acceptance of new business and the continuation of old, internal inspection procedures, professional ethics rules, and “such other requirements as the Board may prescribe.” § 7213(a)(2)(B).
The Board promulgates auditing and ethics standards, performs routine inspections of all accounting firms, demands documents and testimony, and initiates formal investigations and disciplinary proceedings. §§ 7213-7215 (2006 ed. and Supp. II). The willful violation of any Board rule is treated as a willful violation of the Securities Exchange Act of 1934, 48 Stat. 881, 15 U.S.C. § 78a et seq.-a federal crime punishable by up to 20 years' imprisonment or $25 million in fines ($5 million for a natural person). §§ 78ff(a), 7202(b)(1) (2006 ed.). And the Board itself can issue severe sanctions in its disciplinary proceedings, up to and including the permanent revocation of a firm's registration, a permanent ban on a person's associating with any registered firm, and money penalties of $15 million ($750,000 for a natural person). § 7215(c)(4). …
The Act places the Board under the SEC's oversight, particularly with respect to the issuance of rules or the imposition of sanctions (both of which are subject to Commission approval and alteration). §§ 7217(b)-(c). But the individual members of the Board … are substantially insulated from the Commission's control. The Commission cannot remove Board members at will, but only “for good cause shown,” “in accordance with” certain procedures. § 7211(e)(6).
Id. at 3147-48.
Appointment issues: FEF contended that assigning power to the SEC to appoint PCAOB members violated the Constitution because: (a) PCAOB members were not “inferior” officers and therefore needed to be appointed by the President; (b) even if PCAOB members were inferior, the SEC could not appoint them because it is not a “department” within the meaning of the Appointments Clause; and (c) the Commission as a group could not appoint members of the PCAOB because, even if the SEC is a “department,” its true head is its Chairman—not the collective of the Commissioners. Id. at 3162-64. The justices made speedy work of rejecting these arguments. Following Edmond (discussed in note 4, supra), they held that PCAOB members are “inferior” insofar as they are subject to the control of the SEC—the Board’s superior, as it were. Following Justice Scalia’s concurrence in Freytag (discussed in note 5, supra), the Court held that the SEC is a “department” as it is “a freestanding component of the Executive Branch, not subordinate to or contained within any other such component.” Id. at 3162. Lastly, the Court quickly disposed of the argument that the Chairman is the head of the SEC, noting that its powers “are generally vested in the Commissioners jointly.” Id. at 3163.
Removal and the problem of double-for-cause restrictions (that aren’t really double at all?): Removal presented a far thornier problem, prompting a 5-4 split among the justices. The debate swirled around the premise that two layers of for-cause protection insulate Board members from presidential control—i.e., the President can remove SEC Commissioners only for cause, and the SEC Commissioners can remove PCAOB members only for cause. According to the majority, this double insulation weakened presidential control of PCAOB members too much:
A second level of tenure protection changes the nature of the President's review. Now the Commission cannot remove a Board member at will. The President therefore cannot hold the Commission fully accountable for the Board's conduct, to the same extent that he may hold the Commission accountable for everything else that it does. The Commissioners are not responsible for the Board's actions. They are only responsible for their own determination of whether the Act's rigorous good-cause standard is met. And even if the President disagrees with their determination, he is powerless to intervene-unless that determination is so unreasonable as to constitute “inefficiency, neglect of duty, or malfeasance in office.”…
This novel structure does not merely add to the Board's independence, but transforms it. Neither the President, nor anyone directly responsible to him, nor even an officer whose conduct he may review only for good cause, has full control over the Board. The President is stripped of the power our precedents have preserved, and his ability to execute the laws-by holding his subordinates accountable for their conduct-is impaired.
That arrangement is contrary to Article II's vesting of the executive power in the President. Without the ability to oversee the Board, or to attribute the Board's failings to those whom he can oversee, the President is no longer the judge of the Board's conduct. He is not the one who decides whether Board members are abusing their offices or neglecting their duties. He can neither ensure that the laws are faithfully executed, nor be held responsible for a Board member's breach of faith. This violates the basic principle that the President “cannot delegate ultimate responsibility or the active obligation to supervise that goes with it,” because Article II “makes a single President responsible for the actions of the Executive Branch.”
Id. at 3154. To remedy this problem, the Court invalidated the for-cause restriction on removal of PCAOB members by SEC commissioners—but, to FEF’s disappointment, otherwise left the PCAOB intact.
Stepping back, recall from Morrison that restrictions on removal that interfere too much with presidential authority to ensure execution of the laws violate separation of powers. We learn in Morrison that: (a) a for-cause restriction on removal of independent counsel by the Attorney General does not weaken presidential control too much; and (b) it is still good law that a for-cause restriction on presidential removal of officers like FTC Commissioners does not weaken presidential control too much, (see Morrison’s discussion of Humphrey’s Executor). By contrast, thanks to FEF, we now know that double for-cause insulation of officers from presidential removal can constitute too much interference.
The four-justice dissent, led by Justice Breyer, strongly disagreed on a number of levels. Most striking of all, he observed that SEC Commissioners are not in fact protected by any statutory restriction on their removal! Id. at 3182-84. This fact is not so surprising once one realizes that Congress created the SEC between issuance of Myers and Humphrey’s Executor—a time when congressional authority to restrict presidential removal authority was in doubt. The FEF majority evaded this problem by declaring that it proceeded under the “understanding” that SEC Commissioners—notwithstanding statutory silence on the subject—can be removed only for good cause because all the parties agreed with this position. Id. at 3148-49.
In addition, Justice Breyer contended: (a) in the absence of clearly controlling constitutional text, history, or precedent, the Court should have deferred to the shared judgments of the political branches on structuring of the PCAOB; (b) as a practical matter, the for-cause limitation on removal of PCAOB members was unlikely to matter much given that Sarbanes-Oxley “provides the Commission with full authority and virtually comprehensive control over all of the Board's functions,” Id. at 3172; and (c) the majority’s rule was sufficiently murky that it might “sweep[ ] hundreds, perhaps thousands of high level government officials within the scope of the Court's holding, putting their job security and their administrative actions and decisions constitutionally at risk.” Id. at 3179.
Justice Breyer’s dissent also contained broad reflections on the nature of agency independence and the many factors that bear on real levels of presidential control. Agency independence, he opined, is about much more than for-cause restrictions on removal:
In practical terms no “for cause” provision can, in isolation, define the full measure of executive power. This is because a legislative decision to place ultimate administrative authority in, say, the Secretary of Agriculture rather than the President, the way in which the statute defines the scope of the power the relevant administrator can exercise, the decision as to who controls the agency's budget requests and funding, the relationships between one agency or department and another, as well as more purely political factors (including Congress' ability to assert influence) are more likely to affect the President's power to get something done. That is why President Truman complained … “‘the powers of the President amount to’” bringing “ ‘people in and try[ing] to persuade them to do what they ought to do without persuasion.’ ” C. Rossiter, The American Presidency 154 (2d rev. ed.1960). And that is why scholars have written that the President “is neither dominant nor powerless” in his relationships with many Government entities, “whether denominated executive or independent.” Strauss, The Place of Agencies in Government: Separation of Powers and the Fourth Branch, 84 Colum. L.Rev. 573, 583 (1984) (hereinafter Strauss). Those entities “are all subject to presidential direction in significant aspects of their functioning, and [are each] able to resist presidential direction in others.” Ibid. (emphasis added).
Id. at 3170. Understood in the context of these underlying realities, Justice Breyer insisted that the for-cause restriction on removal of PCAOB members by SEC Commissioners was constitutionally unobjectionable.
For an edited version of Free Enterprise Fund, click here.