CFPB survives, but for how long?

Last week a panel of the 9th U.S. Circuit Court of Appeals unanimously rejected a constitutional challenge to the structure of the Consumer Financial Protection Bureau, becoming the second federal court of appeals to do so. In CFPB v. Seila Law LLC, 2019 DJDAR 3532 (May 6, 2019), the panel, in an opinion authored by Judge Paul J. Watford, held that the CFPB's structure, under which the president may only remove the agency's director for cause, does not violate the Constitution. That decision tracks the D.C. Circuit's en banc decision in PHH Corp. v. CFPB, 881 F.3d 75 (D.C. Cir. 2018) (en banc), which also upheld the CFPB's structure against a similar constitutional challenge. But while the 9th Circuit is the second appellate court to weigh in on the subject, it's not likely to be the last: The same issue is also pending in two other courts of appeal. And the issue itself may well end up in the Supreme Court, which may prove more hospitable to the CFPB's challengers than the appellate courts have been to date.

Congress created the CFPB in 2010 in the aftermath of the 2008 financial crisis, granting the CFPB broad authority to implement and enforce federal consumer-protection laws. The agency's powers include the authority to make rules, to conduct investigations, to adjudicate administrative enforcement proceedings, and to file civil actions in federal court. The CFPB is led by a single director, who is appointed to a five-year term, and who may be removed by the president only for "inefficiency, neglect of duty, or malfeasance in office." That limit on the president's removal power has been challenged in several cases as violating the Constitution's separation of powers.

The D.C. Circuit first adopted this separation-of-powers argument in the PHH panel decision authored by then-Judge Brett Kavanaugh before rejecting it after taking the case en banc. A majority of the en banc court emphasized that the Supreme Court has long approved for-cause restrictions on the president's power to remove agency officers. In Humphrey's Executor v. United States, 295 U.S. 602 (1935), for example, the Supreme Court first held that Congress can limit the president's power to remove officers of "quasi legislative or quasi judicial agencies" because a for-cause restriction was a permissible means of ensuring that the Federal Trade Commission's commissioners would "act in discharge of their duties independently of executive control." The Supreme Court later modified Humphrey's Executor in Morrison v. Olson, 487 U.S. 654 (1988), holding that the constitutionality of a for-cause removal limitation depends not on the nature of the agency, but whether the limitation "impede[s] the President's ability to perform his constitutional duty." The D.C. Circuit majority held that, under Humphrey's Executor and Morrison, the CFPB's structure doesn't unconstitutionally impede that ability.

Judge Kavanaugh dissented. While acknowledging (albeit unhappily) that he had to follow Humphrey's Executor and Morrison, he construed them as setting "the outermost constitutional limits of permissible congressional restrictions on the President's removal power." And he argued that the CFPB's structure exceeds those limits. In his view, the CFPB differs meaningfully from other independent agencies, which are run by multiple administrators, because it has a single director who wields all the agency's power. That fact, he argued, makes any limit on the president's ability to remove the director unconstitutional.

The 9th Circuit decision arose out of a CFPB investigation of and issuance of a civil investigative demand to Seila Law LLC. After Seila Law refused to comply with the CID, the CFPB filed a petition in the district court to enforce compliance. The district court granted the petition, and ordered Seila Law to comply with the CID, with one modification. Seila Law appealed, contending, in relevant part, that an agency with the CFPB's broad law-enforcement powers may not be headed by a single Director removable by the President only for cause.

On appeal, the 9th Circuit panel, composed of Circuit Judges Susan P. Graber and Watford, and District Court Judge Jack Zouhary, acknowledged that Seila Law's argument "was not without force," but ultimately sided with the PHH majority over Kavanaugh's dissent. Noting that "[t]he arguments for and against [the CFPB's constitutionality] have been thoroughly canvassed in the majority, concurring, and dissenting opinions in PHH," the panel chose not "to re-plow the same ground." The panel acknowledged that the CFPB director exercises substantial executive power like the power exercised by executive branch department heads, "at least some of whom, it has long been assumed, must be removable by the President at will." Nevertheless, the panel concluded, the Supreme Court's separation-of-powers decisions -- and in particular, Humphrey's Executor and Morrison compelled a ruling in the CFPB's favor.

The panel noted that Humphrey's Executor upheld tenure protections for commissioners of the FTC, "an agency similar in character to the CFPB." Specifically, the CFPB, like the FTC, exercises both quasi-legislative and quasi-judicial powers. Moreover, the CFPB also acts as a financial regulator, "a role that has historically been viewed as calling for a measure of independence from Executive Branch control." The panel acknowledged "differences between the CFPB and the FTC," but found that Morrison made those differences irrelevant. For example, the panel observed that "the CFPB possesses substantially more executive power than the FTC did back in 1935," but noted that Morrison "upheld the constitutionality of a for-cause removal restriction for an official exercising one of the most significant forms of executive authority: the power to investigate and prosecute criminal wrongdoing." And in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010), the panel pointed out, the Supreme Court left alone the for-cause removal restriction for Securities and Exchange Commission commissioners, who oversee a board exercising "significant executive power."

The panel then turned to Kavanaugh's argument that the CFPB's for-cause removal restriction is unconstitutional because the CFPB has a single director. (By contrast, the FTC has five commissioners). Like the PHH en banc majority, the panel held that Humphrey's Executor and Morrison foreclosed that argument. Humphrey's Executor, the panel noted, "made no mention of the [FTC's] multi-member leadership structure when analyzing the constitutional validity of the for-cause removal restriction at issue." And Morrison "upheld a for-cause removal restriction for a prosecutorial entity headed by a single independent counsel." Indeed, if an agency's leadership is protected by a for-cause removal restriction, the president arguably has more effective control over an agency, not less, if that agency is headed by one individual, rather than a multi-member body. The panel thus found Humphrey's Executor and Morrison "controlling." But it acknowledged that the Supreme Court is "free to revisit those precedents," although it was not.

And the Supreme Court may soon do so. The court has already considered one petition for certiorari from a decision upholding the CFPB's structure. In State National Bank of Big Spring v. Mnuchin, the D.C. Circuit applied PHH to reject another challenge to the CFPB's for-cause removal restriction. In its petition for certiorari, the challenger asked the Supreme Court both to declare the CFPB's structure unconstitutional and to overrule Humphrey's Executor.

The Supreme Court declined to take the case, but that doesn't necessarily support the conclusion that the court is uninterested in these issues. Rather, the court may well have concluded that the case was a poor vehicle for considering the CFPB's constitutionality. For one thing, now-Justice Kavanaugh was recused, creating the risk of a split 4-4 decision. For another, the same issues were pending in three other cases: CFPB v. All American Check Cashing, Inc., in the 5th Circuit; CFPB v. RD Legal Funding, LLC, in the 2nd Circuit; and Seila Law, in the 9th.

The Supreme Court may well grant certiorari in one of these cases, particularly if the 2nd or 5th Circuit creates a circuit split by ruling against the CFPB. And with Justice Kavanaugh now on the court, a majority might well adopt his PHH dissent and find the CFPB's structure unconstitutional. In his PHH dissent, Kavanaugh suggested that Humphrey's Executor and Morrison should be overruled, quoted an academic describing Humphrey's Executor as "one of the more egregious opinions to be found on pages of the United States Supreme Court reports," and argued that there is a "nearly universal consensus" that Morrison was wrongly decided. Like Kavanaugh, the court's Republican-appointed justices have sharply criticized independent federal agencies. They may now join him to overrule Humphrey's Executor and Morrison.

Or the Supreme Court may distinguish those cases without overruling them. That's what it did in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010), a 5-4 decision authored by Chief Justice John Roberts, which held that the Sarbanes-Oxley Act's dual for-cause limitations on removal of Public Company Accounting Oversight Board members contravened the Constitution's separation of powers. The D.C. Circuit had upheld the PCAOB's structure over then-Judge Kavanaugh's dissent, finding that Humphrey's Executor and Morrison required that result. The Supreme Court agreed with Kavanaugh, holding -- in an opinion that repeatedly quoted his dissent -- that the PCAOB's structure was unconstitutional under Humphrey's Executor and Morrison. It distinguished the results in those cases by noting that they involved only one level of protected tenure separating the president from an officer exercising executive power, rather than the two levels at issue in Free Enterprise Fund. As in Free Enterprise Fund, Kavanaugh's PHH dissent gives the Supreme Court a roadmap to strike down the CFPB's structure without outright overruling Humphrey's Executor and Morrison. As a result, while the CFPB may have won in front of the 9th Circuit, there are still battles to be fought in potentially less hospitable forums.