Seila Law v. CFPB: What’s Unconstitutional for One May Not Be Unconstitutional for All

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By Rebecca Jones, Project on Government Oversight

This week, the Supreme Court issued a decision that could help clear the way for Congress to pass crucial protections for inspectors general. While the case at hand, Seila Law LLC v. Consumer Financial Protection Bureau, does not directly address these federal watchdogs, the court’s reasoning in reaching its ruling could have major implications for ongoing efforts to protect inspectors general from being removed from their posts at a president’s political whim.

In short, the court’s reasoning in Seila Law may place Congress on solid constitutional footing to establish what’s known as “for-cause removal protections” for inspectors general, whose independence from political influence is critical to their ability to root out waste, fraud, and abuse in the federal government.

The court’s recent ruling may place Congress on solid constitutional footing to establish much-needed protections for inspectors general.

First, let’s back up and look at the Seila Law case. At issue was the constitutionality of a provision of law that limited when a president could remove the head of the Consumer Financial Protection Bureau (CFPB), the independent federal agency created in the wake of the 2008 financial crisis to consolidate the enforcement of federal consumer protections under one roof. Under the Dodd-Frank Act, which created the agency, the president could only remove the CFPB director for “inefficiency, neglect, or malfeasance.”

The court found that in this instance the law’s limitations on the president’s power to remove the director of the bureau are an unconstitutional violation of the separation of powers, largely because the CFPB has broad powers but operates almost completely independently of the president’s control.

But, because of several key differences in the structure, purpose, and authority of the CFPB director and inspectors general, we can conclude that the court’s reasoning may in fact support the constitutionality of granting those same protections to inspectors general.

The Project On Government Oversight (POGO) has tracked this case closely because we have long held that certain independent executive offices, particularly federal inspectors general, would benefit from for-cause removal protections. POGO submitted an amicus brief in this case, highlighting the broad implications for independent oversight if the court broadly struck down for-cause removal protections. Fortunately for taxpayers, who stand to benefit from bolstered inspector general protections, it didn’t.

A Narrow Ruling

The CFPB is an independent agency in the executive branch—those are agencies that don’t fall under the umbrella of the executive office of the president or any of the 15 so-called executive departments such as the Department of Homeland Security or the Department of Defense. Independent agencies are not uncommon and they are most often regulators that have quasi-judicial or quasi-legislative authority. In other words, they often make regulations and enforce them. Other examples of independent agencies are the Federal Trade Commission, the Federal Election Commission, and the Securities and Exchange Commission.

Given their positioning and mandate as established by Congress, independent agencies operate with a certain degree of autonomy. They’re usually led by a board or commission whose members are appointed by the president and who commonly have term limits and removal protections. The CFPB is unique in that it is led by a single director who, until this case, operated with that same autonomy and protection from removal while exercising broad authority.

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Seila Law, the petitioner in this case, filed a lawsuit to challenge an investigation the CFPB had opened into the firm. Seila Law claimed that the agency’s leadership structure was unconstitutional because the head of the agency operated with too much independence from the president. Essentially, Seila Law argued that an unconstitutional agency can’t legally tell it, or anyone else, what to do.

In its decision, the court agreed with Seila Law that the agency’s for-cause removal protections violated the Constitution.

But it did so in a narrow way: Rather than declaring all for-cause removal protections across government unconstitutional, the court held that the removal protections for the head of the CFPB are unconstitutional because the agency operates with unprecedented independence from presidential control.

The court pointed out that executive officers appointed by the president are exercising the president’s authority on his behalf. So, if those officers are insulated from the president’s influence, they are no longer acting as agents of the president. Here, the court found that the CFPB director’s independence was unconstitutional because the authority of the president to remove their officers at will is the rule, not the exception, as an important part of ensuring the president’s officers continue to represent the president’s policies. And while the court acknowledges two exceptions to the general rule that a president can remove their own officers at will, the director position didn’t meet the criteria for either.

In the majority opinion, Chief Justice John Roberts wrote:

While we have previously upheld limits on the President’s removal authority in certain contexts, we decline to do so when it comes to principal officers who, acting alone, wield significant executive power. The Constitution requires that such officials remain dependent on the President, who in turn is accountable to the people.

The key to understanding what this means for inspectors general is that the structure and work of inspectors general align much more closely with cases where the court upheld for-cause removal protections than with cases where the court has struck down those protections. That means inspectors general could meet one of the two exceptions that the court discusses in this case, and the court’s explanation here helps advance that position.

Differences Between the CFPB Director and Inspectors General

In deciding whether the CFPB fits the two case law exceptions to the general rule of the president’s removal power, the court analyzed the agency’s work and the posture of the agency and cited several disqualifying factors.

In contrast, when we look at the structure and posture of federal inspectors general, what we find strengthens the case that instituting for-cause removal protections for these watchdogs would be constitutional.

As for the CFPB, for example, the court points out that the agency’s director enjoys “extensive rulemaking, enforcement, and adjudicatory powers” as the head of an independent agency. Further, the director may only be fired for “good cause,” and does not report to a boss or overseer who is removable at will by the president. As the court explains, our constitutional structure avoids concentrating power in the hands of a single individual other than the president, who is accountable to voters. The CFPB director, as a solitary leader only removable for cause, would be largely insulated from the president’s influence. The president cannot, for example, appoint other leaders to a hypothetical commission or board that would, as the court explains, “serve as a check on the Director’s authority and help bring the agency in line with the President’s preferred policies.”

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Some presidents, the court notes, may not be able to influence the CFPB at all since the director enjoys a five-year term, longer than the presidential term. As the court sees it, this means that a president would be forced to work alongside an incumbent CFPB director who was appointed by the previous president, as opposed to a new CFPB head who would serve as a representative of the new president’s priorities.

Finally, the court points out that even the agency’s funding is cordoned off from presidential influence. While executive agencies are typically funded through the congressional appropriations process, the CFPB gets its funding through the Federal Reserve, the funds for which come from bank assessments. This means that the president cannot influence how much money the CFPB gets through the president’s annual budget request to Congress. The court notes, “this financial freedom makes it even more likely that the [CFPB] will slip from the Executive’s control, and thus from that of the people.”

The court may have decided these arguments are compelling reasons to strike down the CFPB director’s for-cause removal protections as unconstitutional, but, importantly, they don’t translate to inspectors general.

First, the findings and recommendations that inspectors general produce are not binding on the agencies they oversee. Inspectors general are, first and foremost, investigators whose mandate is to bring waste, fraud, and abuse to light for Congress and executive branch agencies to address—not prosecute agencies or officials or hold private entities to account. The findings and recommendations of inspectors general may be dismissed by the head of an agency, who is usually a political appointee and is therefore immediately accountable to and removable by the president at will. Because of this structure, the chief justice’s analysis in Seila Law may show that even with for-cause removal protections for inspectors general, the president would be able to exert sufficient control over them through the head of the inspector general’s parent agency.

Further, inspectors general do not have policymaking or broad administrative authorities, and are subject to a dual reporting structure both to the head of their agency and to Congress. And while they have a degree of statutorily mandated independence, they are still beholden to the traditional appropriations process, and send their budget requests to the head of their agency, which sends the request to the president, every year.

Unlike heads of agencies, inspectors general are apolitical by design. While they do not have term limits under the Inspector General Act of 1978, that same law requires them to be appointed “without regard to political affiliation.”

Inspectors general are distinct from the director of the CFPB in terms of mandate, independence, and authority—in other words, every factor the court used to determine that the director’s removal protections were unconstitutional.

Inspectors General Occupy a Middle Ground

In analyzing the CFPB, the chief justice explained two exceptions to the president’s removal power. The exceptions were created by the Supreme Court in two previous cases: Humphrey’s Executor v. United States, and Morrison v. Olson. Roberts summarizes those exceptions along the following lines.

In Humphrey’s Executor, the court found that Congress can grant for-cause removal protections to multi-member bodies—in that instance, the Federal Trade Commission—that maintain some balance along partisan lines and that are quasi-legislative or quasi-judicial and don’t exercise purely executive power.

In Morrison, the court found that Congress can also give for-cause removal protections to “inferior officers,” a term of art used in the “Excepting Clause” of the Constitution. These are generally officers whose duties are narrowly defined and who don’t have policymaking authority. Inferior officers often report directly to a senior political appointee like the head of an agency. In Morrison, the court declared a congressionally appointed independent counsel’s removal protections constitutional, even though the counsel exercised law enforcement functions typically reserved for the executive branch. Because the independent counsel was an inferior officer, it was not unconstitutional for them to also have for-cause removal protections and to exercise some authorities that are typically reserved for executive branch agents.

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Roberts determined that the head of the CFPB does not meet either exception.

By our reading, it’s actually not clear that inspectors general fit cleanly into these exceptions, either. Instead, the nature and work of these watchdogs seems to belong in a middle ground, pulling from both exceptions. Inspectors general are solitary appointees who have not been deemed “inferior officers” by the courts—though inspectors general meet the characteristics of an inferior officer found in the late Justice Antonin Scalia’s often-cited Morrison dissent, which we will examine in greater detail below.

Turning back to the Seila Law ruling: Roberts highlighted a difference between the Federal Trade Commission—another independent agency—and the CFPB that is instructive here. “Instead of making reports and recommendations to Congress … the [CFPB] director possesses the authority to promulgate binding rules and fleshing out 19 federal statutes, including a broad prohibition on unfair and deceptive practices in a major segment of the U.S. economy,” he wrote.

Like the Federal Trade Commission—and unlike the CFPB—inspectors general do make reports and recommendations to Congress as a core tenet of their mission and work. Inspectors general, in particular, are in near-constant communication with Congress, a connection that is mandated in their authorizing legislation, the Inspector General Act. Section two of that law explains that Congress created inspectors general, in part, “to provide a means for keeping the head of the [agency] and the Congress fully and currently informed about problems and deficiencies relating to the administration of [agency] programs and operations and the necessity for and progress of corrective action.” Importantly, in Humphrey’s Executor, the court found Federal Trade Commission’s for-cause removal provisions were constitutional and “quasi-legislative” in part because of that reporting structure.

Roberts drew a further distinction between the Federal Trade Commission’s structure as analyzed in Humphrey’s Executor and the unconstitutional CFPB structure by pointing out that the commission is designed to be nonpartisan and to act with impartiality, and that its duties are neither political nor executive. The same is true of inspectors general.

The court drew a similar distinction between the CFPB case and Morrison, the other case law exception that the court offers to the general presidential removal rule. Roberts highlighted that, unlike the CFPB director, the independent counsel whose removal protections were in question in Morrison maintained only limited jurisdiction and lacked policy making or significant administrative authority.

The court conceded that the independent counsel in Morrison had significant power to initiate criminal investigations and prosecutions, which is a core executive power. However, as Roberts explained, those authorities combined with removal protections still did not make the removal protections unconstitutional because the scope of the independent counsel’s authority was very narrowly limited to a few individual government officials who were under investigation. The CFPB, on the other hand, is focused on enforcement against private entities, giving the director much wider authority.

It is reasonable to think that the court could ultimately make a similar distinction about the work and scope of inspectors general—who focus on and investigate misconduct related to federal programs and spending, often involving high-level officials, and do not have enforcement power—as it did about the independent special counsel.

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And while the court has not yet had an opportunity to declare inspectors general to be inferior officers, the characteristics of an inferior offer as explained by Scalia in his dissent in the Morrison case could easily apply to an inspector general.

Scalia defined an inferior officer as one who is “subordinate” at some level to another officer. While inspectors general are generally independent from the agency they oversee, the Inspector General Act states that “each Inspector General shall report to and be under the general supervision of the head of the establishment involved.” Further, while Congress gave these watchdogs a significant degree of autonomy and unfettered access to agency documents, the products of their investigations and the recommendations they make are always subject to the agency head’s decision to accept or rejected them. In that way, inspectors general fit squarely into Scalia’s definition of an “inferior officer” for purposes of the Constitution’s Excepting Clause.

While the court cites only these two exceptions explicitly in Seila Law, Roberts acknowledges that there are federal officers who have removal protections and who do not fit cleanly into either of the exceptions laid out in Humphrey’s Executor or Morrison.

For example, Roberts drew a distinction between the CFPB structure and the head of the Office of Special Counsel, a solitary leader who enjoys for-cause removal protections. While the special counsel is not a part of a commission and has not been deemed an inferior officer—therefore not clearly satisfying either exception—Roberts seems to defend the special counsel’s removal protections in direct comparison to the CFPB director’s. He explains that the special counsel “exercises limited jurisdiction to enforce certain rules governing Federal Government employers and employees.” And unlike the CFPB, the Office of Special Counsel does not have legal enforcement authority over private individuals or entities to wield regulatory authority. Inspectors general similarly do not bind private parties or wield regulatory authority.

Another example the court offers that does not fit neatly into either exception is the head of the Social Security Administration. The court points out that this official also lacks authority to bring enforcement actions against private parties, but enjoys for-cause removal protections.

As neither the Office of Special Counsel nor the Social Security Administration examples fit cleanly into the two case law exceptions the court lays out, this hints at some undefined gray area of constitutional for-cause removal protections. Under these examples, inspectors general seem to fit the bill.

The Right Side of the Constitutional Line

While the court has of course not ruled on whether for-cause removal protections are constitutional for inspectors general, the nature and scope of their work is much more in line with the exceptions in the Humphrey’s Executor and Morrison cases than with cases where the court has struck down for-cause removal protections as unconstitutional. Additionally, inspectors general are similar to the agencies referenced in the court’s opinion that appear on the right side of the constitutional line.

Congress is currently considering for-cause removal protections for inspectors general in several legislative initiatives that POGO supports, such as the CORE Act. While Seila Law v. CFPB was not intended to be instructive as to whether Congress can protect inspectors general, this decision could not be more timely, as Congress considers these bills. Armed with a Supreme Court opinion with positive analysis of why specific agencies’ for-cause removal protections are different than those held unconstitutional, it should be easier than ever for legislators with good-faith constitutionality concerns to support stronger removal protections for inspectors general.

We need watchdogs, not lapdogs—and for-cause removal provides the independence needed to expose and remedy waste, fraud, abuse, and corruption inside the federal government.

Originally posted here.

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