Free Enterprise Fund v. PCAOB -- Humphrey's Executor Squared:

This morning the U.S. Court of Appeals for the D.C. Circuit released its long-awaited opinion in Free Enterprise Fund v. Public Company Accounting Oversight Board, a challenge to the constitutionality of the PCAOB on appointments clause grounds. Judge Rogers, joined by Judge Brown, rejected the Free Enterprise Fund's challenge.

In this facial challenge, appellants contend that Title I of the Sarbanes-Oxley Act of 2002 ("the Act") . . . violates the Appointments Clause of the Constitution and separation of powers because it does not permit adequate Presidential control of the Public Company Accounting Oversight Board ("the Board"). Congress, however, made the Board's exercise of its duties subject to the comprehensive control of the Securities and Exchange Commission ("the Commission"). Under the Act, the Commission is empowered to set Board rules and procedures, to overturn any sanction proposed by the Board, and to limit or relieve the Board of its powers; the Commission also may remove members of the Board for cause. Members of the Commission, in turn, are appointed by the President with the advice and consent of the Senate and subject to removal by the President for cause; its chairman is selected by and serves at the pleasure of the President. In appellants' view this statutory scheme vests Board members "with far reaching executive power while completely stripping the President of the authority to appoint or remove those members or otherwise supervise or control their exercise of that power." . . . But their facial challenge ignores the entirety of the statutory scheme and runs afoul of the Supreme Court's instruction regarding the nature of the President's constitutional relationship with independent administrative agencies. Supreme Court precedent as we have it does not support appellants' singular focus on removal powers as the be-all and end-all of Executive authority, but rather compels a more nuanced approach that examines the myriad means of Executive control.

We hold, first, that the Act does not encroach upon the Appointment power because, in view of the Commission's comprehensive control of the Board, Board members are subject to direction and supervision of the Commission and thus are inferior officers not required to be appointed by the President. Second, we hold that the for-cause limitations on the Commission's power to remove Board members and the President's power to remove Commissioners do not strip the President of sufficient power to influence the Board and thus do not contravene separation of powers, as that principle embraces independent agencies like the Commission and their exercise of broad authority over their subordinates. Accordingly, we affirm the grant of summary judgment to the Board and the United States.

Judge Kavanaugh penned a 58-page must-read dissent (which, admittedly, I've only skimmed).

This case raises fundamental questions about the scope of the President's constitutional power to appoint and remove officers in the Executive Branch. Article II begins: "The executive Power shall be vested in a President of the United States of America." Under Article II, the President possesses the sole power and responsibility to "take Care that the Laws be faithfully executed." To assist in his duties, the President has authority, within certain textual limits, to appoint and remove executive officers. Myers v. United States. . . . Disputes over the scope of the President's appointment and removal powers have arisen sporadically throughout American history. This latest chapter involving the Public Company Accounting Oversight Board is the most important separation-of-powers case regarding the President's appointment and removal powers to reach the courts in the last 20 years.

The Public Company Accounting Oversight Board is an independent executive agency created by the Sarbanes-Oxley Act of 2002. The PCAOB is considered an "independent" agency because the five members of the PCAOB are removable only for cause, not at will. The PCAOB portrays itself as just another independent executive agency -- like the FCC, the FTC, and the NLRB -- that is permissible under the Supreme Court's 1935 decision in Humphrey's Executor. Plaintiffs, including a Nevada accounting firm regulated by the Board, strenuously disagree and challenge its constitutionality. Plaintiffs object to the fact that members of the PCAOB are appointed by and removable for cause by another independent agency, the Securities and Exchange Commission, rather than by the President. They argue that this structure, an independent agency appointed by and removable only for cause by another independent agency: (i) interferes with the President's Article II authority to remove executive officers, and thereby exercise the executive power and take care that the laws be faithfully executed; and (ii) violates the specific terms of the Appointments Clause of Article II regarding the President's authority to appoint "principal officers" in the Executive Branch. Plaintiffs contend that "vesting government agencies with coercive power over the citizenry, and simultaneously depriving the citizenry of any ability to control or check those exercising such potentially tyrannical authority, is precisely the fundamental threat to the 'liberty and security of the governed' that separation of powers principles were designed to prevent." . . .

On the removal issue, the majority opinion views this case as Humphrey's Executor redux. But this case is Humphrey's Executor squared. There is a world of difference between the legion of Humphrey's Executor-style agencies and the PCAOB: The heads of the Humphrey's Executor independent agencies are removable for cause by the President, whereas members of the PCAOB are removable for cause only by another independent agency, the Securities and Exchange Commission. The President's power to remove is critical to the President's power to control the Executive Branch and perform his Article II responsibilities. Yet under this statute, the President is two levels of for-cause removal away from Board members, a previously unheard-of restriction on and attenuation of the President's authority over executive officers. This structure effectively eliminates any Presidential power to control the PCAOB, notwithstanding that the Board performs numerous regulatory and lawenforcement functions at the core of the executive power. So far as the parties, including the United States as intervenor, have been able to determine in the research reflected in their exhaustive and excellent briefs, never before in American history has there been an independent agency whose heads are appointed by and removable only for cause by another independent agency, rather than by the President or his alter ego. But that is the case with PCAOB members, who are removable for cause only by the SEC -- and it is undisputed that the SEC as an independent agency is not the President's alter ego. The PCAOB thus goes well beyond what historical practice and Humphrey's Executor authorize.

This is a huge case (I used the fact pattern for my Admin Law exam a few years back), and one I expect will either go en banc or produce some en banc dissents.

Dave N (mail):
Seems like a good candidate for certiorari.
8.22.2008 2:41pm
Some Law Talking Guy (mail):
In a former life, I was asked by a lawyer I respect on the Hill what I thought of the then-pending Sarbanes-Oxley Act. I told him the PCAOB was unconstitutional. He agreed.

I'm still pretty sure the PCAOB provision is unconstitutional. This is what happens when legislation is passed over objections of counsel in three weeks.
8.22.2008 2:42pm
Wow. I need to read the opinions but had Kavanagh's view held a majority it would have meant the end of Sarbanes-Oxley, and it doesn't get much more significant than that.
8.22.2008 2:57pm
Apologies for misspelling "Kavanaugh."
8.22.2008 2:59pm
frankcross (mail):
The Humphrey's Executor squared analysis completely baffles me. Every subordinate officer of the SEC, or any agency, is two levels of for-cause removal away from the President. No?
8.22.2008 3:02pm
Hans Bader (mail):
The majority decision in Free Enterprise Fund v. Public Company Accounting Oversight Board relies on inconsistent reasoning.

It simultaneously claims that the SEC's chairman is NOT the head of the SEC -- despite the fact that the SEC itself has described its chairman as its "head" and its "chief executive" -- and then notes that the SEC's chairman "dominates Commission policymaking." If he's dominant, and he's called the "chairman," then functionally as well as in name, he is the "head."

The court's majority makes the former contention to justify letting the SEC Commissioners COLLECTIVELY pick the PCAOB members, by claiming that they are the SEC's head (even inferior officers have to be picked by the "head" of a department; by contrast, important officers like PCAOB members should be picked by the president), not its chairman individually.

It makes the latter, contrary contention to justify claiming that the President, by picking the SEC's chairman, has a large influence over the SEC's policies (and, indirectly it claims, the PCAOB).

A court is entitled to take one view or the other of the facts. It is not entitled to adopt mutually inconsistent facts.
8.22.2008 3:23pm
Opher Banarie (mail) (www):
Would striking the PCAOB provision(s) result in the entire Sarbanes-Oxley Act being struck down? The Act did much more than just creation of the PCAOB.
8.22.2008 4:13pm
Dilan Esper (mail) (www):
Under Judge Kavanaugh's reasoning, is the Federal Reserve unconstitutional? If the answer is "yes", than his constitutional theory is a nonstarter.
8.22.2008 4:36pm
Hans Bader (mail):
No, the Federal Reserve is constitutional, because its board of governors is selected just the way Judge Kavanaugh says would be permissible for the PCAOB: they're picked by the President and confirmed by the Senate.

"The seven members of the Board of Governors are appointed by the President and confirmed by the Senate to serve 14-year terms of office."
8.22.2008 5:12pm
Houston Lawyer:
It would be way too sweet for Sarbanes Oxley to be repealed. It is a stupid and unnecessary law passed merely to show the public that Congress was doing something after Enron melted down. It has made securities compliance a nightmare. Not like they could convict Ken Lay under the old laws.
8.22.2008 7:23pm
martinned (mail) (www):
I would be interested to hear what Mrs. Volokh (i.e. Hannah) has to say about this one, but I can see how she would be otherwise engaged...
8.23.2008 9:43am
jkoerner (mail):
There is no severability clause in Sarbanes Oxley, so striking the PCAOB as unconstitutional would strike the whole law.
8.23.2008 3:48pm
This court decision, issued by a divided court over a sharp dissent, rests on reasoning that is disturbingly inconsistent.

This case is a constitutional challenge to the PCAOB, the regulatory board set up by Sarbanes-Oxley, as a violation of the Appointments Clause and separation of powers. The PCAOB is enormously important: The red tape generated by the board has cost the stock market over $1 trillion (according to a University of Rochester study), and annually imposes compliance costs of over $35 billion, while providing only illusory benefits for investors (Countrywide Financial complied with PCAOB rules to the letter, as a way of diverting attention from its risky subprime mortgage lending), and driving businesses and high-tech jobs overseas (the number of U.S. IPOs has shriveled in both absolute and relative terms since the PCAOB was set up).

But rather than being picked by the President with Senate approval, the way important government officials are supposed to be, PCAOB members are picked by SEC Commissioners as a group (which led to a disorganized selection process for the first PCAOB members, as the GAO has noted).

The constitutional challenge argues that violates the Appointments Clause of the Constitution, which requires that government officials be picked by the President or (for minor officials) by the "Head of a Department." The challenge also argued that the PCAOB members are so unaccountable to the president, who can't remove them (the SEC Commissioners collectively can, but only for "willful" misconduct), that it violates separation of powers.

In order to reject the constitutional challenges, the court's majority had to rely on inconsistent reasoning. First, it claimed that the SEC's Chairman is NOT the SEC's head, but rather "simply one" of "several commissioners," making the SEC Commissioners collectively the head of the SEC. See Opinion, at pg. 20 ("The [SEC's] Chairman . . . is simply one Commissioner"); Opinion, pg. 21 ("The commission" is a body "whose 'Head' consists of the several commissioners"). Only by doing that could it rule that the SEC Commissioners collectively are the "Head" of a department and thus are permitted by the Appointments Clause to make appointments. (Never mind that the Chairman has been described by the SEC itself as its "chief executive" and "head").

Then, just a few pages later, it suddenly suggested just the opposite: that the SEC's chairman was, after all, the SEC's head. Confronted with the argument that the PCAOB is not accountable to the President through his appointees, such as the SEC's chairman (who, unlike other SEC commissioners, serves at the president's pleasure), the court stated that the President does have indirect influence over the PCAOB through the SEC, because the president picks the SEC Chairman, whom the court claimed "dominates commission policymaking." See Opinion, Pg. 24. But if the Chairman so "dominates commission policymaking," that is because he is the SEC's actual "head" (its "top executive," as the SEC describes him), not a mere figurehead.

Is it too much to ask that courts at least use consistent reasoning? Especially in an important case like this, which Judge Kavanaugh noted is "the most important separation-of-powers case regarding the President's appointment and removal powers to reach the courts in the last 20 years."
8.23.2008 5:23pm
Hans Bader (mail):
The divided court ruling rejecting the constitutional challenge to the PCAOB is not only internally inconsistent (as I have explained above), but also rests on factual premises conceded to be false by a Senator who voted to create the PCAOB.

The 2-to-1 decision by the D.C. Circuit claimed, over a strong dissent by Judge Kavanaugh, that PCAOB members really weren't powerful enough, or independent enough, to be "principal officers" who needed to be appointed by the President with the advice and consent of the Senate, as the text of the Constitution's Appointments Clause explicitly mandates.

But the very legislators who voted to create the PCAOB recognized differently. For example, a Senator who voted to pass Sarbanes-Oxley said that the law gave the PCAOB "massive power," "unchecked power by design."
8.24.2008 11:50am