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.