The court takes on the administrative state
Ilya Shapiro
After two years that featured major rulings on abortion, guns, and affirmative action, the Supreme Court doesn’t yet have anything on its docket this coming term that will roil the culture wars. Instead, when our black-robed philosopher-kings come out from behind their velvet curtain on the first Monday in October, it’ll be renewed battles over the administrative state that will set the tone for the year.
Parsing the abstruse statutes and complex regulations that govern executive branch agencies was once a rather sleepy, and very technical, area of law. But as people have come to realize it’s these agencies, rather than a gridlocked and grandstanding Congress, that increasingly make the laws by which we live our lives, administrative law has come to the fore. As the Supreme Court has turned back expansive pen-and-phone schemes that range from a “clean power plan” to vaccine mandates and student loan cancellation, you don’t have to own green eyeshades in multiple hues to see that these hitherto nerdy debates over agency authority are a big deal.
A trio of cases the justices will hear this fall exemplifies this trend.
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Perpetual-motion governance
The Consumer Financial Protection Bureau is one of those agencies that Federalist Society lawyers joke isn’t even in the fourth branch of government, the bureaucracy that is beyond the three branches the Constitution established, but is in its own category of independent agency isolated from political accountability. The CFPB, a regulatory body housed within the Federal Reserve, has been subject to legal challenges ever since its creation by the Dodd-Frank financial reform of 2010. The closest anyone came to killing it off was when the Supreme Court ruled in a 2020 case called Seila Law v. CFPB that having a single director removable only for cause was unconstitutional but allowed the agency to continue operating. Well, in CFPB v. Community Financial Services Association of America, the court has another bite at that apple, this time regarding the agency’s funding.
A few years ago, the CFPB promulgated a rule restricting how payday and other non-bank lenders can pursue loan repayments. Specifically, it barred lenders from continuing to make pre-authorized withdrawal requests on a consumer’s bank account after two consecutive attempts had failed due to insufficient funds, unless the lender obtains renewed consumer authorization. The industry group for non-bank lenders sought to vacate the rule on statutory and constitutional grounds. A district court in Texas rejected these challenges, but the 5th U.S. Circuit Court of Appeals reversed it based on a violation of the appropriations clause.
That is, the court held that the CFPB’s funding mechanism, which exempts the agency from the ordinary appropriations process and instead allows it to control its own funding levels by making pro forma requests for transfers from the Fed, unconstitutionally abdicates Congress’s appropriations power. It explained that by giving the CFPB a “self-actualizing, perpetual funding mechanism,” Congress abandoned an important check on the executive and unified “the purse and the sword” in violation of the “separation of powers.”
It’s not surprising that the Supreme Court took the case because it typically reviews rulings that significantly impair the operation of federal agencies. The CFPB is arguing its funding structure comports with the Constitution’s appropriations processes but, regardless, that the appropriate remedy for any constitutional defect isn’t vacating the rule but severing any problematic provisions or prospective relief barring the CFPB from enforcing the rule by means of unconstitutionally secured funds. Of course, if a majority of the justices see all of the CFPB’s finances as legally infirm, then the agency will be effectively disabled — a principle that would apply equally to any regulatory structure that operates independent of congressional funding.
Hooked on regulation
Speaking of weird funding mechanisms, the National Marine Fisheries Service, a part of the Department of Commerce, promulgated a rule that forces most small fishermen to pay for their own regulators. As portrayed in the Oscar-winning movie CODA, if a fishing boat needs an at-sea monitor, it must often pay for one itself. The daily cost for most vessels exceeds $700.
Four family-owned and family-operated fishing companies contend that the funding requirement, which is not explicitly authorized by statute, will have a devastating economic impact on the herring fleet and will disproportionately affect small businesses, destroying historic communities. In Loper Bright Enterprises v. Raimondo, they sued the government to have the rule voided as beyond the fisheries agency’s lawful authority.
The district court ruled for the government, finding that various provisions of the Magnuson-Stevens Fishery Conservation and Management Act together conferred broad authority to manage fisheries. It also found that even if the statute were ambiguous, the government’s reading is “reasonable” and thus worthy of judicial deference under a doctrine established by the 1984 Supreme Court case Chevron U.S.A., Inc. v. Natural Resources Defense Council.
The U.S. Court of Appeals for the District of Columbia Circuit affirmed, reasoning that the Magnuson-Stevens Act’s authorization for the placement of monitors left room for agency discretion regarding the program’s funding mechanism. The Supreme Court took up the case not to untangle fishing regulations but to consider whether to overrule Chevron — or at least clarify whether statutory silence constitutes an ambiguity requiring deference to the agency on broad assertions of power.
Chevron was originally a little-noticed decision that was supposed to insulate executive decision-making from judicial meddling, but it has ballooned to be the central facet of administrative law. It has led to agency overreach and haphazard practical results. Although intended to empower Congress, Chevron has instead empowered agencies to grow their own powers to the greatest extent under their operative statutes, and often beyond.
Congress has proven unequal to the task of responding to this agency overreach and now has less of a role in policymaking than in the pre-Chevron era. Although the Supreme Court hasn’t invoked Chevron deference in years, instead applying the “major questions doctrine” to require clear statutory text for big-impact rules, lower courts are still hooked on making their own jobs easier by finding statutory ambiguity and then deferring to agency interpretations. It’s a vicious cycle of legislative buck-passing and judicial deference to executive overreach.
The Loper Bright case presents the court a whale of an opportunity to revisit Chevron, whether it chooses to overrule it explicitly or keep it nominally under a newly restricted standard. Indeed, the court did the latter in the 2019 case Kisor v. Wilkie, when it preserved judicial deference to agency reinterpretation of its own regulations as devised in the 1997 case Auer v. Robbins. Kisor reworked Auer deference so completely that both Chief Justice John Roberts, who joined Justice Elena Kagan’s majority opinion, and Justice Brett Kavanaugh, who joined Justice Neil Gorsuch’s effective dissent, noted that there wasn’t much difference between Kagan’s explication and Gorsuch’s evisceration.
Whatever the court does here will ripple through the entire administrative state.
Jarking you around
Even as Loper Bright has major implications for lawsuits against agencies, it won’t have much of an effect if people can’t get their cases into courts in the first place and are stuck fighting internal executive branch structures. Currently, agencies conduct many of their prosecutions before “administrative law judges,” with appeals going to the political bosses of those ALJs.
Before 2010, the Securities and Exchange Commission could use its in‐house courts to pursue punitive sanctions only against registered market participants. With the passage of Dodd‐Frank, however, Congress authorized the SEC to seek penalties against “any person” through its home‐court proceedings, where the agency acts as both prosecutor and judge.
George Jarkesy (pronounced JAR-kuh-see) was among the first targets of this enhanced power. In early 2007, Jarkesy undertook the management of several investment funds. Those funds were geared toward sophisticated parties interested in high‐risk, high‐reward investments. After the funds suffered losses in the 2008 market collapse, but despite the absence of any investor complaints, the SEC launched an investigation into Jarkesy’s management. In 2013, the agency alleged that he had violated securities law and, exercising its new Dodd‐Frank authority, prosecuted him through an in‐house court system.
But recall that Jarkesy’s work didn’t fall under the SEC’s licensing authority. He didn’t need the agency’s permission to open or manage his hedge funds, and there’s no allegation that he misrepresented his business model. Still, he was subjected to a Kafkaesque inquisition that lasted more than seven years. Predictably, the SEC ruled against Jarkesy and imposed a lifetime ban on employment in the securities industry, plus a $350,000 fine.
Jarkesy appealed from that kangaroo court to the 5th Circuit, which in May 2022 held that the SEC’s administrative adjudication committed three constitutional violations. First, the internal enforcement of civil penalties for securities fraud violated the Seventh Amendment because securities fraud charges are akin to common-law suits that require jury trials. Second, Dodd-Frank’s broad grant of unfettered discretion to the SEC to choose whether to enforce securities claims either in federal court or its own administrative tribunal violated the “nondelegation doctrine,” the idea that Congress can’t give away its own lawmaking authority because there was no “intelligible principle” for how to make those decisions. Third, the two layers of removal protections of ALJs violated the president’s duty to “take care that the laws be faithfully executed” because the executive can’t effectively control its own inferior officers, who are at the same time masquerading as judges.
It’s unlikely that the government will prevail in SEC v. Jarkesy because to do so, it must convince the Supreme Court that the 5th Circuit was wrong on all three points. But the basis on which the justices affirm the lower court is important. Upholding the jury trial right would deprive agencies of their home-court advantage — ALJs give their employers a 90% success rate — but only in the sorts of enforcement actions that have common-law analogs. Conversely, making ALJs more accountable to their political masters would tilt the playing field even more against the subjects of prosecution.
But if the court applies the non-delegation doctrine, it would invalidate a federal law for the first time in nearly a century, which would mark a true constitutional (counter)revolution. Narrowly, it would throw the entire ALJ regime in doubt, at the SEC and beyond, at least until Congress provides greater guidance. But more broadly, it would force Congress to legislate with precision across all manner of legislation. It would be the major questions doctrine on steroids.
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A constitutional revolution?
Together with decisions that hamstring the funding of independent agencies and limit Chevron deference, a ruling against the entire ALJ superstructure would complete a trifecta that rebalances our constitutional order. These cases all turn on questions about the separation of powers within our federal structure. They may not be as sexy as the social questions driving debates on cable news, but they affect our day-to-day lives much more.
Moreover, even if there are other cases worth watching — the constitutionality of a wealth tax, the regulation of social media, maybe even New York’s rent control regime — administrative law will be the theme of the term. At least until the court has to decide Donald Trump’s eligibility to run for president.
Ilya Shapiro is the director of constitutional studies at the Manhattan Institute and author of Supreme Disorder: Judicial Nominations and the Politics of America’s Highest Court. He also writes the Shapiro’s Gavel newsletter on Substack. The Manhattan Institute has filed or will file amicus briefs supporting the challengers in the three major cases discussed here.