Supreme Court Rules PCAOB Construct Partially Unconstitutional -- Terminable At Will Is New Standard

June 28, 2010

Free Enterprise Fund et al. v. Public Company Accounting Oversight Board et al. (Opinion, Supreme Court; No. 08-861 / June 28, 2010)

We are asked, however, to consider a new situation not yet encountered by the Court. The question is whether these separate layers of protection may be combined. May the President be restricted in his ability to remove a principal officer, who is in turn restricted in his ability to remove an inferior officer, even though that inferior officer determines the policy and enforces the laws of the United States?

We hold that such multilevel protection from removal is contrary to Article II's vesting of the executive power in the President. The President cannot "take Care that the Laws be faithfully executed" if he cannot oversee the faithfulness of the officers who execute them. Here the President cannot remove an officer who enjoys more than one level of good-cause protection, even if the President determines that the officer is neglecting his duties or discharging them improperly. That judgment is instead committed to another officer, who may or may not agree with the President's determination, and whom the President cannot remove simply because that officer disagrees with him. This contravenes the President's "constitutional obligation to ensure the faithful execution of the laws." Id., at 693.

Page 2 of the Opinion

The Constitution that makes the President accountable to the people for executing the laws also gives him the power to do so. That power includes, as a general matter, the authority to remove those who assist him in carrying out his duties. Without such power, the President could not be held fully accountable for discharging his own responsibilities; the buck would stop somewhere else. Such diffusion of authority "would greatly diminish the intended and necessary responsibility of the chief magistrate himself." The Federalist No. 70, at 478.

While we have sustained in certain cases limits on the President's removal power, the Act before us imposes a new type of restriction-two levels of protection from removal for those who nonetheless exercise significant executive power. Congress cannot limit the President's authority in this way.

Page 33 of the Opinion

PCAOB Is More Than a Mere SRO

Respondent Public Company Accounting Oversight Board (PCAOB or the Board) was created as part of a series of accounting reforms in the Sarbanes-Oxley Act of 2002. PCAOB is composed of five members appointed by the Securities and Exchange Commission (SEC or the Commission). It was modeled on private self-regulatory organizations in the securities industry-such as the New York Stock Exchange-that investigate and discipline their own members subject to Commission oversight. Unlike these organizations, the Board is a Government-created entity with expansive powers to govern an entire industry.

Every accounting firm that audits public companies under the securities laws must register with the Board, pay it an annual fee, and comply with its rules and oversight. The Board may inspect registered firms, initiate formal investigations, and issue severe sanctions in its disciplinary proceedings. The parties agree that the Board is "part of the Government" for constitutional purposes, Lebron v. National Railroad Passenger Corporation, 513 U. S. 374, 397, and that its members are " 'Officers of the United States' " who "exercis[e] significant authority pursuant to the laws of the United States," Buckley v. Valeo, 424 U. S. 1, 125-126.

The SEC's Good-Cause Oversight: Willfullness or Enforcement Failure

While the SEC has oversight of the Board, it cannot remove Board members at will, but only "for good cause shown," "in accordance with" specified procedures. §§7211(e)(6), 7217(d)(3). Removal of a Board member requires a formal Commission order and is subject to judicial review. The removal procedures require a Commission finding, "on the record" and "after notice and opportunity for a hearing," that the Board member

"(A) has willfully violated any provision of th[e] Act, the rules of the Board, or the securities laws;

"(B) has willfully abused the authority of that member; or

"(C) without reasonable justification or excuse, has failed to enforce compliance with any such provision or rule, or any professional standard by any registered public accounting firm or any associated person thereof." §7217(d)(3).  

The President's Oversight of the SEC: Inefficiency, Neglect, or Malfeasance

The parties also agree that the Commissioners, in turn, cannot themselves be removed by the President except for " 'inefficiency, neglect of duty, or malfeasance in office.' " Humphrey's Executor v. United States, 295 U. S. 602, 620.

Genesis of This Lawsuit

The Board inspected petitioner accounting firm, released a report critical of its auditing procedures, and began a formal investigation. The firm and petitioner Free Enterprise Fund, a nonprofit organization of which the firm is a member, sued the Board and its members, seeking, inter alia, a declaratory judgment that the Board is unconstitutional and an injunction preventing the Board from exercising its powers.

I. Petitioners argued that the Sarbanes-Oxley Act contravened the separation of powers by conferring executive power on Board members without subjecting them to Presidential control.

The basis for petitioners' challenge was that Board members were insulated from Presidential control by two layers of tenure protection:

  1. Board members could only be removed by the Commission for good cause, and
  2. the Commissioners could in turn only be removed by the President for good cause.

II. Petitioners also challenged the Board's appointment as violating the Appointments Clause, which requires officers to be appointed by the President with the Senate's advice and consent, or-in the case of "inferior Officers"-by "the President alone, . . . the Courts of Law, or . . . the Heads of Departments," Art. II, §2, cl. 2.

The United States intervened to defend the statute. The District Court found it had jurisdiction and granted summary judgment to respondents.

Court of Appeals Affirms

The Court of Appeals affirmed. It first agreed that the District Court had jurisdiction. It then ruled that the dual restraints on Board members' removal are permissible, and that Board members are inferior officers whose appointment is consistent with the Appointments Clause.

No Need to Exhaust Administrative Remedies Here -- District Court Has Jurisdiction

The Supreme Court affirmed that the District Court had jurisdiction over these claims. The Commission may review any Board rule or sanction, and an aggrieved party may challenge the Commission's "final order" or "rule" in a court of appeals under 15 U. S. C. §78y. The Government reads §78y as an exclusive route to review, but the text does not expressly or implicitly limit the jurisdiction that other statutes confer on district courts. It is presumed that Congress does not intend to limit jurisdiction if "a finding of preclusion could foreclose all meaningful judicial review"; if the suit is " 'wholly "collateral" ' to a statute's review provisions"; and if the claims are "outside the agency's expertise." Thunder Basin Coal Co. v. Reich, 510 U. S. 200, 212-213. These considerations point against any limitation on review here. Section 78y provides only for review of Commission action, and petitioners' challenge is "collateral" to any Commission orders or rules from which review might be sought.

The Government advises petitioners to raise their claims by appealing a Board sanction, but petitioners have not been sanctioned, and it is no "meaningful" avenue of relief, Thunder Basin, supra, at 212, to require a plaintiff to incur a sanction in order to test a law's validity, MedImmune, Inc. v. Genentech, Inc., 549 U. S. 118, 129. Petitioners' constitutional claims are also outside the Commission's competence and expertise, and the statutory questions involved do not require technical considerations of agency policy.

Dual For-Cause Barriers Offend Separation of Powers

The dual for-cause limitations on the removal of Board members contravene the Constitution's separation of powers. The Constitution provides that "[t]he executive Power shall be vested in a President of the United States of America." Art. II, §1, cl. 1. Since 1789, the Constitution has been understood to empower the President to keep executive officers accountable-by removing them from office, if necessary. See generally Myers v. United States, 272 U. S. 52. This Court has determined that this authority is not without limit. In Humphrey's Executor, supra, this Court held that Congress can, under certain circumstances, create independent agencies run by principal officers appointed by the President, whom the President may not remove at will but only for good cause. And in United States v. Perkins, 116 U. S. 483, and Morrison v. Olson, 487 U. S. 654, the Court sustained similar restrictions on the power of principal executive officers-themselves responsible to the President-to remove their own inferiors. However, this Court has not addressed the consequences of more than one level of good-cause tenure.  

Where this Court has upheld limited restrictions on the President's removal power, only one level of protected tenure separated the President from an officer exercising executive power. The President-or a subordinate he could remove at will-decided whether the officer's conduct merited removal under the good-cause standard. Here, the Act not only protects Board members from removal except for good cause, but withdraws from the President any decision on whether that good cause exists. That decision is vested in other tenured officers-the Commissioners-who are not subject to the President's direct control.

Because the Commission cannot remove a Board member at will, the President cannot hold the Commission fully accountable for the Board's conduct. He can only review the Commissioner's determination of whether the Act's rigorous good cause standard is met. And if the President disagrees with that determination, he is powerless to intervene-unless the determination is so unreasonable as to constitute " 'inefficiency, neglect of duty, or malfeasance in office.' " Humphrey's Executor, supra, at 620.

SIDE BAR:  Without the ability to oversee the Board, or to attribute the Board's failings to those whom he can oversee, the President is no longer the judge of the Board's conduct. He can neither ensure that the laws are faithfully executed, nor be held responsible for a Board member's breach of faith. If this dispersion of responsibility were allowed to stand, Congress could multiply it further by adding still more layers of good-cause tenure. Such diffusion of power carries with it a diffusion of accountability; without a clear and effective chain of command, the public cannot determine where the blame for a pernicious measure should fall.

The Act's restrictions are therefore incompatible with the Constitution's separation of powers.  The " 'fact that a given law or procedure is efficient, convenient, and useful in facilitating functions of government, standing alone, will not save it if it is contrary to the Constitution. " Bowsher v. Synar, 478 U. S. 714, 736. The Act's multilevel tenure protections provide a blueprint for the extensive expansion of legislative power. Congress controls the salary, duties, and existence of executive offices, and only Presidential oversight can counter its influence. The Framers created a structure in which "[a] dependence on the people" would be the "primary controul on the government," and that dependence is maintained by giving each branch "the necessary constitutional means and personal motives to resist encroachments of the others." The Federalist No. 51, p. 349.

A key "constitutional means "vested in the President was "the power of appointing, overseeing, and controlling those who execute the laws." 1 Annals of Congress 463. While a government of "opposite and rival interests" may sometimes inhibit the smooth functioning of administration, The Federalist No. 51, at 349, "[t]he Framers recognized that, in the long term, structural protections against abuse of power were critical to preserving liberty." Bowsher, supra, at 730. The Government errs in arguing that, even if some constraints on the removal of inferior executive officers might violate the Constitution, the restrictions here do not. There is no construction of the Commission's good-cause removal power that is broad enough to avoid invalidation. Nor is the Commission's broad power over Board functions the equivalent of a power to remove Board members. Altering the Board's budget or powers is not a meaningful way to control an inferior officer; the Commission cannot supervise individual Board members if it must destroy the Board in order to fix it. Moreover, the Commission's power over the Board is hardly plenary, as the Board may take significant enforcement actions largely independently of the Commission. Enacting new SEC rules through the required notice and comment procedures would be a poor means of micromanaging the Board, and without certain findings, the Act forbids any general rule requiring SEC preapproval of Board actions. Finally, the Sarbanes-Oxley Act is highly unusual in committing substantial executive authority to officers protected by two layers of good-cause removal.

Not Throwing the Baby Out With The Bathwater -- A Savings Clause, in essence

The unconstitutional tenure provisions are severable from the remainder of the statute. Because "[t]he unconstitutionality of a part of an Act does not necessarily defeat or affect the validity of its remaining provisions," Champlin Refining Co. v. Corporation Comm'n of Okla., 286 U. S. 210, 234, the "normal rule" is "that partial . . . invalidation is the required course," Brockett v. Spokane Arcades, Inc., 472 U. S. 491, 504. The Board's existence does not violate the separation of powers, but the substantive removal restrictions imposed by§§7211(e)(6) and 7217(d)(3) do. Concluding that the removal restrictions here are invalid leaves the Board removable by the Commission at will. With the tenure restrictions excised, the Act remains " 'fully operative as a law,' " New York v. United States, 505 U. S. 144, 186, and nothing in the Act's text or historical context makes it "evident" that Congress would have preferred no Board at all to a Board whose members are removable at will, Alaska Airlines, Inc. v. Brock, 480 U. S. 678, 684. The consequence is that the Board may continue to function as before, but its members may be removed at will by the Commission.

The Board's appointment is consistent with the Appointments Clause. The Board members are inferior officers whose appointment Congress may permissibly vest in a "Hea[d] of Departmen[t]." Inferior officers "are officers whose work is directed and supervised at some level" by superiors appointed by the President with the Senate's consent. Edmond v. United States, 520 U. S. 651, 662-663. Because the good-cause restrictions discussed above are unconstitutional and void, the Commission possesses the power to remove Board members at will, in addition to its other oversight authority. Board members are therefore directed and supervised by the Commission. .

The SEC Deemed A Government Department

The Commission is a "Departmen[t]" under the Appointments Clause. Freytag v. Commissioner, 501 U. S. 868, 887, n. 4, specifically reserved the question whether a "principal agenc[y], such as "the SEC, is a "Departmen[t]." The Court now adopts the reasoning of the concurring Justices in Freytag, who would have concluded that the SEC is such a "Departmen[t]" because it is a freestanding component of the Executive Branch not subordinate to or contained within any other such component. This reading is consistent with the common, near-contemporary definition of a "department"; with the early practice of Congress, see §3, 1 Stat. 234; and with this Court's cases,which have never invalidated an appointment made by the head of such an establishment.  

Is Chair Schapiro Demoted? The Commissioners Deemed the "Head" of SEC

The several Commissioners, and not the Chairman, are the Commission's "Hea[d]." The Commission's powers are generally vested in the Commissioners jointly, not the Chairman alone. Commissioners do not report to the Chairman, who exercises administrative functions subject to the full Commission's policies. There is no reason why a multimember body may not be the "Hea[d]" of a"Departmen[t]" that it governs. The Appointments Clause necessarily contemplates collective appointments by the "Courts of Law," Art. II, §2, cl. 2, and each House of Congress appoints its officers collectively, see, e.g., Art. I, §2, cl. 5. Practice has also sanctioned the appointment of inferior officers by multimember agencies.

Petitioners are not entitled to broad injunctive relief against the Board's continued operations. But they are entitled to declaratory relief sufficient to ensure that the reporting requirements and auditing standards to which they are subject will be enforced only by a constitutional agency accountable to the Executive.

Affirmed in part, reversed in part, and remanded. ROBERTS, C. J., delivered the opinion of the Court, in which SCALIA, KENNEDY, THOMAS, and ALITO, JJ., joined. BREYER, J., filed a dissenting opinion, in which STEVENS, GINSBURG, and SOTOMAYOR, JJ., joined.

The Breyer Dissent

The statute does not significantly interfere with the President's "executive Power." Art. II, §1. It violates no separation-of-powers principle. And the Court's contrary holding threatens to disrupt severely the fair and efficient administration of the laws.

Congress sometimes may, consistent with the Constitution, limit the President's authority to remove an officer from his post. The Supreme Court should decide the constitutional question in light of the provision's practical functioning in context. And its decision should take account of the Judiciary's comparative lack of institutional expertise.

The Court fails to show why two layers of "for cause" protection-Layer One insulating the Commissioners from the President, and Layer Two insulating the Board from the Commissioners-impose any more serious limitation upon the President's powers than one layer.

The Court is simply wrong when it says that "the Act nowhere gives the Commission effective power to start, stop, or alter" Board investigations. On the contrary, the Commission's control over the Board's investigatory and legal functions is virtually absolute. Moreover, the Commission has general supervisory powers over the Board itself: It controls the Board's budget, §§7219(b),(d)(1); it can assign to the Board any "duties or functions" that it "determines are necessary or appropriate," §7211(c)(5); it has full "oversight and enforcement authority over the Board," §7217(a), including the authority to inspect the Board's activities whenever it believes it "appropriate" to do so, §7217(d)(2) (emphasis added). And it can censure the Board or its members, as well as remove the members from office, if the members, for example, fail to enforce the Act, violate any provisions of the Act, or abuse the authority granted to them under the Act.