As all of this plays out, the SEC did win a major victory in the 7th Circuit in Bebo v. SEC.
The case did not involve a challenge to the system of ALJs under the Appointments Clause but did raise other issues in a collateral challenge to the administrative hearing process. See Id. ('Bebo contends that § 929P(a) of Dodd-Frank is facially unconstitutional under the Fifth Amendment because it provides the SEC “unguided” authority to choose which respondents will and which will not receive the procedural protections of a federal district court, in violation of equal protection and due process guarantees. She also contends that the SEC’s administrative proceedings are unconstitutional under Article II because the ALJs who preside over SEC enforcement proceedings are protected from removal by multiple layers of for-cause protection.").
The 7th Circuit held that the district court did not have jurisdiction to hear the collateral challenge. Instead, the issues needed to be raised in the administrative hearing where they would be reviewed (assuming the case got that far) by the US Court of Appeals. As the court reasoned:
- We affirm. It is “fairly discernible” from the statute that Congress intended plaintiffs in Bebo’s position “to proceed exclusively through the statutory review scheme” set forth in 15 U.S.C. § 78y. See Elgin v. Dep’t of Treasury, 567 U.S. —, 132 S. Ct. 2126, 2132–33 (2012). Although § 78y is not “an exclusive route to review” for all types of constitutional challenges, the relevant factors identified by the Court in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477, 489 (2010), do not adequately support Bebo’s attempt to skip the administrative and judicial review process here. Although Bebo’s suit can reasonably be characterized as “wholly collateral” to the statute’s review provisions and outside the scope of the agency’s expertise, a finding of preclusion does not foreclose all meaningful judicial review. If aggrieved by the SEC’s final decision, Bebo will be able to raise her constitutional claims in this circuit or in the D.C. Circuit. Both courts are fully capable of addressing her claims. And because she is already a respondent in a pending administrative proceeding, she would not have to “‘bet the farm … by taking the violative action’ before ‘testing the validity of the law.’” Id. at 490, quoting MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 129 (2007). Unlike the plaintiffs in Free Enterprise Fund, Bebo can find meaningful review of her claims under § 78y. As a result, she must pursue judicial review in the manner prescribed by the statute.
The reasoning would seem to apply with equal vigor to the cases challenging the SEC's system for appointing ALJs. This is only one circuit and, for administrative law purposes, not the critical DC Circuit. Nonetheless, the reasoning will at a minimum need to be addressed in other cases where the SEC appeals (Hill for example) and argues that the district court never should have heard the case in the first instance.
To the extent that the appellate courts fall into line with Bebo, the approach takes the matter out of the hands of the district courts and gives the SEC the first crack at taking a substantive position on the issue. Moreover, the approach ultimately delays a determination of the constitutionality of the ALJ appointment process until the matter can make it through the SEC's AP process and it can get to the court of appeals.
Finally, once the SEC has ruled in one case (the matter is before the SEC in Timbervest) and assuming the Commission finds the system of appointment constitutional (because the ALJs are employees and not inferior officers), courts may, at least psychologically, be more open to collateral challenges. After all, forcing a party through an administrative process when the outcome has already been determined may be viewed as an unnecessary burden.