Supreme Court Wrestles with Constitutional Challenge to the CFPB

The U.S. Supreme Court heard argument on March 3, 2020, in Seila Law v. CFPB. The case involves a constitutional challenge to the structure of the Consumer Financial Protection Bureau (CFPB) by a California law firm under investigation for potential violations of the Telemarketing Sales Rule. The CFPB is currently headed by a single director, who is appointed by the president and confirmed by the Senate to serve a five-year term in office.¹ Once the CFPB director assumes office, the director can be removed by the president only for "inefficiency, neglect of duty, or malfeasance in office."² That limitation on the president's power to remove the CFPB director from office, both Seila Law and the CFPB itself contend, violates the U.S. Constitution's separation of powers. In short, Seila Law and the CFPB argue that Article II of the Constitution provides that "[t]he executive power shall be vested in a President of the United States of America" who shall "take care that the laws be faithfully executed," and that, in order to effectively execute his power and fulfill his obligations, the president must be able to not only appoint, but also remove senior executive officials at will. Because the CFPB director is such an official and yet is not subject to removal at the will of the president, Seila Law and the CFPB told the justices last week, the CFPB's structure is unconstitutional.

Dispute History

While Seila Law's dispute with the CFPB ultimately ended up in the Supreme Court — a rare occurrence in an age where the Supreme Court often hears less than 100 cases per year — it started like almost all disputes with the CFPB. The CFPB issued a Civil Investigative Demand (CID) to Seila Law asking for information and documents. Seila Law refused to fully comply with the CFPB's requests, lodging a number of objections, including that the CFPB lacked the authority to issue the CID because its director was unconstitutionally insulated from presidential control. The CFPB then filed suit in federal district court to compel compliance with the CID. The U.S. District Court for the Central District of California rejected Seila Law's constitutional challenge and ordered full compliance with the demands in the CID.³ When Seila Law appealed the Central District's order to the U.S. Court of Appeals for the Ninth Circuit, Seila Law was met with nothing less than a unanimous panel, which needed less than seven pages to again reject Seila Law's constitutional challenge.⁴ Seila Law, however, continued to press its constitutional objection to the validity of the CID filing a petition for a writ of certiorari on the question of "[w]hether the vesting of substantial executive authority in the Consumer Financial Protection Bureau, an independent agency led by a single director, violates the separation of powers." The Supreme Court granted Seila Law's petition on the question presented in the petition and directed the parties to brief and argue a second question: "If the Consumer Financial Protection Bureau is found unconstitutional on the basis of the separation of powers, can 12 U.S.C. §5491(c)(3) be severed from the Dodd-Frank Act?"

Court Reaction

The justices reaction to the arguments presented by counsel for Seila Law, the CFPB, the House of Representatives, as amicus curiae, and Paul Clement, as amicus curiae in support of the decision of the Ninth Circuit, which the CFPB refused to defend, was mixed, but telling. To begin, only two justices expressed serious interest in disposing of the case without reaching the constitutional question before the Court. Justice Ruth Bader Ginsburg raised the issue of mootness. She noted that "[t]he demand in question was ratified by an acting head who was subject to the President's removal power, without qualification . . . so whatever might have been [the matter] with the Board head that was responsible for this demand, the acting head is fully removable by the President."⁵ The only other justice to raise a justifiability doctrine was Justice Sonia Sotomayor who stated that "[g]iven that your client is not the President, it seems to me that the person who should be complaining is the President, not your client. Shouldn't we address the severability question and leave for another day the issue that would cause harm, i.e., shouldn't we address severability first? If we find this severable, then it's academic whether the . . . President has power. . . . [a]nd shouldn't we do what we've done for over 200 years of this country and wait until there's an actual dispute between the President and a director that he or she . . . wants to fire?" Because none of the other justices expressed much interest in disposing of the case without addressing the merits, it seems likely that the Court will decide whether the CFPB's unusual structure is constitutionally permissible.

When the justices turned to the merits of the case, many of them found the idea of permitting Congress to place substantial restrictions on the president's authority to remove the heads of both multi-member and single-director executive agencies alike problematic. If the Court were to extend its prior precedent permitting Congress to place "for cause" restrictions on the president's power to remove members of multi-member executive agencies, such as the Federal Trade Commission, to cases involving single-director executive agencies, what, asked Justice Neil Gorsuch, is to stop Congress from placing those restrictions on every member of the president's cabinet. Justice Samuel Alito was quick to follow up with a question aimed at determining precisely where the line would be if the Court were to affirm the Ninth Circuit's opinion permitting Congress to restrain the president's power to replace his closest advisors at will. For Justice Brett Kavanaugh, who authored the U.S. Court of Appeals for the District of Columbia Circuit's panel opinion in PHH v. CFPB holding that the CFPB was unconstitutionally structured⁶ (an opinion that was ultimately vacated by an en banc panel of the D.C. Circuit),⁷ the case presented a very practical problem for future presidents. After observing that the current CFPB director's term does not expire until 2023, Justice Kavanaugh stated that "it's really the next President who's going to face the issue, because the head of this agency will go at least three or four years into the next President's term, and the next President might have a completely different conception of consumer financial regulatory issues yet will be able to do nothing about it." Finally, for Justice John Roberts, although his initial inclination was to ensure that there was no way to reasonably interpret the "inefficiency, neglect of duty, or malfeasance in office" standard so as to afford the president sufficient control over the CFPB director,⁸ he ultimately expressed considerable reservations about interpreting the standard as somewhere between "for cause" and "at will" because of the active role it would create for the courts in deciding future disputes about whether that standard had been met.

With at least four justices apparently of the view that the CFPB's structure is unconstitutional,⁹ the question remains, does that constitutional infirmity require the Supreme Court to eliminate the CFPB? If one can read tea leaves, it appears that the Supreme Court will allow the CFPB to survive. As Justice Kavanaugh highlighted during the argument, the statute that creates the CFPB and provides that its director shall be removable only for "inefficiency, neglect of duty, or malfeasance in office" includes a clear severability clause. The clause provides that " [i]f any provision of this Act . . . is held to be unconstitutional, the remainder of this Act . . . shall not be affected thereby."¹⁰ None of the justices expressed much resistance to interpreting the clear text of the severability clause as written. If fact, even Justice Sotomayor, who seemed inclined to avoid the constitutional question altogether, indicated that the removal standard was likely severable.

Conclusion

Predicting the outcome of a case based upon how an oral argument unfolds is never easy, but it does seem likely that, given the questions and remarks of five of the nine justices, the Supreme Court will 1) reach the question of whether the restrictions on the president's ability to remove the CFPB director violate the Constitution's separation of powers, 2) find that those restrictions render the CFPB's structure unconstitutional, 3) hold that the restrictions on presidential control over the CFPB director are severable from the remainder of the law creating the CFPB, and 4) allow the CFPB to survive with a director who is subject to removal at the will of the president.

About Our Team

If you have questions about the potential implications of the Supreme Court's decision in Seila Law v. CFPB, Holland & Knight's Consumer Protection Defense and Compliance Team can provide additional information. The team is comprised of individuals with extensive experience handling CFPB, FTC and state attorneys general investigations, and can provide advice on how to best navigate those investigations in an ever-evolving regulatory environment. Please contact the authors with any questions.

Notes

¹ 12 U.S.C. § 5491(b), (c)(1)
² Id. § 5491(c)(3)
³ The decision of the U.S. District Court for the Central District of California in CFPB v. Seila Law
⁴ The decision for the U.S. Court of Appeals for the Ninth Circuit in CFPB v. Seila Law
⁵ The transcript of the Supreme Court oral argument
⁶ The panel decision of the U.S. Court of Appeals for the District of Columbia Circuit in PHH v. CFPB
⁷ The en banc panel decision of the U.S. Court of Appeals for the District of Columbia Circuit in PHH v. CFPB
⁸ For example, when the U.S. Court of Appeals for the District of Columbia Circuit, sitting en banc, considered the case of PHH v. CFPB, Judge Thomas Griffith wrote an opinion concurring with the majority's judgement that the restriction on the president's ability to remove the CFPB director from office did not violate the Constitution because, in his view, the "inefficiency, neglect of duty, or malfeasance in office" standard permits the president to remove the CFPB director for nothing more than ineffective policy choices.
⁹ Per his usual practice, Justice Clarence Thomas did not ask any questions during the oral argument.
¹⁰ 12 U.S.C. § 5302

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