A Whopper of an Assumption in Free Enterprise Fund v. PCAOB

In his dissent in Free Enterprise Fund v. PCAOB, D.C. Circuit Judge Brett Kavanaugh characterized the SEC – Public Company Accounting Oversight Board (PCAOB) relationship as “Humphrey’s Executor squared.” His analysis assumes that two firewalls shield the PCAOB’s exercise of executive power from presidential control. First, PCAOB members can be removed only for cause by SEC commissioners. That’s clear enough. Second, SEC commissioners can be removed only for cause by the President.

The strange thing is that no statute says that the President may remove SEC commissioners only for cause. The idea that the President may not remove SEC commissioners except for cause turns out to be only a whopper of an assumption. Removing that erroneous assumption, there is only the PCAOB-SEC firewall to presidential control of the PCAOB and so understood that arrangement looks no worse than Humphrey’s Executor to the first power. Unless the Court is prepared to abandon Humphrey’s Executor altogether, this part of the challenge looks like a loser at this point in time.

The significance of the assumption was not lost on the Court during oral argument.

Justice Breyer first raised the issue (Tr. 17, lines 8-12: “What — what restrictions? Because, interestingly enough, my law clerks have been unable to find any statutory provision that says the President of the United States can remove an SEC commissioner only for cause”), but several justices later seconded the concern, including Justices Kennedy (Tr. 51-52) and Sotomayor (Tr. 52).

The only statute that could be interpretively glossed as creating good cause tenure is the provision for fixed commissioner terms. A provision, however, that fixes a tenure for a period of time does not thereby provide for removal only for cause. Examples abound in the U.S. Code. For example, bankruptcy judges are appointed for 14-year terms, 28 U.S.C. 152(a). It is a separate provision that provides bankruptcy judges may be removed only for cause. See 28 U.S.C. 152(e). A fixed term defines the appointment’s length and provides a measure for the quantum of damages should the officer be removed before the end of the term. On the other hand, a “for cause” provision specifies on what grounds an officer’s tenure may be terminated during that fixed term.

An analogy to agency law may be helpful here. A principal may contract with an agent for a fixed period of service, say, 5 years. If the principal should be canned before the agent’s 5 year term ends (agency law places the principal firmly in control of his choice of agents), the length of the term speaks only to the amount of damages that the erstwhile agent could receive for the breach of contract. The fixed term does not give the jilted agent a right to continue to serve in a principal-agent relationship if the removal was for other than cause. It just defines the amount of damages.

This agency approach explains why Wiener v. United States, 357 U.S. 349 (1958), should not be read to create an implied statutory limitation on presidential removal power whenever an officer merely holds an office for a fixed term. Wiener was simply a suit for back pay, not for reinstatement as an officer. The officer’s fixed term was relevant to the determination of the quantum of damages (much as it would be  in agency law).

Ironically, Justice Scalia was dissatisfied with Justice Breyer’s attention to statutory text – or absence thereof – at oral argument. Scalia thought that, notwithstanding the absence of any statute providing for good cause tenure for SEC commissioners, the Court should go along with the parties’ assumption. That position is surprising. Since when can parties stipulate to different statutory language than that which was duly enacted and the Court go along with it? And what is this new law of extra-textual assumptions? Is Scalia appealing to evolving standards of assumption? International and foreign sources of assumption? Assumptions found in legislative history? As Scalia says, the best evidence of what Congress intended is what the text of a statute said. Here it said nothing about limiting presidential power to remove SEC commissioners to good cause shown.

And what conditions for removal should we assume from this extra-textual exercise? Is the good cause that we are to assume the “malfeasance, neglect of duty, and inefficiency” language that created a “here-and-now subservience” in Synar? Or is it something more limited, such as removal only for physical or mental incapacity?

Of course, there is a textual option that avoids the need to assume and lays the problem at the feet of the democratic process. The Court could conclude that the SEC commissioners are removable at will because the statute does not say otherwise and conclude that there is only one removal firewall. To be sure, Congress could react to the Court’s statutory interpretation and create good cause tenure for such commissioners, but that’s the democratically and institutionally appropriate role of Congress. Then, and only then, would “Humphrey’s Executor squared” be truly presented to the Court for its review.

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3 Responses

  1. You write:

    “Scalia thought that, notwithstanding the absence of any statute providing for good cause tenure for SEC commissioners, the Court should go along with the parties’ assumption.”

    Where exactly does Justice Scalia say that? Now immediately after Justice Breyer makes his observation, Justice Ginsburg (pg 19) does comment:

    “JUSTICE GINSBURG: I thought that both sides agreed that there is no statute, everybody agrees to that. But I thought that the government, just as your side, agreed that the President could dismiss an SEC commissioner for cause.”

    …but I found nothing that would indicate Justice Scalia was morphing into a textual squish. Now he did say (pg. 17)

    “JUSTICE SCALIA: I don’t think the government will think it has achieved a great victory if it comes out of this with the proposition that the SEC is not an independent regulatory agency. And I don’t think the government is arguing that position.”

    Too bad – because I think that would have been a winning argument with Justice Scalia. Also:

    “Unless the Court is prepared to abandon Humphrey’s Executor altogether, this part of the challenge looks like a loser at this point in time.”

    Well, we can hope:

    “GENERAL KAGAN: I — I understand the temptation to say something like, well, we don’t really much like Humphrey’s Executor, but we are stuck with it, but not an inch further.
    CHIEF JUSTICE ROBERTS: I didn’t say anything bad about Humphrey’s Executor.
    (Laughter.)
    GENERAL KAGAN: But — but —
    JUSTICE SCALIA: I did, I did.” (pg 44)

    and

    “GENERAL KAGAN: Again, the President has the same level of control over the SEC as he has with respect to anything else. That’s just Humphrey’s Executor.
    CHIEF JUSTICE ROBERTS: I’m not worried if it’s the same. I’m worried if it’s enough.” (pg 48)

  2. Tuan says:

    Maryland Conservatarian:

    I read the same remark — “I don’t think the government will think it has achieved a great victory if it comes out of this with the proposition that the SEC is not an independent regulatory agency. And I don’t think the government is arguing that position.” — to be a brush off and an adoption of the assumption that the President cannot remove SEC commissioners at will. Later in the argument Scalia again changes topic when the issue is raised by Kennedy and then Sotomayor in a way that seems like a brush off (Tr. at 52.)

    Of course, Scalia did say, in response to the Breyer suggestion and Carvin’s reply, that “I’d love to say that [i.e. that SEC commissioners are removable at will by the President]. That would be wonderful.” (Tr. at 21)

    So then why doesn’t he just say that the SEC commissioners are removable at will by the President? Statutory text doesn’t evaporate because the parties neglect it. If a majority agreed, notwithstanding a broad assumption to the contrary, it would be reaching the same bottom line as the D.C. Circuit (i.e. the PCAOB is constitutional) on the removal question, but on other grounds, viz., the PCAOB doesn’t violate the separation of powers because the President can remove the SEC commissioners and thereby control their exercise of executive power.