Supreme Court finds the restriction on removal of the Consumer Financial Protection Bureau's single director unconstitutional, but leaves the bureau operational

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Financial Services Alert

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On June 29, 2020, in a 5-4 decision, the Supreme Court held that the Dodd-Frank Act’s restriction on the President’s authority to remove the Director of the Consumer Financial Protection Bureau (CFPB) is unconstitutional but the Court is allowing the Bureau to remain intact and continue to operate.  Seila Law LLC v. Consumer Fin. Protection Bureau, ___ S. Ct. ___, 2020 WL 3492641, No. 19-7, slip op. (June 29, 2020). 

This decision settles a legal question that has been hanging over the CFPB since its creation in 2011 in the wake of the 2008 financial crisis.  The Supreme Court found that the CFPB’s single-director structure impermissibly impinges on the President’s removal power under Article II of the Constitution, which requires the President to “take care” that the laws of the United States be faithfully executed.  The Court thus invalidated the statutory restriction on that removal power because it obstructed the President’s constitutional duty to supervise agencies within the executive branch, including the CFPB.

When Congress created the CFPB as part of the Dodd-Frank Act, it gave the agency vast rulemaking, enforcement, and adjudicatory powers over a broad swath of the US economy, including authority under 18 federal statutes plus additional authority related to unfair business practices in the consumer financial services sector.  Congress also removed the CFPB from the annual Congressional appropriations process by funding it directly from the Federal Reserve and created a powerful leadership structure unlike that of any other independent regulatory agency.  Rather than a multi-member board or commission, the CFPB has a single Director appointed for a five-year term, removable by the President only for cause.  This structure was intended to insulate a serving Director from removal by a President during the director’s five-year term absent cause, thereby limiting the Executive’s ability to check the actions of the CFPB.  The result was a federal agency with unprecedented and vast enforcement powers and financial resources that could not be checked by Congress through deprivation of funding or by the Executive through removal of its Director, except for cause.

In Seila Law, a California law firm that provides consumer debt relief-related legal services challenged a Civil Investigative Demand (CID) issued by the CFPB, arguing that its single-director leadership structure violated the separation of powers.  The CFPB brought an action in the Central District of California to enforce the CID.  The district court rejected Seila Law’s constitutional challenge and the Ninth Circuit Court of Appeals affirmed, finding that Humphrey’s Ex’r v. United States, 295 U.S. 602 (1935) (approving for-cause removal authority for FTC directors in 1935), and Morrison v. Olson, 487 U.S. 654 (1988) (insulating independent counsel from removal absent cause) supported the CFPB’s structure and the removal protections for its Director. 

In its Seila Law opinion, the Supreme Court overturned the Ninth Circuit’s decision and, after finding the Director removal protection severable from the Dodd-Frank Act, remanded the case to the district court for a determination of “whether the civil investigative demand was validly ratified.” CFPB, slip op. at 36.

The Supreme Court’s decision in Seila Law

In the Supreme Court’s majority opinion, authored by Chief Justice John G. Roberts, the Court ruled that “[t]he CFPB Director’s insulation from removal by an accountable President is enough to render the agency’s structure unconstitutional.”  Id. at 23.  Additionally, the Court found that the intentional design of the CFPB was even more problematic because, in addition to removing the direct ability of the President to check the agency, Congress also removed indirect methods of checking the CFPB.  These problems included the single-director structure in lieu of a multi-member board or commission that would have allowed the President to appoint some board members or commissioners to serve as an indirect check on the Director, and removing the Bureau from the Congressional appropriations process, putting it beyond the indirect financial restraints of Congress.  Thus, the Court recognized that the combination of such broad and significant enforcement powers, along with the placement of those powers in a single individual Director with limited executive oversight, unconstitutionally undermined the President’s Article II authority to “take care” that the laws of the United States be faithfully executed, in violation of separation of powers.

The majority opinion focuses on the broad scope of the CFPB Director’s unilateral authority “to seek daunting monetary penalties against private parties on behalf of the United States in federal court” unchecked by the Executive.  Justice Roberts distinguished the case law supporting multi-member commissions like the Federal Trade Commission (FTC), whose commissioners are not removable at will, on the basis that the case law did not consider the delegation of such “a quintessentially executive power” to a single individual.  Justice Roberts also distinguished the CFPB from other agencies that have an individual leader with removal protections, like the Social Security Administration, on the basis that those agencies do not involve vast regulatory or enforcement authority comparable to that exercised by the CFPB.

Justice Clarence Thomas, joined by Justice Neil M. Gorsuch, concurred in part and dissented in part, agreeing that the removal restrictions were unconstitutional, but further arguing that the Court should revisit the case law authorizing the existence of independent agencies in the first instance.  This important dissent indicates a willingness of at least two justices to take more far-reaching steps to rein in such agencies. 

Justice Elena Kagan, joined by Justices Ruth Bader Ginsburg, Stephen G. Breyer, and Sonia Sotomayor, dissented, arguing that the removal restrictions should be affirmed under existing precedent and noting that those opinions did not turn on the fact that the FTC had a multi-member commission.

What happens next?

The decision to sever the removal protections but keep the remainder of the CFPB’s structure intact permits the agency to continue to function and is unlikely to have a meaningful immediate impact on the day-to-day operations of the CFPB.  But whenever a new Administration is elected, the incoming President will be able to select a new CFPB Director.  This important change means that the CFPB’s operations and priorities will likely be refocused to more closely mirror those of the serving President any time the Administration changes.

The Court’s decision also throws into question the investigative and enforcement actions of the CFPB to date under the Bureau’s unconstitutional leadership structure.  Affected entities and individuals may seek to set aside prior actions as invalid because they were prosecuted by an unconstitutionally structured agency.  This process may raise afresh the question of whether prior unconstitutional activities of an agency can be ratified.  See eg Lucia v. S.E.C., 138 S. Ct. 2044, 2055, n.6 (2018) (declining to take up the question of ratification).  As a practical effect, however, such relief may come too late for many that are now out of business or lack the financial resources to mount such a challenge.

Perhaps more significant is the potential impact of the majority opinion’s new separation of powers doctrine.  In its attempt to respect stare decisis while reaching a different outcome, the majority potentially opened the door to future challenges based on whether an agency is exercising power that is “quintessentially executive,” and, if so, whether such power is sufficiently diffused among its leadership in essence, a sliding-scale separation of powers test.  The Court’s ruling and the Thomas/Gorsuch dissent raise further, interesting questions as to whether similar structural attacks could be made on other agencies, among them the FTC and Federal Housing Finance Authority.  When we view this decision together with the Supreme Court’s June 22, 2020 decision in Liu v. S.E.C, ___S. Ct. ___, 2020 WL 3405845, No. 18-1501, slip op. (June 22, 2020), in which justices from both sides of the Court came together to limit the authority of the agency to seek disgorgement, we may be seeing a greater willingness in the Court to reconsider issues concerning the authority of independent agencies to seek exceptional remedies.

Learn more about the implications of this decision by contacting any of the authors.