Earlier today, the U.S. Supreme Court released its long-awaited decision in the case of Seila Law LLC v. Consumer Financial Protection Bureau, a constitutional challenge to the structure of the CFPB.  The Court held that (i) the provision of the Dodd-Frank Act that protects the CFPB Director from removal by the President except for cause violates the constitutional separation of powers, and (ii) this provision is severable from the rest of the statute.  As a consequence of the decision, the CFPB Director is now removable by the President; the agency retains its full authority.

As we have reported previously, the Seila Law case grew out of the CFPB’s investigation of Seila Law, a law firm offering debt-relief services.  After the Bureau filed a lawsuit to enforce a civil investigative demand (“CID”) against Seila Law, Seila Law argued that the Bureau lacked the authority to issue the CID because the “for cause” removal provision of the Dodd-Frank Act was unconstitutional.  The Dodd-Frank Act created the CFPB as an independent agency within the Federal Reserve System, headed by a single Director who is appointed by the President and confirmed by the Senate, but who may not be removed by the President absent “inefficiency, neglect of duty, or malfeasance in office.”

The constitutionality of the Bureau’s structure had been litigated previously.  In the case of PHH Corporation v. Consumer Financial Protection Bureau, a three-judge panel of the D.C. Circuit Court of Appeals, led by then-Judge Brett Kavanaugh, held in 2016 that the for-cause removal protection of the CFPB Director was unconstitutional, but severable from the rest of the Dodd-Frank Act.  That decision was subsequently vacated, and the D.C. Circuit sitting en banc upheld the Bureau’s structure in 2018.

The Seila Law case arrived at the U.S. Supreme Court on appeal from the Ninth Circuit, which also upheld the Bureau’s structure.  The U.S. Supreme Court granted certiorari on October 18, 2019, and heard oral arguments on March 3, 2020.  In an unusual development, the Department of Justice and the CFPB declined to defend the constitutionality of the Bureau’s structure in the Seila Law Supreme Court litigation; the Court appointed an amicus curiae to defend the Bureau’s structure.

Writing for the majority of the Court, Chief Justice John Roberts began by articulating, as a general rule, that the President has the authority to remove executive branch officials for any reason.  Two cases tend to undermine this general rule.  In Humphrey’s Executor v. United States, 295 U.S. 602 (1935), the U.S. Supreme Court held that Congress may grant removal protections to the members of the Federal Trade Commission.  Second, in Morrison v. Olsen, 487 U.S. 654 (1988) the Supreme Court held that an independent counsel with limited duties may be protected from presidential removal.  The Court concluded that the CFPB’s structure does not fit within either the Humphrey’s Executor or Morrison framework because the CFPB is headed by a single Director who is not an “inferior officer” like an independent counsel.

Freed from those precedents, the Court next looked to history and concluded that the Bureau’s structure is a “historical anomaly.”  The Court found only a handful of examples of administrative agencies with single directors that had for-cause removal protections, and – except for a one-year period during the Civil War in which the Comptroller of the Currency enjoyed for-cause removal protection – the Court characterized each example as both recent and controversial.  For example, the Court pointed to the Federal Housing Finance Agency (“FHFA”), whose single-director structure was recently held unconstitutional by the Fifth Circuit; however, the Court created room to distinguish the FHFA from the CFPB by noting that the FHFA regulates primarily government-sponsored enterprises, not private actors.  We note that a petition for certiorari was filed in the FHFA case, but the Supreme Court has not yet acted on the cert petition.

The Court took the above-described lack of historical precedent as an indication that the CFPB’s structure is constitutionally problematic.  Ultimately, the Court concluded that the Bureau’s structure undermines the Constitution’s separation of powers framework, in which the executive function is vested entirely in the President, who is the only federal official elected by the whole country.

Having concluded that the Bureau’s structure is unconstitutional, the Court proceeded to analyze whether the for-cause removal protection granted to the CFPB Director in the Dodd-Frank Act is severable from the rest of the statute, or whether the entire agency must be struck down.  On the basis of Supreme Court precedents as well as the Dodd-Frank Act’s severability clause, the Court held that the for-cause removal provision was severable from the rest of the statute.

The case remands the ultimate issue of whether the CID against Seila Law is enforceable.  Seila Law argues that the CID cannot be enforced against it because it was issued by Director Richard Cordray, who at the time of the CID enjoyed unconstitutional for-cause removal protection.  However the government argues that the issuance of the CID was subsequently ratified by Acting Director Mick Mulvaney, who was subject to presidential removal as an Acting Director.  This remand could open a Pandora’s box, because if ratification is relevant to the Seila Law CID, it may be relevant to a large range of enforcement and regulatory actions undertaken by Director Cordray and potentially Director Kraninger (although Director Kraninger can ratify at least her own previous actions).

In addition to the opinion of the Court, two other justices wrote separately.  First, Justice Thomas (joined by Justice Gorsuch) wrote separately to argue that Humphrey’s Executor should be overruled in its entirety, and to advocate for a wholesale rethinking of the Supreme Court’s severability precedents.  Consistent with his view, Justice Thomas would have denied the CFPB’s petition to enforce the CID against Seila Law.  Second, Justice Kagan (joined by Justices Ginsburg, Breyer and Sotomayor) dissented, arguing that the principles enunciated by the majority lacked an anchor in the Constitution and were inconsistent with both history and the broad constitutional latitude given to Congress and the President to structure administrative agencies.