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Free Enterprise Fund v. Public Company Accounting Oversight Board

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Supreme Court of the United States
Free Enterprise Fund et al. v. Public Company Accounting Oversight Board et al.
Term: 2009
Important Dates
Argument: December 7, 2009
Decided: June 28, 2010
Outcome
D.C. Circuit affirmed in part, reversed in part and remanded
Majority
Chief Justice John G. Roberts • Clarence Thomas • Anthony Kennedy • Samuel Alito • Antonin Scalia
Dissenting
Stephen Breyer • Sonia Sotomayor • Ruth Bader Ginsburg • John Paul Stevens


Free Enterprise Fund et al. v. Public Company Accounting Oversight Board et al. was a United States Supreme Court case that said the for-cause limitation on the removal of members of a board was an unconstitutional violation of the separation of powers. The case was argued on December 7, 2009, as part of the Supreme Court's October 2009 term. The case came on a writ of certiorari to the United States Court of Appeals for the District of Columbia Circuit.[1]

HIGHLIGHTS
  • The case: The Free Enterprise Fund, a nonprofit organization subject to the Public Company Accounting Oversight Board, sued the board alleging that it was given executive powers without being subject to presidential control. The suit argued that such a structure violated the separation of powers established by the Constitution.
  • The issue: Whether the Sarbanes-Oxley Act violated the separation of powers by giving broad powers to the board and insulating it from the president. Moreover, whether the board members were inferior officers not subject to presidential appointment rules and whether the act violated the Appointments Clause because of the structure of the Securities and Exchange Commission (SEC).[2]
  • The outcome: The Supreme Court affirmed part of the D.C. Circuit's ruling and reversed part of it. The Court held 5-4 that the two-tiered good cause protection from removal violated separation of powers by denying sufficient authority to the president. It also held that at-will removal did not violate the Appointments Clause and that the SEC commissioners constituted the head of a department.[1]

    • Why it matters: The Supreme Court's ruling in Free Enterprise Fund v. Public Company Accounting Oversight Board set a limit on the ability of Congress to create agencies insulated from presidential control.[1][2]

    You can review the lower court's opinion here.[3]

    Background

    Administrative State
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    Five Pillars of the Administrative State
    • Judicial deference
    • Nondelegation
    • Executive control
    • Procedural rights
    • Agency dynamics
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    What is separation of powers?

    Separation of powers refers to a system of government that distributes the powers and functions of government among separate and independent entities. In the United States, the federal government is divided into three branches: executive, legislative and judicial. The United States Constitution assigns each of these branches distinct powers and responsibilities. The separation of powers is sometimes referred to as a system of checks and balances because the Constitution provides each branch with certain powers over the other two branches.[4][5][6][7][8]

    Case background

    The Sarbanes-Oxley Act of 2002, passed after the accounting scandals at Enron and other companies, created the Public Company Accounting Oversight Board (PCAOB) to regulate firms that audit public companies. The PCAOB was a five-member board appointed and removable by a majority vote of the Securities and Exchange Commission (SEC). Congress intentionally tried to reduce the amount of political influence over the PCAOB, which led to the dispute. PCAOB members were only removable for cause after a vote of the SEC and the operations of the PCAOB were also largely independent of SEC oversight. The Free Enterprise Fund and Beckstead and Watts were firms subject to the PCAOB's authority and they sued to challenge the structure of the board.[9]

    Both the district court and D.C. Circuit Court of Appeals ruled in favor of the PCAOB.[10]

    Panel opinion

    The United States Court of Appeals for the District of Columbia Circuit affirmed the district court. The court held that Title I of the Sarbanes-Oxley Act of 2002 did not violate the Appointments Clause of the U.S. Constitution or the separation of powers. The ruling said that the Public Company Accounting Oversight Board (PCAOB) was under total control of the Securities and Exchange Commission, which gives presidents an acceptable amount of authority.[3]

    “ In appellants' view this statutory scheme vests Board members "with far reaching executive power while completely stripping the President of the authority to appoint or remove those members or otherwise supervise or control their exercise of that power." But their facial challenge ignores the entirety of the statutory scheme and runs afoul of the Supreme Court's instruction regarding the nature of the President's constitutional relationship with independent administrative agencies. Supreme Court precedent as we have it does not support appellants' singular focus on removal powers as the be-all and end-all of Executive authority, but rather compels a more nuanced approach that examines the myriad means of Executive control.


    We hold, first, that the Act does not encroach upon the Appointment power because, in view of the Commission's comprehensive control of the Board, Board members are subject to direction and supervision of the Commission and thus are inferior officers not required to be appointed by the President. Second, we hold that the for-cause limitations on the Commission's power to remove Board members and the President's power to remove Commissioners do not strip the President of sufficient power to influence the Board and thus do not contravene separation of powers, as that principle embraces independent agencies like the Commission and their exercise of broad authority over their subordinates.[3][11][12]

    		”

    Petitioner's challenge

    The petitioner, Free Enterprise Fund, challenged the holding of the United States Court of Appeals for the District of Columbia Circuit arguing that the Public Company Accounting Oversight Board (PCAOB) wielded broad regulatory and enforcement authority without presidential oversight. Moreover, the petition claimed that the DC Circuit opinion contradicted precedent regarding separation of powers and Appointments Clause cases.[10]

    Certiorari granted

    On January 5, 2009, the petitioner initiated proceedings in the Supreme Court of the United States in filing a petition for a writ of certiorari to the United States Court of Appeals for the District of Columbia Circuit.[13]

    The U.S. Supreme Court granted the petitioner's request for certiorari on May 18, 2009. The case was argued on December 7, 2009.[2]

    Questions presented

    Questions presented:

    "1) Does the Sarbanes-Oxley Act violate the separation of powers doctrine by giving broad powers to the Board while simultaneously preventing the President of the power to appoint or remove Board members?

    2) Did the court of appeals correctly hold that the Board members were inferior officers under the direct supervision of the SEC even though the SEC cannot supervise those members individually and can only remove them for just cause?

    3) Does the Sarbanes-Oxley Act violate the Appointments Clause even if the Board's members are inferior because the SEC is not an official department or because the commissioners are not the head of the SEC?"[2]

    Audio

    • You can find audio of the oral argument here.

    Transcript

    • Transcript of oral argument:[14]


    Decision

    The Supreme Court held 5-4 to partly affirm, partly reverse and remand the decision of the United States Court of Appeals for the District of Columbia Circuit. The majority opinion was written by Chief Justice John G. Roberts and joined by Justices Antonin Scalia, Anthony Kennedy, Clarence Thomas and Samuel Alito. Justice Stephen Breyer, joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor and John Paul Stevens filed an opinion dissenting in the judgment.[1]

    Opinions

    Opinion of the court

    See also: Lucia v. SEC

    The majority held that the five members of the PCAOB were inferior officers of the United States who exercise significant authority under the laws. Those officers were not removable by the SEC at will and the SEC members themselves were not removable at will by the president. The Court ruled that the double-layer of tenure protection between members of the PCAOB and the president amounted to an unconstitutional violation of separation of powers. Citing Article II of the U.S. Constitution, the Court said:[1]

    “ Where this Court has upheld limited restrictions on the President’s removal power, only one level of protected tenure separated the President from an officer exercising executive power. The President—or a subordinate he could remove at will—decided whether the officer’s conduct merited removal under the good-cause standard. Here, the Act not only protects Board members from removal except for good cause, but withdraws from the President any decision on whether that good cause exists. That decision is vested in other tenured officers—the Commissioners—who are not subject to the President’s direct control. Because the Commission cannot remove a Board member at will, the President cannot hold the Commission fully accountable for the Board’s conduct. He can only review the Commissioner’s determination of whether the Act’s rigorous good-cause standard is met. And if the President disagrees with that determination, he is powerless to intervene—unless the determination is so unreasonable as to constitute “ ‘inefficiency, neglect of duty, or malfeasance in office.’”


    This arrangement contradicts Article II’s vesting of the executive power in the President. Without the ability to oversee the Board, or to attribute the Board’s failings to those whom he can oversee, the President is no longer the judge of the Board’s conduct. He can neither ensure that the laws are faithfully executed, nor be held responsible for a Board member’s breach of faith. If this dispersion of responsibility were allowed to stand, Congress could multiply it further by adding still more layers of good-cause tenure. Such diffusion of power carries with it a diffusion of accountability; without a clear and effective chain of command, the public cannot determine where the blame for a pernicious measure should fall. The Act’s restrictions are therefore incompatible with the Constitution’s separation of powers.[1][15][12]

    		”

    Moving from the structure of the PCAOB to the way members were appointed, the majority held that their appointment method was consistent with the Constitution because the first part of the ruling makes Board members removable by the SEC at will. The Court also ruled that the multi-member body that composed the SEC was in effect the head of the department, which satisfied the remaining question about the way PCAOB members were appointed.[1]

    Dissenting opinions

    Justice Stephen Breyer, joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor, and John Paul Stevens filed an opinion dissenting from the judgment. Breyer agreed with the majority that the members of the PCAOB were inferior officers, but he did not think the Sarbanes-Oxley Act interfered with the executive power in an unconstitutional way. He was also concerned that the majority opinion would "disrupt severely the fair and efficient administration of the laws." He reasoned:[1][2]

    “ The upshot is that today vast numbers of statutes governing vast numbers of subjects, concerned with vast numbers of different problems, provide for, or foresee, their execution or administration through the work of administrators organized within many different kinds of administrative structures, exercising different kinds of administrative authority, to achieve their legislatively mandated objectives. And, given the nature of the Government’s work, it is not surprising that administrative units come in many different shapes and sizes.


    The functional approach required by our precedents recognizes this administrative complexity and, more importantly, recognizes the various ways presidential power operates within this context—and the various ways in which a removal provision might affect that power. As human beings have known ever since Ulysses tied himself to the mast so as safely to hear the Sirens’ song, sometimes it is necessary to disable oneself in order to achieve a broader objective. Thus, legally enforceable commitments—such as contracts, statutes that cannot instantly be changed, and, as in the case before us, the establishment of independent administrative institutions—hold the potential to empower precisely because of their ability to constrain. If the President seeks to regulate through impartial adjudication, then insulation of the adjudicator from removal at will can help him achieve that goal. And to free a technical decisionmaker from the fear of removal without cause can similarly help create legitimacy with respect to that official’s regulatory actions by helping to insulate his technical decisions from nontechnical political pressure.
    Neither is power always susceptible to the equations of elementary arithmetic. A rule that takes power from a President’s friends and allies may weaken him. But a rule that takes power from the President’s opponents may strengthen him. And what if the rule takes power from a functionally neutral independent authority? In that case, it is difficult to predict how the President’s power is affected in the abstract.[1][16][12]

    		”

    Text of the opinion

    See also

    Footnotes

    1. ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 United States Supreme Court, "Free Enterprise Fund et al. v. Public Company Accounting Oversight Board Opinion," June 28, 2010
    2. ↑ 2.0 2.1 2.2 2.3 2.4 Oyez, "Free Enterprise Fund v. Public Company Oversight Board," accessed August 23, 2018
    3. ↑ 3.0 3.1 3.2 United States Court of Appeals for the District of Columbia, "Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board et al." Opinion, August 22, 2008
    4. ↑ Legal Information Institute, "Separation of powers," accessed September 20, 2017
    5. ↑ National Conference of State Legislatures, "Separation of Powers - An Overview," accessed September 21, 2017
    6. ↑ Stanford Encyclopedia of Philosophy, "Baron de Montesquieu, Charles-Louis de Secondat," April 2, 2014
    7. ↑ US Legal, "Separation of Powers Law and Legal Definition," accessed September 20, 2017
    8. ↑ Dictionary.com, "Separation of powers," accessed September 25, 2017
    9. ↑ Cite error: Invalid <ref> tag; no text was provided for refs named petition
    10. ↑ 10.0 10.1 Supreme Court of the United States, "Petition for a Writ of Certiorari," January 5, 2009
    11. ↑ Internal citations and quotations have been omitted.
    12. ↑ 12.0 12.1 12.2 Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
    13. ↑ SCOTUSblog, "Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board," accessed August 23, 2018
    14. ↑ Supreme Court of the United States, Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board, argued December 7, 2009
    15. ↑ Internal citations and quotations have been omitted.
    16. ↑ Internal citations and quotations have been omitted.
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