Firm Asks Supreme Court to Declare CFPB Structure Unconstitutional

Case challenges whether 'unaccountable' agency has authority to investigate

A California law firm is asking the Supreme Court to rein in a top financial regulator established by the Obama administration because of its lack of accountability to the president.

The Consumer Financial Protection Bureau (CFPB), the brainchild of Democratic presidential candidate Sen. Elizabeth Warren (D., Mass.), has faced numerous legal challenges from businesses and lawmakers since it was created by the 2010 Dodd-Frank bill. On Tuesday, lawyers for Seila Law LLC will ask the Supreme Court to declare the agency's structure unconstitutional. Unlike many other executive branch officials, the CFPB director does not serve at the pleasure of the president. Instead, the director can only be fired for cause, which the statute defines as "inefficiency, neglect of duty, or malfeasance in office." Critics of the restriction say it is unconstitutional because it vests a single person, who is not accountable to the president, with significant executive power.

"If the president lacks the ability to remove an agency's head, the agency is unaccountable and cannot be ‘entrusted with executive powers.' That is precisely what took place here," Seila Law argued in a brief.

The dispute arose when the agency issued a civil investigative demand (CID) into Seila Law to determine whether the firm broke consumer protection laws by allegedly charging clients illegal upfront fees for debt-management services. Seila Law refused to cooperate on the grounds that the agency's structure is unconstitutional, making its investigative demand invalid.

The agency has prevailed against the firm in both a California federal court and the 9th Circuit Court of Appeals. The Trump administration declined to defend the structure of the CFPB in court. The Supreme Court appointed lawyer Paul Clement to argue for the agency's constitutionality.

In legal briefs to the Court, Clement presented a solution that allows the Court to dismiss the case on technical grounds, without weighing the merits of the removal provision. Historically, the justices have only reviewed restrictions on the president's removal powers when the president himself attempts to remove a subordinate officer, according to Clement's briefs. That hasn’t occurred here. In fact, President Donald Trump appointed Kathy Kraninger as director of the CFPB in 2018.

Clement argues the validity of the CID has nothing to do with the rules governing the removal of the director. The agency would issue CIDs regardless of the removal standards for the directorship. As such, Seila Law is not in a position to challenge the removal restrictions Dodd-Frank created.

"The idea that either the CID or the effort to enforce it in court flowed from the director being emboldened by his tenure provisions was always highly artificial," Clement wrote in legal filings. "Whether the director is removable at-will or for inefficiency, neglect, or malfeasance, such CIDs and enforcement petitions would remain commonplace."

The firm argues that agencies exercise executive power on behalf of the president. If the agency's structure is unlawful, then it has no power to exercise executive authority and its actions—including the investigatory demands at issue—are void. The brief also notes that the Supreme Court has set aside the actions of government bureaucrats "laboring under structural constitutional defects." Lawyers pointed to a 2018 case in which the justices set aside decisions of the Securities and Exchange Commission after determining that some of its officers were not validly appointed.

"The CFPB exercised executive power by issuing and attempting to enforce a civil investigative demand to investigate potential violations of consumer-protection laws," the brief adds. "But the director lacked the presidential supervision necessary to exercise that power, rendering the CFPB without authority to do so."

Seila Law is not alone in questioning whether the agency's structure passes constitutional muster. Justice Brett Kavanaugh also took issue with the removal standard when he served as a judge on the U.S. Court of Appeals for the D.C. Circuit.

"Other than the President, the Director enjoys more unilateral authority than any other official in any of the three branches of the U.S. Government," Kavanaugh said in a 2018 dissent. "That combination—power that is massive in scope, concentrated in a single person, and unaccountable to the President—triggers the important constitutional question at issue in this case."

The case has already attracted scrutiny from liberal judicial observers. In December, activists circulated a petition demanding that Kavanaugh recuse himself from the case, citing his 2018 dissent, as well as another D.C. Circuit case dating back to 2016. The Trump appointee has not responded to calls for his recusal.

Arguments in the case, No. 19-7 Seila Law LLC v. Consumer Financial Protection Bureau, are scheduled for Tuesday.