There are widespread expectations that the Supreme Court, following an oral argument last week, may rule that part of the law that created the CFPB is unconstitutional.  As a result, many business executives, in particular, have been asking their lawyers about the likely impact of such a ruling.  These questions have included ones like:  Could a prior CFPB action, including a settlement punishing the target of an investigation, somehow be annulled and unwound?  And what would need to happen in order to bring a lawsuit (or to take some other action) seeking an annulment like that?

These are a valid questions.  In our view, the analysis to answer them begins by focusing on what, exactly, is claimed to be unconstitutional about the CFPB.

What is the Constitutional Problem with the CFPB?

The parties challenging the CFPB’s constitutionality are focused specifically on one provision of the Dodd-Frank Act, which created the agency.  That provision insulates, to a large degree, a Senate-confirmed Director of the CFPB from removal by the President.  It does so by permitting removal only “for inefficiency, neglect of duty, or malfeasance in office,” a legal term of art often abbreviated as “for cause,” which as a practical matter makes removal by the President very unlikely.  This protection from removal makes the CFPB Director different from Cabinet secretaries, for example, whom the President may terminate at will and for any reason.

The Supreme Court has historically allowed Congress to similarly insulate the members of multi-member, staggered commissions that run agencies (like the FTC), largely on the theory that if a President disapproves of such an agency’s policy direction, he or she can soon influence the agency when the next commission spot opens up, and in any event can often designate who chairs the commission.  But challengers to the CFPB have pointed out that, where a regulator is run by a single person — which is the case with the CFPB’s Director — Congress has never tried to insulate that individual from removal at the will of the President.  And they argue that Congress’ decision to do so is an unconstitutional infringement on the President’s authority under the Constitution to direct the operations of the Executive Branch.  That is, in the case of any President who dislikes the policy or enforcement positions of a CFPB Director, the law would unduly inhibit the President’s power to influence the agency.

In the case before the Supreme Court (Seila Law), the target of a CFPB investigation has argued — and the CFPB under the Trump Administration agrees — that the limit on removal is indeed unconstitutional.  We and many other observers agree that their argument is strong.

How is the Supreme Court Likely to Remedy this (Claimed) Violation?

To date, the only appellate opinion to find the CFPB’s removal provision unconstitutional (authored by now-Justice Brent Kavanaugh) went on to hold that the proper remedy was simply to strike the provision — making the Director removable at will — without otherwise disturbing the law or the agency.

We find the reasoning of that opinion to be persuasive.  Justice Kavanaugh (then a federal appeals court judge) explained that in deciding the remedy for a constitutional violation like this, courts should begin by asking:  Is there an alternative that Congress would have preferred if it had known that the passage at issue was unconstitutional?  Justice Kavanaugh reasoned that, in the case of the Dodd-Frank Act, Congress effectively answered that question by including a “severance” provision.  The “severance” provision states that if a court finds any passage of the law to be unconstitutional, it should leave the rest of the law in place.

We think that this same remedy is the most likely outcome at the Supreme Court, if the Court in fact finds that the removal provision is unconstitutional.  The target of the CFPB investigation has argued for broader remedies — such as striking the entire law creating the CFPB and putting the agency out of business — but we think the chance the Court will do something like that is rather low.  As Justice Kavanaugh has pointed out, courts have preferred narrow remedies for constitutional violations like these, even when the law does not contain a “severability” provision.  And it is unlikely that Congress would have preferred no CFPB at all to a CFPB with a Director removable at will.  In the prior case before Justice Kavanaugh, his opinion allowed the CFPB to continue the enforcement action that generated the constitutional challenge, albeit after correcting several errors in the agency’s interpretation of an important consumer-financial law.

But What About Past CFPB Actions?

If the Supreme Court’s remedy is merely to strike the removal clause, it is fair to ask whether that result still calls into question the validity of past CFPB actions.  After all, in this scenario, prior actions would have been directed and finalized by a CFPB Director who was unconstitutionally protected from dismissal by the President.

There have been cases where courts ruled, after striking part of a law as unconstitutional, that the proper result was to invalidate prior agency actions.  However, this has not yet happened where the constitutional problem involved only the President’s power to remove an official.  And we think it unlikely that such a result would obtain here.

Cases invalidating prior agency actions have generally involved two other types of constitutional violations.  First, there have been cases where the law gave power to a government official who did not have the constitutional authority to exercise that power in the first place.  The best example is a law that directed an official under Congress’ control to exercise Executive Branch functions.

The second type of violation involved actions by government officials who were appointed to their jobs in a manner inconsistent with the Constitution.  Examples include officials appointed without Senate confirmation where the Constitution required confirmation.

What these cases have in common is that actions were taken by officers who never should have had the power to take those actions.  But that is not the case where the flaw is in a removal provision like the one involving the CFPB.  Moreover, as a practical matter, most CFPB enforcement actions – and subsequent settlements – have taken place during periods when the CFPB was led by a Director selected by the then-current President, with no indication that the President was unhappy with the Director he chose.  Thus, in opposing an argument to invalidate one of these settlements, the government would argue that the President had as much control over the CFPB Director as the Constitution provides for.

Indeed, one court remarked, in considering a similar issue involving an invalid removal provision, “We should not invalidate” the actions of a President’s own nominee by invoking that President’s “need to exercise executive authority.”  However, there was a period of about 10 months in 2017, following President Trump’s inauguration, when the CFPB was led by an Obama appointee, Richard Cordray, whom President Trump no doubt would have promptly dismissed (or whom would have resigned early) if not for the obstacle of the removal provision.

Nonetheless, the government would also have other, more basic arguments for opposing the invalidation of a past settlement, including ones based on policies against disturbing agreements on which parties have relied.  In the case of many CFPB settlements, the affected parties would include the consumers who received restitution.

In sum, we think that even if the Supreme Court finds a constitutional violation, it is unlikely that the decision will provide a basis for disturbing past agency actions (especially those from periods other than the window of Director Cordray’s work during the Trump Administration).  But we are closely monitoring the case and, in the event that the Court’s opinion does open a window to challenge prior actions, our consumer-finance and appellate teams stand ready to assist.

McGuireWoods’ CFPB and consumer-finance practitioners provide risk-based advice to large and small financial industry clients on a wide range of legal and compliance matters, defend clients subject to investigations and lawsuits, and guide FinTech and other innovators as their products and services approach the market.

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