From the Administrative State to the Wild West? What Employers Should Know About the Shifting Administrative Law Landscape

Over the past several years, federal courts have increasingly questioned the authority of administrative law judges (ALJs) to adjudicate alleged violations of certain labor and employment statutes.  In the last several weeks, two U.S. district courts in Texas issued decisions halting unfair labor practice proceedings before the National Labor Relations Board (NLRB) on the grounds that NLRB ALJs lack the constitutional authority to preside over such actions due to unconstitutional protections against their removal.[1]  Similarly, the last year has seen several decisions by courts in the Fifth and Eleventh Circuits finding that ALJs, whose decisions are not reviewable by a Presidential appointee, lack constitutional authority under the Appointments Clause to adjudicate claims.[2]  The trend illustrated by these decisions, combined with the Supreme Court’s decision in June to abandon the Chevron doctrine of extending deference to federal agency rule-making proceedings, portend significant changes in the way employers interact with federal agencies that enforce labor and employment law. 

The Background - Constitutional Questions about ALJ Appointments

Federal courts have found that federal agency enforcement schemes involving adjudication by ALJs, who have the “power to render a final decision on behalf of the United States,” may be unconstitutional in two scenarios:

1. When there are barriers to removal of an ALJ by the President of the United States, thus restricting the President’s Article II power of removal; or
2. When the ALJ is not a “principal officer” (i.e., appointed by the President) under the Appointments Clause to the Constitution, or when the ALJ is an “inferior officer” (i.e., not a principal officer) whose decisions are not subject to review by a “principal officer.”[3]

The Removal Restrictions Issue 

The first scenario is illustrated in the recent opinions issued by district courts in Texas in Space Exploration Technologies Corp. and Energy Transfer where, in both cases, NLRB ALJs were found to be unconstitutional due to statutory protections against removal by the President.[4]  Specifically, NLRB ALJs may only be removed for “good cause” by the Merit Systems Protection Board (MSPB) pursuant to 5 U.S.C. § 7521(a).  Similarly, “[a] member of the MSPB may only ‘be removed by the President, upon notice and hearing, for neglect of duty or malfeasance in office, but for no other cause.’”[5]  These two layers of restrictions on removal were found to unconstitutionally interfere with the President’s Article II removal power and thus render the ALJs unconstitutional.[6]

These decisions expand on the Fifth Circuit’s 2022 opinion in SEC v. Jarkesy, which held that U.S. Securities and Exchange Commission’s ALJ scheme is unconstitutional due to a two-step, for cause removal process limiting the President’s authority to remove SEC ALJs at will.[7]  Notably, the courts in Space Exploration and Energy Transfer enjoined the underlying NLRB proceedings, finding that the plaintiff-employers would suffer irreparable harm merely by being subject to a proceeding overseen by an unconstitutional ALJ.  These decisions leave an open question as to how unfair labor practice complaints will be adjudicated by the NLRB – given the courts’ finding that NLRB ALJs lack the constitutional authority to conduct administrative hearings and render decisions in unfair labor practice proceedings.

The Appointments Clause Issue for Inferior Officer ALJs

The Supreme Court’s landmark decision in U.S. v. Arthrex illustrates the second scenario – statutory schemes featuring unconstitutional ALJs under the Appointments Clause of the Constitution.  In Arthrex, the Supreme Court held that the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office violated the Appointments Clause when it rendered final decisions on behalf of the United States, because PTAB ALJ decisions are not subject to review by a “principal officer.”[8]  Following this decision, the question of constitutional authority quickly spread to other administrative agencies, with some courts halting proceedings entirely until the constitutional infirmity is resolved.[9]

This issue has been actively litigated in the immigration law area.  For example, final decisions issued by ALJs in the Department of Justice’s Office of the Chief Administrative Hearing Officer (OCAHO), who hear citizen discrimination claims under 8 U.S.C. § 1324b that have been investigated or reviewed by the Department of Justice, are not subject to review by a principal officer.[10]  In 2022, after acknowledging the constitutional issues presented by Arthrex, OCAHO issued a series of orders staying all ALJ proceedings until such time that it gained the constitutional authority to issue orders on “final decisions.”  Subsequently, in Space Exploration Technologies Corp. v. Bell, Space Exploration (“SpaceX”) successfully challenged OCAHO’s constitutional authority under the Appointments Clause in federal court.[11]  The DOJ attempted to proactively cure the constitutional issues by promulgating an interim final rule (IFR) that provided for review of OCAHO decisions by the Attorney General, a principal officer.  In finding the OCAHO ALJ scheme to be unconstitutional under Arthrex, the Fifth Circuit in SpaceX held that the attempted IFR “fix” was unlawful, noting that the “agency could not cure an unlawful statute by adopting in its discretion a limiting construction of the statute.”^[12]

The application of Arthrex and the Fifth Circuit’s decision in Jarkesy will not be limited to immigration cases.  Rather, any administrative agency enforcement scheme relying on ALJ adjudication, including to DOL ALJs, NLRB ALJs, OSHA ALJs, SEC ALJs, among others, that have structural issues such as removal protections or lack of review by a principal officer may be at risk of being found unconstitutional.  And these recent decisions suggest that any constitutional defects must be resolved by an act of Congress – not by federal agency action through rulemaking or otherwise. 

The End of Chevron Deference to Agency Rulemaking Decisions

Recent challenges to agency authority have not just been limited to the constitutionality of ALJs.  The extent of judicial deference given to administrative agencies has been under fire in recent years, as previously discussed in our July 11, 2024 insight.  In addition to SEC v. Jarkesy, the most recent Supreme Court term saw landmark decisions in Loper Bright and Corner Post, all of which may provide employers with bases to challenge the investigation authority or enforcement action of a federal agency. 

Under Loper Bright a challenge may be available if:

1. The underlying statute does not specifically authorize the agency to address the conduct at issue;
2. The conduct at issue derives from an agency-promulgated rule; and
3. That rule has not been challenged in court, or if it has been challenged and upheld, it was upheld on the grounds of agency deference under the Chevron[13]

In addition, Corner Post extends the statute of limitations for challenging agency actions under the Administrative Procedure Act (APA) in certain circumstances, and SEC v. Jarkesy permits employers to remove certain administrative enforcement actions to federal court if the underlying agency enforcement action may result in a civil penalty to which the Seventh Amendment applies.[14]

Courts across the country are beginning to apply the new standard announced in Loper Bright in adjudicating challenges to a variety of agency action, including  challenges to recent rulemaking by the Department of Labor, the Department of Health and Human Services, and the Federal Trade Commission, among others.[15]  One of the many important questions to be litigated in this context is the extent to which Loper Bright extends to agency policy positions articulated through various types of sub-regulatory guidance, as opposed to final rules promulgated under the APA. 

Key Takeaways for Employers

Whether legal challenges to administrative agency actions or proceedings are available to employers will depend on the factual circumstances, the statutory bases for the underlying action, and often which federal circuit has jurisdiction over the matter.  In some circumstances, employers may not need to wait until an ALJ decision is handed down in order to show harm, at least in the Fifth Circuit, but may immediately challenge an ALJ’s constitutional authority on the basis that irreparable harm occurs by merely being subjected to an unconstitutional agency enforcement proceeding.[16] 

The Supreme Court’s decisions in Loper Bright, Corner Post, Jarkesy and Arthrex clearly have not invalidated the authority of the administrative state.  But these cases do provide employers with additional tools that may facilitate their ability to challenge agency actions viewed as regulatory over-reach.  Specifically, employers should evaluate the type of agency action at issue and determine whether the cases summarized above provide alternative legal avenues for challenge, or whether they provide greater leverage when seeking to settle aggressive agency enforcement actions.  

Here at Crowell, we are tracking the litigation in this space and will provide future updates as the administrative landscape continues to shift.