A divided three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit recently decided a significant case for those animal-related businesses who are subject to regulation by the U.S. Department of Agriculture (USDA). Fleming v. U.S. Dep’t of Agriculture, No. 17-1246, 1249 & 1250 (D.C. Cir. Feb. 16, 2021).

The case arose out of administrative enforcement actions brought by USDA against certain individuals (the petitioners in Fleming) who had allegedly violated the Horse Protection Act, 15 U.S.C. § 1821 et seq., a statute that imposes penalties on those who enter sored horses in shows or auctions. As the majority opinion (Maj. Op.) described it, “‘soring’ refers to the practice of injuring a horse’s forelimbs so that it will quickly lift its feet as a result of the pain, inducing it to walk with a high-stepping gait considered desirable for shows and exhibitions.” Maj. Op. at 3-4. Petitioners did not respond to USDA’s administrative complaint. When the agency moved for a default before the USDA Administrative Law Judge (ALJ), Petitioners contended, among other things, that the ALJ was an “officer” of the United States who had not been appointed by the President in accordance with the Appointments Clause of the Constitution. The ALJ did not address the argument and entered the default orders. On appeal to the Judicial Officer — who acts as USDA’s final internal adjudicator — the default orders were affirmed, and the Judicial Officer ruled that the challenge to the constitutionality of the ALJ should be raised in the court of appeals. Petitioners then sought review in the D.C. Circuit.

While the petitions were pending, the Supreme Court decided Lucia v. SEC, 138 S. Ct. 2044 (2018), which held that SEC ALJ’s are “officers” whose appointments were invalid because they had not been appointed by the President. SEC ALJ’s were apparently not differently situated than USDA ALJ’s. Therefore, in light of Lucia, the government in the Fleming case “conceded that the ALJ who had decided petitioners’ cases was, as petitioners argued, an inferior officer who had been improperly appointed.” Slip op. at 6. The government therefore moved to remand the case so that new hearings could be conducted before properly appointed ALJ’s. Petitioners opposed the motion arguing that certain additional issues should be addressed, but the court disagreed in a majority opinion by Chief Judge Srinivasan but with an extended opinion by Judge Rao, concurring in part and dissenting in part.

The majority opinion rejected petitioner’s argument that USDA ALJ’s are “principal officers,” ruling instead that they are “inferior officers who can be appointed by department head like the Secretary of Agriculture.” Maj. Op. at 18. The Department’s ALJ’s are inferior officers because, even though they are not removable at will, they are subject to substantial oversight by the Secretary and their decisions may be appealed to the Judicial Officer. Id. at 18-19.

The majority also declined to address petitioners’ argument that the Judicial Officer was not properly appointed because the government represented that any appeal from new hearings before the agency would go to the Secretary not the Judicial Officer. Maj. Op. at 20. The majority also declined to address the argument that the agency had no authority to disqualify petitioners from events and to impose fines in the same proceeding, ruling that this could be addressed on remand. Id.

More significantly, however, the majority ruled that petitioners had not exhausted their administrative remedies with respect to the claim, raised for the first time on appeal, that, separate from the Appointments Clause issue, the very structure of the USDA ALJ position is unconstitutional pursuant to the decision in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010). That case held that the two layers of protection from removal of the board members of the agency in that case unconstitutionally infringed the President’s executive authority under the Constitution. Board members could only be removed by the SEC for good cause shown and SEC Commissioners could themselves only be removed for inefficiency, neglect of duty or malfeasance. USDA’s ALJ’s likewise have a similar dual layer of tenure: they can be removed by the Secretary only for good cause established by the Merit Systems Protection Board (MSPB), and members of the MSPB may be removed by the President only for inefficiency, neglect of duty or malfeasance. Thus, runs the argument, this structure interferes with constitutional accountability because it means that ALJ’s are not subject to the President’s control, directly or indirectly.

The majority held that this issue should have been raised before the agency because the Horse Protection Act and the agency’s regulations required, not only exhaustion of administrative remedies, but also exhaustion of issues, i.e., an issue cannot be presented to the court unless it is first presented to the agency, in this case to the Judicial Officer. Maj. Op. at 14. The majority reached this result notwithstanding the fact that a USDA lawyer argued before the Judicial Officer in this very case that the Judicial Officer lacked authority to decide constitutional issues. Id. at 16.

In her separate opinion concurring in part and dissenting in part (Sep. Op.), Judge Rao disagreed with the majority on the exhaustion issue, opining that neither the Horse Protection Act nor the agency’s regulations created the absolute exhaustion requirement posited by the majority. Sep. Op. at 5-10. Judge Rao also believed that USDA should be judicially estopped from taking inconsistent positions on this issue. Id. at 12-16. As Judge Rao described it:

In the majority’s view, this court is barred from considering petitioners’ challenge until the agency considers it first — despite the fact the agency has steadfastly maintained it cannot consider structural constitutional challenges until we reach them first. The court refuses to act before the agency, while the agency refuses to act before the court — trapping petitioners in an administrative judicial hall of mirrors.

Sep. Op. at 1 (original emphasis).

As for the merits of the constitutional issue, Judge Rao found that the two layers of for-cause removal protection that apply to USDA ALJ’s is unconstitutional:

When the two for-cause removal restrictions are combined, neither the President nor the Secretary has any meaningful power to remove ALJs from office — for any reason, much less for “simple disagreement with [their] policies or priorities.” Free Enterprise Fund, 561 U.S. at 502. Because adjudication is the sole mechanism by which the USDA can execute statutes like the Horse Protection Act, see 15 U.S.C. § 1825(b)(1), an ALJ’s double layer of independence deprives the President of any effective control over enforcement of such statutes. The two layers insulating Agriculture ALJs from removal are materially identical to the two layers that protected members of the PCAOB — an ALJ may be removed only for cause by a Board whose members may be removed only for cause. This is an unconstitutional infringement of the President’s executive power.

Sep. Op. at 24. Since petitioners had only challenged the constitutionality of two layers of removal protection, Judge Rao would have struck the layer of review by the MSPB, thereby leaving “one layer of for-cause protection — the Secretary alone would be responsible for determining whether there is good cause to remove an ALJ.” Id. at 37.

Unless Fleming is subject to further proceedings in the D.C. Circuit through panel reconsideration or en banc consideration (which divided panel opinions sometimes precipitate), the two-layer removal protection issue will presumably be raised by petitioners in proceedings before the agency. It seems unlikely than an ALJ or the Judicial Officer will declare themselves unconstitutional, so it would appear that (unless the cases end through settlement) the constitutionality of the two-layer tenure protection will find its way back to the D.C. Circuit. Given the wide variety of USDA regulatory matters that go through an ALJ hearing with review by the Judicial Officer, this is a significant issue for regulated parties.