Today the U.S. Supreme Court agreed to hear Free Enterprise Fund v. Public Company Accounting Oversight Board, a challenge to the constitutionality of the respondent PCAOB, a hybrid nonprofit corporation and state regulator. It’s an argument of form, not substance: The petitioners claim that since PCAOB’s members are appointed by the Securities and Exchange Commission – and not the president with the consent of the Senate – this violates the president’s exclusive right to manage the executive branch. Not exactly an argument that will call libertarians to the barricades.
Still, this is a useful case for exploring the larger problem with these sorts of “extra-constitutional” entities. Namely that they’re extra-constitutional. The PCAOB is a corporation that exercises a monopoly over certain types of auditing. Read the Constitution; it doesn’t give Congress any power to create monopolies. (The clause allowing for limited-term copyrights and invention patents is the exception that proves the rule.) The PCAOB is unconstitutional on this ground alone. But in the age of the “living Constitution,” such an argument won’t fly with the judicial monopolists on the Supreme Court.So we’re left with a debate over the Appointments Clause of Article II, which states the president,
shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.
The question thus becomes how to distinguish an “inferior” officer who can be appointed by a department head from a “superior” officer who must be appointed by the president. Twenty-one years ago, in Morrison v. Olson, the Supreme Court held that Congress could allow the judicial branch to appoint Justice Department independent counsels, because the counsel was an “inferior” officer who could still be fired by the president’s designee – the attorney general – for “good cause.” This followed a 1935 case where the court similarly allowed Congress to restrict the president’s ability to remove the heads of executive branch agencies. (More on this case in a minute.)
In the present case, however, the PCAOB is two steps removed from presidential control. The PCAOB members can only be removed “for cause” by the SEC; and SEC members, in turn, can only be removed “for cause” by the president. Despite all this insulation, the PCAOB maintains its members are “inferior” officers – in other words, they don’t have to be appointed by the president with the Senate’s consent – because it is “supervised” by the SEC.
Conservative proponents of the “unitary” executive are irked by this watering down of presidential authority. The libertarian concern is somewhat different. As stated above, PCAOB is a monopoly corporation; it is incompatible with any notion of free markets. As for the left, they are apprehensive about this case, because if the court sustains the Appointments Clause case against PCAOB, it could theoretically place the entire federal regulatory apparatus in jeopardy. And this brings us to William Ewart Humphrey.
Humphrey served in the House of Representatives in the early 20th century. After his congressional days were over, Calvin Coolidge appointed Humphrey to the Federal Trade Commission. At the time, FTC commissioners served six-year terms. (Today they serve seven years.) Humphrey was appointed to a second term in 1931 by Herbert Hoover, but in 1933, Franklin D. Roosevelt decided he wanted his own people at the FTC, so he asked Humphrey to resign. Humphrey refused and Roosevelt fired him. Humphrey sued for reinstatement and back pay. He died in 1934, but his estate continued the lawsuit, and the Supreme Court ruled in his favor in 1935.
Then, as now, the Federal Trade Commission Act said commissioners could only be removed for “inefficiency, neglect of duly, or malfeasance in office.” The Roosevelt administration argued this unconstitutionally restricted the president’s ability to see his policies carried out. Justice George Sutherland, writing for a unanimous court in Humphrey’s Executor v. United States, disagreed. Sutherland said the FTC required a certain degree of independence from the president in order to function:
The Federal Trade Commission is an administrative body created by Congress to carry into effect legislative policies embodied in the statute in accordance with the legislative standard therein prescribed, and to perform other specified duties as a legislative or as a judicial aid. Such a body cannot in any proper sense be characterized as an arm or an eye of the executive. Its duties are performed without executive leave, and, in the contemplation of the statute, must be free from executive control. In administering the provisions of the statute in respect of “unfair methods of competition” — that is to say, in filling in and administering the details embodied by that general standard — the commission acts in part quasi-legislatively and in part quasi-judicially. In making investigations and reports thereon for the information of Congress under [Section] 6 [of the Federal Trade Commission Act], in aid of the legislative power, it acts as a legislative agency. Under Â§ 7, which authorizes the commission to act as a master in chancery under rules prescribed by the court, it acts as an agency of the judiciary. To the extent that it exercises any executive function — as distinguished from executive power in the constitutional sense — it does so in the discharge and effectuation of its quasi-legislative or quasi-judicial powers, or as an agency of the legislative or judicial departments of the government.
Sutherland accepts the idea of “quasi-legislative and quasi-judicial” agencies like the FTC. Yet as with monopolies, there is nothing in the Constitution that permits such entities. To the contrary, Article I vests “all legislative powers” with Congress, and the “judicial power” with courts created under Article III. The FTC fits into neither category yet is allowed to exercise the functions of both. And contra Sutherland, the FTC exercises significant executive power as it is authorized to carry out – ro execute – its rules and orders. And as “quasi-legislative and quasi-judicial” body, the FTC is not subject to any of the constraints imposed on the constitutional branches. For example, there is no right of trial by jury in FTC cases, despite the Seventh Amendment’s guarantee.
In separating the FTC from presidential control, the Humphrey’s Executor decision severs the FTC from the government itself. Like the PCAOB, the FTC should be viewed as a private corporation exercising monopoly power. The same is true of other “independent” agencies like the SEC and FCC. They operate for their own benefit, not any “public interest.”
Another part of the Sutherland opinion that warrants scrutiny is his naÃ¯ve belief that the FTC possesses special knowledge that requires a hands-off approach from mere elected officials:
The commission is to be nonpartisan, and it must, from the very nature of its duties, act with entire impartiality. It is charged with the enforcement of no policy except the policy of the law. Its duties are neither political nor executive, but predominantly quasi-judicial and quasi-legislative. Like the Interstate Commerce Commission, its members are called upon to exercise the trained judgment of a body of experts “appointed by law and informed by experience.”
What makes the FTC a “body of experts”? Apparently, the mere congressional declaration of such expertise makes it so. It’s little wonder, then, that the FTC in modern times has morphed into the exclusive playground of the professional antitrust bar. The four sitting FTC commissioners include a professor of antitrust law, a former state assistant attorney general for antitrust, a former staff lawyer from the Senate’s antitrust subcommittee, and an antitrust litigator. No experience in the wealth-creating sector among them.
Humphrey’s Executor paved the way for “expert inflation” in the form of dozens of new monopoly corporations like the PCAOB. Even if the modern Supreme Court strikes down PCAOB, however, it’s hard to fathom any revisiting of the 1935 court’s massive error in judgment that allowed this situation to arise in the first place.