Southern District of New York federal Judge Richard Berman yesterday decided that Barbara Duka, a former Standard & Poor’s employee charged with securities law violations by the SEC, cannot enjoin the SEC administrative enforcement action brought against her. In doing so, Judge Berman rejected the argument that he lacked jurisdiction over the case, unlike two previous federal court judges. See SEC Wins First Skirmish on Constitutional Challenge to Chau Administrative Proceeding, and Court Dismisses “Compelling and Meritorious” Bebo Constitutional Claims Solely on Jurisdictional Grounds. As a result, he addressed the merits of Ms. Duka’s constitutional argument, finding the she was “unlikely to succeed on the merits” of that claim. Likely success on the merits of the claim is a requirement for granting the preliminary injunctive relief sought by Ms. Duka. The opinion is available here: Order Denying Relief in Duka v. SEC.
Judge Berman rejected the jurisdictional argument accepted by two prior judges because, unlike them, he concluded that the relief sought by Ms. Duka could not be satisfied within the administrative adjudication process, the challenge made addressed not the substance of the claims against her but the very suitability of the forum to adjudicate those claims, and the constitutional issue fell outside of the SEC’s area of expertise.
The Court concludes that the absence of subject matter jurisdiction “could foreclose all meaningful judicial review” of Plaintiff’s claim. . . . The Court of Appeals obviously would not be able, upon appellate review of any final SEC order, to enjoin the SEC from conducting the Administrative Proceeding, as Duka asks this Court to do. And, while the Court of Appeals could, presumably, vacate an adverse decision (order) by the SEC on constitutional grounds, it would be unable to remedy the harm alleged by Plaintiff in this Court, i.e., the “substantial litigation and resource burdens incurred during [the] administrative proceeding,” and the “reputational harm” associated with her defending the Administrative Proceeding. . . .
Plaintiff is not here challenging the outcome of her Administrative Proceeding or any order(s) issued by the SEC. Rather, Plaintiff seeks to enjoin the proceeding itself, and the (injunctive and declaratory) relief she seeks is to prevent the Administrative Proceeding from occurring in the first place. . . . If Plaintiff were required, as the Government urges, to await the completion of the Administrative Proceeding to seek (any) judicial intervention, important remedies could be foreclosed. That is, her claim for injunctive and declaratory relief would likely be moot at that stage because the allegedly unconstitutional Administrative Proceeding would have already taken place. Simply put, there would be no proceeding to enjoin. . . .
Slip op. at 10-12 (cites and footnotes omitted).
The Court concludes that Plaintiff’s claim for injunctive and declaratory relief is “wholly collateral” to “any Commission orders or rules from which review might be sought” in the Court of Appeals. . . . In Free Enterprise, the Supreme Court found that the petitioners’ Article II claim was collateral because “petitioners object[ed] to the Board’s existence, not to any of its auditing standards.”. . . Similarly, Duka contends that her Administrative Proceeding may not constitutionally take place, and she does not attack any order that may be issued in her Administrative Proceeding relating to “the outcome of the SEC action.” Chau [v. SEC], 2014 WL 6984236, at *13; see Gupta [v. SEC], 796 F. Supp. 2d at 513 (where plaintiff “would state a claim even if [he] were entirely guilty of the charges made against him . . . .”).
Unlike the plaintiffs in Chau, Duka does not assert an “as-applied” challenge to agency action “in light of the facts of a specific case.” Chau, 2014 WL 6984236, at *6. Rather, she contends that Administrative Proceedings are “unconstitutional in all instances—a facial challenge.” Id. As Judge Kaplan noted in Chau, “courts are more likely to sustain preenforcement jurisdiction over broad facial and systematic challenges.” Id. (internal quotation marks omitted).
Without in any way diminishing ALJ Elliot’s exceptional legal background, the Court concludes that the constitutional claim posed in this injunctive/declaratory judgment case is outside the SEC’s expertise. This aspect of executive agency practice is governed by clear Supreme Court precedent. See Thunder Basin [Coal Co. v. Reich], 510 U.S. at 215 (“[A]djudication of the constitutionality of congressional enactments has generally been thought beyond the jurisdiction of administrative agencies.”); see also Free Enterprise [Fund v. Pub. Co. Accounting Oversight Bd.], 561 U.S. at 491 (“Petitioners’ constitutional claims are also outside the Commission’s competence and expertise . . . . [T]he statutory questions involved do not require ‘technical considerations of [agency] policy’. . . . They are instead standard questions of administrative law, which the courts are at no disadvantage in answering.”).
When he turned to the merits of the constitutional issue, Judge Berman was unwilling to apply the Supreme Court’s Free Enterprise Fund decision to the SEC’s administrative law judges. Not, however, because he doubted that SEC ALJ’s are “inferior officers” of the Executive Branch in constitutional terms. He did not decide that issue, because he said it was unnecessary, but plainly viewed prior Supreme Court precedent regarding Tax Court special trial judges in Freytag v. Commissioner likely to be determinative: “The Supreme Court’s decision in Freytag v. Commissioner, 501 U.S. 868 (1991), which held that a Special Trial Judge of the Tax Court was an “inferior officer” under Article II, would appear to support the conclusion that SEC ALJs are also inferior officers. See Freytag, 501 U.S. at 881–82 (“[S]pecial trial judges perform more than ministerial tasks. They take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders. In the course of carrying out these important functions, the special trial judges exercise significant discretion.”). Slip op. at 16. As noted, however, Judge Berman decided he “need not resolve that issue.” Id.
That is because he reasoned that even if the SEC’s ALJ’s are inferior officers, the double-layer of removal protection they are accorded by statute does not undermine the President’s Executive power. He noted that the Free Enterprise Fund Court “specifically excluded ALJs from the reach of its holding,” and rejected Ms. Duka’s argument that Free Enterprise Fund established a “categorical rule” forbidding two levels of “good cause” tenure protection. Slip op. at 17.
Instead, Judge Berman created “a functional test to determine whether and when statutory limitations on the President’s power to remove executive officers violate Article II” based on other Supreme Court precedent. He relied on the Supreme Court’s special prosecutor case, Morrison v. Olson, 487 U.S. 654 (1988), to argue for a test focused on whether Congress “interfere[d] with the President’s exercise of the ‘executive power’ under Article II” (quoting Morrison, 487 U.S. at 689-90). Although Free Enterprise Fund had no similar language regarding the double-layer of removal protection, Judge Berman argued that the Free Enterprise Fund decision “likewise focused upon whether the statutory restrictions on removal of PCAOB members were so structured as to infringe the President’s constitutional authority by ‘depriv[ing] the President of adequate control over the Board.’ Free Enterprise, 561 U.S. at 508.” Slip op. at 17-18.
Indeed, he argues that if the President could dismiss ALJ’s without cause, that would “undermine” the agency adjudication process, citing an article by Elena Kagan, written before she became a Supreme Court justice. Slip op. at 21.
Having elided the issue of whether the SEC ALJs are “inferior officers,” the opinion strikes me as somewhat superficial and relatively weak effort at resolving the constitutional issues that arise if they are, indeed, officers in the Executive Branch. Judge Berman dispenses with this issue in a mere 4-1/2 double-spaced pages. His treatments of the Supreme Court decisions in Morrison v. Olson, Wiener v. United States, and the grandfather of them all, Humphrey’s Executor v. United States, are largely superficial. In Judge Berman’s view, the fact that ALJ’s perform their executive duties as part of an adjudicative process insulates them from the need for control or influence by the Chief Executive. He makes no real effort to examine the constitutional consequences of exempting large numbers of Executive Department officers from the need for Presidential control, and fails even to address the conundrum of treating an Executive Department officer within a law enforcement agency as if he or she were just another judge. The nuances of how to accord administrative judges the freedom to act as an independent judicial branch within a powerful law enforcement department of the Executive Branch are basically ignored. In sum, the effort lacks the depth and studiousness of an opinion likely to persuade appellate courts, and possibly other district courts as well. It may well be that a proper, complete, and thorough argument along these lines can be made, but it is not reflected in this opinion.
Judge Berman effectively creates an adjudicative exception to the need for Presidential control over “inferior officers” involved in an adjudicative process within the Executive Branch. That is, essentially, formed out of whole cloth. His core argument — “that congressional restrictions upon the President’s ability to remove ‘quasi judicial’ agency adjudicators are unlikely to interfere with the President’s ability to perform his executive duties” — is pure ipse dixit. Short references to Humphrey’s Executor, Wiener, and Morrison, none of which involved facts and circumstances even vaguely like this case, hardly suffice to justify such a broad-reaching conclusion. Many of the Supreme Court decisions addressing the role of the Executive in non-Article III courts are not examined, or even mentioned. Included among these is the separation of powers discussion in Freytag v. Commissioner, which Judge Berman acknowledged in the first part of his opinion and ignored thereafter (Freytag has an extensive discussion of the separation of powers implications of performing adjudicative functions outside in non-Article III courts). Since Free Enterprise Fund plainly treats the SEC as an Executive Department, and there is abundant case law addressing the constitutional treatment of non-Article III courts, an in-depth analysis of those cases would seem necessary before reaching Judge Berman’s conclusions. I haven’t delved into those cases any more than he does (which is to say, not at all), but I’m certain that a reasoned resolution of the issue requires a lot more spade work than I see reflected in Judge Berman’s four pages on the issue.
Judge Berman’s decision also proceeds on the assumption that it is not important – and, indeed, could be harmful – for the President to be able to exercise authority over officials within the Executive Branch who perform adjudicative-like functions. That fails totally to consider the context in which the SEC ALJs function. Judge Berman seems to think all ALJs perform the same kind of function, and none of them do things the Chief Executive cares much about. But some ALJs, like those in the SEC, are critical cogs in a law enforcement process addressing large portions of the Nation’s economic and financial infrastructure. They play a critical role in an Executive process to enforce the law, and exercise considerable discretion in doing so, without any direct supervisors. The SEC’s enforcement actions already proceed with, at best, limited input from, or control by, the President. To the contrary, the SEC touts itself as being “independent” of the President. If the SEC’s ALJs are, indeed, executive officers playing key roles in implementing a quintessentially executive function – the enforcement of the laws – why does the fact that ALJs follow an adjudicative-like process as part of that function mean they should be doubly insulated from Presidential influence? Judge Berman effectively postulates this as a necessary aspect of having an agency-based adjudicatory function, but the stated support for that – even if it is a law review article by Elena Kagan — is slim indeed, putting aside whether the very concept of an independent judiciary, functioning within an independent law enforcement agency, has any place in Articles I, II, or III of the Constitution.
There also is no mention or apparent consideration of potential Appointments Clause issues in this context. That may well be because Ms. Duka’s counsel never pressed those issues. But if the SEC’s ALJs are officers of the Executive Branch, the Appointments Clause applies, and it is not at all clear whether the appointment process for SEC ALJs complies with that process.
To be sure, this decision represents a victory for the SEC in another battle in this campaign. The loss on the jurisdiction issue is more than outweighed by the favorable ruling on the merits issue. (Although it may encourage the DC Circuit to reach the merits of the constitutional issue in the recently-argued appeal in Jarkesy v. SEC). The approach taken by the court does suggest that the SEC may not fare well in its arguments that its administrative law judges are not “inferior officers,” but the overall rejection of the Free Enterprise Fund double-insulation theory provides the groundwork for future SEC arguments on the merits in other courts. One of those courts may take the time and make the effort to provide a more thorough consideration of the merits issue, but for now, count this as a significant, if not definitive, victory for the Commission.
This entry was posted in Administrative Proceedings, SEC Enforcement, Securities Law and tagged administrative courts, administrative law judge, administrative proceeding, ALJ, Appointments Clause, Article II, Barbara Duka, Bebo, Bebo v. SEC, Chau, Chau v. SEC, Constitution, constitutionality, DC Circuit, Duka, Duka v. SEC, Enforcement Division, Free Enterprise Fund, Free Enterprise Fund v. PCAOB, Freytag v. Commissioner, injunction, Jarkesy, Jarkesy v. SEC, Judge Berman, Judge Kaplan, jurisdiction, lawyer, legal analysis, likelihood of success on the merits, PCAOB, preliminary injunction, S&P, SDNY, SEC, SEC enforcement, securities, securities fraud, securities law, securities litigation, separation of powers, Standard & Poors on April 16, 2015 by Straight Arrow.
It’s not often that securities litigators get to breathe the rarefied air of constitutional law, but there are some challenging constitutional issues now being raised in opposition to the SEC’s use of administrative proceedings for its civil enforcement proceedings.
A range of such issues could be raised, some of them not limited to the administrative proceedings themselves. They derive from the SEC’s peculiar (at least constitutionally) combination of authorities, powers, and responsibilities under the statutory framework created in the Securities Exchange Act of 1934.
In particular, the constitutionality of the administrative proceedings presided over by SEC administrative law judges has been challenged in two recent district court filings in Peixoto v. SEC and Stilwell v. SEC. Those cases argue the administrative law judges cannot properly preside over such proceedings because they are officers of the United States who are not subject to removal at will by either the President or an appointee of the President, in violation of Article II of the Constitution. Se our earlier discussion of these allegations here. The complaints filed in those cases can be found here (Peixoto v SEC) and here (Stilwell v SEC). Issues of due process were raised in Wing Wing Chau v. SEC). And there remains a distant cloud over much of the prosecutorial power of the SEC itself because its commissioners do not answer to the President when they exercise such powers.
Although the first so-called independent agency was created before the turn of the 20th century when the Interstate Commerce Commission was established, the enormous growth of the so-called “Fourth Branch” came in the 1930s, when the Roosevelt Administration undertook a fundamental restructuring of the national government, based on a growing legal movement arguing that government affairs had grown too complex and specialized to be run by the purely political executive branch. Complex commercial and financial activities, it was said, require the oversight of specialists in the field, who can apply expertise that normal executive department appointees, who come and go, cannot develop. Brilliant legal minds like Felix Frankfurter developed jurisprudential theories justifying the need for, and propriety of, these administrative entities under our legal traditions. Generations of lawyers have since been trained to accept this model as an enlightened approach to governance of the complex industrial state.
Governmental regulation of banking, insurance, public utilities, industry, finance, immigration, the professions, health and morals, in short, the inevitable response of government to the needs of modern society, is building up a body of enactments not written by legislatures and of adjudications not made by courts, and only to a limited degree subject to their revisions. These powers are lodged in vast congeries of agencies. We are in the midst of a process, still largely unconscious and unscientific, of adjusting the play of these powers to the traditional system of Anglo-American law and courts.
Frankfurter and Davison, Cases and Other Materials on Administrative Law (1932), at vii.
So began the modern administrative state. Multiple administrative agencies were created to develop rules governing commercial and financial activities, and to oversee compliance with those rules. The FTC was created in 1914 to promote competition amidst great concern about trusts and monopolies, but it also was involved in efforts to try to deal with sharp practices in the sale of securities. A focus on securities practices during the 1932 campaign led to the early proposal of a securities act, which became the Securities Act of 1933. For a year, it was the FTC that had responsibility for overseeing that statute. In 1934, the SEC was created in the Securities Exchange Act of 1934. (Interestingly, some questioned the constitutionality of giving an independent agency the powers granted to the SEC, suggesting instead in earlier legislative proposals that they be given to the U.S. Post Office, based on the notion that the use of the postal service was key to securities transactions.) Felix Frankfurter, who was thought by Roosevelt to be perhaps the greatest legal mind of his time, was a key architect of that statute.
Frankfurter brought with him some key protégés, not the least of which was James Landis, who eventually served on the FTC and as Chairman of the SEC from 1935 to 1937. Landis is most renowned for his encomium to administrative agencies in the book The Administrative Process (1938). In that book, Landis argued that the Nation desperately needed a “Fourth Branch” because of “the inadequacy of a simple tripartite form of government to deal with modern problems.” Like Frankfurter, he believed that because complexities of modern commerce, “the need for expertness became dominant.” In his view, legislation should only identify the scope of subject matter for an agency and the issues it should address, and then stand aside and allow administrative experts to apply broad discretion to those matters. Landis and another Frankfurter acolyte, Benjamin Cohen, created the first draft of the Securities Act of 1933.
Even as the governmental alphabet soup burgeoned with the establishment of the SEC, FCC and other agencies, it was apparent that the precise constitutional nature of these entities was not clear. They were touted as the best means of regulating business activity because they were supposedly “non-political,” applying expertise to set an enlightened path to guide and develop commerce. To promote that theoretical aim, and because they were to set rules for and govern vast portions of United States commerce, these agencies were designed not to be a captive of, or to answer to, the “political” branches – the President and the Congress.
Like the FTC, and unlike an executive department, the President was not given the power to remove a commissioner. In fact, although the Federal Trade Commission Act gave the President power to remove FTC commissioners for “inefficiency, neglect of duty, or malfeasance in office” (i.e., not “at will”), the Securities Exchange Act had no provision addressing removal of commissioners. It has since remained unclear what power the President may have to remove SEC commissioners, although it is usually assumed that he may do so only “for cause,” i.e., like the FTC, for “inefficiency, neglect of duty, or malfeasance in office.” The only time the Supreme Court addressed that issue, it accepted a stipulation by the parties that SEC commissioners “cannot themselves be removed by the President except [for] “inefficiency, neglect of duty, or malfeasance in office,” and “decide[d] the case with that understanding.” Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477, 487 (2010) (“Free Enterprise Fund”).
The reasons for favoring [the independent, regulatory administrative agency] seem simple enough – a desire to have the fashioning of industrial policy removed to a degree from political influence. At the same time, there seems to have been a hope that the independent agency would make for more professionalism than that which characterized the normal executive department. Policies would thus be more permanent and could be fashioned with greater foresight than might attend their shaping under conditions where the dominance of executive power was pronounced. Again, the idea of the independent Commission seems naturally to have evolved from the very concept of administrative power. That power embraces functions exercisable by all three branches of government. To have taken these functions and to have placed them in the hands of any one of the three branches of government would have seemed incongruous. The natural solution was to place them beyond the immediate control of any one of the three branches, yet subject to checks by each of them.
Landis, The Administrative Process (1966 ed.), at 111. Landis goes on to note that independence allowed agencies “to have achieved a degree of permanence and consistency that they might not have possessed had their formulation been too closely identified with the varying tempers of changing administrations,” and “professionalism in the nonindependent agencies has suffered on occasion at the hands of political superiors.” Id. at 113-14.
But the traditional “separation of powers” among the three branches of government recognized in Articles I-III of the Constitution – Legislative, Executive, and Judicial – could not easily accommodate this new conception; recall that Landis argued the administrative agencies were needed to cure “the inadequacy of a simple tripartite form of government to deal with modern problems.” Id. at 1. Ever since 1935, the Supreme Court has had great difficulty articulating how to accommodate the Constitution’s framework with various forms of creative governing mechanisms that fall outside of Articles I, II or III.
In a nutshell, the SEC’s constitutional challenges are: (1) to remain consistent with Article II’s statement of Executive powers and responsibilities while pursuing law enforcement activities that by all appearances are Executive functions, i.e., “executing” those laws placed by Congress within its (and not the Executive’s) jurisdiction; and (2) to adjudicate law enforcement proceedings internally while still complying with judicial concepts of due process and fundamental fairness.
The constitutional quagmires that the SEC’s “Fourth Branch” status raise can come in multiple forms. They range from the question of how the insulation of SEC Commissioners from Presidential control (because they are not removable “at will”) may affect the SEC’s ability to appoint some officials who operate under its aegis, or to function as a powerful vehicle for enforcing a wide range of laws of the United States, to the question of how the SEC can function simultaneously as the enforcer of those laws and the adjudicator of the enforcement actions it decides to bring while still affording due process to those it prosecutes.
The issue currently at the top of the heap is how the SEC’s establishment as an independent agency impacts its ability to operate administrative courts with judges not subject to the control of the President, and we turn to that now.
The current constitutional challenges to SEC proceedings flow from the SEC’s increased use of its administrative law courts to hear major law enforcement proceedings. Although the constitutional issues discussed below might also apply to SEC administrative proceedings of a more traditional type (involving alleged violations of law by SEC-regulated entities), the intrusion on purely executive functions seems most clear when the “executive” action occurring is a prosecution for violation of the law by persons not otherwise subject to SEC regulation.
Stilwell v. SEC and Peixoto v. SEC involve challenges to the constitutionality of threatened and filed proceedings in the SEC’s administrative law court. In these cases, the plaintiffs seek declaratory relief that their administrative proceedings would violate Article II of the Constitution because the officials administering those proceedings – SEC administrative law judges – are “officers” of the United States and therefore must be reasonably subject to Executive control under Article II. Plaintiffs argue (i) the SEC ALJs are “officers” of the United States in the constitutional sense; (ii) the ALJs may be removed from their jobs only “for cause” by the SEC; and (iii) the SEC commissioners can be removed by the President only “for cause.” This arrangement, it is alleged, so diminishes the President’s ability to control the conduct of executive officers that it violates Article II.
Free Enterprise Fund is the Supreme Court precedent most central to this argument. In that case, the Court considered a constitutionality challenge to the law enforcement powers of the Public Company Accounting Oversight Board (“PCAOB”). The PCAOB was created in the Sarbanes Oxley Act of 2002 as a government organization with powers to adopt and enforce rules governing the public accounting profession, under the oversight of the SEC. Its five Board Members are appointed by the SEC. They are not government employees for statutory purposes, but they were acknowledged by all parties to be “Officers of the United States” who exercised “significant authority pursuant to the laws of the United States.” 561 U.S. at 485-86. They are removable by a formal order of the SEC only “for good cause shown,” subject to judicial review. Id. at 486. As noted above, the parties in the case also stipulated that the SEC Commissioners were removable by the President only for “inefficiency, neglect of duty, or malfeasance in office.” Id. at 487. The case presented the question whether the layering of “for cause” removal restrictions – limiting the President as to “a principal officer” (the SEC Commissioners) “who is in turn restricted in his ability to remove an inferior officer (the PCAOB Members) – is permissible “even though that inferior officer determines the policy and enforces the laws of the United States.” Id. at 483-84.
But the Court nevertheless concluded that the PCAOB violated Article II because its members were too insulated from presidential control to allow the President to perform his required executive functions: “We hold that such multilevel protection from removal is contrary to Article II’s vesting of the executive power in the President. The President cannot “take Care that the Laws be faithfully executed” if he cannot oversee the faithfulness of the officers who execute them. Here, the President cannot remove an officer who enjoys more than one level of good-cause protection, even if the President determines that the officer is neglecting his duties or discharging them improperly.” Id. at 484.
That raises questions about the SEC’s ALJs. Under the Administrative Procedure Act, the SEC is responsible for the appointment of the ALJs that preside over its administrative courts. The SEC is also responsible for their removal. But it can’t do so “at will.” 5 U.S.C. § 7521 states: “An agency may remove, suspend, reduce in level, reduce in pay, or furlough for 30 days or less an administrative law judge only for good cause established and determined by the [Merit Systems Protection Board] on the record and after opportunity for a hearing before the Board.” In other words, the SEC’s ALJs are removable by the SEC only after proof of good cause as found by the Merit Systems Protection Board. In that respect, it appears to be somewhat more difficult for the SEC to remove an ALJ than it is to remove a Member of the PCAOB.
Is an Administrative Law Judge an Officer or Inferior Officer of the United States?
Free Enterprise Fund, 561 U.S. at 507 n.10. The Court did “not address” the issue, but it certainly raised a significant obstacle, seemingly suggesting that if ALJs “perform adjudicative rather than enforcement or policymaking functions” they may be constitutionally okay.
[A]dministrative law judges in the independent agencies are removable only for cause at the initiation of the agency that employs them and with approval of the Merit Systems Protection Board, . . . whose members in turn are removable only for cause by the President. . . . [T]here are good reasons the Board and the United States did not cite ALJs as a precedent. First, an agency has the choice whether to use ALJs for hearings . . . Congress has not imposed ALJs on the Executive Branch. Second, many ALJs are employees, not officers. [See Landry v. FDIC, 204 F.3d 1125, 1132-34 (D.C. Cir. 2000)] (ALJs in FDIC are employees because they possess only recommendatory powers that are subject to de novo review by agency). Third, ALJs perform only adjudicatory functions that are subject to review by agency officials . . . and that arguably would not be considered “central to the functioning of the Executive Branch” for purposes of the Article II removal precedents. . . . Nothing in this dissenting opinion is intended to or would affect the status of employees in independent agencies who have congressionally mandated civil service tenure protection or the status of administrative law judges.
537 F.3d 667 at 699 n.8 (dissenting opinion).
The opinion in Landry v. FDIC. Both Justice Roberts’s Supreme Court opinion and Judge Kavanagh’s D.C. Circuit dissent cite only one case in relation to the ALJ issue: Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000). Kavanagh cites Landry to support the statement that “many ALJs are employees, not officers” and Roberts cites it for the point that “Whether administrative law judges are necessarily ‘Officers of the United States’ is disputed.” Neither judge is suggesting that the holding in Landry decides the issue completely, but it would be important for someone asserting the SEC ALJs are “officers” to be able to explain why the rationale underlying Landry is not especially helpful in evaluating the status of the SEC ALJs.
Landry involved a challenge to sanctions imposed by the FDIC after it reviewed the decision of an FDIC administrative law judge recommending findings and sanctions under the operative FDIC statute. Among the grounds for appeal to the D.C. Circuit was the contention that the appointment of the FDIC’s ALJ violated the Appointments Clause of the Constitution, Article II, Section 2, Clause 2: “[The President] … shall appoint … 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.” Landry contended that an FDIC ALJ was an “inferior Officer” who could be appointed only by the President, the Courts, or a Head of Department, but had been appointed by a federal banking agency, which was not a “Department” in the constitutional sense.
A majority of the D.C. Circuit panel ruled that the FDIC ALJ was not an inferior officer, but was instead a mere “employee.” The court noted that “[t]he line between ‘mere’ employees and inferior officers is anything but bright. . . . In fact, the earliest Appointments Clause cases often employed circular logic, granting officer status to an official based in part upon his appointment by the head of a department.” Landry, 204. F.3d at 1132 (citations omitted). The Supreme Court’s statement in Buckley v. Valeo, 424 U.S. 1, 126 n.162 (1976), that “any appointee exercising significant authority pursuant to the laws of the United States is an ‘Officer of the United States,’” was treated as not especially helpful. Instead, “ascertaining the test’s real meaning requires a look at the roles of the employees whose status was at issue in other cases.” Landry, 204 F.3d at 1133.
The one case deemed “most analogous” was Freytag v. Commissioner, 501 U.S. 868 (1991), in which the Court found that special trial judges (“STJ”) for the Tax Court were indeed “inferior Officers.” The Landry majority distinguished Freytag, however, because the Freytag Court relied in part on powers of the STJ not matched by the FDIC ALJs: “the authority to render the final decision of the Tax Court in declaratory judgment proceedings and in certain small-amount tax cases.” Landry, 204 F.3d at 1133. Because the FDIC ALJ could only render a recommended decision, findings of fact, and conclusions of law, with final decisions reserved to the FDIC, and because the Supreme Court in Freytag “laid exceptional stress on the STJs’ final decisionmaking power” (id. at 1134), the majority found the ALJ was not an “officer” of the United States.
Judge Randolph concurred in the result based on no prejudice suffered by the appellant, but strongly disagreed on the determination that the ALJ was not an officer of the United States. He found the FDIC ALJ indistinguishable in material respects from the Tax Court STJ under the reasoning of the Supreme Court in Freytag. Quoting the Freytag opinion extensively, he argued that the Supreme Court placed no great importance on the limited respects in which the STJs had final authority. In particular, the mere fact “that an ALJ cannot render a final decision and is subject to the ultimate supervision of the FDIC shows only that the ALJ shares the common characteristic of the ‘inferior Officer,’” that is that “‘inferior’ officers are officers whose work is directed and supervised at some level by others who were appointed by Presidential nomination….” Landry, 204 F.3d at 1142 (quoting Edmond v. United States, 520 U.S. 651, 663 (1997).
In the end, the divided opinion in Landry v. FDIC lends some, but limited, support to the notion that an ALJ whose authority is exclusively limited to recommending determinations to be made finally by others may be an “employee” and not an “inferior Officer.” But the division in the court makes this far from clear.
The decision in Freytag v. Commissioner. Since the Landry decision turns on how the disagreeing judges read the Supreme Court decision in Freytag, we should at least understand what the Freytag court decided.
As noted above, the Freytag case involved the status of special trial judges (formerly known as “commissioners”) appointed by the Tax Court. The Tax Court is an Article I court created by Congress with judges appointed for limited terms. Congress authorized the Chief Judge of the Tax Court to appoint STJs to hear specific types of tax cases, some of which could be decided by the STJ but others of which require a recommended decision by the STJ and final determination by a regular judge of the Tax Court. Freytag’s case was one of those that required review and adoption by a regular judge, and that is what occurred.
The reasoning behind that was laid out in the majority opinion. That opinion rejected the contention set forth by the Commissioner of the IRS that the STJs were “employees” who did no more than assist the regular Tax Court judges in taking evidence and preparing proposed findings and an opinion. The Court started with the statement in Buckley v. Valeo, 424 U.S. 1, 126 (1976), that” “Any appointee exercising significant authority pursuant to the laws of the United States is an ‘Officer of the United States,’ and must, therefore, be appointed in the manner prescribed by § 2, cl. 2, of [Article II].” It went on to reject the argument that STJs are only employees “because they lack authority to enter into a final decision” because that argument “ignores the significance of the duties and discretion that special trial judges possess.” Freytag, 501 U.S. at 881. The Court focused on the facts that “the office of special trial judge is ‘established by Law’” and the statute lays out their “duties, salary, and means of appointment for that office” (id.); they “perform more than ministerial tasks” including “tak[ing] testimony, conduct[ing] trials, rul[ing] on the admissibility of evidence, and hav[ing] the power to enforce compliance with discovery orders.” Id. at 881-82. And in the course of doing so, they “exercise significant discretion.” Id. at 882. These factors were bolstered by others, because “[e]ven if the duties of [STJs] were not as significant as . . . we have found them to be,” there are circumstances where “they exercise independent authority,” and they cannot be “inferior Officers” for some purposes and not others. See id.
So, Freytag rejects the argument that officials who “lack authority to enter into a final decision” must be employees and not inferior officers, places great weight on whether a person’s job was created and delineated by statute and involves the exercise of significant discretion, and notes that if this is accompanied by the exercise of “independent authority,” there is no doubt that the official is an inferior officer.
Weiss challenged military trial judges who were appointed by the President as officers of the military but never appointed to be judges. The case proceeded on the “common ground” of the parties, with apparent acquiescence by the Court, that “military judges, because of the authority and responsibilities they possess, act as ‘Officers’ of the United States.” Weiss, 510 U.S. at 169; see id. at 173 (Buckley, Freytag, and Morrison v. Olson “undoubtedly establish the analytical framework upon which to base the conclusion that a military judge is an ‘officer of the United States’ – a proposition to which both parties agree”). The Court held that because the appointment as military officers of those serving as judges was consistent with the Appointments Clause, no “reappointment” was required. The only issue disputed by the justices was how to decide whether the military judges were “inferior Officers” or “principal officers.” See id. at 182-94 (Souter, J., concurring).
Ryder involved a challenged conviction where the intermediate appellate court, the Coast Guard Court of Military Review, included two civilian judges whose appointments did not comply with the Appointments Clause, and, because they were not military officers, were never appointed to a military office by means consistent with the Appointments clause. The Court unanimously reversed the decision of the United States Court of Military Appeals (the highest military appellate court) that there were ground to ignore this flaw, and overturned the conviction. In doing so, the Court agreed that judges serving on the Coast Guard Court of Military Review were officers required to be appointed in accordance with the Appointments Clause. Significantly, the Court reached this result despite the fact that the intermediate appellate judges in question were subject to review by the higher appellate court, noting that the lower and higher courts applied different standards of review. Ryder, 515 U.S. at 187-88.
Edmond also involved a challenge to a conviction where the intermediate appellate court (now renamed the Coast Guard Court of Criminal Appeals) included two civilian judges who were assigned to the intermediate court by the Judge Advocate General of the Coast Guard (who also was General Counsel of the Department of Transportation). After Weiss was decided, the Secretary of Transportation “adopted” the assignments as his own “judicial appointments.” The Court found no violation of the Appointments Clause because the judges were officers of the Department of Transportation and the power to appoint all such officers was given by statute to the Secretary of Transportation, consistent with the Appointments Clause. One of petitioner’s challenges was that these judges were “principal officers,” not “inferior officers.” The Court noted that its “cases have not set forth an exclusive criterion for distinguishing between principal and inferior officers,” and discussed several cases finding other officials to be inferior officers. Edmond, 520 U.S. at 661. In response to the argument that these judges exercised “significant authority” on behalf of the United States, the Court that this does not make them principal officers, but draws “the line between officer and non-officer.” Id. at 662. The Court concluded they would be “inferior officers” because “[g]enerally speaking, the term ‘inferior officer’ connotes a relationship with some higher ranking officer or officers below the President: whether one is an ‘inferior’ officer depends on whether he has a superior.” The fact that these judges were subject to administrative oversight by the Judge Advocate General, and could be removed by the Judge Advocate General “without cause,” were strong grounds to show they were subordinates. Id. at 664. And the fact that the decisions of the intermediate court were subject to reversal on further appeal, also showed that these judges “have no power to render a final decision on behalf of the United States unless permitted to do so by other executive officers” and are therefore inferior officers. Id. at 665. Justice Souter’s concurrence argued that more factors should be considered in determining whether these judges were principal or inferior officers, but in the end agreed “that the judges . . . are inferior officers within the meaning of the Appointments Clause.” Id. at666-70 (Souter, J., concurring).
The SEC’s ALJs exercise powers of the government and have significant discretion in adjudicating enforcement proceedings involving major sanctions. Although they are subject to review by the SEC, the cases seem to make it crystal clear that merely being subject to reversal does not render an inferior officer a non-officer. That their decisions can be reversed is a sign that they are not “principal officers,” but has little bearing on whether they are inferior ones. To the contrary, in the words of Justice Scalia in Edmond, “we think it evident that ‘inferior officers’ are officers whose work is directed and supervised at some level by others who were appointed by presidential nomination with the advice and consent of the Senate.” Edmond, 520 U.S. at 663.
Beyond the case law. This certainly has not been an exhaustive review of all cases discussing the scope of “inferior Officers.” But it seems sufficient to conclude that the characterization of the SEC ALJs as inferior officers, on the one hand, or employees, on the other, is not easily made based solely on the cases. One question to ask is whether there are other authorities addressing the issue that might be helpful. It turns out that the Office of Legal Counsel of the Department of Justice (OLC) has on several occasions considered how to determine whether certain officials are officers of the United States. Might these analyses be useful?
We conclude that any position having the two essential characteristics of a federal “office” is subject to the Appointments Clause. That is, a position, however labeled, is in fact a federal office if (1) it is invested by legal authority with a portion of the sovereign powers of the federal Government, and (2) it is “continuing.” A person who would hold such a position must be properly made an “Officer[ ] of the United States” by being appointed pursuant to the procedures specified in the Appointments Clause.
OLC April 2007 Opinion at 1.
The crux of the OLC analysis is that a person is a federal officer if he or she has a continuing position established by law that involves the application of the sovereign powers of the federal government. That would be in contrast to a person whose position is “purely advisory” or who “provides goods and services.” Id. at 4. If their official positions involve “the wielding of delegated sovereign authority,” they hold an office, and are officers. Id. at 7. Citing historic authorities, the OLC says: “Officers, thus, were persons holding sovereign authority delegated from the King that enabled them in conducting the affairs of government to affect the people “against [their] will, and without [their] leave.” Id. at 8. An influential 19th century treatise cited by the OLC summarized a public office as follows: “A public office is the right, authority and duty, created and conferred by law, by which for a given period, either fixed by law or enduring at the pleasure of the creating power, an individual is invested with some portion of the sovereign functions of government, to be exercised by him for the benefit of the public. The individual so invested is a public officer.” Id. at 10 (citing F. Mechem, A Treatise on the Law of Public Offices and Officers § 1, at 1-2 (1890)).
Critically, the OLC emphasizes that “‘independent discretion’ is not a necessary attribute of delegated sovereign authority.” Id. at 17. “[T]reating discretion as necessary for the existence of an office conflicts with the original understanding of ‘office,’ early practice, and early precedents.” Id. at 18. Nor is the exercise of “independent” authority needed: “If it is not necessary to the existence of delegated sovereign authority (and thus to the existence of an office) that a position include the exercise of discretion, all the more is it not necessary that a position include some sort of ‘independent’ discretion in carrying out sovereign functions. The question for purposes of this first element is simply whether a position possesses delegated sovereign authority to act in the first instance, whether or not that act may be subject to direction or review by superior officers.” Id.
This OLC opinion, coupled with the Supreme Court decisions in Freytag and Edmond, provides heavy artillery in support of the argument that the SEC ALJs are “inferior Officers” under the Appointments Clause. They surely are “invested by legal authority with a portion of the sovereign powers of the federal Government.” They wield governmental power to issue subpoenas and compel testimony. They determine what evidence should be included in the record, and decide whether portions of the case should proceed to trial or not. They can sanction lawyers. In short, they have all the powers of a judge in their courtrooms, and those powers are derived from the sovereign. They hold “continuing” positions and can only be removed for cause. They do not appear distinguishable from military judges, and are barely distinguishable from Tax Court special trial judges, or for that matter, from U.S. magistrates.
Do the SEC’s Administrative Law Judges Perform Executive Functions?
Since the constitutionality issue in Free Enterprise Fund turned on the inability of the President to exercise sufficient influence over the PCAOB’s executive functions, could the SEC’s ALJs be approved on the theory that they do not perform executive functions? After all, they are serving in a traditional adjudicative capacity, and Justice Roberts did note in his footnote that “unlike members of the Board, many administrative law judges of course perform adjudicative rather than enforcement or policymaking functions. . ..” Free Enterprise Fund, 561 U.S. at 507 n.10.
Surely that comment provides the opening for an argument, but it is difficult to conceive of the Court concluding that the SEC’s ALJs are not functioning as Executive officers even though they perform key functions in what the Court concluded was an Executive Department. When the Court decided the Freytag case, it left open whether a “principal agenc[y], such as . . . the Securities and Exchange Commission” is a “Department” under the Appointments Clause. Freytag, 501 U.S. at 887 n.4. But with that issue now resolved with the ruling that it is such a Department, it is difficult to create an argument that statutory judges performing adjudicative functions within that Department, just as the special trial judges functioned within the Treasury Department, should be treated as outside of the Executive power. Likewise, the military court triumvirate of cases all involved officers performing adjudicative functions as part of an arm of the Executive, and it was never suggested that this impacted the importance of their Executive roles.
The constitutional challenges raised in the Stilwell and Peixoto cases are far from makeweight. The Supreme Court decision in Free Enterprise Fund coupled with the SEC’s status as an “independent agency” with Commissioners not subject to removal by the President other than “for cause” seem to make these cases come down to a single issue: are the SEC’s administrative law judges “officers” of the United States performing Executive functions. A significant line of Supreme Court cases provides apparent support for finding these officials to be “inferior Officers” within the meaning of that clause. There is also apparent support for this contention from the Department of Justice Office of Legal Counsel opinion addressing the issue of how to decide when a person is an “inferior Officer.” And the determination that the SEC is to be treated as “a freestanding component of the Executive Branch” leaves little room to conclude that ALJs working for the SEC are not performing Executive functions.
To be sure, the majority opinion of the D.C. Circuit in Landry, and the footnotes of Justice Roberts and Judge Kavanagh in the Free Enterprise Fund cases noting this to be an open issue, make it clear this is not a slam dunk. But there can be no doubt that the constitutional issues raised are real and serious, and it seems likely that the Supreme Court will be deciding them relatively soon.
When we next delve into SEC constitutional issues, which may take awhile, we will address why it is that an “independent agency” can exercise enormous power in executing the law through enforcement proceedings even though Article II of the Constitution places the power to “take Care that the Laws be faithfully executed” solely in the hands of a unitary Executive.
This entry was posted in Enforcement Overreaching, SEC Enforcement, Securities Law and tagged administrative courts, ALJ, Appointments Clause, Article II, Chau v. SEC, Constitution, constitutionality, due process, Edmond v. United States, Enforcement Division, Free Enterprise Fund, Freytag v. Commissioner, Landry v. FDIC, lawyer, Peixoto, Peixoto v. SEC, Ryder v. United States, SEC, SEC enforcement, securities, Securities Act of 1933, Securities Exchange Act of 1934, securities fraud, securities law, securities litigation, separation of powers, Stilwell, Stilwell v. SEC, Weiss v. United States, Wing Chau on December 2, 2014 by Straight Arrow.


§ 159-4 Responsibility of operators of places of amusement.
§ 159-5 Responsibility of hotels, motels and rooming houses.
§ 159-6 Loitering in school and playground areas.
§ 159-7 Detaining a child.
§ 159-9 Violations and penalties.
§ 159-14 Investigation of truants and dropouts.
§ 159-17 Contributing to truancy.
§ 159-19 Possession on school grounds prohibited.
§ 159-20 Delivery on school grounds prohibited.
§ 159-23 Violations and penalties.


Excellence is achieved incrementally. The 1985 interference rules were an enormous improvement on the preexisting interference rules, and the 1995 amendments made significant improvements on the 1985 rules. However, there is obviously room for further improvement, and there is no reason to wait to 2005 to make them. The interference rules are procedural, not substantive, and they should be subject to continuous scrutiny and continuous tinkering.
Interferences proceed in secrecy, and there have been very few published opinions in recent years. Accordingly, any practitioner's proposals for improvements in the rules are, of necessity, largely the results of his or her own personal experience. We can all see the forest, but only through the underbrush in our immediate vicinity. However, I believe that the issues addressed in this paper are of general concern.
Note that my suggestions are in numerical order (i.e., in the order of the rules to which they apply), not in the order of the importance which I attach to the various suggestions.
37 CFR 1.632 currently provides that, unless authorized otherwise by an APJ, a 37 CFR 1.632 notice of intent to argue suppression or concealment must be filed "within ten (10) days after the close of the testimony-in-chief of the opponent." In practice, the opponent (let's call it the party A) will ordinarily have put on its evidence of one or more pre-filing date actual reductions to practice (i.e., the earliest possible actual reduction to practice, followed by a series of fallback actual reduction to practice's until the party A has put on its evidence of its strongest possible actual reduction to practice), and there will be progressively shorter gaps of time between each successive alleged actual reduction to practice and the party A's filing date. The other party (let's call it the party B) waits until the party A's testimony-in-chief period is over and then files a 37 CFR 1.632 notice. The party A then has a choice. It can either (1) stand on the evidence that it has already put on or (2) ask the APJ for a special testimony period in which to put in evidence to rebut the inference of suppression or concealment that the party B has indicated that it intends to argue should be drawn from the gaps between the party A's various alleged actual reduction to practices and its filing date.
Of course, if the party A has no evidence of so-called Peeler diligence, its decision is easy. However, if it has some evidence that it could put in, its decision is very difficult indeed. In the first place, putting in the additional evidence will cost something -- perhaps a good deal. In the second place, the special testimony period will inevitably extend the interference by two to four months. In the third place, there is a question whether the party A needs to put in the evidence. It can simply argue that the relevant gap (i.e., the gap between whichever alleged actual reduction to practice the board buys and its filing date) is not long enough to justify an inference of suppression or concealment -- thereby placing on the party B the almost insurmountable burden of affirmatively proving (during its testimony period) that the party A did suppress or conceal the invention. If the board buys that argument, the party A is almost definitely safe. On the other hand, if the party A puts on its evidence of Peeler diligence, not only will that cost money and delay resolution of the interference, but, if the evidence is weak, it may wind up making a worse impression on the board than if the party A had declined to put in any evidence at all.
To compound the confusion, nobody knows how long a gap is required to switch the burden of proof. We only know the extremes. If the gap is less than three months, the party A can be pretty sure that it does not have the burden of justifying the delay. On the hand, if the gap is more than four years, the party A can be pretty sure that it does have the burden of justifying the delay. Anything in between those extremes is anybody's guess.
I have a two part solution to this problem.
The first part is to amend 37 CFR 1.632 to provide a rule of thumb gap that would automatically trigger an inference of suppression or concealment. Specifically, if the period between the alleged actual reduction to practice and the filing date is <= the rule of thumb gap, the burden would be on the opponent to prove that the party which allegedly actually reduced the invention to practice did thereafter suppress or conceal the invention, whereas, if the period between the alleged actual reduction to practice and the filing date is > the rule of thumb gap, the burden would be on the party to prove that it did not suppress or conceal the invention after having actually reduced it to practice. Such an ad hoc distinction would be similar in concept to (1) the ad hoc distinction between the <= three month period of 37 CFR 1.608(a) and the > three month period of 37 CFR 1.608(b) and (2) the three month and six month periods of MPEP § 2303.
My proposal would do rough justice, and it would remove a contentious and unpredictable variable (namely, whether or not the burden of proof and/or the burden of persuasion had shifted) from suppression or concealment cases. Specifically, (1) a party such as the party A would know that, if the gap between each of its alleged actual reductions to practice and its filing date was greater than the rule of thumb gap, it had the burden of proving that it did not suppress or conceal the invention during that period; (2) the party A would know that it has to put on its evidence of Peeler diligence during its regular testimony period or not obtain the benefit of its alleged early actual reduction to practice date; and (3) the party B would not have to file a 37 CFR 1.632 notice. Thus, there would never be a second special testimony period for the purpose of putting in evidence of Peeler diligence.
The second part of my suggestion is that the rule of thumb gap that would trigger the shift in burden should be three months. I suggest that length (1) in deference to Shindelar v. Holdeman, supra, (2) by analogy to the period set in 37 CFR 1.608 and MPEP § 2303, and (3) because I think that it is a reasonable period, bearing in mind the importance of encouraging prompt disclosures of inventions to the PTO. However, I think it far more important that there be a set period than that the set period be three months.
Interferences are supposed to resolve all of the controversies between or among the opponents relating to the subject matter of the or each count. Goutzoulis v. Athale, 15 USPQ2d 1461, 1464 (Comm'r 1990); and Shaked v. Taniguchi, 21 USPQ2d 1285, 1287-88 (PTOBPAI 1990). However, they don't. In many interferences, the major issue is not which party is going to win on priority, but what the other party or parties will be able to salvage despite losing on priority.
37 CFR 1.633(c)(4) permits an interferent to file a motion to redesignate an application or patent claim originally designated as corresponding to a count as not corresponding to the or any count -- i.e., to degroup a claim initially grouped with a count. However, no rule permits an applicant interferent (1) to amend a claim so that, as amended, it does not correspond to a count or (2) to add a claim and obtain a ruling that the added claim does not correspond to a count. L'Esperance v. Nishimoto, 18 USPQ2d 1534, 1537 (PTOBPAI 1991). The effect of the absence of a rule permitting an applicant interferent to amend a claim or to present a new claim and have the amended or new claim designated as not corresponding to the or any count is that applicant interferents present amended and added claims in post-interference ex parte practice. In the post-interference ex parte practice, the applicant argues that the amended or added claims are allowable despite the loss in the interference because they are patentably distinct from the subject matter defined by the or all counts in the interference. Such claims can be rejected under 37 CFR 1.658(c) if the examiner believes that they are not patentably distinct. However, the application of 37 CFR 1.658(c) is inconsistent, and the ex parte action is no substitute for thrashing these important issues out in the inter partes context.
The solution to this problem is simple. 37 CFR 1.633(c) should be amended to permit an applicant interferent to file a motion "amending an application claim corresponding to a count or adding a claim in the moving party's application and requesting an order designating the amended or added claim as not corresponding to a count."
Such an amendment to the rules would not "introduce issues that APJ's are not equipped to handle." This is so, among other reasons, because the APJ's already handle precisely the same types of issues on behalf of patentee interferents. A patentee interferent can file an application to reissue its patent in interference and a 37 CFR 1.633(h) motion to add the reissue application to the interference. Under 37 CFR 1.637(h)(3), the patentee has to identify all of the claims in the reissue application which it believes should be designated as corresponding to each count, but it doesn't have to identify all of the claims in the reissue application as corresponding to the or any count. The practical effect of this rule is that a patentee interferent can amend the patent claims and/or add new claims and identify some reissue application claims as corresponding to the or each count and other reissue application claims as not corresponding to the or any count. If the patentee's opponent(s) disagree with the patentee's proposed claim grouping (as they normally do), the issue of which claim should be designated as corresponding to the or any count gets resolved inter partes.
If the APJ's can handle these issues for patentee interferents, they jolly well can handle them for applicant interferents.
37 CFR 1.633(h) provides that, "When a patent is involved in an interference and the patentee has on file or files an application for reissue under § 1.171, [the patentee interferent may file] a motion to add the application for reissue to the interference." However, the rules do not provide that the reissue application is automatically added to the interference. Some APJ's do in fact immediately and automatically add applications to reissue involved patents to the interference, thereby obtaining jurisdiction over the reissue applications, but others do not. In fact, some APJ's do not add such reissue applications to the interference even when they decide the preliminary motions! This leads to bizarre results, with prosecution in the reissue applications continuing independently of the interference. Needless to say, the results can be inconsistent, which can be frustrating for either the patentee interferent or its opponent(s), depending on how things go.
The solution is simple. The position of the APJ's who immediately and automatically add applications to reissue involved patents to their interferences should be adopted uniformly by rule. 37 CFR 1.660(b) should be amended to require patentee interferents to notify the board immediately when they file a reissue application (not ten days later, as the rule currently provides), and 37 CFR 1.633(h) should be amended to provide that the reissue application would be immediately and automatically added to the interference with all claims designated as corresponding to the count (if there is only one count) or to a count to be determined by the APJ (if there is more than one count). If the patentee interferent disagrees that all of the claims in the reissue application should be designated as corresponding to the or any count, it could file a 37 CFR 1.633(c)(4) motion asking to have one or more of its reissue claims designated as not corresponding to the or any count. Its opponent(s) could oppose that motion, and the issue of whether or not the reissue claims should be designated as not corresponding to the or a count would then be decided inter partes in the normal course.
37 CFR 1.642 authorizes a request (not a motion!) to the APJ that he or she exercise his or her discretion to add another patent or application to the interference. Theeuwes v. Bogentoft, 2 USPQ2d 1378 (Comm'r 1986). 37 CFR 1.642 is used in two very different situations. First, it is used to add to an interference a patent or application owned by an entity not already involved in the interference. Second, it is used to add to an interference another patent or application owned by an entity that already has one or more patents or applications involved in the interference. It is the latter use of 37 CFR 1.642 with which I am concerned. There are currently at least two problems with it.
First, the practice is inconsistent from APJ to APJ. Some APJ's will consider requests to add other patents or applications owned by an opposing party, come to a reasoned judgment as to whether or not at least one claim in the other patent or application is drawn to the same subject matter as is defined by the or a count of the interference, and, if so persuaded, will add the other patent or application to the interference. Other APJ's refuse to consider the issue, asserting that the party filing the 37 CFR 1.642 request should attempt to provoke a new interference with the target patent or application even if the count of the new interference would not be patentably different (or even different at all!) from the count of the existing interference. This obviously has the potential of leading to inconsistent results and weird conflict problems -- since the decision in the plural interferences would each give rise to an independent 37 CFR 1.658(c) estoppel.
Second, to file a 37 CFR 1.642 request, one must know about and be able to identify the target patent or application. That is alright for patents, but applications are currently maintained in secrecy. That secrecy can be used to prosecute applications containing claims that arguably should be designated as corresponding to the or a count of the interference. If a claim that should be designated as corresponding to the or a count of the interference is allowed, and if a patent issues containing that claim, the successful applicant has, in effect, made an end run around the interference -- and has obtained a license to sue its opponent on a patent which should not have issued, at least until it prevailed in the interference.
The solution, once again, is simple. A rule should be added providing that any application or patent that claims the benefit of the filing date of (a) any application or patent involved in the interference or (b) any application the benefit of the filing date of which is claimed by any application or patent involved in the interference be automatically and immediately added to the interference with all of its claims designated as corresponding to the count (if there is only one count) or to a count to be determined by the APJ (if there is more than one count).
If the owner of any patent or application so added disagrees that all of the claims in the case(s) so added should be designated as corresponding to the or a count, it could file a 37 CFR 1.633(c)(4) motion asking to have one or more of those claims designated as not corresponding to the or any count and/or a 37 CFR 1.633(b) motion asking to have one or more of the added cases released from the interference. Its opponent(s) could oppose those motions, and the issue of whether or not the claims in the patents and applications so added should be designated as corresponding to the or a count would then be decided inter partes in the normal course.
Of course, what I am proposing is based on the implicit presumption that all claims in all cases that claim the same priority date are either (1) not patentably distinct from each other (that is, that they are all drawn to the same patentable invention within the meaning of 37 CFR 1.601(n)) or (2) not patentably distinct from the count or counts of the interference. Prior to June 08, 1995, that would not have been a reasonable presumption. However, now that claiming a priority date to which one is not entitled cuts down on the life of one's patent, I submit that it is a reasonable presumption. That is, it is likely enough that all of the claims in the related patents or applications should be in the interference so that all of the related patents or applications should be put in the interference automatically, after which the owner of those patents or applications would have the right to try to persuade the APJ that certain of those patents or applications or certain claims in certain of those patents or applications should be allowed out of the interference.
There is no real discovery in interferences.
37 CFR 1.687(d) provides that "The parties may agree to discovery among themselves at any time." However, if one party has something really bad in its files, it is highly unlikely that it will agree to discovery.
37 CFR 1.687(b) provides that "Where appropriate, a party may obtain production of documents and things during cross-examination of an opponent's witness or during the testimony period of the party's case-in-rebuttal." Besides the fact that none of us really knows what "Where appropriate" means, getting discovery during trial testimony is an abomination! In the first place, even if the witness will admit that a document exists, it is a rare day that the document has been brought to the deposition. In the second place, even if the requesting attorney gets the document handed across the table to him or her right then and there, either he or she has to ask ill-prepared questions on the spot or try to get the deposition continued to a later date. The former solution leads to poor questions, and the latter solution leads to unnecessary expenses. All in all, 37 CFR 1.687(b) is an invitation to childish and wasteful game playing!
37 CFR 1.687(c) says that, "Upon a motion (§ 1.635) brought by a party within the time set by an administrative patent judge under § 1.651 or thereafter as authorized by § 1.645 and upon a showing that the interest of justice so requires, an administrative patent judge may order additional discovery, as to matters under the control of a party within the scope of the Federal Rules of Civil Procedure, specifying the terms and conditions of such additional discovery." The trouble here is the "interest of justice" language. The APJ's read that language extraordinarily tightly, ensuring that very little 37 CFR 1.687(c) discovery takes place.
Of course, there was a time that there was no discovery at all in interferences, so having any discovery is no doubt better than having no discovery. However, it's not much better. Why can't we have real discovery, as they do in inter partes proceedings before the TTAB?
Over the years, two reasons have been given for the difference in practice before the BPAI and the TTAB.
First, it has been suggested that the APJ's couldn't handle discovery issues because they are difficult and the APJ's have had no experience with such issues. In response, I point out that all of the APJ's who handle interferences are lawyers, that some of them have trial experience, and that all of them routinely handle legal issues that are far more complex than discovery issues. I don't see why they couldn't handle discovery issues -- perhaps with a little help initially from their colleagues on the TTAB.
Second, it is argued that having real discovery would raise the average cost of interferences. That is, while having real discovery would no doubt cause some interferences to end more quickly and at reduced cost, the additional costs attributable to real discovery would, on average, outweigh the savings.
In response, I point out that there is always a tension between the desire to maximize the probability of obtaining a just result and the desire to minimize the cost of the proceeding. Discovery can indeed be expensive. However, we could minimize the costs of interferences by providing that they would be decided by flipping a coin. We haven't done that. We have decided to have relatively expensive proceedings to decide the relatively complicated issues (derivations, fraud, validity, etc., as well as priority!) that we decide in interferences. The real question is whether the additional expenses that would result from having real discovery would be justified by the enhanced probability of obtaining a just and rationale result.
In my opinion, the answer is yes. A decision was made long ago in connection with conventional litigation that the expense of discovery is justified by the enhancement of the quality of the justice produced. Interferences are just a special form of litigation. I see no reason why the same judgment should not be made concerning interferences.
Senior parties not infrequently think that the junior party or parties has or have failed to overcome their filing dates. That is, the senior party thinks that it will win as to priority even if it does not put in any priority evidence. However, such senior parties can seldom be sure, and, as things now stand, the decision not to put on their priority evidence is irrevocable. That is, if they elect not to put on their priority evidence, and if the board disagrees with the senior party's assessment (i.e., if the board holds that the junior party or any one of the junior parties can beat the senior party's filing date), the senior party is hosed. The result is that many senior parties wind up putting on priority evidence which is never considered -- because the board does hold that the junior party or parties cannot beat the senior party's filing date. The result is a colossal waste of time and money for all of the parties.
If during a trial by jury a party has been fully heard on an issue and there is no legally sufficient evidentiary basis for a reasonable jury to find for that party on that issue, the court may determine the issue against that party and may grant a motion for judgment as a matter of law against that party with respect to a claim or defense that cannot under the controlling law be maintained or defeated without a favorable finding on that issue.
I submit that FRCP 50(a)(1) could be adapted for interference practice. The major argument that I have heard against doing so is that, if such motions were permissible, they would be filed in every case, thereby slowing down interference practice still further. (Of course, FRCP 50(a)(1) motions are usually oral, and they are usually denied on the spot by a judge who has sat through the testimony in question. However, the interference analog would have to be in writing, and, in order to decide such a motion, an APJ would have to familiarize himself or herself with written testimony that he or she had not sat through, which would of course require time.) That argument is not without force, but there is an answer to it which should gladden the hearts of PTO management: charge a whopping big fee for filing the motion. A $10,000 fee would discourage the filing of such motions that were frivolous, but it would not discourage the filing of such motions that had a decent chance of success (since the cost of putting on a priority case would normally vastly exceed $10,000). Moreover, the $10,000 fee would presumably compensate the PTO for the extra expense of deciding such motions in most cases, and the PTO might even be able to turn a little profit on the exercise.
The presence of Commissioner Goffney and Judge Calvert here today is extremely gratifying. The willingness of PTO management to listen to and to act upon suggestions for changes to the interference rules has varied dramatically over the years. If we are once again entering a period during which the PTO is amenable to considering proposed changes in the interference system suggested by the principal users of the interference system, that will be a very good thing indeed.
I propose two ways of continuing this dialog.
First, I suggest that an APJ be designated to receive, to consider, and to respond to suggestions from members of the bar for changes in the interference rules. Some of those suggestions will be good! Moreover, if the PTO at least gives the bar the impression that it's listening politely, that will reduce the level of frustration that is now experienced by members of the bar in attempting to work with the current rules.
Second, I suggest that that APJ (and any other APJ who is interested) meet quarterly with members of the interference bar to discuss (1) proposed rule changes and (2) lesser changes to interference practice that might be conducive to "the just, speedy, and inexpensive determination of...[at least some] interference[s]"!
Presented at the American Bar Association-Intellectual Property Law Section program of Patent, Trademark & Copyright Law: Litigation and Corporate Practice, April 2-3, 1997. For complete program information please contact Ms. Mary Brassie at the American Bar Association at 312-988-5598.
.This paper was presented on April 03, 1997 during a program entitled "Patent, Trademark and Copyright Law: Litigation and Corporate Practice" sponsored by the Section of Intellectual Property Law of the American Bar Association.
.Some practitioners choose to put in their evidence to rebut the inference of suppression or concealment during their initial testimony periods. However, the rules do not require that, and doing so means that they forfeit the possibility that their opponents will fail to file timely 37 CFR 1.632 notices.
.The request for a special testimony period is treated as a pro forma request. That is, no showing of good cause other than the fact that one's opponent has filed a 37 CFR 1.632 notice is required to get the special testimony period.
.So-called after Peeler v. Miller, 535 F.2d 647, 653 54, 190 USPQ 117, 122 (CCPA 1976) (Rich, J.). Evidence of Peeler diligence is evidence of activity during the period between an actual reduction to practice and a filing date offered to rebut the inference of suppression or concealment drawn from the length of the period.
.Of course, in many interferences delay benefits one of the parties. Accordingly, the party A may actually be delighted to have an excuse to extend the length of the interference by two to four months.
.The reason that this is an almost insurmountable burden is that we don't have real discovery in interferences. See my suggestions for changes to 37 CFR 1.687.
.See Shindelar v. Holdeman, 628 F.2d 1337, 207 USPQ 112 (CCPA 1980).
.I have made this suggestion before, and the PTO currently has it under advisement. See 66 Fed. Reg. 14488 (March 17, 1995), 14505 col. 3, first full paragraph.
Interferences will not be declared between pending applications if there is a difference of more than 3 months in the effective filing dates of the oldest and the next oldest applications, in the case of inventions of a simple character, or a difference of more than 6 months in the effective filing dates of the applications in other cases, except in exceptional situations, as determined and approved by the group director.
.Of course, there are occasional special testimony periods for other purposes, but they are infrequent.
.If (a) the patentee interferent identifies all of the reissue application claims as not corresponding to any count and (b) the patentee does not already have on file or file concurrently with the reissue application in question another reissue application containing at least one claim that it does identify as corresponding to that count, judgment will be entered against it as to that count pursuant to 37 CFR 1.662(b).
.The patentee interferent could of course suggest a claim grouping to the APJ.
.Logically, it might make more sense to delete 37 CFR 1.633(h) and to provide in 37 CFR 1.660(b) that the reissue application is automatically added to the interference effective the date that it is filed.


This is a multi-part blog post dealing with the issues upon arrest & consequences of a conviction or plea bargain in Texas domestic violence cases. The focus of this post is a domestic violence offender gun ban.
Can I own or possess a firearm while out on bail?
No! Under 18 U.S.C. § 922(g)(8) (The Lautenberg Amendment) it is a Federal felony to be in possession of a weapon or ammunition while under a restraining order involving domestic violence or abuse, and that includes military and peace officers.
Under Texas law, after arrest a magistrate will usually issue an emergency protective order, which can prohibit the arrested person from possessing a firearm, unless the person is a peace officer. Tex. Code Crim. Proc. Art. 17.292.
The magistrate or judge assigned the case can make additional bond conditions, which prohibit the accused from possessing a firearm while the case is pending. However, Federal law supersedes state law.
What happens if I have a right to carry handgun license?
Under Texas law the magistrate can suspend a license to carry a concealed handgun Tex. Code Crim. Proc. Art. 17.292 but that has been superseded by Federal law 18 U.S.C. § 922(g)(8 and 9) and you cannot purchase, acquire, or be in possession of firearms or other dangerous weapons, e.g., swords, grenades, explosives, ammunition, etc. This is a felony with a mandatory minimum of 5 years in prison if convicted.
If you have a gun collection, swords, etc., the Bureau of Alcohol, Tobacco, Firearms, and Explosives (BATFE) approved method of storage after issuance of a restraining order or being charged with domestic violence is with an attorney, with the police or sheriff, or with an approved firearms dealer.
What kind of conditions will I be under while out on bail?
A magistrate can require any condition to bail that he or she finds to be reasonable as long as it is related to the safety of the victim or the community Tex. Code Crim. Proc. Art. 17.40. “Conditions Related to Victim or Community Safety”.
In most cases this will mean there is to be no contact between the alleged victim and the defendant. Once the case has been assigned to a court, that judge may order additional conditions of bond. A judge in Collin County, Texas, has made it a practice to require the accused to attend a weekly batterer intervention counseling program for eighteen (18) weeks even though there has been no conviction. You may also be required to wear an electronic location-monitoring bracelet, attend alcohol or anger management classes, and etc., all before your case goes to trial.
The prosecutor must notify family law court of an arrest for domestic violence if temporary orders regarding custody or possession of a child are in effect.
The prosecutor must notify a family law court of an arrest for family violence if the family law court had previously entered temporary orders. Tex. Code Crim. Proc. Art. 42.23. “Notification of Court of Family Violence Conviction”.
This affidavit is a legal document from the victim informing the authorities prosecution is not desired and requesting the case to be dropped.
What happens if my spouse or girlfriend executes an affidavit of non-prosecution?
The charging decision belongs to the government. In all likelihood, the State will prosecute the case anyway.


text:
Court of Appeals of Texas, Eastland.
*1 This is an appeal from a judgment in which the trial court granted Appellee’s combined motion to dismiss for lack of jurisdiction and motion for summary judgment. We affirm.
Appellee filed an answer in which it denied that Appellant was an insured or third-party beneficiary under the policy or was a judgment creditor of the insured. Appellee then filed a single motion denominated as “Motion for Summary Judgment and Motion to Dismiss for Lack of Jurisdiction.” This motion rested on several grounds: first, that Appellant was not a named or additional insured; second, that Appellant was not an intended third-party beneficiary; and third, that Texas is not a “direct action” state and, therefore, that Appellant could not sue Appellee until he procured a judgment against the Appellee’s insured. The trial court granted both parts of the motion for summary judgment and the plea to the jurisdiction; it severed and dismissed Appellee from the primary suit, and Appellant’s claims against Appellee became final and appealable.
Whether a court has subject-matter jurisdiction is a question of law and is reviewed de novo. Tex. Nat. Res. Conservation Comm’n v. IT-Davy, 74 S.W.3d 849, 855 (Tex. 2002). We note that a review of a plea to the jurisdiction challenging the existence of jurisdictional facts mirrors that of a motion for summary judgment. Tex. Dep’t of Parks & Wildlife v. Miranda, 133 S.W.3d 217, 228 (Tex. 2002).
In his first issue, Appellant contends that the trial court erred when it granted summary judgment in favor of Appellee, because there existed a question of material fact as to whether Appellee had a duty to defend its insured. Appellant’s first issue requires that this court first decide a preliminary issue: whether the trial court could issue a declaratory judgment regarding Appellee’s duty to defend before the insured was found liable as a result of the accident.
Appellee argues that Appellant cannot sue it unless Appellant first obtains a judgment that reflects the tortfeasor’s liability. We agree. Texas is not a direct action state; rather, “the general rule … is that an injured party cannot sue the tortfeasor’s insurer directly until the tortfeasor’s liability has been finally determined by agreement or judgment.” Angus Chem. Co. v. IMC Fertilizer, Inc., 939 S.W.2d 138, 138 (Tex. 1997) (citing Great Am. Ins. Co. v. Murray, 437 S.W.2d 264, 265 (Tex. 1969)). With limited exceptions, not applicable here, this rule applies equally in instances where a plaintiff seeks a declaratory judgment and where a plaintiff seeks money damages. See In re Essex Ins. Co., 450 S.W.3d 524, 526 (Tex. 2014).
*2 Appellant argues that the Texas Supreme Court has recognized a third-party claimant’s ability to participate in a declaratory judgment action. See Farmers Tex. Cty. Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 84 (Tex. 1997) (explaining that an insurer must “either accept coverage or make a good faith effort to resolve coverage before adjudication of the plaintiff’s claim” and stating that “the plaintiff may wish to participate in that litigation”); see also State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996) (“A plaintiff who thinks a defendant should be covered by insurance may be willing to … assist in obtaining an adjudication of the insurer’s responsibility.”).
In Griffin, an automobile insurer brought a declaratory judgment suit in which it asked the trial court to determine that it had no duty to defend or indemnify its insured. 955 S.W.2d at 82. The insured had invoked the insurer’s duty to defend him. Id. The court held that, under the facts in that case, the insurer’s duty to indemnify was properly justiciable by declaratory judgment, even before the trial court rendered a judgment in the underlying suit. Id. at 83–84.
However, in 2014, the Texas Supreme Court declined to extend its holding in Griffin to those instances in which a plaintiff in the underlying lawsuit seeks to ensure that the insureds’ coverage dispute is resolved prior to the adjudication of the insureds’ negligence. Essex, 450 S.W.3d at 527. In Essex, the plaintiff in the underlying lawsuit sued Essex’s insured for personal injuries, then added a declaratory judgment claim against Essex in which that plaintiff sought a declaration that the insurer must indemnify its insured. Id. at 525. The plaintiff argued that he “merely [sought] a declaration that the … policy cover[ed] the [insured’s] liability to [the plaintiff], as opposed to a money judgment” and, therefore, that the declaratory judgment constituted an exception to the “no direct action” rule. Id. at 526. The court explained that allowing the plaintiff to pursue claims simultaneously against the insured—for liability—and the insurer—for coverage of that liability—would “prejudice” both parties because it would create a conflict of interest for the insurer and would require the admission of evidence of liability insurance in violation of Rule 411 of the Texas Rules of Evidence. Id. at 526–27. Therefore, the policy of the “no direct action” rule applied. Id.
We find no facts in the procedural history of, or allegations in, this case that distinguish it from Essex. Because a third-party claimant’s claims regarding an insurer’s coverage are not ripe for adjudication until a judgment is obtained establishing the insured’s liability, the trial court did not err when it granted Appellee’s motion for summary judgment.1 See id. We overrule Appellant’s first issue.
In his second issue, Appellant argues that the trial court erred in dismissing the case for want of jurisdiction because he is an intended third-party beneficiary as to the issue of duty to defend. In other words, Appellant argues that he had standing, as a third-party beneficiary, to bring the declaratory judgment suit.
*3 The “no direct action” rule pertains to standing because there is no justiciable controversy until the liability of the insured has been established. See Farmers Ins. Exch. v. Rodriguez, 366 S.W.3d 216, 223 (Tex. App.—Houston [14th Dist.] 2012, pet. denied). “But the need for a determination of liability before bringing a direct action against an insurer, while often referred to as a standing issue, is more appropriately characterized and analyzed as ripeness.” Auzenne v. Great Lakes Reinsurance, PLC, 497 S.W.3d 35, 37–38 (Tex. App.—Houston [14th Dist.] 2016, no pet.). We refer to our holding that Appellant’s declaratory judgment was not ripe until the insured was finally determined to be liable to Appellee. Furthermore, if Appellee owed a duty to defend, that particular duty was owed to its insured, not to Appellant, a nonparty to the insurance contract. In any event, under the “no direct action” rule, a plaintiff in an underlying lawsuit cannot maintain a lawsuit against an alleged tortfeasor’s insurer until that party has been found to be liable for damages that resulted from the activity sued upon. See Essex, 450 S.W.3d at 527. Accordingly, we overrule Appellant’s second issue.
Appellant argues that the trial court’s judgment, which granted both the motion to dismiss for lack of jurisdiction and the motion for summary judgment, was erroneous because it was “paradoxical.” However, matters concerning subject-matter jurisdiction, such as ripeness and standing, may be raised by a plea to the jurisdiction, as well as by other procedural vehicles such as a motion for summary judgment. Bland Indep. Sch. Dist. v. Blue, 34 S.W.3d 547, 553–54 (Tex. 2000).

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