Supreme Court Update for Banking and Financial Services Professionals

by Charles W. Prueter, Waller

For everything there is a season, and a time for every matter under heaven, a wise man said long ago. And 2020 showed us that all the things and all the matters can, in fact, be jam-packed into one year. Weeping and laughing, tearing down and building up, mourning and dancing, staying silent and speaking out — 2020 had it all. One moment of mourning came when Justice Ruth Bader Ginsburg passed away in September. Justice Ginsburg was a universally respected jurist with a background in fighting for justice as a practicing lawyer. Unlike any other member of the judiciary, she had become something of a pop culture icon over the last decade as the “Notorious RBG.” Although the process by which her seat was filled was not universally respected, we again have nine members of the Court with the addition of Justice Amy Coney Barrett. It is a reminder that, as the same wise man also said, there is nothing new under the sun.

Let’s turn to the business of the Court. In previous editions, the Update has twice discussed a particular case involving the youngest federal agency that looms over the financial services industry — the Consumer Financial Protection Bureau, which was created in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In Seila Law LLC v. CFPB, No. 19-7 (June 29, 2020), the question before the Court went to the heart of the structure of the CFPB. Ultimately, the Court held that the structure is unconstitutional and struck down the rules governing the removal of the CFPB’s Director. By way of background, the CFPB had issued a civil investigative demand to the law firm of Seila Law LLC, seeking information and documents related to Seila Law’s debt-related business practices. Seila Law refused, citing what it alleged to be the unconstitutional leadership structure of the CFPB. The Supreme Court agreed (mostly).

What was unconstitutional about it? In essence, the Court — through Chief Justice Roberts — held that the CFPB was an unconstitutional creature of administrative law because it was headed by a unitary director who was removable by the president only for cause. This set-up came straight out of Dodd-Frank and represented Congress’s effort to make sure that the agency would be independent and insulated from political pressure. This design represented a rejection of prior proposals for an independent consumer protection bureau, which would have created a multi-member commission leadership structure rather than a unitary director.

If Congress had followed historical practice and instituted a multi-member body, this litigation would not have made it anywhere. A unitary director removable at will also would have done the trick. The point is that unitary heads of executive agencies are accountable to and checked by the president when they are removable at will, so that’s acceptable under the Constitution. And members of multi-member commissions for “independent” agencies are accountable to and checked by their fellow commissioners, even though they are removable by the President only for cause, so that’s acceptable, too. But Congress wanted to have it both ways: A unitary director who also is independent and removable only for cause. With the CFPB designed this way, one unelected director purportedly had the authority to promulgate regulations (a legislative function), enforce those regulations (an executive function), and also adjudge compliance with those regulations (a judicial function) — all with the comfort of being removable only for cause (i.e., a very good reason like neglect of duty or malfeasance). Thus, the independent directorship was an unconstitutional blurring of the Constitution’s Separation of Powers — i.e., how the founders intended to “scrupulously avoid concentrating power in the hands of any single individual,” as the Chief Justice explained.

So is that the end of the CFPB? No. While the Supreme Court held that the independent directorship was unconstitutional and that the director of the CFPB “must be removable by the president” at will, the Supreme Court did not strike down the whole agency. As a result, the CFPB will continue to carry out its role to ensure “that consumer debt products are safe and transparent.” But, now, if the president wishes to remove the director, the president may remove the director for any reason.

The Affordable Care Act, which has provided plenty of litigation fodder over the years, was back at the Court recently. Readers will recall that the first piece of the ACA that got everyone all riled up was the individual mandate. This provision of the law requires all Americans to maintain health insurance — either through their employers or through the marketplace. Under the original law, those who didn’t secure insurance were required to pay a tax. Challengers to the law argued that this required payment was a penalty because the government’s power to impose monetary penalties is much narrower than the government’s power to impose taxes. Therefore, the challengers argued, the individual mandate was an unconstitutional exercise of power. But in 2012 the Supreme Court ultimately rejected that argument and held that the individual mandate was constitutional because it could reasonably be read as a tax.

Life went on, and for several years, as anyone who filed a tax return knows, Americans had to verify that they had health insurance. The individual mandate thus was administered through the IRS.

But then control over Congress and the presidency flipped. And through the Tax Cuts and Jobs Act of 2017, Congress eliminated that tax created by the individual mandate. In other words, if you don’t have health insurance, you are required to pay $0.

A collection of states (including Texas) then realized that the Supreme Court’s reasoning upholding the individual mandate — i.e., it was constitutional because it could reasonably be read as a tax — no longer made much sense and decided to challenge the individual mandate. Siding with the challengers, the federal judge in Texas who heard the case first explained that the Tax Cuts and Jobs Act “sawed off the last leg” that the ACA stood on. The judge reasoned that under the law as it now stands, the individual mandate no longer “triggers a tax” and, therefore, cannot be upheld under the government’s tax power. (In other words, without the tax component, the government can force Americans neither to buy broccoli nor buy health insurance.) And if the individual mandate is not constitutional and must be struck down, the theory goes, the whole ACA must be struck down with it. The U.S. Court of Appeals for the Fifth Circuit, which covers Texas, Louisiana, and Mississippi, largely agreed that the individual mandate is no longer constitutional. The U.S. House of Representatives and the State of California intervened to defend the law, and the case, which is now California v. Texas, is pending at the Supreme Court.

In November, the Justices heard oral arguments. If the Court reaches the primary question of whether the individual mandate is still constitutional, it is difficult to envision a decision other than one striking it down. But there are two more interesting questions: First, do the challengers to the law have “standing” to bring this lawsuit in the first place? As a rule, federal courts only may hear cases if the plaintiff has been injured in some way — physical harm or monetary loss or damage to property, for example. But when the individual mandate lacks any consequence at all, there may not be any injury to be found anywhere. Paying $0 is rather unburdensome. So the Justices may kick this case for lack of standing and not decide the constitutionality of the individual mandate.

Second is the question of “severability.” Severability is the idea that certain provisions in a broader law might be excised with no effect on the remaining provisions. Applied here, if the Court finds the individual mandate unconstitutional, the question is whether the entire ACA must fall with it. The first time around, when the individual mandate and the ACA survived on the grounds that the individual mandate was a tax, the individual mandate was presented as an essential piece of the broader ACA. But experience has shown that the completely toothless individual mandate — the one that ostensibly requires health insurance but demands a payment of $0 if you don’t secure health insurance — hasn’t brought down the ACA. Thus, the individual mandate appears to be severable from the rest of the ACA, meaning that the rest of the ACA would survive without it.

In the end, this could all be for naught if the Biden Administration and Congress manage to amend the health care law. I would not be shocked if the Court holds onto this case as long as possible before issuing a decision to see if there will be a legislative fix that moots the dispute. And even if the Court does decide the constitutionality of the individual mandate, Congress will likely move to amend the law in the next few years and thereby moot the effect of the Court’s decision. But we shall see.

Charles W. Prueter is an appellate lawyer at Waller Lansden Dortch & Davis, LLP, in Birmingham. He can be reached by email at