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Free Enterprise Fund v. Public Co. Accounting Oversight Board

Supreme Court of the United States
561 U.S. 477 (2010)
ELI5:

Rule of Law:

A statutory scheme that provides two levels of for-cause protection from removal for an officer of the United States who exercises significant executive power is unconstitutional because it impermissibly interferes with the President's authority under Article II to oversee the executive branch.


Facts:

  • In response to major accounting scandals, Congress passed the Sarbanes-Oxley Act of 2002.
  • The Act created the Public Company Accounting Oversight Board (PCAOB) to regulate the public accounting industry.
  • The PCAOB is composed of five members appointed by the Securities and Exchange Commission (SEC) for staggered 5-year terms.
  • The Act provides that members of the PCAOB can only be removed by the SEC for 'good cause shown' under specific, rigorous criteria and procedures.
  • The SEC Commissioners, who appoint and oversee the PCAOB, are themselves understood to be removable by the President only for 'inefficiency, neglect of duty, or malfeasance in office.'
  • Beckstead and Watts, LLP, an accounting firm, was registered with the PCAOB.
  • The PCAOB conducted an inspection of Beckstead and Watts, issued a critical report, and initiated a formal investigation.
  • The Free Enterprise Fund, a nonprofit organization of which Beckstead and Watts is a member, sued the PCAOB, challenging its constitutionality.

Procedural Posture:

  • The Free Enterprise Fund and Beckstead and Watts, LLP, sued the PCAOB and its members in the U.S. District Court for the District of Columbia, seeking a declaratory judgment that the Board's structure is unconstitutional.
  • The United States intervened to defend the Sarbanes-Oxley Act's constitutionality.
  • The District Court granted summary judgment in favor of the PCAOB and the United States.
  • The petitioners appealed to the U.S. Court of Appeals for the D.C. Circuit.
  • A divided panel of the Court of Appeals affirmed the District Court's judgment.
  • The U.S. Supreme Court granted the petitioners' writ of certiorari.

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Issue:

Does the dual for-cause protection from removal for members of the Public Company Accounting Oversight Board violate the Constitution's separation of powers?


Opinions:

Majority - Chief Justice Roberts

Yes, the dual for-cause protection from removal for members of the Public Company Accounting Oversight Board violates the Constitution's separation of powers. Article II vests the executive power in the President, which includes the power to oversee and control those who execute the laws. While a single layer of for-cause removal for officers of independent agencies is permissible under precedents like Humphrey's Executor v. United States, this statute adds a second layer. Here, the President can only remove SEC Commissioners for cause, and the SEC can only remove PCAOB members for cause. This structure insulates the PCAOB from Presidential oversight, as the President cannot hold the SEC fully accountable for the PCAOB's actions. This diffusion of power undermines the President's constitutional responsibility to 'take Care that the Laws be faithfully executed' and severs the chain of accountability to the people. The remedy is not to invalidate the entire Board, but to sever the unconstitutional for-cause removal provision, making Board members removable by the Commission at will.


Dissenting - Justice Breyer

No, the statute does not violate the separation of powers. A functional analysis shows that the dual for-cause protection does not significantly interfere with the President's executive power. The SEC retains virtually comprehensive control over the PCAOB's functions, including its budget, rules, and enforcement actions, meaning the President's sufficient control over the SEC translates into sufficient control over the Board. Furthermore, Congress had legitimate reasons for this structure, such as ensuring the Board's members, who perform adjudicatory and highly technical functions, possess independence and expertise free from political pressure. This precedent threatens to disrupt the administration of numerous other government bodies with similar structures, including administrative law judges and civil servants, by creating an overly rigid and formalistic rule.



Analysis:

This decision significantly bolsters the 'unitary executive' theory, which posits a strong, centralized executive branch under the President's direct control. By striking down the dual for-cause removal structure, the Court limits Congress's ability to create agencies deeply insulated from presidential influence. The ruling establishes a new, clear line: while one layer of insulation is permissible for certain independent agencies, a second layer is not. This precedent could be used to challenge the structure of other government entities and will likely constrain legislative designs for future independent regulatory bodies.

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