Antitrust Law Daily Wrap Up, CONSUMER PROTECTION NEWS: H&R Block fails to disqualify FTC ALJs from hearing its case, (Oct 21, 2024)

By Martin A. Steinberg, J.D.

The restrictions on removing ALJs allegedly infringed on the President’s power under Article II.

The FTC announced that in its enforcement action against H&R Block Inc. for allegedly misrepresenting its products as “free,” the Commission denied H&R Block, Inc., HRB Digital, LLC, and HRB Tax Group, Inc.’s motion seeking to disqualify the assigned ALJ and all other FTC ALJs from participating in adjudicating this case. The motion challenged the constitutionality of the ALJs’ participation, asserting that Congress had impermissibly shielded the ALJs from removal by the President, thereby diminishing Presidential control over them in violation of Article II of the United States Constitution (H&R Block Inc., FTC Docket No. 9427 (FTC, October 18, 2024)).

On February 23, 2024, the Commission issued an administrative complaint against H&R Block, alleging unfair and deceptive practices in their online tax-preparation services. The Commission’s complaint accused H&R Block of allegedly coercing customers into purchasing more expensive tax preparation services than they would have preferred and for allegedly deceptively marketing its products as “free” though many customers did not meet the criteria H&R Block has established for the “free” version of its product.

The complaint advised that the matter would be heard by an ALJ on October 23, 2024. Respondents filed an Answer on March 12, 2024, which asserted several defenses on constitutional challenges to the Commission’s structure or the conduct of its proceedings. Respondents asserted that the administrative proceedings are invalid, asserting that the Commission’s “significant executive power,” combined with limitations on the ability of the head of the executive branch to remove the Commissioners “and other FTC officials,” violates the doctrine of the separation of powers.

On March 20, 2024, Respondents had filed a federal district court complaint and simultaneously a motion for a preliminary injunction seeking to block the Commission from using an ALJ in this proceeding, on grounds substantially similar to those advanced in the Motion. H&R Block, Inc. v. Himes, No. 4:24-cv-00198-BP (W.D. Mo.). On August 1, 2024, the district court declined to issue the requested injunction. On March 26, 2024, Respondents filed its motion to disqualify the presiding ALJ. On April 4, 2024, the ALJ issued an order declining to disqualify himself and certifying the Motion to the Commission for further proceedings.

Removal protections. The Commission held that the “good cause” removal protections that apply to Commission ALJs are limited and are consistent with the President’s performance of his presidential duties, especially given the nature of the ALJs’ role. Respondents asserted that the ALJs are “inferior officers.” While they effectively conceded that the ALJs were constitutionally appointed, their concern stemmed from the conditions under which ALJs may be removed. Pursuant to the Civil Service Reform Act, the Commission may remove ALJs only for “good cause” established and determined by the Merit Systems Protection Board after an opportunity for a hearing. Thus, these restrictions improperly restrict presidential powers.

A “for cause” termination standard for the FTC’s ALJs is fully consistent with the President’s ability to carry out his constitutional duty and exercise his executive power. In Morrison v. Olson, 487 U.S. 654 (1988), the Court upheld a “good cause” restriction on removal of the independent counsel, an inferior officer. The Court reasoned that the President’s power to remove government officials under Article II is “not all-inclusive” and that the imposition of a good cause standard for removal by itself does not unduly infringe on executive authority.

The Commission’s ALJs perform solely adjudicative functions in FTC Act cases and possess purely recommendatory powers. They can neither initiate investigations nor begin enforcement cases. The ALJs’ role is to preside over fair and impartial hearings and the parties’ discovery, and then to apply the law to the facts and prepare a recommended decision in accordance with Commission policies and subject to Commission review of the entire record, including all trial and pre-trial rulings. The ALJs’ recommended decisions do not become final until the Commission approves them.

The Dissent/Concurrence argued that the FTC ALJs have “extensive” power over administrative hearings through their control over the creation of the administrative record, including control over discovery, the admission or exclusion of evidence, and every order necessary to direct the adjudication. The Commission, however, oversees its ALJs at each step of the proceeding. Discovery and evidentiary rulings may be brought to the Commission for interlocutory review. Moreover, such rulings are subject to the Commission’s de novo review following the issuance of the recommended decision, at which point the Commission can reverse evidentiary rulings and reopen the record as necessary to receive evidence improperly excluded.

Multi-level protections. The multi-layer of protections for the ALJs are not problematic. Though the Supreme Court in Free Enterprise Fund, 561 U.S. 477 (2010), explained that two layers of protection pose different and greater concerns than one, it excepted ALJs from its holding for reasons that suggest it would permit the structure here. Adjudicators are charged solely with recommending liability of particular parties before them by finding facts and applying the law to those facts. Thus, removal protections for those adjudicators consequently raise little concern that the power to make important policy decisions “may slip from the Executive’s control, and thus from that of the people.” Free Enter. Fund, 561 U.S. at 499.

Disqualification not appropriate. Even if the Commission agreed with Respondents that there were a constitutional problem with removability, the “good cause” requirement of § 7521 could be severed as it applies to the ALJs, leaving the ALJs terminable at will by the Commission or the President. When addressing a constitutional flaw in a statute, courts typically sever the problematic portions and leave the remainder intact. More likely, Congress would accept an imperfect but still functional system under which executive officers with less protection than they currently possess could carry on the government’s work. Severability would allow this outcome. Even if it were found that the ALJs’ removal protections impermissibly restrictive, this would not render the ALJs’ actions void.

To obtain a remedy for a putative constitutional violation, Respondents would need to demonstrate harm in the form of, for example, a substantiated presidential desire to remove the ALJ that was blocked by the removal restrictions and that affected the outcome. Respondents, however, made no showing of concrete harm from the removal restrictions and did not allege that the adjudication would unfold differently without them. Indeed, the Commission was satisfied with the performance of its administrative law judges and would not take steps to remove them even absent the “for cause” removal protections.

Commissioner Andrew N. Ferguson. The Commissioner stated that dual-layer tenure protections for FTC ALJs insulate subordinate officers from the President’s control. Because they undermine self-government and empower the administrative state to the people’s detriment, he would hold that those protections violate the Vesting and Take Care Clauses of Article II of the U.S. Constitution. Nevertheless, he concurred in the denial of the disqualification motion because the provision conferring for-cause removal protections to FTC ALJs is severable from the remainder of the statutory scheme.

Chair Lina M. Khan and Commissioner Alvaro M. Bedoy. Their statement focused on responding to Commissioner Ferguson’s dissent. They noted that Ferguson’s positions in this case and in prior proceedings pointed in the direction of undermining the FTC and its authorities. “Some already map on to arguments that parties in litigation against the FTC are advancing—while others provide an invitation and roadmap for advocates to take up. While disagreement and debate among Commissioners is a longstanding FTC tradition, never in modern history has a Federal Trade Commissioner gone to such lengths to declare that core institutional features of the FTC are unconstitutional.”

Companies: H&R Block

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