FYI: 9th Cir Rejects Challenges to CFPB Structure and CID

The U.S. Court of Appeals for the Ninth Circuit ("Ninth Circuit") recently affirmed a trial court's Order requiring a law firm to respond to interrogatories and requests for production of documents pursuant to a Civil Investigative Demand promulgated by the Consumer Financial Protection Bureau's ("CFPB" or "Bureau").

In so ruling, the Ninth Circuit cited prior Supreme Court separation-of-power opinions which indicate that the Bureau's restriction permitting removal of its Director only by the president "for cause" did not violate the Constitution's separation of powers doctrine to conclude that its structure was constitutionally permissible.  

The Ninth Circuit also held that the Civil Investigative Demand was proper because the Bureau was permitted to investigate the law firm for potential Telemarketing Sales Rule violations pursuant to an exception to the practice-of-law exclusion, and because the Bureau complied with the demand requirements under section 5562(c)(2).

A copy of the opinion is available at:  Link to Opinion

The CFPB opened an investigation to determine whether a law firm ("Law Firm") violated the Telemarketing Sales Rule, 16 C.F.R. pt. 310 in the course of providing debt-relief services to its consumer clients. 

After the Law Firm refused to comply with the CFPB's Civil Investigative Demand requiring it to respond to seven interrogatories and four requests to produce documents (the "CID"), the CFPB filed a petition in the United States District Court for the Central District of California to enforce compliance.  The trial court granted the CFPB's petition and ordered the Law Firm to respond to the CID.  The instant appeal ensued.

On appeal, the Law Firm argued that the CFPB's structure violates the U.S. Constitution's separation of powers doctrine, and that the CFPB lacked statutory authority to issue the CID. 

In considering the Law Firm's first argument, the Ninth Circuit analyzed the history of the formation and purpose of establishing the CFPB, the powers bestowed upon it to implement and enforce federal consumer financial laws, and the role of its single Director appointed by the President with the advice and consent of the Senate.  12 U.S.C. § 5491(b). 

As you may recall, the Bureau's Director serves for a term of five years that may be extended until a successor has been appointed and confirmed, and may be removed by the President only for "inefficiency, neglect of duty, or malfeasance in office." § 5491(c)(1)-(3).  It is this "only for cause" provision that the Law Firm challenges and contends that an agency with the CFPB's broad law-enforcement powers may not be headed by a single Director removable by the President only for cause. 

The Ninth Circuit reviewed prior Supreme Court separation-of-powers decisions to determine whether the CFPB's structure is constitutionally permissible.  In Humphrey's Executor v. United States, 295 U.S. 602 (1935), the petitioner similarly challenged the structure of the Federal Trade Commission ("FTC"), which similarly allowed for removal of the agency's five Commissioners only by the President for cause.  There, the Supreme Court held that the for-cause removal restriction was a permissible means of ensuring that the FTC's Commissioners would "maintain an attitude of independence" from the President's control. Id. at 629.

The Ninth Circuit remarked that like the FTC, the CFPB exercises quasi-legislative and quasi-judicial powers, and Congress could therefore seek to ensure that the agency discharges those responsibilities independently of the President's will.  See PHH Corp. v. CFPB, 881 F.3d 75, 91-92 (D.C. Cir. 2018) (en banc) (noting that the CFPB acts in part as a financial regulator, a role that has historically been viewed as calling for a measure of independence from the Executive Branch). 

As such, the Ninth Circuit opined, the Supreme Court's reasoning in its decisions in Humphrey's Executor and Morrison v. Olson, 487 U.S. 654 (1988) applied equally to the CFPB, and the for-cause removal restriction protecting the CFPB's Director does not "impede the President's ability to perform his constitutional duty" to ensure that the laws are faithfully executed. Morrison, 487 U.S. at 691.

Accordingly, the Ninth Circuit viewed the Supreme Court's separation-of-powers decisions in those cases as controlling, and the CFPB's structure as constitutionally permissible.

Next, the Ninth Circuit considered the Law Firm's argument that the CFPB lacked statutory authority to issue the CID.  First, the Law Firm argued that the CID's investigation into its advertising of legal services violated the Consumer Financial Protection Act's practice-of-law exclusion, 12 U.S.C. § 5517(e)(1), which provides that  the Bureau "may not exercise any supervisory or enforcement authority with respect to an activity engaged in by an attorney as part of the practice of law under the laws of a State in which the attorney is licensed to practice law." 

The Ninth Circuit rejected this argument, and concluded that the trial court correctly applied one of the exceptions to the practice-of-law exclusion.  Under Section 5517(e)(3), the CFPB's authority is not limited with respect to any attorney, "to the extent they are otherwise subject to enumerated consumer laws or authorities under subtitle F or H" – including enforcement of the Telemarketing Sales Rule, which does not exempt attorneys from its coverage even when they are engaged in providing legal services.   15 U.S.C. § 1602; Telemarketing Sales Rule ,75 Fed. Reg. 48,458-01, 48-467-69 (Aug. 10, 2010).

The Law Firm's second argument that the CID failed to "state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation" as required under § 5562(c)(2) was also rejected, as the Ninth Circuit concluded that the CID properly identified the allegedly illegal conduct under investigation and provision of applicable law to put the Law Firm on notice of the conduct being investigated. 

Accordingly, the trial court's order requiring the Law Firm to comply with the CFPB's Civil Investigative Demand was affirmed.

Eric Tsai

Maurice Wutscher LLP 
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Email: etsai@MauriceWutscher.com

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