Privatization and the Constitution: Selected Legal Issues
Released: 2017-09-25T00:00:00

P rivatization is a broad term that generally refers to the transfer of public or governmental functions or services to private entities. Privatization of government functions involves a "host of arrangements," including public-private contractual relationships where private entities provide goods or services for the government or the public. For example, federal agencies often contract with private entities to assist in the rulemaking process, including drafting proposed regulations and preparing legal opinions. Other types of privatization include government-funded voucher programs or other subsidies that allow individuals to purchase private goods or services.

In other contexts, Congress has empowered private entities or created entities in a variety of forms to (1) deliver services or perform functions previously provided by governmental entities or (2) advance legislative objectives. One form of privatization is the creation of government corporations. As noted by the U.S. Government Accountability Office: "The federal government has created entities using a corporate device, in various forms and contexts, for a long time." Congress has created numerous corporations, including Amtrak and the Communications Satellite Corporation (COMSAT). Congress established Amtrak in 1970 as a for-profit corporation to take over the passenger rail service from private railroad companies. In addition, Congress created COMSAT, a publicly traded corporation, in the Communications Satellite Act of 1962, to develop a commercial communications satellite system. More recently, in the 114th and 115th Congresses, legislation was proposed to create a nonprofit corporation to provide air traffic control services that are currently administered by the Federal Aviation Administration. Other recent privatization efforts include legislative proposals to establish a wholly owned government corporation to provide bond guarantees and loans for state or local government-sponsored transportation, energy, water, communications, or educational facility infrastructure projects.

While the federal government employs various forms of privatization, the transfer of government functions and services to other entities has its constitutional limits. As explained by Supreme Court Justice William J. Brennan: "The Government is free, of course, to 'privatize' some functions it would otherwise perform. But such privatization ought not automatically release those who perform Government functions from constitutional obligations . " Congressional efforts to privatize or delegate functions or services may raise constitutional questions regarding Congress's authority to empower other entities.

To what extent can Congress transfer or delegate authority to other entities? Are these entities considered private or governmental actors? Does such delegation of authority implicate due process concerns? Are managing directors and employees who govern a government-created corporation considered "Officers of the United States" subject to the requirements of the Appointments Clause?

This report will explore these questions by reviewing how courts apply constitutional principles to privatization differently, depending on whether the authority is delegated to governmental entities, private entities, or government-created corporations.

Judicial Review of Privatization

To define what constitutional limits could apply when Congress delegates authority to an entity to perform a governmental function, courts must first determine whether the entity in question is a private or governmental entity. The answer to this threshold question is central to how a court would review the constitutional issues underlying the delegation of authority to that entity. As one legal scholar explained, "the public-private distinction is primary—all other legal distinctions are subsumed beneath this first-order division of legal life." For example, constitutional provisions, such as the Due Process Clause, apply only to governmental entities, while the private nondelegation doctrine that prohibits the delegation of governmental functions to nongovernmental entities is relevant only if Congress improperly delegates authority to private entities.

Is an Entity a Governmental or Private Entity?

While certain entities such as federal agencies can be readily characterized as governmental entities, the distinction between a public and a private entity is often unclear for government-created corporations. Courts cannot rely on the legislative origins of these corporate entities because the Supreme Court has held that a legislative declaration that an entity is either a private or governmental entity is not dispositive for purposes of determining the entity's status. Thus, courts have developed various tests and weighed different factors to classify these entities. Recent case law highlights "the judiciary's unsettled approach to analyzing the constitutional status of 'boundary agencies' that sit at the public-private border." For "boundary agencies" set up as private corporations with varying degrees of governmental involvement and oversight, it is unclear whether courts would consider these corporations as private or governmental entities and what test courts would apply in reviewing constitutional challenges to their authority.

In the most recent Supreme Court case on this issue, Department of Transportation v. Association of American Railroads , the Supreme Court reviewed a determination by the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) that concluded that Amtrak was a private entity "with respect to Congress's power to delegate regulatory authority." Consistent with that threshold determination, the D.C. Circuit invalidated joint regulations established by Amtrak and the Federal Railroad Administration (FRA) pursuant to the Passenger Rail Investment and Improvement Act of 2008 (PRIIA). These joint regulations set performance metrics and standards to enforce Amtrak's statutory priority over other trains. The standards would have been used in part to determine when the Surface Transportation Board should investigate if delays in Amtrak's passenger rail service are being caused by freight railroad operators failing to comply with their statutory mandate to prioritize Amtrak traffic over freight traffic on their tracks. The Association of American Railroads (AAR), a trade association acting on behalf of its freight railroad members, filed suit to challenge the PRIIA as an unconstitutional delegation of authority to a private entity and a violation of the Fifth Amendment's Due Process Clause. The D.C. Circuit concluded that "[f]ederal lawmakers cannot delegate regulatory authority to a private entity. To do so would be 'legislative delegation in its most obnoxious form.'"

On appeal, the Supreme Court vacated the D.C. Circuit opinion, holding that "Amtrak is a governmental entity, not a private one, for purposes of determining the constitutional issues presented in [the] case." The Court reasoned that "for purposes of Amtrak's status as a federal actor or instrumentality under the Constitution, the practical reality of federal control and supervision prevails over Congress' disclaimer of Amtrak's governmental status." As a result, the Court gave little weight to Congress's declaration that Amtrak "is not a department, agency, or instrumentality of the United States Government' and 'shall be operated and managed as a for-profit corporation.'"

In concluding that Amtrak was a governmental entity, the Court relied on a multifactor test, looking to Amtrak's (1) ownership and corporate structure; (2) political branches' supervision over its priorities and operations; (3) statutory goals; (4) day-to-day management; and (5) federal financial support. The Court determined that:

Given the combination of these unique features and its significant ties to the Government, Amtrak is not an autonomous private enterprise. Among other important considerations, its priorities, operations, and decisions are extensively supervised and substantially funded by the political branches. A majority of its Board is appointed by the President and confirmed by the Senate and is understood by the Executive to be removable by the President at will. Amtrak was created by the Government, is controlled by the Government, and operates for the Government's benefit.

In applying this multifactor test, the Court concluded that, "in its joint issuance of the metrics and standards with FRA, Amtrak acted as a governmental entity for purposes of the Constitution's separation-of-powers provisions. And that exercise of governmental power must be consistent with the design and requirements of the Constitution, including those provisions relating to the separation of powers." Of note, the Court did not explain the relative importance of the various factors in the test announced in Association of American Railroads , and the Court provided little guidance on how the test might apply beyond the specific circumstances respecting Amtrak. The Supreme Court remanded the case to the D.C. Circuit to reconsider the nondelegation, due process, and other constitutional claims raised by the plaintiffs in light of the determination that Amtrak is a governmental entity.

Because case law on the threshold question of whether an entity is a private or governmental entity is undeveloped and fact-dependent, it is difficult to conclude with any certainty how a court will apply the Association of American Railroads test with respect to other government-created corporations or other entities performing government functions. In general, when applying this multifactor test, courts have examined these entities in a holistic manner instead of focusing on the specific challenged action of the entity. For example, in 2016, then-Judge Gorsuch, writing on behalf of a panel of the U.S. Court of Appeals for the Tenth Circuit, examined the factors considered in Association of American Railroads to determine that the National Center for Missing and Exploited Children (NCMEC) was a government entity to which the Fourth Amendment applied. The court looked at NCMEC as a whole, reviewing the participation of law enforcement in its daily operations, "sizable" presence of government officials on its board, and government funding in determining NCMEC's governmental status. Once the court determined that NCMEC was a governmental entity, it then addressed whether NCMEC violated the Fourth Amendment when it searched an individual's email without a warrant.

Applying Constitutional Principles to Privatization

Congress's authority to delegate and privatize governmental functions and services is potentially limited by constitutional principles, including the nondelegation doctrine, the Due Process Clause, and the Appointments Clause. Courts have applied these principles in legal challenges to (1) the scope of Congress's authority to delegate its legislative power; (2) the manner in which Congress delegates these powers; (3) the types of entities that exercise delegations of authority; (4) the nature and scope of the delegated powers or functions; and (5) the authority to appoint the individuals that exercise certain powers.

Nondelegation Doctrine

Under Article I of the Constitution, "[a]ll legislative Powers herein granted shall be vested in a Congress of the United States." The Supreme Court has broadly defined "legislative power" as "the power to make laws." Although the Court has interpreted the Constitution to prohibit Congress from delegating its legislative authority, the Court has explained that Congress may "delegate to others at least some authority that it could exercise itself."

The "nondelegation doctrine" has traditionally been applied to limit Congress's authority to delegate "legislative power" to the other governmental entities. This doctrine is based on the larger doctrine of separation of powers and exists primarily to prevent Congress from abdicating its core legislative function as established under Article I of the Constitution. How courts apply the nondelegation doctrine depends on whether an entity is considered a private or governmental entity.

Delegation to Official Governmental Entities

The Supreme Court has upheld delegations of authority to governmental entities, including the President, executive officials, judicial bodies, and federal agencies when Congress provides an "intelligible principle" to govern its delegation. In allowing limited delegation of legislative authority, the Court acknowledged in Mistretta v. United States that "no statute can be entirely precise, and that some judgments, even some judgments involving policy considerations, must be left to the officers executing the law and to the judges applying it." The "intelligible principle" test requires that Congress, not the delegatee, be the entity that delineates a legal framework to guide and constrain the authority of the delegatee, such as a federal executive agency. Congressional delegation of regulatory power to a federal agency is often accompanied by the authority to implement the delegation through rulemaking.

The Supreme Court has upheld very broad congressional delegations of authority to federal agencies as satisfying the "intelligible principle" test, having invalidated federal laws only twice under the test. For example, the Court has previously held that broad delegations to regulate in the "public interest" or a "fair and equitable" manner satisfy the "intelligible principle" test.

Delegations to Private Entities

In contrast to the relative latitude given to delegations to official governmental entities under the "intelligible principle" test, the Supreme Court has limited the types of authority and functions that Congress can delegate to a purely private entity. The seminal case addressing delegations to a private entity is Carter v. Carter Coal Co . In Carter Coal , the Supreme Court invalidated the Bituminous Coal Conservation Act of 1935, a law that granted a majority of coal producers and miners in a given region the authority to impose maximum hour and minimum wage standards on all other miners and producers in that region. The Court reasoned that by conferring on a majority of private individuals the authority to regulate "the affairs of an unwilling minority," the law was "legislative delegation in its most obnoxious form; for it is not even delegation to an official or an official body, presumptively disinterested, but to private persons whose interests may be and often are adverse to the interests of others in the same business."

Carter Coal has not been interpreted by courts as a comprehensive ban on private involvement in regulation. In the context of private parties aiding in regulatory functions and decisions, the Court has indicated that Congress may empower a private party to play a more limited role in the regulatory process. For example, in Currin v. Wallace , the Court upheld a law that authorized the Secretary of Agriculture to issue a regulation respecting the tobacco market, but only if two-thirds of the growers in that market voted for the Secretary to do so. Distinguishing Carter Coal , the Court stated that "this is not a case where a group of producers may make the law and force it upon a minority." Rather, it was Congress that had exercised its "legislative authority in making the regulation and in prescribing the conditions of its application."

Similarly, in Sunshine Anthracite Coal Co. v. Adkins , the Supreme Court upheld a provision of the Bituminous Coal Act of 1937, which authorized private coal producers to propose standards for the regulation of coal prices. Those proposals were provided to a governmental entity, which was then authorized to approve, disapprove, or modify the proposal. The Court approved this framework, relying heavily on the fact that the private coal producers did not have the authority to set coal prices, but rather acted "subordinately" to the governmental entity (the National Bituminous Coal Commission). In particular, the Sunshine Anthracite Court relied on the fact that the commission and not the private industry entity determined the final industry prices to conclude that the "statutory scheme" was "unquestionably valid."

In Currin and Adkins , the Supreme Court did not evaluate whether Congress laid out an "intelligible principle" guiding these private entities. Rather than applying the "intelligible principle" test, the Court reviewed whether the responsibilities given to the private entities were acts of legislative or regulatory authority. In both statutes challenged in Currin and Adkins , the private entities did not impose or enforce binding legal requirements. Because the private entity's responsibilities were primarily administrative or advisory, the Court determined that the statute did not violate the nondelegation doctrine.

Other courts have relied on the Supreme Court's holdings in Currin and Adkins to uphold limited delegation of authority to private entities so long as the government retained "pervasive surveillance and authority" over the entity in question. For example, in Pittston Co. v. United States , the U.S. Court of Appeals for the Fourth Circuit concluded that the delegation of authority to a private entity to collect premiums to be paid by market participants was permissible because such a power was "administrative or advisory in nature." Other courts have held that the private entities were not exercising regulatory authority but rather performed limited administrative or advisory functions subject to considerable governmental oversight.

The Due Process Clause and Delegations to Governmental Entities

As discussed above, the nondelegation doctrine exists primarily to prevent Congress from ceding its legislative power to other entities not vested with legislative authority under the Constitution. As interpreted by the courts and legal scholars, the doctrine helps to ensure that legislative decisions are made by the elected Members of Congress or governmental officials subject to "democratic responsibility and accountability." However, delegations of authority to governmental entities may raise additional constitutional concerns if those delegations deny due process to those subject to those delegated powers.

The Due Process Clause of the Fifth Amendment prohibits the federal government from depriving any person of "life, liberty, or property without due process of law." The Supreme Court has interpreted the Due Process Clause to, in part, ensure principles of fundamental fairness, including the notion that decisionmakers must be disinterested and unbiased. Issues of potential unfairness and denial of rights can arise when self-interested entities such as profit-seeking corporations are delegated "coercive" regulatory power. The potential Due Process issues related to delegations of authority to certain types of governmental entities have their roots in the same case as the origin of the private nondelegation doctrine, Carter Coal.

Due Process Concerns in Carter Coal

Although Carter Coal concerned the delegation of authority to private entities and not governmental bodies, some commentators have suggested that it may more accurately be viewed as a due process case. In striking down the delegation to coal producers and miners to impose standards on other producers and miners, the Supreme Court focused on the coercive power that the majority could exercise over the "unwilling minority." The opinion articulated the due process problems involved with providing regulatory authority to private entities:

The difference between producing coal and regulating its production is, of course, fundamental. The former is a private activity; the latter is necessarily a governmental function, since, in the very nature of things, one person may not be entrusted with the power to regulate the business of another, and especially of a competitor. And a statute which attempts to confer such power undertakes an intolerable and unconstitutional interference with personal liberty and private property. The delegation is so clearly arbitrary, and so clearly a denial of rights safeguarded by the due process clause of the Fifth Amendment, that it is unnecessary to do more than refer to decisions of this court which foreclose the question.

The Court's reasoning in Carter Coal suggests that delegating authority to coal producers and miners to impose standards on other miners violates both the nondelegation doctrine and the constitutional protections of the Due Process Clause. As the D.C. Circuit pointed out, it is unclear what aspect of the "delegation [in Carter Coal ] offended the Court. By one reading, it was the Act's delegation to 'private persons rather than official bodies. By another, it was the delegation to persons 'whose interests may be and often are adverse to the interests of others in the same business' rather than persons who are 'presumptively disinterested,' as official bodies tend to be. Of course, the Court also may have been offended on both fronts. But as the opinion continues, it becomes clear that what primarily drives the Court to strike down this provision is the self-interested character of the delegatees'. . . ." Courts have applied these due process principles in cases challenging the authority delegated to government-created corporations that have both private and governmental aspects.

Government-Created Corporations

Congress has created different types of corporations to support its legislative objectives and provide certain government services or functions. As one court stated, "Congress may use any appropriate vehicle to promote constitutionally permissible ends. If it chooses to make use of a 'corporation,' Congress is not limited by traditional notions of corporate powers and organization but may mold its vehicle in any way which appears useful to the accomplishment of the legislative purpose." Congress has established for- and nonprofit "private corporations" that are managed by boards of directors and not (as declared in the enabling legislation) "agencies" or "instrumentalities" of the Government. For example, Congress created Amtrak in 1970 as a for-profit corporation to provide railroad passenger service, requiring by law for Amtrak to "maximize its revenues."

The increased use of corporations that have both public and private aspects has complicated how courts have analyzed challenges to the authority delegated to these entities. The potential self-interested nature of these government-created corporations can raise concerns beyond violations of the nondelegation doctrine. These concerns include whether the self-interested nature of a corporation combined with its coercive power over its competitors violates the Due Process Clause.

The D.C. Circuit has applied a higher level of scrutiny to these types of government-created corporate entities to address these due process concerns. In Association of American Railroads v. Department of Transportation ( American Railroads II ), the D.C. Circuit reviewed whether the delegating of authority to Amtrak, a government-created for-profit corporation, violates the Due Process Clause. American Railroad II was decided on remand after the Supreme Court held that Amtrak is a governmental entity in Department of Transportation v. Association of American Railroads . First, the D.C. Circuit determined that the "Supreme Court's conclusion that Amtrak is a governmental entity resolved the nondelegation issue that was the primary focus" of its decision in American Railroads I . The court then focused its review on whether the delegation of authority to Amtrak as a "public-private enterprise" violates the Due Process Clause. The court explained that:

the government's increasing reliance on public-private partnerships portends an even more ill-fitting accommodation between the exercise of regulatory power and concerns about fairness and accountability. Curbing the misuse of public power was the aim of the Magna Carta, and the Supreme Court has consistently concluded the delegation of coercive power to private parties can raise similar due process concerns. . . . Make no mistake; our decision today does not foreclose Congress from tapping into whatever creative spark spawned the Amtrak experiment in public-private enterprise. But the Due Process Clause of the Fifth Amendment puts Congress to a choice: its chartered entities may either compete, as market participants, or regulate, as official bodies. After all, "[t]he difference between producing . . . and regulating . . . production is, of course, fundamental ." To do both is an affront to "the very nature of things," especially due process.

The court determined that due process of law is violated if the entity is "(1) a self-interested entity (2) with regulatory authority over its competitors." The court held that "giving a self-interested entity rulemaking authority over its competitors" violated the Due Process Clause. It reasoned that "what primarily dr[ove] the [Supreme] Court" in Carter Coal was not the delegation of authority to "private persons," but rather the "self-interested character" of the empowered coal producers.

In applying this due process test, the D.C. Circuit first concluded that Amtrak, though governmental, is similarly "self-interested" in that it is operated as a "for-profit corporation" and is required by law to "maximize its revenues." Importantly, the court suggested that even if a corporation is deemed a "governmental entity," a court may not necessarily conclude that it is a "disinterested" official body. "Delegating legislative authority to official bodies is inoffensive because we presume those bodies are disinterested, that their loyalties lie with the public good, not their private gain." However, delegating regulatory authority to a self-interested entity with power over its competitors would constitute an "unconstitutional interference with personal liberty and private property." This distinction between a self-interested governmental entity and an official governmental body such as a federal agency indicates that a court may view a "boundary agency" such as Amtrak as a separate type of government entity that is subject to a different type of scrutiny under the Due Process Clause.

In applying the second part of the test, the court determined that Amtrak has regulatory power over its competitors. The court explained that the failure of an Amtrak competitor to incorporate the metrics and standards developed by Amtrak and "constrained very partially" by the Federal Railroad Administration (FRA), could increase the risk of enforcement. "Because obedience to the metrics and standards materially reduces the risk of liability, railroads face powerful incentives to obey. That is regulatory power." As such, the court invalidated the PRIIA's provision of joint regulatory authority to Amtrak, holding that the fundamental principle of "fairness" that emanates from the Due Process Clause does not permit Congress to delegate to Amtrak the "coercive power to impose a disadvantageous regulatory regime on its market competitors."

It is unclear how courts will apply the American Railroads II due process test with respect to the other types of government-created corporations. Future judicial decisions will likely further define the American Railroads II due process test as courts will apply the test to different types of corporations with unique governing structures and specific delegated authorities.

Appointments Clause

Privatization of government services and functions may also implicate the Constitution's requirements regarding the appointment of certain federal officials under the Appointments Clause. As suggested earlier, given the wide variety of privatization forms that can be utilized by Congress, clear rules concerning the applicability of constitutional principles to "private" entities can be difficult in the abstract. A threshold question when considering the nature of any particular entity created by Congress thus might be whether it exercises the sovereign authority of the United States at all. In other words, no matter the form chosen by Congress when creating an entity to carry out specific functions, private or otherwise, an essential issue for constitutional purposes is whether that entity is charged with carrying out the sovereign power of the government.

For instance, in the Sarbanes-Oxley Act of 2002, Congress created the Public Company Accounting Oversight Board (PCAOB or Board) to oversee aspects of the accounting industry. The Board is modeled after "private self-regulatory organizations in the securities industry . . . that investigate and discipline their own members subject to Commission oversight." Congress established the PCAOB as a private, nonprofit corporation whose employees and Board members are not, at least for statutory purposes, considered government employees or officers. Nonetheless, because of the various governmental duties delegated to the Board by Congress, in a challenge to the constitutional structure of the Board in Free Enterprise v. Public Company Accounting Oversight Board , the parties agreed that the PCAOB was a governmental entity and that the Board's members are officers of the United States subject to the requirements of the Appointments Clause. Similarly, in Association of American Railroads , Justice Alito, in a concurring opinion, raised concerns that the method of appointment for the president of Amtrak violated the Appointments Clause. At the time, Amtrak's president, a voting member of the Board, was appointed by the Amtrak Board, rather than the President of the United States. Subsequently, Congress passed legislation to remove the voting powers of Amtrak's president, apparently alleviating these concerns by reducing the position's authority.

The Appointments Clause of Article II of the Constitution requires "Officers of the United States" to be appointed by the President "with the Advice and Consent of the Senate," although Congress may vest the appointment of "inferior" officers "in the President alone, in the Courts of Law, or in the Heads of Departments." In contrast, non-officers are not subject to any constitutionally required method of appointment. The Appointments Clause has been viewed as one of the Constitution's key features that preserve a separation of powers among the executive, legislative, and judicial branches. The Appointments Clause and the concomitant power of removal of executive branch officials ensure a measure of accountability for executive branch actions by vesting decisionmaking in individuals accountable to the President who, in turn, is accountable to the voters. Congress may not aggrandize its own power at the expense of the executive branch by arrogating to itself authority to appoint officers. Moreover, the Constitution bars the "diffusion" of the appointment power by, for example, placing the power to appoint a principal officer in the hands of someone other than the President. Accordingly, a crucial threshold question respecting the Appointments Clause is thus who constitutes an "officer" of the United States.

A position's degree of authority generally determines whether it reaches officer status under the Appointments Clause. In the seminal case explaining who qualifies as an officer, Buckley v. Valeo , the Supreme Court established that "Officers of the United States" are those positions "exercising significant authority pursuant to the laws of the United States." In that case, the Court examined the appointment of certain members of the Federal Election Commission (FEC) charged with regulating federal elections by enforcing the Federal Election Campaign Act. In examining whether the FEC members wielded significant authority, the Buckley Court distinguished among three types of powers the members exercised—functions concerning (1) the flow of information—"receipt, dissemination, and investigation"; (2) the implementation of the statute—"rulemaking and advisory opinions"; and (3) the enforcement of the statute—"informal procedures, administrative determinations and hearings, and civil suits."

The Buckley Court held that the first category of FEC duties was not executive in nature because they were "investigative and informative," essentially "in aid of the legislative function of Congress." Therefore, such functions could be exercised by individuals not appointed in conformity with the Appointments Clause. The latter two categories of functions, however, were executive in nature and constituted "significant authority." The duties regarding implementation of the statute—including rulemaking, disbursal of funds, and decisions about who may run for a federal office—constituted significant authority that could be executed only by "Officers of the United States." Likewise, the power to enforce the underlying statute, "exemplified by [the Commissioner's] discretionary power to seek judicial relief" by instituting civil litigation to vindicate public rights, amounted to authority that, according to the Court, must be exercised by an officer appointed pursuant to the Appointments Clause.

Nearly 15 years after Buckley , the Supreme Court's opinion in Freytag v. Commissioner of Internal Revenue again examined what responsibilities qualify an individual as an officer of the United States, concluding that a special trial judge of the U.S. Tax Court qualifies as such an officer. The Court ruled that the special trial judges were officers because of the significance of the duties they held. In contrast with the position of special masters, who temporarily assist Article III judges on an "episodic" basis, and whose positions, "duties[,] and functions are not delineated in a statute," the Court noted that the special trial judges are "established by Law" and their "duties, salary, and means of appointment" are specified in statute. Further, special trial judges are entrusted with duties beyond "ministerial tasks," exercising significant discretion in taking testimony, conducting trials, ruling on evidence, and enforcing compliance with discovery orders. In addition, the Court noted that even leaving aside these duties, special trial judges qualified as officers because the underlying statute authorized the Chief Judge of the Tax Court to assign authority to special trial judges to render binding independent decisions in certain cases.

While the Supreme Court has articulated "significant authority" as the standard for weighing whether a position is subject to the Appointments Clause, precisely what duties are encapsulated in this metric is disputed. Accordingly, predicting exactly what type of functions would render the head of a government-created corporation an officer for constitutional purposes is difficult. A circuit split among the federal courts of appeals concerning the constitutional status of Administrative Law Judges (ALJs) at the Securities and Exchange Commission (SEC) illustrates the uncertainty of the question. The SEC is charged with bringing enforcement actions for violations of the federal securities laws both in internal administrative proceedings and federal court. ALJs are selected by an agency employee from an available pool—not in accordance with the Appointments Clause—and preside over administrative actions in adjudications that share similarities with a trial. The ALJ's decision is appealable to the Commissioners and then to federal court.

The U.S. Court of Appeals for the Tenth Circuit, in a challenge to the constitutional status of ALJs at the SEC, focused on the range of discretionary duties exercised by the ALJs and found that they qualified as officers who must be appointed pursuant to the Appointments Clause. The court noted that the ALJs' positions are established by law and their duties, salaries, and method of appointment were set by statute. The ALJs also exercise similar discretion to the officers in Freytag , including taking testimony, overseeing the production of documents and depositions, ruling on the admissibility of evidence and motions, issuing subpoenas, and making credibility determinations that are afforded "considerable weight" at the agency review stage. In addition, ALJs can render initial decisions and issue sanctions, which become final absent appeal. And even when an appeal occurs, the agency can decline to review certain cases. Finally, ALJs can enter default judgments, control the outcome of proceedings by requiring attendance at settlement conferences, and modify temporary sanctions imposed by the agency.

In a parallel challenge, the D.C. Circuit has taken the opposite view. Under its analysis, whether a position exercises significant authority depends on (1) "the significance of the matters resolved"; (2) the discretion exercised; and (3) the finality of their decision. That court determined that SEC ALJs do not satisfy the final requirement—finality—because the Commission retains power to review their decisions de novo . And even when the Commission decides not to review a decision, it must issue an order saying so and specifying the date that any applicable sanctions will take effect. The ALJ's decision, therefore, is not truly final until affirmative action is taken by the Commission. For the D.C. Circuit, because ALJs do not render final decisions on behalf of the government, they do not qualify as officers under the Appointments Clause and their current method of selection is, therefore, appropriate.

Although it is well established that "significant authority" is the test that demarks officers and employees, the test that distinguishes between principal officers and inferior officers is less clear. As mentioned above, principal officers of the United States must be appointed by the President and confirmed by the Senate, but Congress may vest the appointment of inferior officers in the President alone, the courts of law, or the heads of departments. At times, the Court has employed a multifactor, holistic balancing test that would suggest that the principal/inferior distinction is governed by an evaluation of the degree of authority exercised. More recently, however, in Edmond v. United States , the Court adopted a different analysis, suggesting that the distinction between a principal and inferior officer hinges on whether the officer is subject to some measure of supervision and control by a principal officer, not on the amount of overall authority exercised by the officer. Under this approach, principal officers are generally subject only to supervision by the President, whereas inferior officers are generally subject to supervision and control by a higher ranking Senate-confirmed official.

The Removal Power

Vesting governmental power in an ostensibly private entity may also implicate the President's constitutional power to remove executive officers. Assuming a position established by Congress qualifies as an officer under the Appointments Clause, Article II's vestment of executive power in the President requires that the President retain some measure of control over the office. The Supreme Court has established that the Constitution's grant of the appointment power to the President includes discretion to remove officers. The Court has outlined the scope of this authority in a series of cases. In the 1926 case of Myers v. United States , the Court invalidated a statutory provision that prohibited the President from removing Postmasters General without first obtaining the advice and consent of the Senate. In striking down the limitation, the Court held that Article II grants the President "the general administrative control of those executing the laws, including the power of appointment and removal of executive officers. . . . "

The otherwise broad holding in Myers was curtailed shortly thereafter in the case of Humphrey ' s Executor v. United State s. In that case, the Court held that Congress had the authority to limit the President's ability to remove members of the Federal Trade Commission (FTC) by providing commissioners with "for cause" removal protections. The Court noted a difference between purely executive departments, such as the one at issue in Myers , whose heads the President generally must be able to remove at will, and other agencies engaged in quasi-legislative or quasi-judicial functions that are intended to function with decreased presidential control. The Court has also upheld restrictions on the removal of certain inferior officers. In Morrison v. Olson , the Court altered its analysis of removal restrictions and upheld a statute that provided for the appointment of an independent counsel who could be removed by the Attorney General only "for cause." The Court acknowledged that its opinion in Humphrey's Executor had relied on a distinction between executive officers and those exercising quasi-legislative or quasi-judicial functions. Nonetheless, the Court asserted that the crucial question in examining restrictions on the removal of executive officers is whether Congress has "interfere[d] with the President's" executive power and his "duty to 'take care that the laws be faithfully executed.'" The Court recognized that the independent counsel operated with a measure of independence from the President, but concluded that the statute gave "the Executive Branch sufficient control over the independent counsel to ensure that the President is able to perform his constitutionally assigned duties."

More recently, the Court announced an important outer limit on Congress's ability to shield executive branch officers from removal. In Free Enterprise Fund v. P ublic Company Accounting Oversight Board ( PCAOB ), the Court invalidated statutory structural provisions providing that members of the PCAOB could be removed only "for cause" by the Securities and Exchange Commission, whose members were, in turn, also protected from removal by for-cause removal protections. The Court concluded that while Humphrey 's approved such protections for independent agencies, and Morrison did the same for inferior officers, the combination of dual "for cause" removal protections "impaired" the President's "ability to execute the laws."

Accordingly, in addition to boundaries set by the nondelegation doctrine and the Due Process Clause, efforts to privatize governmental functions must respect the limits set forth by the Appointments Clause. The appointment of positions vested with significant authority of the United States must comply with the requirements of the Appointments Clause, and any restrictions on the President's power to remove such officers may not impair his duty to execute the laws of the United States.