Free Enterprise Fund v. Public Company Oversight Board

PETITIONER: Free Enterprise Fund and Beckstead and Watts, LLP
RESPONDENT: Public Company Accounting Oversight Board, et al.

DOCKET NO.: 08-861
DECIDED BY: Roberts Court (2009-2010)
LOWER COURT: United States Court of Appeals for the District of Columbia Circuit

CITATION: 561 US 477 (2010)
GRANTED: May 18, 2009
ARGUED: Dec 07, 2009
DECIDED: Jun 28, 2010

Elena Kagan - Solicitor General, Department of Justice, for the respondent
Jeffrey A. Lamken - for respondents Public Company Accounting Oversight Board, et al.
Michael A. Carvin - for the petitioners

Facts of the case

The Free Enterprise Fund, a non-profit organization, brought suit challenging the constitutionality of Title I of the Sarbanes-Oxley Act. It alleged that the creation of the Public Company Oversight Board (the Board) by the Act violated the Appointments Clause because it deprived the President from exercising adequate control over the Board. However, the Board itself was under the direct supervision of the Securities and Exchange Commission (SEC), all of whose commissioners are appointed by and can be removed by the President.

The U.S. Court of Appeals for the D.C. Circuit held that the creation of the Public Company Accounting Oversight Board did not violate either the Appointments Clause or the separation of powers principle. It reasoned that the Board's members were inferior officers under the supervision of the SEC and thus were not obligated to be appointed by the President. Also, the court noted that the President's ability to remove members of the SEC, who in turn could remove members of the Board, preserved the Constitution's separation of powers.


1) Does the Sarbanes-Oxley Act violate the the separation of powers doctrine by giving broad powers to the Board while simultaneously preventing the President of the power to appoint or remove Board members?

2) Did the court of appeals correctly hold that the Board members were inferior officers under the direct supervision of the SEC even though the SEC cannot supervise those members individually and can only remove them for just cause?

3) Does the Sarbanes-Oxley Act violate the Appointments Clause even if the Board's members are inferior because the SEC is not an official department or because the commissioners are not the head of the SEC?

Media for Free Enterprise Fund v. Public Company Oversight Board

Audio Transcription for Oral Argument - December 07, 2009 in Free Enterprise Fund v. Public Company Oversight Board

Audio Transcription for Opinion Announcement - June 28, 2010 in Free Enterprise Fund v. Public Company Oversight Board

John G. Roberts, Jr.:

Finally this term I have the opinion of the Court in case 08-861, Free Enterprise Fund Versus Public Company Accounting Oversight Board.

This is a case about Presidential power and accountability.

We learned early on that our constitution seeks to protect liberty by separating the government’s powers in to three branches, legislate, executive and judicial.

The constitutional vests executive power in the President and makes it his duty to take care that the laws be faithfully executed.

The President of course, cannot executive the laws by himself, rather he insures the faithfully execution of the laws through his oversight of executive officers.

The issue before us concerns the President’s authority to remove those officers when he determines that such action is necessary to his own faithful execution of the laws.

The case arises out of a challenge to an unusual government agency, the public company accounting oversight board.

The Congress created the board in 2002 to regulate the accounting business.

Accounting firms that audit public companies must register with the board, pay it fees and comply with its rules and oversight.

The board inspects firms, conducts formal investigations and can issue severe sections.

Members of the board are not appointed by the President instead they are appointed by the Securities and Exchange Commission, an independent government agency over which the President has little direct control.

The President appoints commissioners but the parties agree that the President can not remove them at will but only for good cause.

A legal concept that in this context does not include disagreements about policy.

While the SEC appoints board members it in turn can not remove them at will, instead the SEC can remove board members only for good cause strictly defined in this instance to include only the willful violation of board rules or the securities laws, willful abuse of office or unreasonable failure to enforce compliance with the law and with accounting rules.

Board members execute the laws of the United States but they are shielded from the chief executive by two layers of insulation.

The President must show good cause to fire the commissioners and the commission must show good cause to fire the board.

Now this suit was brought by an accounting firm, Beckstead and Watts and a nonprofit group, the free enterprise fund, they argued that the Act creating the board violates the separation of powers by effectively shielding the board from the President's control.

The District Court ruled against petitioners and a divided Court of Appeals affirmed.

We granted certiorari and now reverse in part, we hold that the dual for cause limitations on the removal of Board members contravene the Constitution's separation of powers.

The President's executive power includes the authority to keep executive officers accountable by removing them from office if necessary.

As James Madison stated on the floor of the first Congress “if any power whatsoever is in its nature executive, it is the power of appointing overseeing and controlling those who execute the laws".

Our landmark decision in Myers versus United States almost 90 years ago, we affirm that Article Two confers on the President, the general administrative control of those executing the laws. It is his responsibility to take care that the laws be faithfully executed.

As we explained in Myers he must therefore have the power to remove those officers for whom he cannot continue to be responsible.

Now since Myers, we have upheld limited restrictions on the President's removal power, most prominently in a case called Humphrey's Executor versus United States, there we held that Congress may under certain circumstances create independent principal officers whom the President cannot remove at will but only for good cause.

But in that case and others applying similar reasoning only one level of protected tenure separated the President from an officer exercising executive power.

The President or a subordinate he could remove at will decide it whether the protected officers conduct merited removal under the good cause standard.

In this case, we are asked to consider a new situation, not yet encountered by the court.

The act before us insulates executive officers, officers who exercise significant power in the name of the United States behind two levels of good cause tenure, it not only protects board members from removal except for good cause but withdraws from the President, any decision on which on whether that could cause exists.

That decision invested in other tenured officers, to commissioners were not subject to the President's direct control and who cannot be fired simply because the President disagrees with their decision.

This added layer of protection makes a fundamental difference with only one layer of insulation, the commissioners could remove board members at will and would have no excuse for retaining an officer who is not faithfully executing the law, they would be responsible for everything the board does and the President could hold them accountable to the same extent that he can hold them accountable for all the commission's other functions but with two layers of insulation in place the President's review is limited.