The Czar Has No Clothes by Kevin Sholette

I.     Introduction

One of President Obama’s most controversial executive branch appointments is Kenneth Feinberg, the Special Master for TARP Executive Compensation, informally known as the Pay Czar.  Feinberg is responsible for interpreting the TARP regulations on executive compensation standards, and more notably, for unilaterally approving the pay for top executives at the largest institutions receiving TARP funding.  In October of 2009, he invoked this authority to slash compensation for executives at seven large financial firms by an average of fifty percent.  Although most financial executives have been too timid to publically complain about Feinberg’s bold intrusion into corporate boardrooms, legitimate constitutional questions surround the validity of his decisions.  Public policy concerns abound over the TARP legislation that authorized government regulation of executive compensation.  However, this Note will focus solely on whether Feinberg constitutionally possessed the legal authority he exercised, given the method of his appointment.

Executive Branch appointments fall within two categories: officers and employees.  Officers occupy an “office” of the United States, and “[e]mployees are lesser functionaries subordinate to officers of the United States.”  According to the Supreme Court in Buckley v. Valeo, “the term ‘Officers of the United States’ as used in Art. II . . . is a term intended to have substantive meaning. . . . [A]ny appointee exercising significant authority pursuant to the laws of the United States is an ‘Officer of the United States,’ and must, therefore, be appointed in the manner prescribed by s 2, cl. 2, of that Article.”  In other words, nobody can authorize legal authority under the Constitution, unless properly appointed to an office according to the Appointments Clause.  Therefore, if appointment to an office is a predicate to exercising constitutional authority, no mere employee can constitutionally exercise significant authority.  The questions then become: (1) is Kenneth Feinberg exercising significant authority, and if so (2) was he properly appointed under the Appointments Clause.

It is impossible to determine whether Feinberg exercises “significant authority” without further defining the term.  Although case law is sparse on the meaning of significant authority, the term is probably best understood as the exercise of “sovereign authority,” which historically has been the defining characteristic of holding an office.  Although the Supreme Court used the phrase “significant authority” rather than “sovereign authority” in Buckley, it gave no other indication that it was abandoning the historical definition.

A leading nineteenth century treatise defined an office as the “right, authority and duty, created and conferred by law,” to exercise “the sovereign functions of government . . . for the benefit of the public.”  Citing numerous eighteenth and nineteenth century legal authorities, a 2007 Office of Legal Counsel memorandum defined sovereign authority as the “power lawfully conferred by the Government to bind third parties, or the Government itself, for the public benefit.”  Sovereign authority also includes other traditionally executive functions, including but not limited to foreign negotiations, the direction of military operations, the handling and disbursement of public funds, and the right to contract on behalf of the United States.  Sovereign authority, however, does not include the proprietary management of governmental property, or “[p]urely ministerial and internal functions, such as building security, mail operations, and physical plant maintenance, which neither affect the legal rights of third parties outside the Government nor involve the exercise of significant policy making authority . . . .”

As the Special Master for TARP Executive Compensation, Feinberg’s duties include: interpretative authority, the authority to review prior payments already made to employees, the power to demand information from TARP recipients, the authority to approve compensation packages for the highest paid employees of TARP recipients, and the authority to issue advisory opinions.  These duties include the power to issue binding decisions regarding the rights of third parties receiving executive compensation, as well as, the exercise of significant policy making authority through interpretation and advisory opinion, which can also likely bind the government when used as estoppel defenses.  The authorities described in the Treasury regulations clearly constitute significant authority, when understood as meaning the exercise of the federal government’s sovereign authority.  In short, Feinberg is acting on behalf of the United States—not as a mere employee—and thus occupies an office.

III.   Was The Pay Czar Properly Appointed?

For purposes of appointment, the Constitution requires all officers to be nominated by the President and confirmed by the Senate.^20a However, for convenience, the Constitution allows Congress to vest appointment of “inferior” officers “in the President alone, in the courts of law, or in the heads of departments.”  So the default method of appointment is by the President with the advice and consent of the Senate, unless Congress passes a law providing otherwise.  Because the Treasury Secretary appointed Feinberg without Senate confirmation, his office must be an inferior office in order for his appointment to be constitutional.

The Treasury regulation authorizing the Treasury Secretary to appoint a Special Master for TARP Executive Compensation says that the Special Master “shall serve at the pleasure of the Secretary, and may be removed by the Secretary without notice, without cause, and prior to the naming of any successor Special Master.”  This clause subordinates the Special Master to the Treasury Secretary.  This makes it likely that he constitutes an inferior officer under Edmond v. United States, which defined inferior officers as those subordinate to a superior.

The last question about the constitutionality of Feinberg’s appointment is whether Congress vested the unilateral appointment of Feinberg with the Treasury Secretary.  In a Heritage Foundation online debate on the subject, Professor Steven Schwinn argues that the TARP legislation authorizing the Secretary to perform the functions of Feinberg’s Office, combined with “Congress’s previous and general authorization to the Secretary to delegate authority, and congressional acquiescence in the creation of the Office together satisfy the formal requirements of the Excepting Clause.”

However, Professor Schwinn fails to explain adequately why the acquiescence of Congress should be sufficient reason to disregard the Constitution.  The Appointments Clause requires Congress to vest appointment of an inferior officer in the head of department, in order to bypass Senate confirmation.  Schwinn is correct that the TARP legislation authorizes the Treasury Secretary to perform the actions currently being carried out by Feinberg.  It does not, however, create an office of Special Master for Executive TARP Compensation, or authorize the Treasury Secretary to appoint anyone without the consent of the Senate.

Professor Schwinn is also correct that 31 U.S.C. § 321(b)(2) authorizes the Secretary to “delegate [his] duties and powers . . . to another officer or employee of the Department of the Treasury.”  However, Congress does not have the authority to override the Constitution.  If the constitutional meaning of the term “officer” is defined by the duties associated with his office, then the Treasury Secretary cannot circumvent the Constitutional restrictions on appointments by delegating significant authority to an employee.  To allow the Secretary to delegate the duties of an officer to an employee, in order to avoid the confirmation process, makes a mockery out of the appointments clause.  This is the exact idea that the Buckley v. Valeo decision attempted to dispel by holding that the definition of officer is governed by duties rather than title.

Although Professor Schwinn argues that the statutory creation of a duty, combined with the statutory authority to delegate that duty, can be read to imply the authority to create an office and appoint an officer, such an interpretation undermines the important role of the Appointments Clause.  According to the Supreme Court, the Appointments Clause “is among the significant structural safeguards of the constitutional scheme,” because it protects the separation of powers and also ensures a higher quality of appointments.

Moreover, although Congress can vest unilateral appointment of an inferior officer in the head of a department, it cannot vest the creation of an office itself in the executive branch without treading on the separation of powers envisioned by the founders in the Constitution. “That the Constitution distinguishes between the creation of an office and appointment thereto for the generality of national offices has never been questioned.”  “[I]t is clear that the Framers intended to vest the task of creating the governmental structure in Congress alone.  Thus, it seems evident that the President cannot establish executive offices.”  In Maurice, Chief Justice Marshall (riding circuit) rejected the idea that the President could create offices, stating that “the general spirit of the constitution, [] seems to have arranged the creation of offices among legislative powers.”  Therefore, it is hard to argue that the Constitution permits the Treasury Secretary to interpret his statutory powers to not only include appointing inferior offices, but actually establishing those offices himself.

IV.   Conclusion

The argument that Pay Czar Kenneth Feinberg was not constitutionally appointed may not be popular, but it stands on firm legal footing.  Although the Excepting Clause was created for administrative convenience, convenience alone is not sufficient reason to interpret it so loosely as to swallow the substantive meaning of the Appointment Clause itself.  The importance of the separation of powers is fundamental to our constitutional democracy, and should not be trampled lightly, no matter the convenience.