Appeals court hears CFPB argument for 90% reduction in force

A panel of appellate judges will decide whether the Trump administration can fire 90% of the Consumer Financial Protection Bureau’s staff through a reduction-in-force without impacting the agency’s legally-mandated work.

On Friday afternoon, a three-judge panel of the U.S. Court of Appeals for the District of Columbia heard oral arguments on whether a district court erred in issuing an injunction that stopped the CFPB leadership from cutting roughly 1,500 employees through a government RIF. 

The Trump administration argued that cutting staff was not a final agency action, or even a policy, and therefore is not reviewable by the courts under the Administrative Procedure Act. The APA, enacted in 1946, provides a framework for how agencies create and enforce rules, and what can be reviewed by courts.

At the hearing, Judge Gregory Katsas highlighted the lack of a clear statement by CFPB officials to shut down the agency, which could be a legal hurdle for the agency’s union, which has argued that CFPB officials have been working behind the scenes to dismantle the agency. 

“This has a little bit of a nailing-Jello-to-the-wall quality to it,” said Katsas, a Trump appointee. “The agency action feels a little hard to pin down. There’s no agency record. There’s no rule or order. What’s the end game other than some form of very ongoing and intrusive judicial supervision?”

The National Treasury Employees Union sued acting CFPB Director Russell Vought in February to halt mass firings. Vought appealed a preliminary injunction that restricted his ability to reorganize and reduce the CFPB’s staff. The Department of Justice, defending Vought, has argued that a district court injunction was an unwarranted intrusion on the executive branch’s authority to manage the CFPB, and that the union’s claims lacked legal and factual basis.

Last month the same appeals court’s panel sided, in part, with the Trump administration by allowing some firings to resume. But the court’s three-judge panel narrowed the district court’s injunction and instead required CFPB officials to make a “particularized assessment” to determine which employees are necessary for the agency to perform its legally-mandated duties. 

Eric McArthur, a Department of Justice lawyer defending the CFPB, said that if CFPB officials had made a decision to shut down the agency without legislation, then it would be unlawful.

But he claimed that the CFPB’s leaders determined, after an assessment, that only 200 employees are necessary for the agency to perform its statutory functions, and that they are allowed to fire the remaining employees without judicial oversight. 

“The new leadership of the bureau has a radically different vision for this agency and the way it has been operated in the past, and wants to strip it down, as it were, to the statutory studs,” McArthur said. “That is a lawful policy. To do only the bare statutory minimum is lawful. Whether that latter policy decision is good policy or bad policy is not for the courts to review. That is ultimately for the American people to decide whether that’s a good policy through their elected representatives, and ultimately, at the ballot box.”

Judge Cornelia Pillard disputed McArthur’s claim that CFPB officials had no intention of shutting down the agency. She disputed whether it was possible to “radically scale down” the agency without CFPB officials having a plan to do so. 

“There’s a lot of factual evidence raising solid inferences as to what the district court found and your response to that, I take it, is that’s all a misunderstanding,” said Pillard, who is an appointee of President Obama. “Radically scaling down without a plan also seems to me to be extraordinary. I don’t think that’s the way it’s been done in the past.”

To which McArthur said: “It is certainly unusual … and I wouldn’t say there was a lack of a plan. I discern a very clear governing policy here, which is: ‘We’re going to minimize, to the extent possible, the elimination of non-statutorily required functions.'”

But at another point in the hearing, McArthur disputed that there was a plan and he sought to characterize emails sent to staff from Vought and the CFPB’s Chief Legal Officer Mark Paoletta ordering employees to stop working as a “a pause of non-urgent work that doesn’t say we’re not going to perform our statutory duty.”

“We don’t think there was ever any decision — authoritative or otherwise — to shut down the agency,” McArthur said, referring to a stop-work order in February. “This was at a particular moment where the building was shut down for the week because it was unsafe to come in because of the protest activity around the building, and it was a provisional and temporary measure.” 

Jennifer Bennett, a principal at the law firm Gupta Wessler, which is representing the union plaintiffs in the case, claimed that a record of emails and witness statements submitted at the district court’s evidentiary hearing showed that CFPB officials took several actions that, when taken as a whole, amounted to a dismantling of the agency. 

“There would actually be quite a danger of holding this shutdown is not a final agency action,” Bennett said. “Getting rid of an agency is a separation of powers violation. The facts and what the district court found is they were getting rid of the agency completely. And so that I think is a clear constitutional violation.”

Many of the questions asked by the judges dealt with whether the firings amounted to a violation of the Constitution or a statutory claim. The CFPB was created by the Dodd-Frank Act of 2010, and the Consumer Financial Protection Act that specifically vested the power to enforce and administer 18 consumer finance laws in the CFPB. 

The CFPB’s union claims that the bureau’s actions violate collective bargaining rights of employees that are NTEU members, and that the proposed reduction in force would significantly harm the CFPB’s ability to function and protect consumers.

Bennet claimed that the CFPB’s leadership has sought to usurp legislative authority and the stop-work order was used as a justification to eliminate staff.

“The stop work order is a permanent decision — and, I’ll note, it’s a justification not just for firing people, but for RIFs, which isn’t just actually firing people; a RIF is technically eliminating that position from the agency entirely,” she said. “They use the stop work order as a justification to fire people from the agency.”

At one point, Judge Neomi Rao cut in to question whether a “district court judge is going to decide the extent of RIFs that the executive branch thinks is appropriate? So there would just be constant judicial supervision: You can do 40% RIFs, but you can’t do 50%? What would that possibly look like?”

Bennet said an injunction that said “don’t shut down the agency” would work. 

“I want to be really clear that we are not saying that this preliminary injunction would be the permanent injunction,” she said. “But what this preliminary injunction does is … ensures that we are not having to worry about the agency being shut down in the interim as the case goes on.”

Katsus said the court is being put in the position of deciding how many employees can be fired while still having the CFPB perform its functions, such as answering the phone.

“What might an injunction look like that would not involve this problem of, at what point are you firing too many people?” Katasas asked. “Or at what point are you canceling too many contracts, losing too many offices?”