A Los Angeles-based accounting and tax consultancy failed to timely raise its challenge to the constitutionality of hearing officers at a federal oversight board, Justice Department lawyers told the U.S. Supreme Court as a potential new wave of appointments-clause disputes looms.

The Justice Department's recommendation that the justices turn down the company's challenge comes less than a year after the high court's ruling in Lucia v. Securities and Exchange Commission. In that case, the Justice Department, in a change of positions, turned against the securities agency and urged the justices to find that the SEC's administrative law judges had not been properly appointed.

The Supreme Court in Lucia concluded the SEC's in-house judges were more than “mere employees,” and that SEC commissioners, not agency staff, must appoint them. The ruling set off a cascade of new questions for agencies across Washington, as lawyers representing individuals and corporate clients sought to dismiss or derail pending actions.

In the latest case, Kabani v. SEC, Kirkland & Ellis partner George Hicks Jr. has asked the justices to review an issue that has been the major obstacle to reaching his client's appointments clause challenge: What constitutes a “timely challenge” to the appointment of an officer adjudicating a case?

The federal Public Service Accounting Oversight Board disciplined Kabani & Co. for allegedly falsifying audit documents in an attempt to deceive board inspectors. The board had appointed a prosecutor for the Financial Industry Regulatory Authority to adjudicate the case. He censured the company and three accountants, permanently revoking the firm's registration, barring the accountants from association with a registered public accounting firm, and imposing total fines of $155,000 on the accountants.

The U.S. Court of Appeals for the Ninth Circuit last August ruled against Kabani, concluding that the “petitioners forfeited their appointments clause claim by failing to raise it in their briefs.” The Justice Department contends the Kabani petitioners failed to raise the appointments clause challenge before the board and the SEC, and in their opening and reply briefs in the circuit court. That failure resulted in a forfeiture of the appointments clause challenge, they conclude.

The first time the challenge was raised by Kabani, writes U.S. Solicitor General Noel Francisco, was in a Rule 28(j) letter of supplemental authorities in the Ninth Circuit. “The courts of appeals uniformly agree that 'a letter submitted pursuant to rule 28(j) cannot raise a new issue,'” Francisco told the justices.

But Hicks, a Kirkland appellate partner in Washington, counters that Kabani did raise the issue in a timely fashion before the board and the agency. His clients just didn't use the magic words “appointments clause,” Hicks told the justices. Instead, they challenged the constitutional deficiencies of the accounting board's framework, including the appointment of the hearing officer.

The Lucia decision last year referred to timely challenges, Hicks wrote, but “did not define the scope of what constitutes a timely challenge,' as there was no claim in Lucia that the petitioner's challenge was untimely. Given this lack of guidance, lower federal courts have divided over when, and to what extent, a party must 'timely challenge' the appointment of an administrative officer in order to be entitled to relief.”

The Ninth Circuit, Hicks argued, imposed an indefensible “inflexible verbiage requirement” that the appointments clause be specifically named as the basis for the constitutional objections.

The Public Company Accounting Oversight Board may have seen some of these issues coming in the wake of the Lucia decision.

In January, the board adopted amendments to its bylaws and rules that make its appointment and removal of its hearing officers subject to SEC approval. It acted, the board said, even though no court, the board or the SEC had adjudicated whether a PCAOB hearing officer is, like SEC administrative law judges, an inferior officer under the appointments clause.

“In light of the Lucia litigation, other federal government agencies have taken similar measures as to their ALJs or like officials, also out of an abundance of caution and for avoidance of doubt,” the accounting board said in a statement then.

The Justice Department's brief in Kabani & Company v. SEC is posted below: