By Aruna Viswanatha and Terry Baynes

Jan 25 (Reuters) - A federal appeals court ruled on Friday that President Barack Obama violated the U.S. Constitution when he used recess appointments to fill a labor board, in a sweeping decision that could limit presidential power to push through federal nominees.

The court found that the Senate was not truly in recess, for the purpose of a recess appointment, when Obama in January 2012 installed three nominees to the National Labor Relations Board.

The nominees were facing stiff Republican opposition, and the appointments caused an uproar at the time. Republicans argued that Obama undercut the Senate's power to confirm nominees because although most of its members were out of town, the Senate had not formally adjourned.

In a surprisingly broad ruling, the three-judge panel rejected not only the NLRB appointments but any made while the Senate is in session but on a break. That could limit recess appointments to only a few weeks a year.

The U.S. Court of Appeals for the District of Columbia Circuit also ruled that recess appointments could only be used for positions that become vacant while the Senate is in recess.

"If the decision stands, it would be a significant reduction of the president's recess power," said John Elwood, a Washington lawyer who was deputy assistant attorney general in the Office of Legal Counsel from 2005 through 2009.

"This is a big, big decision for executive power," Elwood said. "It is one of the most important decisions in decades."

More immediately, the ruling casts doubt on the ability of the NLRB, an independent agency that oversees labor disputes, to conduct its business if it does not have enough members. Its recent rulings may also be vulnerable to challenge.

The ruling also throws into question the legality of the appointment of Richard Cordray, the head of the new Consumer Financial Protection Bureau. Obama used the same type of recess appointment to install Cordray; his appointment was challenged in a separate lawsuit.

But the ruling's most profound impact may be its threat to the now-standard practice of presidents ramming through nominees that otherwise would get bogged down in the Senate, often because of unrelated political fights.

White House spokesman Jay Carney called the ruling "novel and unprecedented" and said it contradicted 150 years of practice by both Democratic and Republican administrations.

The Justice Department said it is considering its options to appeal. Legal experts expect the administration will challenge the ruling, and the case could go to the Supreme Court.

Republican lawmakers, who had joined the legal challenge to the NLRB appointments, jumped on the ruling as a vindication of their view that the administration had overreached.

"The D.C. Circuit Court today reaffirmed that the Constitution is not an inconvenience but the law of the land," Mitch McConnell, the top Republican in the Senate, said in a statement.

NLRB Chairman Mark Gaston Pearce said in a statement the board would continue to perform its statutory duties and issue decisions. CFPB spokeswoman Moira Vahey said the ruling had no direct effect on the bureau.

A TEST OF POWERS

The suit started as a routine dispute between soda bottling company Noel Canning and the labor board, but developed into a high-profile appeal with the help of the U.S. Chamber of Commerce and Senate Republicans.

The case was seen as a test of the president's ability to bypass a Senate vote on nominees. The Constitution allows the Senate to block nominees, and both Democratic and Republican presidents have used recess appointments as a way around this for decades.

When Obama made the NLRB appointments, the Senate was not officially in recess. It continued to meet every few days for minutes at a time with few senators present.

The court's decision, issued by a panel of judges who had been appointed by Republicans, hinged on what constitutes a "recess" and whether it includes short breaks while the Senate is still technically in session.

Presidents have often used these intra-session recess appointments. Ronald Reagan, for example, made 36 such appointments, and Bill Clinton made 39, according to data from the Congressional Research Service.

"Considering the text, history, and structure of the Constitution, these appointments were invalid from their inception," the ruling said about the NLRB appointments of Sharon Block, Richard Griffin and Terence Flynn.

It said the president could not have "free rein to appoint his desired nominees at any time he pleases, whether that time be a weekend, lunch, or even when the Senate is in session and he is merely displeased with its inaction. This cannot be the law."

Jay Wexler, a law professor at Boston University School of Law, said the ruling includes "pretty big restrictions" but that he was most surprised that presidents would only be allowed to use such appointments when a vacancy popped up during a recess.

Once rare, recess appointments became more common in the late 1970s as a way to bypass the confirmation process, which senators have used increasingly to block nominees.

Recent presidents pushed the boundaries. George W. Bush took the unusual step of filling a judgeship during a recess.

Democratic Senator Ted Kennedy previously challenged the intra-session recess appointment of William Pryor to the 11th U.S. Circuit Court of Appeals in 2004 by George W. Bush. The 11th Circuit upheld the right of the president to make the recess appointment, finding the term "recess" in the Constitution ambiguous. That decision conflicts with the D.C. Circuit's decision on Friday.

NLRB, CORDRAY IN DOUBT

Pearce of the NLRB said the ruling would not deter the board from getting on with its work. However, the NLRB's recent and future decisions are now on legally shaky ground because without the three appointments, the board lacks a quorum.

The NLRB has been active this past year in expanding protections for employees who complain about their employer on social media like Facebook or Twitter.

It also issued a ruling requiring employers to continue collecting union dues even after a union contract expires.

Donna Ballman, an employment lawyer and author of "Stand Up For Yourself Without Getting Fired," said the appeals court decision would lead to delays in NLRB rulings.

Although Friday's decision did not touch on Cordray, his appointment to the CFPB was challenged in a separate lawsuit brought in June by the State National Bank of Big Spring, Texas, and other institutions.

That suit presented a similar argument that the recess appointment was invalid because the Senate was technically still in session.

Cordray's appointment followed months of rancorous debate over the new consumer bureau, which was created by the 2010 Dodd-Frank financial oversight law to police markets for products such as credit cards and home loans.

Obama on Thursday renominated Cordray to head the CFPB, but it is unclear how long the confirmation process will take.

Even though the new ruling doesn't deal with the consumer agency, it could call into question supervisory actions and regulations it has taken. "The CFPB world has been turned upside down," said financial services lawyer Richard Gottlieb of the Dykema law firm. 

(Additional reporting by Emily Stephenson, Joan Biskupic, and Diane Bartz)

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