At issue are three NLRB appointments Obama made in January under a provision for filling vacancies when Congress is in recess.
The Senate had taken a 20-day recess, but Republican leaders and right-to-work groups claimed it technically stayed in session because it was gaveled in and out every few days, and therefore Obama's appointments were unconstitutional. Obama lawyers argue the Senate itself had called for a recess, no business was conducted and attendance wasn't required during the brief "pro forma" sessions.
Republicans had vowed for months to block any appointees to the NLRB, which was down to just two members, because of what they considered the board's pro-union decisions. The five-member board must have at least three members to function.
Obama has said he made the appointments to prevent the board from effectively being shut down, leaving it unable to referee labor-management disputes or rule on unfair labor practices.
The 7th U.S. Circuit Court of Appeals took the matter under advisement and first must decide whether petitioners have legal standing to bring the case.
Glenn Taubman, an attorney for the National Right to Work Legal Defense Fund, argued that the Senate has the power to make its own rules and set up any sessions as it sees fit, "and it is not up to another branch to say they are a sham."
Judge Ann Claire Williams suggested if the Senate was in session but not conducting business, it was "having its cake and eating it too."
But Judge Ilana Diamond Rovner asked the Justice Department why the court "should be in the position of determining" whether the Senate was in session.
Deputy Assistant Attorney General Beth Brinkmann said there was no doubt that the Senate was in a recess, including under its own analysis, so there was no clash between legislative and executive branch authority. She said the Senate called for a recess, said no business would be conducted during that time, and did not require senators to attend the brief sessions, some of which lasted less than a minute.
In fact, she said, messages from the president and the House of Representatives were not "laid before the Senate" until it returned from recess on Jan. 23.
"Given the Senate's declared and actual break from business over this 20-day period, the president plainly possessed the authority to exercise his recess appointment power," according to a legal brief for the NLRB.
Challenges in more than two dozen labor cases around the country have been winding their way through the legal system since the Jan. 4 appointments. The Chicago court was the first to hear oral arguments on the issue, and the U.S. Court of Appeals for the District of Columbia Circuit will take up a similar case on Wednesday.
Legal experts say the outcome is uncertain because there is little precedent, and the issue likely will end up before the U.S. Supreme Court sometime in the next year.
Associated Press Writer Sam Hananel in Washington contributed to this report.