By: Matthew A. Rossi and Eleanor Hudson Callaway

On Friday, April 14, 2023, the Supreme Court cleared the way for respondents in Federal Trade Commission (“FTC”) and Securities and Exchange Commission (“SEC”) administrative proceedings to challenge the constitutionality of those proceedings in federal district court while the administrative process is ongoing.  Typically, as required by statute, respondents challenging an administrative proceeding must first make such claims in the administrative proceeding itself and then, if necessary, in the federal courts of appeal after conclusion of the administrative proceeding.  

Background

The decision consolidated two separate cases: Axon Enterprise v. Federal Trade Commission and Securities and Exchange Commission v. Cochran.  Both cases involved challenges to administrative enforcement proceedings adjudicated by administrative law judges (“ALJs”).  In Cochran, the SEC brought an administrative proceeding against a certified public accountant alleging that she failed to comply with auditing standards in violation of the Securities Exchange Act of 1934 (“Exchange Act”).  In Axon, the FTC brought an administrative proceeding against a company, Axon Enterprise, Inc., alleging that Axon entered into a merger agreement with a competitor in violation of the Federal Trade Commission Act of 1914’s (“FTC Act”) prohibition on unfair methods of competition and consummated a merger that violated Section 7 of the Clayton Act.  Both respondents filed actions in federal district court seeking to enjoin the proceedings on the grounds that the two layers of “for good cause” removal protection afforded to ALJs by statute so insulates the ALJs from presidential authority that it violates the separation of powers, specifically Article II of the Constitution, which vests executive power in the President.  Axon also argued that the combination of the “prosecutor, judge, and jury” functions of the FTC renders all FTC enforcement actions unconstitutional under the Fifth Amendment’s Due Process Clause. 

The plaintiffs in Cochran and Axon based jurisdiction for their claims on the general federal question jurisdiction of federal district courts under 28 U.S.C. § 1331.  However, the district courts dismissed both actions for lack of subject matter jurisdiction.  In Cochran the district court held that the review scheme set forth in the Exchange Act, which provides for administrative review followed by appeal to the federal courts of appeal, implicitly divests federal district courts of jurisdiction over challenges to SEC proceedings.  The district court in Axon arrived at a similar holding based on the comparable review scheme provided in the FTC Act.  On appeal, the Ninth Circuit affirmed the district court’s decision in Axon, but the Fifth Circuit en banc reversed the district court’s Cochran decision, finding that Cochran’s claim “is not the type of claim Congress intended to funnel through the Exchange Act’s statutory review scheme.” Cochran v. SEC, 20 F.4th 194, 207 (5th Cir. 2021) (aff’d and remanded).

Supreme Court Decision

The Supreme Court held that the review schemes set forth in the Exchange Act and the FTC Act do not displace federal district court jurisdiction over Axon and Cochran’s constitutional challenges to the Commissions’ structures.  Justice Kagan, writing for the majority, explained that a statutory review scheme of the kind provided in the Exchange Act and FTC Act does not necessarily extend to every type of claim concerning agency action.  The Court identified three factors from Thunder Basin Coal Co. v. Reich to assist in determining whether the particular claims brought were of the type Congress intended to be reviewed within this statutory structure.  These factors ask: 1) whether “a finding of preclusion could foreclose all meaningful judicial review”; 2) whether the claim is “wholly collateral” to the routine review procedure; and 3) whether the claim is “outside the agency’s expertise.” Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994).

For the first factor, Justice Kagan noted that although meaningful judicial review “does not usually demand a district court’s involvement,” the defendants’ injury of “being subjected to unconstitutional agency authority” including “having to appear in a proceeding before an unconstitutionally insulated ALJ . . . is impossible to remedy once the proceeding is over.” Axon Enterprise, Inc. v. Federal Trade Commission, Slip Opinion at 4. Second, the Court held that the constitutional claims raised “have nothing to do with the enforcement-related matters the Commissions regularly adjudicate” and therefore, “are collateral to any Commission order or rules from which review might be sought.” Id. For the third factor, the Court found that the parties’ claims are outside the Commissions’ expertise, reasoning that “agency adjudications are generally ill suited to address structural constitutional challenges like those maintained here.” Id. (citing Carr v. Saul, 141 S. Ct. 1352 (2021)).

Conclusion

The Axon decision provides respondents in SEC and FTC administrative proceedings an immediate path to raise constitutional challenges to those proceedings in federal district court.  This development is just the most recent of several defeats for agency administrative proceedings in recent years.  For example, in 2021 the Supreme Court held that SEC ALJs were unconstitutionally appointed. Lucia v. Securities and Exchange Commission, 138 S. Ct. 2044 (2018). Just last year the Fifth Circuit held that SEC ALJs were unconstitutionally insulated from removal and that SEC administrative proceedings to impose monetary penalties for fraud were unconstitutional.  Jarkesy v. Securities and Exchange Commission, 34 F.4th 446 (5th Cir. 2022). Our article on that decision may be found here.

Going forward, respondents in FTC or SEC administrative proceedings may raise constitutional challenges to the agencies’ structures and seek to enjoin the proceedings in federal district court.  This may make administrative proceedings more time consuming and difficult for the agencies involved.  The SEC in particular has moved away from bringing contested enforcement actions in administrative proceedings, preferring instead to file suit in federal court.  Similarly, the FTC can, and typically does, file an action for preliminary and permanent injunctive relief in federal court, prior to (or instead of) commencing an administrative action.  The Axon decision will likely reinforce this trend.