SUPREME COURT UNANIMOUSLY ALLOWS ‘EXISTENTIAL’ CONSTITUTIONAL CHALLENGES TO SEC & FTC TO BE BROUGHT IN FEDERAL COURT

On Friday, the Supreme Court held, 9-0,^[1] that two plaintiffs—Ms. Cochran and Axon Technologies—could bring their constitutional challenges against the SEC and the FTC directly in federal court, bypassing a statutorily created administrative process through which the agencies had asserted claims against them. Axon Enter. Inc. v. FTC, No. 21-86 (Apr. 14, 2023).^[2]

The Decision

The SEC and the FTC—and many other agencies—often bring enforcement actions via administrative proceedings. An administrative law judge (ALJ) adjudicates those proceedings. The Commission may then review the ALJ’s decision. And, at the end of the road, the respondent may seek (limited) review in a federal court of appeals.^[3] The Supreme Court has long held that this statutorily created process displaces federal-court jurisdiction over related claims. Put differently, a respondent in an administrative proceeding generally cannot evade the administrative process by simply suing the agency in federal district court and asking the court to adjudicate the claims at issue instead. It does not, however, displace federal-court jurisdiction over all claims a respondent might bring.

In determining whether a claim must proceed through the administrative process, the Court considers the so-called Thunder Basin^[4] factors. First, would requiring the plaintiff to use the administrative process foreclose meaningful judicial review? Second, is the plaintiff’s claim wholly collateral to the substance of the statutory-review provisions? Third, is the plaintiff’s claim outside the agency’s expertise? If all three factors are met, the plaintiff can skip the administrative process and bring her claim directly in federal court.^[5]

Here, in response to an SEC complaint, Ms. Cochran sued in federal district court (N.D. Tex.), claiming that the SEC’s ALJs were unconstitutionally insulated from Presidential supervision.^[6] Similarly, in response to an FTC complaint, Axon sued in federal district court (D. Ariz.), claiming the same of the FTC’s ALJs and that all FTC enforcement actions are unconstitutional because the FTC wields both prosecutorial and adjudicative power. The question was whether these claims could proceed in federal court or whether they had to proceed via the administrative process.

Applying the Thunder Basin factors,^[7] the Supreme Court held the claims could proceed in federal court. First, the statutory-review process would foreclose meaningful judicial review. Plaintiffs’ alleged injury—that the SEC’s and FTC’s administrative processes were illegal—would be impossible to remedy if they had to go through those very processes. By the time plaintiffs reached a court, the damage would have been done. Second, plaintiffs’ claims were wholly collateral to the administrative proceedings: “they are challenging the Commissions’ power to proceed at all, rather than actions taken in the agency proceedings.” Op. 14. Third, their constitutional claims were outside the agencies’ expertise—the FTC, for example, “knows a good deal about competition policy, but nothing special about the separation of powers.” Op. 16. So, the Court held, plaintiffs can proceed directly in federal court rather than having to go through the administrative process. The Court did not, however, weigh in on the merits of plaintiffs’ constitutional challenges.

Takeaways

Although this decision is not the main event, it tees up the main event. These cases will now head back to the federal district courts, which will decide in the first instance the constitutionality of the SEC’s and the FTC’s ALJs and (more importantly) whether all FTC enforcement actions are illegal. These cases will be worth watching as they work their way back through the federal system (perhaps back to the Supreme Court) and could have implications beyond the SEC and FTC.

On the underlying merits, Justices Thomas and Gorsuch issued separate opinions signaling that they may favor plaintiffs’ claims. Justice Thomas suggested that all federal agencies may lack the authority to adjudicate so-called “private rights” (i.e., those bearing on life, liberty, or property). Thomas, J., concurring at 3. Justice Gorsuch primarily explained that all challenges to federal agency authority can be brought in federal court absent an express contrary congressional command but also took aim at the administrative process itself:

Agencies like the SEC and FTC combine the functions of investigator, prosecutor, and judge under one roof. They employ relaxed rules of procedure and evidence—rules they make for them­selves. The numbers reveal just how tilted this game is. From 2010 to 2015, the SEC won 90% of its contested in-house proceedings compared to 69% of the cases it brought in federal court. Meanwhile, some say the FTC has not lost an in-house proceeding in 25 years.^[8]

It’s unclear, though, whether other Justices share either Justice Thomas’ or Justice Gorsuch’s concerns (no other justice joined either separate opinion). Still, the separate opinions may prove influential for some lower court judges.

These challenges will play out against the backdrop of federal agencies, and the FTC in particular, taking increasingly expansive views of their enforcement authority. See “The FTC Sets Its Sights on Noncompete Agreements” (Jan. 9, 2023); “The FTC Abandons (The Rule Of) Reason” (Nov. 17, 2022). This opinion will no doubt increase challenges to such expansion in federal court. At the same time, it is important not to overread the decision. Whether a party may sue an agency in federal court or must proceed through the administrative process remains a claim-specific inquiry. And the claims here are unusual in that they go to the very existence and structure of the agencies. Challenges to the substance of agency rulemaking, for example, are more likely to be sent into the administrative process. Cf. Op. 15 (emphasizing that the plaintiffs’ claims here “have nothing to do with the enforcement-related matters the Commissions regularly adjudicate—and nothing to do with those they would adjudicate in assessing the charges against Axon and Cochran” (cleaned up)).

While this decision does not answer the ultimate substantive question, it opens the door for federal district courts to hear major challenges to the SEC’s and the FTC’s structure and authority.