Supreme Court Greenlights Pre-enforcement Challenges to FTC and SEC Proceedings
The U.S. Supreme Court’s decision in Axon Enterprise, Inc. v. Federal Trade Commission, 598 U.S. ____ (2023), allows federal district courts to consider constitutional challenges to administrative proceedings prior to the issuance of final rulings. The justices unanimously held that the statutory review schemes set out in the Securities Exchange Act and Federal Trade Commission Act do not displace a district court’s federal-question jurisdiction over claims challenging as unconstitutional the structure or existence of the Securities and Exchange Commission (SEC) or the Federal Trade Commission (FTC).
Facts of the Case
In response to separate enforcement actions against them by the SEC and FTC, Michelle Cochran and Axon Enterprise, Inc. each filed suit in federal district court challenging the constitutionality of the agency proceedings against them. In such actions where the Commission elects to institute administrative proceedings to address statutory violations, it typically delegates the initial adjudication to an Administrative Law Judge (ALJ) with authority to resolve motions, hold a hearing, and then issue a decision. As prescribed by statute, a party objecting to the Commission proceedings makes its claims first within the Commission itself, and then (if needed) in a federal court of appeals.
Both Cochran and Axon instead brought their claims directly in district court, seeking to enjoin the administrative proceedings. Cochran and Axon argued that the tenure protections of the agencies’ ALJs render them insufficiently accountable to the President, in violation of separation-of-powers principles. Axon maintained that the combination of prosecutorial and adjudicatory functions in the FTC is unconstitutional. Each suit premised jurisdiction on district courts’ ordinary federal-question authority to resolve “civil actions arising under the Constitution, laws, or treaties of the United States.”
Cochran’s and Axon’s suits were both dismissed for lack of jurisdiction. The district court in Cochran’s case held that the review scheme specified in the Securities Exchange Act—“administrative review followed by judicial review in a federal court of appeals”— “implicitly divest[s] district courts of jurisdiction” over “challenges to SEC proceedings,” including Cochran’s constitutional ones. Similarly, the district court in Axon’s case found that the FTC Act’s comparable review scheme displaces §1331 jurisdiction for claims concerning the FTC’s adjudications. On appeal, the Ninth Circuit affirmed the district court’s dismissal of Axon’s constitutional challenges to the FTC proceeding, concluding that the claims were the type that fell within the FTC Act’s review scheme. However, the en banc Fifth Circuit disagreed as to the equivalent SEC question, finding that Cochran’s claim would not receive “meaningful judicial review” in a court of appeals; that the claim was “wholly collateral to the Exchange Act’s statutory-review scheme”; and that the claim fell “outside the SEC’s expertise.”
Supreme Court’s Decision
The Supreme Court unanimously agreed that the district courts have jurisdiction to hear the parties’ constitutional challenges to the Commissions’ structure. According to the Court, “[t]he ordinary statutory review scheme does not preclude a district court from entertaining these extraordinary claims.” Justice Elena Kagan wrote the majority opinion, with Justice Clarence Thomas concurring and Justice Neil Gorsuch concurring in the judgment.
To determine whether Congress intended to preclude collateral judicial review by district courts when it creates a review system within an administrative agency, the Court held the following factors should be considered: whether Congress’s intent to preclude district court jurisdiction was fairly discernible in the statutory scheme (such as the system of administrative review in this case); and whether the dispute at issue is of the kind meant to be first reviewed within an agency’s statutory scheme. It went on to find that the test set forth in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994) should be used to analyze whether the dispute at issue was meant to be first reviewed within the agency’s statutory scheme.
Under Thunder Basin, the Court asks three questions. First, could precluding district court jurisdiction “foreclose all meaningful judicial review” of the claim? Next, is the claim “wholly collateral” to the statute’s re- view provisions? Finally, is the claim “outside the agency’s expertise”? Applying the Thunder Basin factors, the Court ultimately determined that the claims fell outside the Exchange Act and FTC Act. In reaching its decision, the Court first found that preclusion of district court jurisdiction “could foreclose all meaningful judicial review.” As Justice Kagan explained, “The claim, again, is about subjection to an illegitimate proceeding, led by an illegitimate decisionmaker. And as to that grievance, the court of appeals can do nothing: A proceeding that has already happened cannot be undone. Judicial review of Axon’s (and Cochran’s) structural constitutional claims would come too late to be meaningful.”
The Supreme Court also found that the collateralism factor also favored Axon and Cochran. According to the Court, the challenges to the Commissions’ authority have nothing to do with either the enforcement-related matters the Commissions regularly adjudicate or those they would adjudicate in assessing the charges against Axon and Cochran. The parties’ claims are thus “collateral” to any Commission orders or rules from which review might be sought.” Lastly, the Court found that Cochran’s and Axon’s claims are “outside the [Commissions’] expertise.” Citing Carr v. Saul, 593 U.S. ___ (2021), the Court emphasized that “agency adjudications are generally ill suited to address structural constitutional challenges”— like those maintained in this case.
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