Judicial scrutiny of agency adjudicative authority enhanced by SCOTUS

On Friday, the US Supreme Court issued one of the most hotly anticipated decisions of this term, answering a question with far-reaching implications for regulatory agencies and the targets of enforcement actions: Can a party challenging the constitutionality of an in-house administrative proceeding bring suit immediately in federal district court to vindicate its rights, or must it submit to the proceeding and raise that challenge first before the agency itself?

In Axon Enterprise v. FTC, No. 21–86 (Apr. 14, 2023), the Court unanimously held that these kinds of structural constitutional claims can be heard in the federal district courts in the first instance. In other words, a party who contends that the action at issue—or even the entire agency—is unconstitutional can invoke the ordinary jurisdiction of the federal courts to decide that question immediately, rather than awaiting review in the court of appeals after the agency's proceedings have concluded.

Background

In Axon, the Court granted certiorari to resolve a long-simmering circuit split manifest most recently in Cochran v. SEC, 20 F.4th 194 (5th Cir. 2021) (en banc) and Axon Enterprises v. FTC, 986 F.3d 1173 (9th Cir. 2021). Cochran and Axon arose out of administrative enforcement proceedings brought by the SEC and FTC, respectively, and assigned to administrative law judges (ALJs) for initial adjudication. The agencies' enabling statutes—the Securities Exchange Act (the Exchange Act) and the Federal Trade Commission Act (the FTC Act)—both contain jurisdictional provisions authorizing a party "aggrieved by" a "final order" of the agency to seek review of that order in a federal court of appeals. According to one line of federal case law, this statutory scheme channeled federal judicial review of agency actions into the courts of appeals and reserved such review for "final orders"; this, the courts in this camp said, "displaced" or "stripped" federal question jurisdiction from the federal district courts in cases contesting agency proceedings, leaving regulated parties to submit to the proceedings and preserve their challenges for eventual review by the court of appeals upon an unfavorable outcome at the agency level.

In Cochran, an accountant charged with violations of the Exchange Act in an in-house SEC tribunal sued the agency in federal district court to enjoin the proceedings, claiming that the tenure protection afforded to ALJs under the Exchange Act violated the constitutional separation of powers. Likewise, in Axon, a company administratively charged with violations of the FTC Act sued the agency for injunctive relief in federal district court, asserting a similar separation-of-powers challenge, as well as a claim that the FTC unlawfully combined prosecutorial and adjudicative functions in the same body, rendering all of its enforcement actions unconstitutional.

Both district courts dismissed the suits for lack of jurisdiction, holding that the statutory review schemes in the Exchange Act and the FTC Act displaced federal-question jurisdiction over the respondents' constitutional challenges. The Ninth Circuit affirmed, while the Fifth Circuit reversed.

The Supreme Court decision

The Supreme Court agreed with the Fifth Circuit that federal district courts retain federal-question jurisdiction to decide structural constitutional challenges to agency enforcement proceedings. See 28 U.S.C. § 1331. The Court applied the three-part test from Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994), which held that district courts may hear claims arising in administrative proceedings, notwithstanding "a special statutory review scheme" like that in the Exchange Act or the FTC Act, if (1) adhering to a statute's administrative review scheme would "foreclose all meaningful judicial review" of such claims, (2) the claims are "wholly collateral" to the statute's review provisions and (3) the claims concern matters outside the agency's expertise. "The ultimate question," the Court wrote, "is how best to understand what Congress has done—whether the statutory review scheme, though exclusive where it applies, reaches the claim in question."

Applying the factors, the Court first held that because the respondents asserted that the administrative proceedings subjected them to "unconstitutional agency authority," denying district court jurisdiction over such claims could foreclose all meaningful judicial review. In other words, the harm of being subjected to an unconstitutional proceeding—a "here-and-now injury"—could not be undone by subsequent appellate review. Second, the respondents' claims were "wholly collateral" to the actual subject matter of the enforcement actions, as the claims challenged the agencies' powers rather than any specific actions that the agencies could take against the respondents. Third, the claims at issue were "outside the Commissions' expertise." As the Court pointedly wrote with respect to the Axon proceeding, "the [FTC] knows a good deal about competition policy, but nothing special about the separation of powers."

Justice Gorsuch concurred in the judgment but argued that the Court should abandon the Thunder Basin test altogether and that federal jurisdiction here flowed directly from 28 U.S.C. § 1331. In a separate concurrence, Justice Thomas addressed the broader substantive question of when Congress can vest administrative agencies with primary adjudicative authority over particular matters. Justice Thomas noted that the challengers in Cochran and Axon faced monetary fines and compelled transfer of company assets, concluding that because such orders would implicate "core private rights" (such as the right to "life, liberty, and property"), "they likely must be adjudicated by Article III courts and juries." This echoes another Fifth Circuit decision limiting the enforcement authority of administrative agencies, Jarkesy v. SEC, 34 F.4th 446 (5th Cir. 2022), which we covered in our legal update US SEC administrative tribunals held unconstitutional, and which the SEC has since asked the Supreme Court to review.

Takeaways

The Axon decision has several important takeaways for individuals and firms in industries regulated by the SEC and the FTC—and, indeed, any other regulatory agency whose enforcement actions are governed by a similar statutory review scheme.

• The decision opens the federal courthouse doors to immediate constitutional challenges to federal agency proceedings. While the Court portrayed the respondents' claims as "extraordinary" and emphasized that district courts have jurisdiction only over constitutional claims that are not "intertwined" with substantive issues of agency expertise, recent case law suggests that the line may not be as sharp as the Court assumed. As discussed in previous publications, we have seen a rise in successful constitutional challenges to agency actions, including decisions from the Fifth Circuit holding that the Consumer Financial Protection Bureau is unconstitutionally structured (CFSA v. CFPB, 51 F.4th 616 (5th Cir. 2022)) and that the SEC's unfettered authority to choose its venue for prosecution violates the non-delegation doctrine (Jarkesy). Cases like these may present respondents with grounds for structural challenges to every agency action.
• Although the constitutional claims raised by the respondents in Cochran and Axon are easy to classify as structural in character—and do seem to apply broadly to most, if not all, agency enforcement actions—other claims may present closer questions under Thunder Basin. For example, would a claim that an agency's investigative or adjudicatory procedures violate the respondent's constitutional due process rights qualify as "wholly collateral"?
• Not all agencies' enabling statutes are created equal. Axon applied the Thunder Basin test to the distinct statutory review scheme set out in the Exchange Act and the FTC Act, which, as noted above, vests the federal courts of appeals with jurisdiction to review "final orders" of each agency. Other agencies, like the FDIC, have a clause in their enabling statutes that expressly purport to limit the jurisdiction of any court to enjoin certain agency actions. See, e.g., 12 U.S.C. § 1818(i)(1). Axon, like Thunder Basin and its progeny, does not address the effect of these kinds of uniquely direct clauses on a district court's jurisdiction under 28 U.S.C. § 1331 to hear structural constitutional challenges to agency actions.
• More broadly, Axon underscores the Court's increased willingness to scrutinize how federal agencies do business. For instance, in Lucia v. SEC, 138 S. Ct. 2044 (2018), the Court invalidated the SEC's mechanism for appointing ALJs. The Court also held in Seila Law LLC v. CFPB, 140 S.Ct. 2183, 2192 (2020) that restrictions on the President's authority to remove the CFPB's lone director violated the constitutional separation of powers.
• The decision could be a preview of next term, when the Court may address the substance of the plaintiffs' claims in Axon and Cochran. The SEC has asked the Court to reverse Jarkesy, which held the agency's system of in-house administrative tribunals unconstitutional on several grounds, including those asserted by the challengers in Axon. Jarkesy also held—again, in broad terms—that securities fraud defendants in SEC actions have a right to a jury trial. If the SEC's petition is granted, the case could dramatically alter the landscape of administrative enforcement nationwide.