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Generative AI: A global guide to key IP considerations
Artificial intelligence (AI) raises many intellectual property (IP) issues.
United States | Publication | abril 2023
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.
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 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.
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.
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