SCOTUS Approves Challenges to Agency Enforcement Proceedings

Has the administrative state gotten “too big for its britches”? Certainly, the pendulum of virtually uncritical deference to federal agencies has swung sharply in the opposite direction in various decisions of the Roberts Court.

Five years ago, in Lucia v. Securities & Exchange Commission,^[1] the U.S. Supreme Court held that U.S. Securities and Exchange Commission (“SEC”) administrative law judges (“ALJs”) are inferior executive officers and are therefore subject to the Appointments Clause of the U.S. Constitution.^[2] As a result, respondents in SEC administrative proceedings were entitled to de novo hearings before new, constitutionally appointed ALJs.

The most recent example is Axon Enterprise, Inc. v. Federal Trade Commission,^[3] which held—without dissent—that the statutory review schemes for both the Federal Trade Commission (“FTC”) and the SEC do not displace classic federal question jurisdiction over claims that those agencies’ structures or activities are unconstitutional. The holding presages a tsunami of constitutional challenges against not only these two regulators but also other federal agencies operating under similar statutory structures.

The Federal Agency Enforcement Paradigm

Both the SEC and the FTC partake of an enforcement model that is common to many federal agencies. Each commission has the option to bring an action in federal court, but they also have (and typically prefer) the option of proceeding via an administrative complaint. When the cards are dealt that way, the deck is stacked in favor of the agency. If the respondent does not fold and agree to some form of consent order but decides to litigate, the matter will go before an ALJ. ALJs are removable “only for good cause,” e.g., “neglect of duty” or “malfeasance,” as determined by a separate federal entity, the Merit Systems Protection Board (whose members likewise are removable only for good cause).

Hearings before ALJs typically allow only such discovery as the rules of the federal agency may permit. Like any other judge, the ALJ hears witnesses, makes credibility determinations, decides what evidence will be admitted, weighs the evidence, and reaches a decision. That decision, however, is only a recommendation.

Appeals by either the agency enforcement staff or the respondent (or both) go to the full commission—the same commission that authorized the investigation and the enforcement proceeding to begin with—and that commission then makes a decision based solely on the administrative record. Even if the ALJ found the evidence overwhelmingly favored one party, the commission is free (even though it had no opportunity to hear the evidence firsthand or assess the credibility of witnesses) to disregard the ALJ’s recommendation. It is only when the commission issues a decision that there is “final agency action” within the meaning of the Administrative Procedure Act (“APA”).^[4]

Then, and only then, may the respondent obtain judicial review, but it is not de novo review in a district court. Rather, the review is before a federal appeals court, is based on the administrative record, and is circumscribed by the deferential APA standards of judicial review (i.e., “substantial evidence” / “arbitrary” and “capricious”).^[5]

This enforcement paradigm is followed by many other federal agencies. For example, each of the three bank regulatory agencies—the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation—uses the same model.

Constitutional Backdrop

While the amount of relevant precedent is considerable, some decisions vital to an understanding of the Axon decision delineate the shift in the judiciary’s assessment of the administrative state:

• Humphrey’s Executor v. United States.^[6] This now oft-questioned 1935 SCOTUS precedent upheld for-cause limitations on the President’s ability to remove an FTC commissioner. At that time, the Court believed the FTC (then barely twenty years old) was not only nonpartisan but “neither political nor executive,” and exercised “predominantly quasi-judicial and quasi-legislative” powers.^[7] The Court thought it “essential that the commission should not be open to the suspicion of partisan direction.”^[8] 
• Thunder Basin Coal Co. v. Reich.^[9] This 1994 SCOTUS decision established a tripartite analysis to determine whether Congress intended to preclude a federal district court from exercising jurisdiction over challenges to federal agency action. The three factors are (1) whether preclusion of district court jurisdiction could foreclose all meaningful judicial review, (2) whether the challenge is wholly collateral to the statute’s review provisions, and (3) whether the claim is “outside the agency’s expertise.”^[10]
• Free Enterprise Fund v. Public Company Accounting Oversight Board.^[11] This 2010 SCOTUS decision invalidated certain limitations on the president’s removal power over executive branch officials. Significantly, in order to reach that question, the Court concluded that it had jurisdiction to review a challenge to the legitimacy of an ongoing SEC investigation, even though that investigation had not yet resulted in a final order.
• Seila Law, LLC v. Consumer Financial Protection Bureau.^[12] This 2020 SCOTUS decision gave Humphrey’s Executor a narrow construction and held that the Consumer Financial Protection Bureau (“CFPB”) was unconstitutionally structured, because the combination of a single agency director and termination only for “inefficiency, neglect of duty, or malfeasance” ^[13] (the same standard at issue in Humphrey’s Executor) violated Article II of the U.S. Constitution. Thus, the President can remove the head of the CFPB without cause.
• Jarkesy v. Securities & Exchange Commission.^[14] This 2022 Fifth Circuit decision held that an enforcement proceeding by the SEC seeking civil money penalties was unconstitutional because (1) seeking such penalties is sufficiently similar to common law fraud actions and sufficiently involves private rights (as opposed to public rights) that the targets of such actions are entitled to trial by jury, (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide an “intelligible principle” to guide the SEC’s determinations whether to file cases as federal court actions or internal administrative proceedings, and (3) the statutory restrictions on removing SEC ALJs from office violate Article II.^[15] 

The Road to Axon

Two cases were consolidated in the recent Axon opinion: Cochran v. Securities & Exchange Commission^[16] and Axon Enterprise, Inc. v. FTC.^[17]

Cochran v. Securities & Exchange Commission

Michelle Cochran, a CPA, was suspended from practicing before the SEC for five years based on an alleged failure to comply with auditing standards established by the Public Company Accounting Oversight Board. After losing at an administrative hearing, Cochran decided to fight on, but then the Lucia decision intervened, and so the SEC went back to square one with newly (and, this time, constitutionally) appointed ALJs. Cochran, however, filed an action in federal district court contending that even if a substitute ALJ were constitutionally appointed, the ALJ would still be unconstitutionally insulated from the president’s removal power because of multiple layers of for-cause protections against removal from office.

The district court dismissed her case for lack of subject-matter jurisdiction on the ground that the relevant statute implicitly stripped district courts of jurisdiction to hear challenges to ongoing SEC enforcement proceedings by providing for review of final SEC orders in a circuit court of appeals.^[18] On appeal, a divided Fifth Circuit panel affirmed the dismissal,^[19] but then the Fifth Circuit, sitting en banc, reversed, holding that Cochran’s constitutional challenge was cognizable by, and within the jurisdiction of, the district court because the claim was “wholly collateral” to the SEC’s administrative proceeding.^[20]

Axon Enterprise, Inc. v. Federal Trade Commission

When Axon, a manufacturer of body cameras and other equipment for law enforcement, sought to purchase a failing competitor, the FTC commenced an antitrust investigation. The agency subsequently filed an administrative complaint against Axon’s consummated acquisition of the competitor^[21] and asserted that the acquisition violated section 7 of the Clayton Act.^[22] The FTC demanded that Axon spin off the acquired company and share its own intellectual property.

Seeking to enjoin the FTC’s administrative proceeding, Axon sued in federal court alleging, inter alia, that the combination of investigative, prosecutorial, adjudicative, and appellate functions within a single agency violates due process, and, similar to what Cochran argued against the SEC, the dual layer of protection given to the FTC’s ALJs insulated them from presidential removal power in violation of the Appointments Clause. The FTC argued that the district court lacked jurisdiction because Axon had to bring its claims in the administrative proceeding and, if it did not prevail, only then seek judicial review in the court of appeals. The district court agreed and dismissed the complaint.^[23]

On appeal, a divided panel of the Ninth Circuit affirmed. The majority concluded that Axon would have meaningful judicial review of its constitutional claims because the Supreme Court held in Thunder Basin that such claims “‘can be meaningfully addressed in the Court of Appeals,’ even though the petitioner there similarly had argued that the agency process itself would violate its constitutional rights.”^[24]

The Axon Enterprise Decision

Authored by Justice Kagan, the Court’s opinion concluded that neither the statutory provision governing FTC enforcement proceedings nor the statutory provision governing SEC enforcement proceedings divests federal district courts of jurisdiction to hear collateral constitutional challenges to administrative proceedings. Reviewing the three Thunder Basin questions, the Court answered each in the affirmative. On the first factor of “meaningful judicial review,” the Court reasoned that precluding district court jurisdiction of these constitutional challenges would effectively foreclose meaningful judicial review of these sorts of claims. The analysis was straightforward: “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.”^[25] The Court emphasized the “here-and-now injury” that Cochran and Axon suffered by being subject to proceedings they believed to be unconstitutional.^[26] A similar result was reached on the second factor, as the constitutional challenges are collateral to the proceedings “because they are challenging the Commissions’ power to proceed at all, rather than actions taken in the agency proceedings.”^[27] Finally, observing that issues of constitutionality fall outside the expertise of both the FTC and the SEC, the Court concluded that those sorts of claims are not “of the type” that the FTC’s and SEC’s statutory schemes address and, accordingly, are properly reviewable by the district court.^[28]

Justice Thomas authored a concurring opinion in which he expressed doubt that Congress may vest administrative agencies with primary authority to adjudicate “core private rights” to life, liberty, and property.^[29] Congress might be violating separation of powers by compelling the judicial branch to defer to the executive branch on matters that the Constitution vests in the judiciary. Similarly, because agencies are not courts of competent jurisdiction, Congress might be violating due process by empowering federal agencies to deprive citizens of core private rights. Finally, Thomas noted that “the appellate review model” might violate the Seventh Amendment because agencies adjudicate “what may be core private rights without a jury.”^[30]

Justice Gorsuch concurred only in the judgment. He wrote separately to express dissatisfaction with the Thunder Basin balancing test, which he regards as an incoherent “judge-made” device.^[31] In his view, the Court need only review the relevant statutory text to assess whether (A) Congress “has actually carved out some exception” to jurisdiction, and (B) the general federal question jurisdiction statute, 28 U.S.C. § 1331, grants district courts the ability to hear the claims at issue.^[32]

Conclusion

Axon goes hand in glove with increasing disillusionment at the results of uncritical Chevron deference and with last year’s invocation, in West Virginia v. Environmental Protection Agency,^[33] of the “major questions” doctrine to curb the authority of federal agencies to act on “decisions of vast economic and political significance” absent clear congressional authorization.^[34] At a minimum, the Axon Enterprise decision will create hurdles for agency enforcement actions. Beyond that, the case can be seen as part of a larger trend toward increased skepticism by the Court of overbroad powers—and potential abuses of those powers—by federal administrative agencies.

1. 138 S. Ct. 2044 (2018). ↑

2. U.S. Const. art. II, § 2, cl. 2. ↑

3. No. 21-86, slip op. (U.S. Apr. 14, 2023). ↑

4. 5 U.S.C. § 551 et seq. ↑

5. 5 U.S.C. § 706. ↑

6. 295 U.S. 602 (1935). ↑

7. Id. at 624 (emphasis added). ↑

8. Id. at 625. ↑

9. 510 U.S. 200 (1994). ↑

10. Id. at 212–13. ↑

11. 561 U.S. 477 (2010). ↑

12. 140 S. Ct. 2183 (2020). ↑

13. Id. at 2193 (citing 12 U.S.C. § 5491(c)(1), (3)). ↑

14. 34 F.4th 446 (5th Cir.), reh’g denied, 51 F.4^th 644 (5^th Cir. 2022). ↑

15. Jarkesy, 34 F.4^th at 462–67. ↑

16. 20 F.4^th 194 (5th Cir. 2021). ↑

17. 986 F.3d 1173 (9^th Cir. 2021) ↑

18. 15 U.S.C. § 78y. ↑

19. Cochran, 969 F.3d 507 (5th Cir. 2020), rev’d, 20 F.4^th 194 (5^th Cir. 2021) (en banc). ↑

20. 20 F.4^th 194 (5th Cir. 2021) (en banc). ↑

21. In re Axon Enter. & Safariland LLC, FTC File No. 1810162 (last updated June 27, 2022). ↑

22. 15 U.S.C. § 18. ↑

23. Axon Enter. Inc. v. Fed. Trade Comm’n, 452 F. Supp.3d 882 (D. Ariz. 2020), rev’d, 986 F.3d 1173 (9^th Cir. 2021). ↑

24. 986 F.3d 1173 (9th Cir. 2021). ↑

25. No. 21-86, slip op. at 13 (U.S. Apr. 14, 2023). ↑

26. Id. ↑

27. Id. at 14. ↑

28. Id. at 16–17. ↑

29. Id. (Thomas, J., concurring) (slip op. at 1). ↑

30. Id. (Thomas, J., concurring) (slip op. at 8). ↑

31. Id. (Gorsuch, J., concurring in judgment) (slip op. at 2). ↑

32. Id. (Gorsuch, J., concurring in judgment) (slip op. at 6) (emphasis in original). ↑

33. 142 S. Ct. 2587 (2022). ↑

34. The “major questions” doctrine is a label applied to jurisprudence over the years where the Court has curtailed exercises of power by administrative agencies “beyond what Congress could reasonably be understood to have granted.” Id. at 2609 (citing King v. Burwell, 576 U.S. 473, 486 (2015); Utility Air Reg. Group v. EPA, 573 U.S. 302, 324 (2014); Gonzales v. Oregon, 546 U.S. 243 (2006); FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 159 (2000)). ↑