Supreme Court opens door to challenging FTC and SEC in district court

The Supreme Court on Friday, April 14, opened a new path for challenges to administrative proceedings before the Federal Trade Commission (FTC) or the Securities and Exchange Commission (SEC). The Supreme Court’s decision has potential broad implications.

Background

Parties facing administrative regulatory proceedings have in the past sought to challenge the propriety of such proceedings based on claimed constitutional defects in the structure of the relevant agency’s administrative process.  For many years, federal district courts have taken the position that they did not have the jurisdiction to hear such challenges and that the parties must pursue those claims in the same administrative process that the party was challenging.

In 2021, the U.S. Court of Appeals for the Ninth Circuit decided that a challenge to the constitutionality of the FTC’s administrative enforcement process asserted by Axon Enterprise, Inc. (Axon) must first be heard in the FTC’s administrative court; the district court did not have jurisdiction to hear the challenge.  In contrast and, also in 2021, the U.S. Court of Appeals for the Fifth Circuit, en banc, ruled that Michelle Cochran (Cochran) could assert her constitutional challenges to the SEC’s administrative enforcement process in district court before the SEC’s administrative proceeding began.

Axon and the SEC each sought Supreme Court review and the Court granted both certiorari petitions, consolidating the cases for consideration.

The decision

In Axon Enterprise Inc. v. Fed. Trade Comm’n, the Court unanimously held that Axon and Cochran – respondents in the separate enforcement actions initiated by the FTC and SEC  – could bring claims in district court seeking to enjoin the proceedings against them on constitutional grounds and were not required to bring their challenges through the agencies’ “in-house” administrative process.

The central issue before the Court was jurisdictional.  Under Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 207–13 (1994), statutory review schemes, such as those created by the Securities Exchange Act of 1934 and the Federal Trade Commission Act, do not necessarily divest district courts of their jurisdiction over every claim concerning agency action.  Rather, to determine whether district courts have jurisdiction, the Court asks three questions, commonly known as the “Thunder Basin factors”: (1) “could precluding district court jurisdiction foreclose all meaningful judicial review of the claim?’”; (2) “is the claim wholly collateral to the statute’s review provisions?”; and (3) “is the claim outside of the agency’s expertise?”

Applying Thunder Basin, the Axon Court held that Axon and Cochran’s structural constitutional challenges to the SEC’s and FTC’s authority are within the jurisdiction of the district courts.

First, Axon and Cochran asserted that forcing them before an “insufficiently accountable” administrative law judge of the FTC or SEC would subject them to “an illegitimate proceeding, led by an illegitimate decisionmaker.” The Supreme Court confirmed that, while that alleged harm “may sound a bit abstract,” it is a “here-and-now injury” that cannot be remedied after the fact – therefore, preclusion of district court jurisdiction “could foreclose all meaningful judicial review.”

Second, the Court found that these constitutional challenges are collateral to the enforcement-related matters the Commissions regularly adjudicate and to those they would adjudicate in assessing the charges against Axon and Cochran.

Third, the Court held that Cochran and Axon’s constitutional challenges are outside the Commissions’ “competence and expertise.”

What’s next

The potential implications of this decision are significant.  Axon, Cochran and other agency respondents are now free to directly challenge the constitutionality of FTC and SEC adjudicative procedures, and even the constitutionality of the agencies themselves.  Indeed, in a concurring opinion, Justice Clarence Thomas expressed “grave doubts about the constitutional propriety of Congress vesting administrative agencies with primary authority to adjudicate core private rights with only deferential judicial review on the back end” and encouraged future consideration of that issue “[i]n an appropriate case.”

Such a case may be just around the corner: The government’s petition for certiorari is pending in SEC v. Jarkesy, discussed here.  In that case, the Fifth Circuit held that the SEC’s administrative process is unconstitutional on three grounds:  deprivation of the constitutional right to a jury trial; unconstitutional delegation of legislative power to the SEC by Congress in allowing the SEC the unlimited discretion to decide whether to sue in federal courts or administratively; and unconstitutional removal provisions for SEC administrative law judges.

Federal agencies with enforcement authority may also face structural constitutional challenges on other grounds. For example, the Supreme Court recently granted certiorari in CFPB v. Community Financial Services Association, a case challenging the constitutionality of the funding mechanism of the Consumer Financial Protection Bureau based on principles of separation of powers.

Until such legal questions are resolved, it is likely that respondents in agency proceedings (whether brought by the SEC, FTC, or other agencies) will consider and may initiate constitutional challenges in district courts.  What appears to be the first such case, Gibson v. SEC et al., was filed in the U.S. District Court for the Northern District of Georgia on April 18, alleging that the SEC’s administrative process is unconstitutional and seeking to enjoin an ongoing SEC administrative proceeding.  And, so long as these issues are pending, affected agencies are likely to commence new actions directly in federal court, rather than proceeding administratively.

Find out more about these significant developments by contacting any of the authors.