US Supreme Court Ruling Allows for Constitutional Challenges to Agency Proceedings to be Brought in Federal Court

6.09.2023

CeCo EE.UU

The Supreme Court issued a decision resolving the procedural question of whether a litigant can bring a constitutional claim against an agency without first going through the agency’s own administrative process. The Court answered in the affirmative, finding that federal district court had federal-question jurisdiction over those claims.

Background

On April 14, 2023, the Supreme Court decided the consolidated cases of Axon v. FTC and SEC v. Cochran (598 U.S. _, 2023). In both cases, the respondents argued that the Administrative Law Judge (ALJ) dual layer protection from removal was unconstitutional, and brought suit in federal district court, asserting federal-question jurisdiction.

Both the Securities and Exchange Commission (SEC) and the Federal Trade Commission’s (FTC) organic statutes provide for review in a court of appeals following the agency’s own administrative proceedings (p. 7; see also 15 U.S.C. § 78y; 15 U.S.C. § 45). ALJs who adjudicate the agency’s proceedings are subject to a “dual layer protection from removal”: ALJs are removable only for good cause by the Merit Systems Protection Board (MSPB) and members of the MSPB are only removable for good cause by the President (Axon, 598 U.S. _, p. 2; see also 5 U.S.C. § 7521(a), § 1202(d)).

In the administrative proceedings underlying SEC v. Cochran, an ALJ found that Michelle Cochran, a certified public accountant, violated the Securities Exchange Act by failing to comply with auditing standards (Axon, 598 U.S. _, p. 4). However, shortly after that decision was issued, the SEC ordered a fresh hearing with a new and validly appointed ALJ to comply with the Court’s decision in Lucia v. SEC (p. 4; see also Lucia v. SEC, 585 U.S. ___2018, finding that SEC ALJs must be appointed through the President). Before the second hearing began, Cochran filed suit against the SEC in federal district court arguing that the “two layers of tenure protection all ALJs hold” violated the Constitution (Axon, 598 U.S. _p. 4; Cochran argued that ALJ tenure protection was unconstitutional because the arrangement violated the separations of power principle).

In the second case, policing equipment company Axon Enterprise attempted to block the FTC’s proceedings by bringing suit against the FTC in federal district court. The FTC issued an administrative complaint challenging Axon’s acquisition of a competitor, alleging that the acquisition constituted an unfair method of competition. Axon filed suit against the FTC in federal district court alleging that the ALJ’s dual layer protection from removal was unconstitutional and further arguing that the Commission’s combination of prosecutorial and adjudicative functions renders its enforcement actions unconstitutional (Axon, 598 U.S. _p. 5).

In both cases, the district courts dismissed the actions for lack of jurisdiction (pp. 5-6). On appeal, the Ninth Circuit affirmed the district court’s decision in finding that Axon would have to raise its constitutional claims during the administrative process before seeking review in the Court of Appeals (pp. 6). However, the Fifth Circuit, sitting en banc, disagreed, finding instead that Cochran’s claim that the ALJ’s dual layer protection from removal was unconstitutional fell outside the Securities Exchange Act’s review scheme (Cochran v. SEC, 20 F.4th 194, 198, 5th Cir. 2021). The Supreme Court granted certiorari to resolve the circuit split.

Supreme Court Holding

In an opinion penned by Justice Kagan, the Court found that federal courts have jurisdiction to hear constitutional challenges to administrative proceedings prior to respondents exhausting the administrative review process (Axon, 598 U.S. _p. 2). Although the Court has issued several decisions finding that “[t]he agency effectively fills in for the district court, with the court of appeals providing judicial review…a statutory review scheme of that kind does not necessary extend to every claim concerning agency action” (p. 7).

The Court relied on the three factors enumerated in Thunder Basin Coal Co. v. Reich, and found that each factor weighed against limiting federal court jurisdiction (pp. 7-8). For the first factor, which asks whether precluding district court jurisdiction forecloses all meaningful judicial review, the Court answered in the affirmative (p. 13). The harm of being subjected to “unconstitutional agency authority” is “impossible to remedy” after the administrative proceedings conclude (p. 13). The result is that “judicial review of Axon’s (and Cochran’s) structural constitutional claims would come too late to be meaningful” (p. 13).

In regards to the second inquiry of whether the claim is wholly collateral to the statute’s review provisions, the Court found that the claims were in fact wholly collateral because Axon and Cochran’s claims each challenged the agencies’ “power to proceed at all, rather than actions taken in the agency proceedings” (p. 14)

Finally, the Court found that Axon’s and Cochran’s claims were outside each agency’s area of expertise (p. 16). The claim that ALJ tenure protections are unconstitutional falls within administrative and constitutional law and is “detached from considerations of agency policy” (p. 16). Similarly, Axon’s additional claim that the Commission’s combination of prosecutorial and adjudicative functions renders its enforcement actions unconstitutional also falls outside of the FTC’s area of expertise, as the FTC “knows a good deal about competition policy, but nothing special about the separation of powers” (pp. 16-17). Thus, the Court concluded that all three Thunder Basin factors weighed against limiting district court review of Axon’s and Cochran’s claims.

Concurrences

In his concurring opinion, Justice 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” (Thomas, J., concurring, p. 1 ). Justice Thomas found that “the rights at issue in these cases appear to be core private rights that must be adjudicated by Article III courts” rather than ALJs overseeing administrative proceedings (Thomas, J., concurring, p. 9).

Although Justice Gorsuch agreed with the outcome, rather than relying on the Thunder Basin factors, he would have found for the plaintiffs based on statute governing federal-question jurisdiction (Gorsuch, J., concurring, p. 1). In his concurrence, Justice Gorsuch criticized the “incoherence” of the Thunder Basin factors and pointed to the federal-question jurisdiction provision as the relevant statute to resolve the jurisdictional dispute (Gorsuch, J., concurring, p. 8).

Conclusion

The Court’s decision in Axon v. FTC opens the door to future constitutional challenges to the power of federal agencies. This decision has been framed as an attack on the power of administrative agencies by business interests (Barnes, 2023). Moving forward, this decision will likely bolster pre-enforcement challenges to agency enforcement proceedings.

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