District courts can hear constitutional challenges to FTC and SEC

The Supreme Court’s decision in Axon was limited to a procedural issue concerning the appropriate venue for parties to bring a challenge to agency proceedings.  The Court was tasked with determining whether analogous statutory review schemes set out in the Securities and Exchange Act (the Exchange Act)¹ and the Federal Trade Commission Act (FTC Act)² preclude a district court from having jurisdiction to hear challenges to the agencies’ constitutional authority.  The review schemes provided by these statutes require a party challenging an FTC or SEC proceeding to first bring their claims in an in-house agency proceeding before an Administrative Law Judge (ALJ).  Following the ALJ’s decision, the losing party may appeal to the Commission (or the Commission may undertake review at its discretion) and the Commission will then enter its final decision³.  Only after entry of the agency’s final judgment are parties able to challenge the decision in federal court before a United States Court of Appeals.   

In Axon, the Supreme Court addressed this procedural issue as it arose in two separate cases consolidated before the Court, each challenging the constitutionality of agency proceedings initiated by the FTC and SEC. In Axon v. FTC, Axon Enterprises—an Arizona company that makes police body cameras and other policing equipment—filed a lawsuit in federal court challenging an enforcement proceeding brought by the FTC alleging that the company’s acquisition of a competitor violated the FTC Act’s ban on unfair methods of competition.  Axon brought its federal court case on the day the FTC filed an administrative complaint seeking to unwind the transaction.  Axon alleged that the agency’s enforcement action violated its due process and equal protection rights, and “runs afoul of separation-of-powers principles.”  The district court dismissed Axon’s case for lack of jurisdiction.  The Ninth Circuit affirmed the dismissal, agreeing with the lower court that the FTC’s statutory scheme requires Axon to raise its constitutional challenge first in an FTC administrative proceeding.  In the parallel SEC case, Securities and Exchange Commission v. Cochran,  a certified public accountant facing an SEC ALJ hearing on allegations that she had failed to comply with auditing standards⁴ sued the SEC in federal court challenging the constitutional authority of ALJs to exercise power.  As in Axon, the district court dismissed Cochran’s case for lack of jurisdiction.  However, in contrast to the Ninth Circuit’s decision in Axon, an en banc Fifth Circuit held that the district court did have jurisdiction over Cochran’s structural constitutional claims.⁵

In its April 14, 2023 decision addressing the consolidated cases, the Supreme Court held that “the statutory review schemes set out in the Securities Exchange Act and the Federal Trade Commission Act do not displace a district court’s federal-question jurisdiction over claims challenging as unconstitutional the structure or existence of the SEC or FTC.”  The Court found that while the statutory review schemes in the Exchange Act and the FTC Act may preclude district courts from exercising jurisdiction over challenges to federal agency action, such schemes do “not necessarily extend to every claim concerning agency action.”  The Court determined that the “sweeping” and “extraordinary” claims brought by Axon and Cochran alleging that the agencies are “wielding authority unconstitutionally in all or broad swaths of their work” are the types of claims to which the statutory review schemes of the Enforcement Act and FTC Act do not extend.  Accordingly, the Court held that district court review of the claims in Axon and Cochran should be allowed.

Implications for the FTC, SEC and potentially other federal agencies

The Supreme Court did not address the merits of the constitutional claims brought by Axon and Cochran in their respective cases challenging FTC and SEC enforcement authority.  However, the decision will allow parties leveling similar challenges to the constitutionality of the basic structure and authority of administrative agencies to bring their cases directly before a federal district judge without first having to wait for the conclusion of a potentially protracted in-house administrative process.  By removing this procedural hurdle, parties that may have been disincentivized to bring such cases because of cost or time prohibitions may decide that it is worth it to move forward with these challenges in a more expedited federal court proceeding. 

With respect to the FTC, the court’s ruling will accelerate potential due process and equal protection challenges leveled at the agency’s merger review process.  One such potential challenge—raised by Axon in its case on the merits—targets the clearance process the FTC and Department of Justice (DOJ) use to determine which agency has jurisdiction over a particular merger, and alleges that the process is arbitrary, has no statutory basis, and violates the Due Process Clause.  Axon also alleged that the combined investigatory, prosecutorial, and adjudicative functions of the FTC violates due process. 

More broadly, the FTC and SEC may face challenges to their use of ALJs on the ground that the removal protections afforded to ALJs are unconstitutional.  Such a challenge was raised in both of the Axon and Cochran cases, and while the Supreme Court did not address the issue in its consolidated Axon opinion, it may have another bite at the apple if it accepts review of the Fifth Circuit’s May 2022 decision in SEC v. Jarkesy.  In Jarkesy, the Fifth Circuit vacated an SEC ALJ’s decision, agreeing with the petitioner that the removal protections of the SEC ALJ are unconstitutional.  The court also held that the in-house SEC adjudication process is unconstitutional because it violates the right to a jury trial, and is an unconstitutional delegation of legislative power to the SEC.  In March 2023 the SEC filed a petition for a writ of certiorari asking the Supreme Court to address these constitutional questions.  Should the court accept the case and rule against the agency, it could have significant ramifications for the enforcement authority of the SEC, and potentially the FTC and  other administrative agencies that utilize in-house tribunals to adjudicate agency proceedings. 

References 

1. 15 U.S.C. §78(d), 78-u-1, 78u-2, 78u-3.

2. 15 U.S.C. §45(b), (m) (FTC Act). 

3. If the ALJ’s ruling is not appealed, it will be entered as the final decision of the Commission.     

4. In a prior hearing an SEC ALJ found that Cochran violated the Exchange Act.  However, a new hearing was ordered in compliance with the Supreme Court’s decision in Lucia v. SEC, 138 S. Ct. 2044 (2018), which held that the SEC’s ALJs had been improperly appointed. 

5.  The Fifth Circuit held that Cochran’s claims would not receive “meaningful judicial review” in a court of appeals; that the claim was “wholly collateral to the Exchange Act’s statutory review scheme”; and that the claim fell “outside the SEC’s expertise.”