On April 14, 2023, the Supreme Court issued a unanimous decision in two related cases, Axon Enterprise, Inc. v. FTC (No. 21-86) and SEC v. Cochran (No. 21-1239), holding that respondents may challenge the constitutionality of the agency’s authority in federal court before receiving a final agency order.

The plaintiffs in the two cases, Axon Enterprise, Inc., and Michelle Cochran, initiated suits in federal district court challenging the constitutional authority of the Federal Trade Commission (FTC) and Securities and Exchange Commission (SEC), respectively, to bring enforcement actions against them. In response, the agencies argued that the parties could not sue in federal court before first receiving a final agency order because their authorizing statutes “implicitly divest[] district courts of jurisdiction.”^[1]

The Supreme Court rejected the agencies’ arguments, holding that the rights of Axon and Cochran not to undergo unauthorized legal proceedings would be “effectively lost” if review of their constitutional challenges were deferred until after they received final agency orders. Both Axon Enterprise and Cochran were remanded for further proceedings.

Case Histories

The two cases were decided after a split in the Fifth and Ninth Circuits.

In SEC v. Cochran, Michelle Cochran, a certified public accountant, sued the SEC after it brought an administrative enforcement action against her under the Securities Exchange Act for allegedly failing to meet PCAOB auditing standards. Cochran claimed that the SEC lacked authority to adjudicate the enforcement action because the administrative law judges (ALJs) were protected from removal by the U.S. president. The district court dismissed Cochran’s case for lack of jurisdiction, but on appeal the en banc Fifth Circuit held that the district court could hear Cochran’s claims.^[2]

The Axon Enterprise case arose after the FTC brought an enforcement action against Axon alleging that its purchase of its competitor was an unfair method of competition. In turn, Axon sued the FTC in federal district court, arguing that the FTC lacked authority to bring suit. Like Cochran, Axon claimed that the ALJs were unconstitutionally protected from presidential removal. Axon also alleged that the FTC lacked authority to bring any enforcement action because it unconstitutionally takes the role of both prosecutor and adjudicator. As in Cochran, the district court dismissed the case on jurisdictional grounds. On appeal, the Ninth Circuit affirmed that dismissal.

The Supreme Court granted certiorari in both cases to resolve the circuit split.

SCOTUS Rationale

While the FTC and Exchange acts divest district courts of their federal question jurisdiction over certain agency actions, not every type of case is covered. In evaluating whether Congress intended that Axon’s and Cochran’s constitutional challenges fell within those statutory schemes, the Supreme Court considered the three factors outlined in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994): “First, could precluding district court jurisdiction foreclose all meaningful judicial review of the claim? Next, is the claim wholly collateral to the statute’s review provisions? And last, is the claim outside the agency’s expertise?”^[3]

The Court, in an opinion by Justice Elena Kagan, answered “yes” to all three questions. The Court reasoned that precluding judicial review of the constitutional claims would prevent Axon and Cochran from relief because their alleged injury was being subjected to illegitimate proceedings. Thus, appellate court review of the constitutional challenge would “come too late to be meaningful.”^[4]

The Court also held that the constitutional claims were collateral to the statute’s review provisions because they had “nothing to do with the enforcement-related matters” being adjudicated by the agencies.^[5] Finally, the Court held that the constitutional challenges fell outside the agencies’ expertise because they raised “standard questions of administrative and constitutional law, detached from considerations of agency policy.”^[6]

Because all three Thunder Basin factors favored Axon and Cochran, the Court held that they were entitled to review of their constitutional claims in district court. The Court did not address the constitutional claims on their merits and remanded them to the district courts.

Concurrences

Justices Clarence Thomas and Neil Gorsuch wrote separate opinions in the case. Thomas joined in the Court’s opinion, but concurred to emphasize the need for full Article III adjudication — rather than deferential appellate review — when private rights are at stake, and challenged the constitutionality of the “appellate review model” that has become prevalent since the passage of the FTC and Exchange acts in the context of “core private rights.”^[7] He wrote that because Axon and Cochran “face the threat of significant monetary fines,” the actions against them “likely must be adjudicated by Article III courts and judiciaries.”^[8]

Gorsuch, also concurring in the judgment, focused on the “sheer incoherence” of the Thunder Basin precedent.[9] Gorsuch argued that “Congress, and not the judiciary, defines the scope of federal jurisdiction”^[10] and took issue with the prospect that a Thunder Basin analysis could allow courts to “refuse individuals their right to a judicial forum based on nothing more than suppositions about implicit congressional intentions.”^[11]

Takeaways

The Court’s decision reflects its skepticism toward the expansion of administrative power. The case opens up to individuals who are subject to administrative enforcement actions new avenues to challenge government agencies in federal district court without first having to incur significant time and expense in exhausting administrative proceedings. While the decision only addressed whether the FTC and Exchange acts divested federal question jurisdiction regarding constitutional questions to the FTC and SEC, respectively, the Court’s reasoning would likely apply to other administrative agencies.

Although the Court did not address the merits of the underlying constitutional challenges, such underlying challenges could make their way to the Supreme Court in the near future. In Jarkesy v. SEC, a divided Fifth Circuit panel held that an SEC administrative proceeding alleging fraud unconstitutionally deprived respondents of their Seventh Amendment right to a jury trial.^[12] The Fifth Circuit also held that Congress had improperly delegated legislative power to the SEC by giving the agency unconstrained authority to choose in particular cases to seek civil remedies by initiating administrative proceedings rather than suing in district court. Finally, the court held the statutory restrictions on removal of SEC ALJs are unconstitutional. The SEC’s petition for certiorari, filed in March of this year, is currently pending.

[1] Decision at 5.

[2] Our client alert reporting on the Fifth Circuit’s en banc opinion can be found here. Prior to the Fifth Circuit’s en banc opinion, the Second, Fourth, Seventh, Eleventh and D.C. Circuits had all dismissed constitutional claims related to SEC enforcement due to lack of jurisdiction. Bennett v. SEC, 844 F.3d 174 (4th Cir. 2016); Hill v. SEC, 825 F.3d 1236 (11th Cir. 2016); Tilton v. SEC, 824 F.3d 276 (2d Cir. 2016); Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. 2015); Bebo v. SEC, 799 F.3d 765 (7th Cir. 2015). However, the Southern District of New York had denied a motion to dismiss an equal protection challenge to an SEC administrative proceeding. Gupta v. SEC, 96 F. Supp. 2d 503 (S.D.N.Y. 2011). The plaintiff in that case, Rajat Gupta, was represented by Kramer Levin Naftalis & Frankel, LLP.

[3] Decision at 8 (internal quotation marks and alterations omitted).

[4] Decision at 13.

[5] Decision at 15.

[6] Decision at 16.

[7] (Thomas, J., concurring, at 8-9).

[8] (Thomas, J., concurring, at 9).

[9] (Gorsuch, J., concurring in the judgment, at 2-3).

[10] (Gorsuch, J., concurring in the judgment, at 4, quoting New Orleans Public Service, Inc. v. Council of City of New Orleans, 491 U.S. 350, 359 (1989)).

[11] (Gorsuch, J., concurring in the judgment, at 5 (internal quotation marks and citation omitted)).

[12] See Kramer Levin Naftalis & Frankel, LLP’s in-depth analysis of the Fifth Circuit’s Jarkesy decision here.

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