On April 14, 2023, the Supreme Court issued a consolidated opinion in Axon Enterprise, Inc. v. FTC and SEC v. Cochran.^[1] We previously covered the oral argument in these cases here. These cases address whether respondents in federal administrative proceedings have the ability to pose constitutional challenges to those proceedings in federal court prior to exhausting the administrative process. The Supreme Court, in an opinion by Justice Kagan, held that respondents may do so. The decision could have profound implications for the future of federal administrative proceedings.

Background

The Securities Exchange Act (“Exchange Act”) and FTC Act authorize the SEC and FTC, respectively, to address statutory violations within their purview either by bringing civil suits in federal district court or by instituting their own administrative proceedings.^[2] When they choose to proceed administratively, an initial adjudication is usually delegated to an administrative law judge (“ALJ”). ALJs are removable only “for good cause” as determined by the Merit Systems Protection Board (“MSPB”), which is a separate administrative agency whose members are themselves removable by the President only for good cause.^[3] Respondents may appeal from an ALJ to the Commissioners, who enter the final decision of the agency. The Exchange Act and FTC Act provide for review of final Commission decisions in a circuit court of appeals.

The respondents in both Axon and Cochran argued that the FTC’s and SEC’s ALJs are insufficiently accountable to the President, in violation of separation of powers principles.^[4] As the opinion notes, these challenges “are fundamental, even existential” to the agencies, asserting that “as currently structured,” the agencies “are unconstitutional in much of their work.”^[5] The Supreme Court was not presented with—nor did it decide—those constitutional issues. Instead, the opinion addresses when and “where [such challenges] may be heard.”^[6]

In Cochran and Axon, the respondents to administrative enforcement actions immediately brought suit in federal district court, seeking to enjoin the ALJ proceeding and arguing that “some fundamental aspect of the Commission’s structure violate[d] the Constitution; that the violation made the entire proceeding unlawful; and that being subjected to such an illegitimate proceeding causes legal injury (independent of any rulings the ALJ might make).”^[7] These collateral lawsuits were premised on ordinary federal-question jurisdiction under 28 U.S.C. 1331. The district courts in each underlying matter concluded that they lacked jurisdiction—that the Exchange Act’s and FTC Act’s review scheme displaced 28 U.S.C. 1331 jurisdiction for claims concerning the agency’s administrative adjudications.

The Court’s Ruling

The Supreme Court concluded that the statutory review schemes do “not necessarily extend to every claim concerning agency action.”^[8] In considering whether a district court may exercise jurisdiction in the first instance, the Court considered whether the particular claims at issue were “of the type Congress intended to be reviewed within this statutory structure.”^[9] The Thunder Basin factors, which the Court has held guide this inquiry, pose three questions: (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 the agency’s area of expertise? When the answer to all three is yes, the Court “presume[s] that Congress does not intend to limit [district court] jurisdiction.”^[10] Considering each of those factors, the Court concluded that Cochran’s and Axon’s constitutional claims could be brought in district court.^[11]

First, the Court noted that the harm at issue here is “being subjected to unconstitutional agency authority,” namely, “a proceeding by an unaccountable ALJ.”^[12] That is, it is the proceeding itself, rather than any adverse decision against the respondent, that constitutes the harm. As to that harm, ultimate review of agency decision-making in “the court of appeals can do nothing: A proceeding that has already happened cannot be undone.”^[13] Thus, “[j]udicial review of Axon’s (and Cochran’s) structural constitutional claims would come too late to be meaningful.”^[14]

Second, Cochran’s and Axon’s challenges are wholly collateral: “they are challenging the Commissions power to proceed at all, rather than actions taken in the agency proceedings.”^[15]

Third, Cochran’s and Axon’s claims lie beyond the Commissions’ expertise: claims “that tenure protections violate Article II . . . raise standard questions of administrative and constitutional law, detached from considerations of agency policy.”^[16]

Thus, all three factors favor allowing a respondent to proceed immediately in federal district court to raise structural, constitutional claims regarding the administrative adjudication process.

Concurrences

Justice Thomas issued a concurring opinion to “express 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.”^[17] Private rights are those which encompass “life, liberty, and property” and, in Justice Thomas’s view, require “full Article III adjudication.”^[18]

Justice Gorsuch concurred in the judgment on separate grounds. He would have dispensed with the Thunder Basinfactors and would instead have reached the same result under 28 U.S.C. 1331, the federal-question jurisdiction provision.^[19]

Implications

The Supreme Court’s opinion is likely to have far-reaching implications for administrative enforcement proceedings in the coming months and years. Independent agencies like the SEC and FTC may choose to bring enforcement actions directly in federal court, rather than before their own ALJs, for fear of collateral, constitutional proceedings being initiated in federal court. Federal court proceedings may advance on a longer timeline than ALJ proceedings, suggesting that certain enforcement priorities may be slowed. And where constitutional challenges are raised collaterally to administrative/ALJ proceedings, it remains to be seen whether federal district courts will enter preliminary orders staying the administrative proceedings while the constitutional questions play out in federal court. Finally, while the Justices did not reach the merits of the constitutional challenges to administrative authority here, several signaled openness to these types of constitutional claims in the past—including in the recent Luciaopinion.^[20] This arguably has the potential to implicate the constitutionality of the agencies themselves, or of some portion of their enforcement apparatus.

The decision in Axon/Cochran may not be the last word on this subject. The SEC recently filed a petition for certiorari in SEC v. Jarkesy, which raises questions as to whether the SEC’s ability to initiate and adjudicate administrative proceedings violates respondents’ rights under the Seventh Amendment; whether the statutory provisions that authorize the SEC to file district court actions violates the nondelegation doctrine (which says that congress cannot delegate such decisions); and whether Congress violated Article II of the Constitution by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protections.[21] The Fifth Circuit, in the decision below, concluded that the ALJ proceedings violated the respondent’s Seventh Amendment right to trial by jury; Congress unconstitutionally delegated its legislative authority to the SEC by leaving it to the SEC when it could commence an administrative hearing; and that ALJs were unconstitutionally insulated from removal by the President.[22] We previously reported on Jarkesy here.

We will continue to monitor the ramifications of this decision, including in the underlying Cochran and Axonmatters on remand, as well as any forthcoming developments in the Jarkesy matter.

^[1]Nos. 21-86 and 21-1239, 598 U.S. --- (2023) (“Axon Slip Op.”).

^[2] 15 U.S.C. 78u, 78u-1, 78u-2, 78u-3 (SEC); 15 U.S.C. 45 (FTC).

^[3]5 U.S.C. 7521(a), 1202(d).

^[4]Axon Slip Op. at 1.

^[5]Id.

^[6]Id. at 2.

^[7] Id.at 3.

^[8]Id. at 7.

^[9]Id.(quoting Thunder Basin, 510 U.S. 200, 208, 212 (1994)).

^[10]Id. at 8.

^[11]Id. at 11.

^[12]Id. at 13 (quotation marks omitted).

^[13]Id.

^[14]Id.

^[15]Id. at 14.

^[16]Id. at 16 (quotation marks omitted).

^[17]Id. at 19 (Thomas, J., concurring).

^[18]Id. at 21 (Thomas, J., concurring).

^[19]Id. at 29 (Gorsuch, J., concurring in the judgment).

^[20]See Lucia v. SEC, 138 S. Ct. 2044 (2018).

^[21]See SEC v. Jarkesy, No. 22-859 (S. Ct. 2023); see also Jarkesy v. SEC, 34 F.4th 446 (5th Cir. 2022) (opinion below).

^[22]See Jarkesy, 34 F.4th at 449-50.