SCOTUS Deals Another Blow to FTC and SEC Administrative Enforcement
April 18, 2023
Last week, the Supreme Court opened the door to direct constitutional challenges to the Federal Trade Commission’s (“FTC”) and Securities and Exchange Commission’s (“SEC”) administrative enforcement regimes. In Axon Enterprise, Inc. v. Federal Trade Commission, the Court unanimously held that respondents in FTC and SEC administrative proceedings can challenge in federal district court the constitutionality of the agencies’ structure or enforcement apparatus, without having to first do so within the administrative proceedings themselves. These constitutional claims are now likely to increase in frequency, challenging and potentially slowing down administrative proceedings that are ostensibly meant to provide for efficient adjudication of these agencies’ enforcement actions. This development may drive the agencies to increasingly favor bringing enforcement actions in federal district court.
The Federal Trade Commission Act and federal securities laws authorize the FTC and SEC, respectively, to bring civil enforcement actions in federal district court or in each Commission’s in-house administrative courts. In administrative enforcement actions, the Commissions typically delegate initial adjudication to an Administrative Law Judge whose decision may be appealed to the Commission itself. Litigants can then challenge the Commission’s final order in a federal court of appeals, but that appellate review is deferential to the Commission.
Constitutional Challenges to the FTC and SEC in District Court
On April 14, 2023, in Axon Enterprise, Inc. v. FTC (consolidated with SEC v. Cochran), the Supreme Court unanimously held that the statutes governing the agencies’ administrative proceedings do not preclude a federal district court from exercising jurisdiction over constitutional challenges to an agency’s structure or existence or to the legality of the administrative enforcement action.
In these consolidated cases, the FTC and the SEC brought administrative enforcement proceedings against Axon (a company that makes police equipment) and Cochran (an individual accountant), respectively. In response, Axon and Cochran each sued in federal district court, claiming that the administrative enforcement proceedings were unconstitutional because the Commissions’ structures violated constitutional separation-of-powers principles. The district courts dismissed both suits for lack of jurisdiction, holding that the review schemes provided by the FTC Act and the Securities Exchange Act of 1934 precluded Axon and Cochran from directly bringing their constitutional claims in federal court. Rather, the courts held, Axon and Cochran were required to assert their constitutional arguments in the administrative proceedings, with subsequent review by a federal circuit court.
On appeal, the courts of appeals split: the en banc Fifth Circuit held that Cochran could bring her constitutional claims against the SEC in district court, while the Ninth Circuit affirmed the dismissal of Axon’s claims against the FTC. The Supreme Court granted certiorari in both cases.
The Thunder Basin Factors
The Supreme Court affirmed the Fifth Circuit and reversed the Ninth Circuit, holding that the FTC’s and SEC’s statutory review processes did not foreclose district court jurisdiction over Axon’s and Cochran’s “far-reaching” constitutional claims. In reaching this outcome, the Court evaluated the three factors articulated in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994), for determining whether certain claims are intended to be adjudicated in an administrative enforcement regime: (1) whether precluding district court jurisdiction could “foreclose all meaningful judicial review” of the claim; (2) whether the claim is “wholly collateral” to the relevant statute’s review provisions; and (3) whether the claim is “outside the agency’s expertise.”
- First Factor: The Court emphasized that Axon and Cochran asserted cognizable legal injury from simply “being subjected” to proceedings run by an “unconstitutional agency authority.” Because that injury “is impossible to remedy once the proceeding is over,” post-proceeding appellate review “would come too late to be meaningful.”
- Second Factor: The Court explained that Axon’s and Cochran’s separation-of-powers claims “d[id] not relate to the subject of the [underlying] enforcement actions.”
- Third Factor: The Court noted that “structural constitutional challenges” are “outside the [Commissions’] expertise.”
In light of these factors, the Court held that Axon’s and Cochran’s constitutional claims were not “of the type” contemplated by the FTC Act or the Exchange Act review schemes, and therefore, a district court could hear them in the first instance.
Potential Ramifications for the FTC and SEC
The Supreme Court’s decision is just the latest in a series of recent cases examining administrative agencies’ enforcement authority. In the last few years alone, the Court has limited the agencies’ ability to collect monetary relief, holding that the FTC Act does not authorize the FTC to seek restitution or disgorgement at all (AMG Capital Management, LLC v. FTC, 141 S. Ct. 1341 (2021)); and that although the SEC has the ability to collect disgorgement, it is limited to a wrongdoer’s net profits (Liu v. SEC, 140 S. Ct. 1936 (2020)). In Lucia v. SEC, 138 S. Ct. 2044 (2018), the Court held that the SEC’s Administrative Law Judges are subject to the Constitution’s Appointments Clause and therefore had not been properly appointed—a ruling that required the SEC to reconduct administrative proceedings before properly appointed ALJs.
This month’s case is almost certainly not the end of the Court’s examination of these agencies’ administrative proceedings. Some of the very constitutional questions Axon and Cochran sought to assert—such as whether the removal restrictions on FTC and SEC ALJs are unconstitutional—are implicated in Jarkesy v. SEC, a case in which the Fifth Circuit recently held that the SEC’s administrative enforcement proceedings are unconstitutional on several grounds. 34 F.4th 446 (5th Cir. 2022). The SEC has filed a petition for certiorari in Jarkesy.
Even before the Court weighs in on these constitutional questions, subjects of pending or forthcoming FTC and SEC administrative proceedings can immediately raise constitutional challenges to them in district court. Some litigants may seek preliminary injunctions to halt the administrative proceedings while the constitutional challenges are addressed.
These contemporaneous challenges will hamper the speed of—and potentially curtail the viability of using—administrative proceedings, which means the FTC and SEC (and other similarly structured agencies) may be more inclined to file contested enforcement actions in district courts, where available. The SEC seemingly has already started to shift more of its litigated enforcement actions into district courts following Jarkesy.
If the Supreme Court holds in Jarkesy or another future case that some aspect of the SEC’s and FTC’s administrative litigation structures are unconstitutional, the agencies will be forced to pursue more enforcement actions in district court—a forum that generally provides defendants with a broader array of discovery tools and motions and a fact finder that is independent of the agencies, and that, therefore, takes longer, and is less friendly to the agencies.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Jorge deNeve, an O'Melveny partner licensed to practice law in California, Andrew J. Geist, an O'Melveny partner licensed to practice law in New York, Mia N. Gonzalez, an O'Melveny partner licensed to practice law in New York, Peter Herrick, an O'Melveny partner licensed to practice law in New York, Stephen McIntyre, an O'Melveny partner licensed to practice law in California, Bill Martin, an O'Melveny counsel licensed to practice law in New York, Jamie Quinn, an O'Melveny counsel licensed to practice law in California, and Arjun Shenoy, an O'Melveny associate licensed to practice law in the District of Columbia and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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