Supreme Court Holds That Structural Challenges To Agency Administrative Proceedings May Be Brought Directly In Federal Court
On April 14, 2023, the United States Supreme Court issued a unanimous decision in the consolidated cases of Axon Enterprises Inc. v. FTC and SEC v. Cochran, finding that constitutional challenges to the ability of the Federal Trade Commission (“FTC”) and the U.S. Securities and Exchange Commission (“SEC”) to bring certain claims as administrative proceedings can bypass the administrative appeals process and be brought directly in federal court. The Court concluded that the authorizing statutes of the regulatory agencies do not implicitly restrict federal district courts of original jurisdiction to hear any challenges to an agency’s constitutionality. Thus, although the Court did not decide the substance of the petitioners’ constitutional challenges to the agencies’ administrative proceeding processes, it allowed petitioners’ challenges to move forward in federal court.
In Axon Enterprises Inc. v. FTC, after the FTC initiated administrative proceedings against Axon Enterprises for alleged unfair competition, Axon brought a claim in federal district court contending that the FTC’s use of administrative proceedings was, as a matter of structure and process, unconstitutional. Specifically, Axon alleged that the Commission’s administrative law judges (“ALJs”) could not constitutionally exercise governmental authority because of their dual-layer protection from removal and that the combination of prosecutorial and adjudicative functions in the Commission renders all of its enforcement actions unconstitutional. The Ninth Circuit upheld the lower court’s dismissal of the case, stating that the FTC Act “impliedly barred jurisdiction in district court,” meaning that Axon needed to first respond to the administrative proceedings through a resolution before it could appeal to federal court. Similarly, in SEC v. Cochran, the petitioner brought a direct challenge to the SEC’s administrative review scheme, stating that the agency’s ALJs “dual-layered protection from removal…taints their existence and vitiates their authority to act at all.” The petitioner argued that the Securities Exchange Act of 1934 does not prohibit respondents in SEC administrative proceedings from seeking any pre-exhaustion relief on structural constitutional claims in a federal district court; rather, the petitioner contended, it grants federal courts of appeals the jurisdiction and authority to review challenges from final SEC orders, while not taking away any other jurisdiction. In tension with the Ninth Circuit decision regarding challenges to FTC administrative proceedings, the Fifth Circuit agreed that constitutional challenges to SEC administrative proceedings could proceed directly in district court.
According to the Supreme Court, the statutory review schemes of the Federal Trade Commission Act and the Securities Exchange Act of 1934 do not prohibit a district court “from entertaining these extraordinary claims.” The Court did not rule that any challenges to a given enforcement action could necessarily proceed directly but concluded unanimously that because of the nature of these claims—constitutional challenges to the very structure of agency processes—such claims may be brought directly in the district court, without waiting for the administrative appeals process. While both the Federal Trade Commission Act and the Securities Exchange Act of 1934 each contemplate a specific review scheme that would allow for appeals to be brought following the completion of administrative processes, the Court held that such claims are not the type of claims contemplated by Congress in the review schemes. As the Court stated in Carr v. Saul, where it allowed challenges to Social Security administrative law judges to be brought in district court, as “agency adjudications are generally ill suited to address structural constitutional challenges.”