Key Points

• The U.S. Supreme Court held that litigants can bring constitutional challenges in federal district court against the FTC and SEC without fully exhausting administrative proceedings.

• The litigants attacked the combination of prosecutorial and adjudicatory functions in a single agency, especially the process of review before an ALJ, claiming the agencies are currently unconstitutional in how they operate.

• The Court decided where and when litigants can bring these claims and appeared receptive to the claims of unconstitutionality, though the merits of those claims will need to be decided in another case, possibly soon.

No Need to Wait to Bring Federal Court Challenges

The U.S. Supreme Court has ruled in Axon Enterprise, Inc. v. FTC (consolidated with SEC v. Cochran) that, notwithstanding ongoing agency proceedings at the Federal Trade Commission (FTC) and the Securities Exchange Commission (SEC), federal district courts have jurisdiction to review structural constitutional claims against those agencies without having to first exhaust the administrative proceedings.¹ In a unanimous decision, Justice Elena Kagan explained that the Court was tasked only with deciding where those constitutional challenges should be heard and not with resolving the constitutional challenges themselves.  Those challenges included the lack of presidential supervision over administrative law judges (ALJs), as well as the more substantial issue of the FTC acting as prosecutor, judge, and jury in determining liability and remedies for violations of the FTC Act.  In their concurring opinions, two justices indicated that they are receptive toward these challenges and leaning firmly toward curtailing the authority of the FTC, SEC and other administrative agencies with internal administrative review processes, should they have the opportunity to adjudicate the merits of similar constitutional claims.

The Court’s Reasoning

The Court acknowledged that in both the FTC Act and the Exchange Act, Congress created a review scheme that precluded district courts from exercising jurisdiction over challenges to federal agency action, while allowing for court of appeal review following the agency’s own review process.  However, the Court also recognized that this process would apply only to claims that were “of the type Congress intended to be reviewed within this statutory structure.” Given that the claims in Axon were that the “structure, or even existence, of any agency violates the Constitution,” the Court concluded that such claims were not “of the type” that the statutory review schemes were intended to reach and they could not receive meaningful judicial review through the FTC Act or the Exchange Act. Accordingly, a district court could review them. 

One of the key constitutional issues was the agencies’ use of ALJs. Under both statutory review schemes, the ALJ has the authority to “resolve motions, hold a hearing, and then issue a decision.”  The ALJ’s decisions can be appealed to each Commission, sitting as an adjudicatory body, and then to a federal court of appeals.  Axon claimed that the combination of prosecutorial and adjudicative functions in the FTC made the agency’s enforcement actions unconstitutional.  This type of challenge had been brewing for some time as parties have often complained about the fairness of the internal agency process, especially in merger matters adjudicated by the FTC where lengthy agency review processes can upset the commercial aspects of a deal. The Court did not directly address this challenge this time, though both Justice Clarence Thomas and Justice Neil Gorsuch did question the use of administrative proceedings to adjudicate certain rights. 

Concurring Views

Justice Thomas stated in his concurring opinion that he has “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.” His analysis went further to conclude that the rights in question in the Axon and Cochran cases likely did require adjudication by Article III courts, and that “the administrative review schemes here raise serious constitutional issues.” Also, as if it were not clear enough, Justice Thomas added that “[i]n an appropriate case, we should consider whether such schemes and the appellate review model they embody are constitutional methods for the adjudication of private rights.” 

In a separate concurring opinion, Justice Gorsuch noted that “[a]gencies like the SEC and FTC combine the functions of investigator, prosecutor, and judge under one roof.  They employ relaxed rules of procedure and evidence—rules they make for themselves.”

The stage is seemingly now set for a careful vetting by the Court of the administrative review process with two members already signaling which way they are leaning.

Upcoming Developments

The Supreme Court may have that opportunity if it decides to review the Fifth Circuit’s decision in Jarkesy v. SEC. In that case, the Fifth Circuit agreed that the statutory removal protections on SEC ALJs were unconstitutional and vacated the ALJ’s decision.  In March 2023, the SEC filed a writ of certiorari that if accepted could result in the Supreme Court issuing a decision that significantly limits the SEC’s administrative authority, as well as other agencies like the FTC that have similar internal administrative review processes.

Jarkesy successfully requested an extension until May 10, 2023 to file a response in opposition to the SEC’s petition for a writ of certiorari.  Following submission of this response, the SEC may choose to reply again, after which the Court will consider all these materials in deciding whether to grant the petition.  Due to the annual summer slowdown in Court activity, however, it may be a couple more months before the decision is released.

Key Takeaways

At various times during public discussions, FTC Chair Lina Khan has stated that the FTC will continue to bring risky cases because the FTC is concerned more about the cost of not bringing such cases and not enforcing the antitrust laws.  For example, Chair Khan said in a 2022 interview with CNBC and the New York Times, “[e]ven if it’s not a slam dunk case, even if there is a risk you might lose . . . there can be enormous benefits from taking that risk. You might win, right, you lose all the shots you don’t take.  But I think what we can see is that inaction after inaction after inaction can have severe costs.”  The vulnerability exposed by the Axon decision may lead the FTC leadership to rethink that approach.  Similarly, we anticipate that the SEC will more carefully consider when to make use of its internal administrative review process.  However, either way, we anticipate that the Supreme Court will soon consider the question of the constitutionality of administrative review processes.