The Supreme Court heard arguments yesterday in Axon Enterprise v. Federal Trade Commission (No. 21-86), as to whether federal courts can hear a challenge to the FTC’s constitutionality by a party in an administrative proceeding before the agency has issued a final order. The Court also heard arguments in a similar case, Securities and Exchange Commission v. Cochran (No. 21-1239). The outcome of these cases may significantly alter the framework for how federal courts address complaints about federal agencies and allow parties subject to enforcement actions to initiate proceedings outside of agency jurisdiction.

Specifically, in the Axon case, the Court has been asked to address (1) Whether Congress impliedly stripped federal district courts of the jurisdiction over constitutional challenges to the FTC’s structure, procedures, and existence by granting the court of appeals jurisdiction to “affirm, enforce, modify, or set aside” the Commission’s cease-and-desist orders, and (2) Whether, on the merits, the structure of the FTC, including the dual-layer for-cause removal protections afforded its administrative law judges (“ALJs”), is consistent with the Constitution.

Federal district courts have broad jurisdiction pursuant to 28 U.S.C. 1331 to hear constitutional challenges. However, the FTC in Axon and the SEC in Cochran argue that Congress may implicitly preclude district court jurisdiction over disputes by creating a review scheme that bypasses district courts and gives judicial review of agency action directly to the courts of appeals.

Axon Enterprises, an Arizona company that manufactures police body cameras and other law enforcement technology, has been under investigation by the FTC after it purchased a competitor in 2018. Axon sued the FTC in U.S. District Court for the District of Arizona, arguing that the proceeding against it is unconstitutional on due process grounds and because the appointment of ALJs violates the Constitution’s appointments clause. On appeal, the Ninth Circuit ruled in the FTC’s favor, holding that the FTC Act impliedly bars jurisdiction in district court and challenges to agency proceedings may only be made after the conclusion of the agency’s action.

The companion case, Cochran, involves a 2016 action brought by the SEC in which an ALJ fined a CPA and barred her from practice before the SEC. That decision was vacated after the Supreme Court ruled in Lucia v. SEC that the SEC’s process for appointing ALJs was unconstitutional. When the SEC brought a new proceeding against her, the CPA filed suit in U.S. District for the Northern District of Texas, arguing that the appointment of the ALJ was unconstitutional and deprived her of due process. Unlike the Ninth Circuit, the Fifth Circuit held that a party in an administrative proceeding could sue on these grounds before a final determination of the agency proceeding.

In its brief, Axon argues that it makes no sense for it to have to bring a structural separation of powers challenge about an administrative agency to that very agency, citing to the Court’s decision in Free Enterprise Fund v. Public Co. Accounting Oversight Board, 561 U.S. 477 (2010) (holding that a party alleging a structural separation of powers challenge to an agency need not endure the process over which an allegedly-unconstitutionally-insulated official presides before it can get judicial review). Axon also argues that its challenge to the constitutionality of the ALJ is wholly collateral to the merits of the issue before the FTC. The FTC argues that Congress created a comprehensive scheme for the commencement and review of FTC proceedings, and that this comprehensive enforcement structure establishes a discernible intent to preclude district court review. See, e.g., Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 216 (1994) (finding congressional intent to preclude such review in mine safety laws). The FTC also points out that Axon’s claims about the FTC’s constitutionality is not wholly collateral to the administrative proceeding, as it is the vehicle by which it seeks to prevail in those proceedings. Brief for FTC, p. 10.

At oral argument, questions from several of the justices, including Chief Justice John Roberts, Justice Neil Gorsuch, and Justice Samuel Alito, challenged the FTC’s position, with Justice Alito asking, “What sense does it make for a claim that goes to the very structure of the agency having to go through the administrative process?” Justice Ketanji Brown Jackson, on the other hand, expressed concern that allowing district court jurisdiction would be an end-run around the agency enforcement process when the FTC Act makes it clear that the agency has exclusive jurisdiction.

In an amicus curiae brief, the Chamber of Commerce asked the Court to rule in Axon’s favor, arguing that “[t]he FTC is a poster child for the perils of cutting off pre-enforcement review” and [f]orcing parties to go to the FTC first thus rewards the agency for its prolific constitutional flaws.”  Brief for the Chamber of Commerce as Amicus Curiae, p. 13. Amicus curiae briefs have also been filed in support of Axon by the Washington Legal Foundation and Allied Educational Foundation, Atlantic Legal Foundation, Americans for Prosperity Foundation, Pacific Legal Foundation, the National Treasury Employees Union, the Separation of Powers Clinic at Antonin Scalia Law School, American Hospital Association, Committee for Justice, and The Justice Society.

While the actual issue before the Court is a procedural one involving jurisdiction, the challenge to the constitutionality of the FTC structure underlying the dispute is just the latest challenge to agency regulatory authority. On October 21, 2022, the Fifth Circuit denied en banc rehearing in Jarkesy v. SEC, which (like Cochran) challenged the use of the SEC’s ALJs, finding it unconstitutional. On October 19, 2022, the Fifth Circuit held in Community Financial Services Association of America v. Consumer Financial Protection Bureau that the CFPB’s funding mechanism violates the Constitution’s appropriations clause. (An in-depth discussion of the impact of this decision can be heard on the Consumer Finance Monitor Podcast here.) That decision has already resulted in defendants in several CFPB actions seeking dismissal of their cases on constitutional grounds, and it paves the way for potential challenges for other federal agencies that are funded outside of the Congressional appropriations process, including the Federal Reserve, the OCC, FDIC, NCUA, and FHFA. Beyond Jarkesy and Community Financial Services Association, there is another recent challenge to the FTC in FTC v. Walmart, where Walmart argues that the FTC lacks constitutionally valid authority to bring the action against it because the FTC Act’s removal provision (which specifies and limits the President’s ability to remove commissioners) is unconstitutional.

Should the Court rule in favor of Axon and Cochran, it will represent a further erosion in agency enforcement authority, and open the door wider to further challenges.