The U.S. Supreme Court ruled last week that parties seeking to challenge the constitutionality of the structure of the Federal Trade Commission and the Securities and Exchange Commission cannot be required to raise such challenges in the first instance before an administrative law judge (ALJ) and may bring such challenges directly in a federal district court.  The decision has implications for other federal agencies that use administrative law judges (ALJ), including the CFPB.

The ruling was made in two cases decided together by the Court: Axon Enterprises, Inc. v. FTC and SEC v. Cochran.  The cases involve FTC and SEC enforcement actions that each agency had instituted before an ALJ.  Each of the respondents (Axon and Cochran) then brought actions in federal district court asserting ordinary federal question jurisdiction.  Both respondents alleged that the ALJs assigned to their cases could not constitutionally exercise power.  More specifically, they argued that the ALJs’ for-cause removal protection violated Article II of the Constitution.  Both Axon’s and Cochran’s lawsuits were dismissed by the district courts for lack of jurisdiction.  In the two cases, the district courts found that the agencies’ similar review schemes, which provide for administrative review followed by judicial review in a federal court of appeals, displaced ordinary federal question jurisdiction. 

On appeal from those decisions, the Fifth and Ninth Circuits split.   The Ninth Circuit, considering Axon’s case, concluded that the Axon’s constitutional challenges fell within the FTC Act’s review scheme and affirmed the district court’s dismissal.  The en banc Fifth Circuit, considering Cochran’s case, concluded that Cochran’s constitutional claim fell outside of the Exchange Act’s review scheme and reversed the district court’s dismissal.

The Supreme Court, agreeing with the Fifth Circuit, concluded that the FTC and SEC review schemes did not displace district court jurisdiction over the respondents’ “sweeping” constitutional claims.  In reaching this conclusion, the Court applied various factors established by its own precedent for when Congress can preclude district courts from exercising jurisdiction over challenges to federal agency action.  Notably, the Court found that judicial review of the respondents’ claims would come too late to be meaningful.  This is because the respondents would lose their rights not to undergo the challenged agency proceedings if they could not assert their constitutional rights until the proceedings were over.  It also found that the respondents’ claims were outside the agencies’ expertise.

The decision would allow constitutional challenges to the structure of any federal agency with a review scheme similar to that of the FTC and SEC, such as the CFPB, to be brought in federal district court.  The Court, however, did not address the merits of the constitutional challenges, particularly the challenge to the ALJ’s exercise of power based on their for-cause removal protection.  In Axon and Cochran, the respondents’ challenge to the ALJ’s exercise of power was based on the dual-layer nature of the ALJs’ protection from removal, meaning that the officials who could remove the ALJs also had for-cause protection from removal.  While CFPB ALJs also have for-cause removal protection, the CFPB Director can be removed without cause.

The Supreme Court could soon address the constitutionality of the use of ALJs by federal agencies if it grants the petition for certiorari filed by the SEC in Jarkesy v. Securities and Exchange Commission.  (A reply to the certiorari petition must be filed by May 12, 2023.)  The underlying case in Jarkesy involves an SEC investigation that resulted in an administrative action against the respondents in which the SEC alleged that the respondents had committed securities fraud and sought both monetary and equitable relief.  After an SEC ALJ’s finding that the respondents had committed securities fraud was affirmed the SEC, the respondents sought review by the Fifth Circuit.  A divided 3-judge Fifth Circuit panel ruled that the proceedings suffered from three constitutional defects, vacated the SEC’s decision, and remanded the matter to the SEC for further proceedings.

The SEC’s certiorari petition presents the following questions: 

  • Whether the statutory provision that empowers the SEC to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violated the Seventh Amendment of the U.S. Constitution. 
  • Whether statutory provisions that authorized the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine. 
  • Whether Congress violated Article II of the Constitution by granting for-cause removal protection to ALJs in agencies whose heads can only be removed by the President for cause. 

The first two questions could have significant implications for the use of ALJs by the FTC and CFPB.  The third question could also have significant implications for the FTC (but not the CFPB since the CFPB Director can be removed without cause.) 

Another issue with potential significant implications for both the FTC and CFPB is one raised by Justice Thomas in his concurring opinion in Axon and Cochran.  In addition to challenging the authority of the FTC’s ALJ based on the ALJ’s for-cause removal protection, Axon claimed that the combination of prosecutorial and adjudicative functions in the FTC renders all of its enforcement actions unconstitutional.  Justice Thomas suggested that any administrative review scheme that allows an administrative agency to adjudicate private rights (e.g. monetary penalties that implicate the private right to property) may raise “serious constitutional issues.”  He indicated 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.”   The CFPB’s “appellate review model” could also face the type of constitutional challenge raised by Justice Thomas.