Supreme Court Considers Whether to Allow Early Constitutional Challenges to FTC and SEC Administrative Proceedings

Supreme Court Considers Whether to Allow Early Constitutional Challenges to FTC and SEC Administrative Proceedings

November 18, 2022, Covington Alert

On Monday, November 7, the Supreme Court heard argument in Axon Enterprise, Inc. v. FTC and SEC v. Cochran to decide whether a party subject to an FTC or SEC administrative proceeding can simultaneously challenge the constitutionality of an administrative proceeding, or even of the agency itself, in federal district court rather than waiting for final agency action.  At least five Justices expressed some measure of support for the private parties’ arguments, which indicates that the Court may permit certain kinds of collateral constitutional attacks (e.g., due process and appointments clause claims) at the outset of administrative proceedings.

Although predicting the outcome of any case from the oral argument is extremely difficult, three Justices – Neil Gorsuch, Samuel Alito, and Clarence Thomas – expressed strong support for finding in Axon’s and Cochran’s favor. Through their questions, they implied that 28 U.S.C. Section 1331, which grants federal district courts “original jurisdiction of all civil actions arising under the Constitution of the United States,” provides a clear grant of jurisdiction over constitutional claims and neither the FTC Act nor the Securities Exchange Act of 1934 (“the Exchange Act”) could strip district courts of that jurisdiction. They also suggested that Free Enterprise Fund v. PCAOB requires a finding for the companies. In PCAOB, the Court held that a district court had jurisdiction to hear an appointments clause challenge to PCAOB’s structure despite the fact that the SEC had not yet issued a final order against Free Enterprise Fund.

Other justices appeared to favor the private parties, but not as overtly. Chief Justice John Roberts’s questions suggested that PCAOB may prove to be an insurmountable barrier to the government’s claims and that the availability of jurisdiction in other forums (i.e., the court of appeals) under the FTC Act and the Exchange Act clearly does not act as an implied removal of jurisdiction from Section 1331. Justice Brett Kavanaugh’s questions indicated that he believes that the issue may be decided solely by reference to the “wholly collateral” factor of the Thunder Basin test, which courts have used to guide determinations about when a party may bring an Article III challenge to agency proceedings before those proceedings have concluded. Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994) (holding that the statutory review scheme of the Federal Mine Safety and Health Amendments Act of 1977 precludes a district court from exercising subject-matter jurisdiction over a pre-enforcement challenge to the Act). He stated that clarity, certainty, and speed counseled in favor of permitting district courts to hear constitutional claims.

Both Justice Sonia Sotomayor and Justice Ketanji Brown Jackson expressed some measure of support for the government’s position. Justice Sotomayor noted that the whole purpose for the FTC’s and SEC’s administrative processes was to consolidate rather than bifurcate review of agency action and produce consistent judgments. She also stated that courts generally require parties to wait until the end of initial proceedings to raise a due process claim. Justice Jackson expressed concern that a ruling for Axon and Cochran would be used by future challengers to undermine the finality of agency action.

It was unclear from oral argument where Justice Elena Kagan and Justice Amy Coney Barrett stood on the issues presented. Justice Kagan suggested that stare decisis counseled in favor of using the Thunder Basin factors to decide the outcome of the case, but noted that the those factors did not clearly favor either side here. Justice Barrett did not ask any questions that make her views of the case readily apparent.

Key takeaways:

• A majority of the Court indicated that they are open to overturning settled practice at the FTC and SEC by allowing private parties to challenge independent agencies’ constitutionality in federal district court at the outset of administrative proceedings.
• In the short term, a decision for the private parties likely would result in an increase in collateral constitutional challenges to FTC and SEC enforcement actions, thereby imposing additional burdens and creating distractions for the agencies, with the potential for delaying enforcement actions.
• If Axon and Cochran prevail, the constitutionality of FTC and SEC, as well as their administrative processes, would likely make their way to the Court’s docket in the relatively near future.
• These cases involve statutory interpretation of the FTC Act and the Exchange Act, so the outcome will not necessarily apply to other statutes (e.g., the Federal Deposit Insurance Act) that could be read as expressly postponing judicial review until after the agency process is complete.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Litigation and Investigations practice.