U.S. Supreme Court Holds That Structural Constitutional Agency Challenges Can Proceed in Federal District Court

U.S. Supreme Court Holds That Structural Constitutional Agency Challenges Can Proceed in Federal District Court

April 18, 2023, Covington Alert

The U.S. Supreme Court announced its decision in the consolidated cases of Axon Enterprise, Inc. v. FTC and SEC v. Cochran on Friday, April 14, 2023, holding that “the review schemes in the Exchange Act and FTC Act do not displace district court jurisdiction” over petitioners’ “far-reaching constitutional claims” challenging the structure of the agencies.

In both cases, the parties sought to bring claims that the relevant administrative law judges (at either the FTC or SEC) were unconstitutionally protected from removal by the President, in violation of separation-of-powers principles. Axon additionally claimed that the FTC unconstitutionally combined prosecutorial and adjudicatory functions. The question before the Court was whether the parties could bring these claims immediately in federal district court under § 1331 general federal-question jurisdiction, or whether those claims must instead first proceed through the standard administrative channels prescribed by statute. In a unanimous opinion written by Justice Kagan, the Court held that these structural constitutional claims need not wait: They are appropriate for immediate federal district court adjudication.

Applying the three factors set forth in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994), the Court determined that petitioners’ structural constitutional claims were not “of the type Congress intended to be reviewed within” the relevant administrative schemes and therefore the statutes governing appellate review of SEC and FTC adjudications did not preclude immediate district court review.

First, the Court held that precluding review in federal district court “could foreclose all meaningful judicial review” because the relevant claims alleged harm from “being subjected to unconstitutional agency authority” including proceedings before “an unaccountable ALJ,” which was a “here-and-now injury” that could not be remedied by appellate review after the administrative proceedings had run their course. As the Court explained, such an injury “is impossible to remedy once the proceeding is over” because the challenger will have already suffered it and “a proceeding that has already happened cannot be undone.”

Second, the Court held that petitioners’ claims were “wholly collateral” to the administrative proceedings at issue because they related to the agencies’ “power generally”—not to “the subject of the enforcement proceedings” or to “procedural or evidentiary matters” that are often resolved in the context of an agency decision.

Third, the claims were “outside the . . . expertise” of the agencies because they involved constitutional questions that the relevant agencies were not specially positioned to address.

The Court noted that its decision did not “portend[] newfound enthusiasm for interlocutory review,” and that parties will continue to be required to “wait before appealing” in many cases even when that means being subjected to significant burden and expense. But the Court’s decision does open a new avenue for challenging at least some agency actions—and potentially obviating protracted administrative enforcement or adjudicatory proceedings—based on claims that meet the Thunder Basin factors.

Justice Thomas wrote a concurring opinion, in which he expressed “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.” Justice Gorsuch also wrote a concurring opinion, stating that he would have decided the case based on the statutory text of § 1331 rather than applying the Thunder Basin factors.

Finally, the Court ruled only on the jurisdictional question and remanded the cases for the district courts to address the underlying merits of the constitutional challenges to the SEC and FTC. Based on this decision, other companies subject to administrative proceedings are likely to file collateral constitutional challenges in federal district court. Such collateral proceedings have the potential to stay the administrative proceedings during their pendency, as has been the case in Axon and Cochran. More fundamentally, the substantive question of whether the FTC, SEC, and other administrative agencies are constitutionally constructed is likely to be adjudicated and appealed, which means that these issues could be in front of the Supreme Court in the relatively near future.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Antitrust/Competition and Supreme Court/Appellate practices.