High Court Rules Against FTC in ALJ Axon Case With FCC Implications

The Axon case stems from the FTC’s attempt to block Axon Enterprise’s buy of its closest competitor using authority under the FTC Act’s ban on unfair methods of competition. Axon, a police equipment manufacturer, sued the FTC in 2020, asserting the FTC’s ALJs couldn’t “constitutionally exercise governmental authority because of their dual-layer protection from removal,” according to filings. Axon argued the “combination of prosecutorial and adjudicative functions in the Commission renders all of its enforcement actions unconstitutional.” The Cochran case concerns an accountant’s similar attempt to challenge in district court an ongoing SEC ALJ proceeding against her.

The high court considered whether district courts have jurisdiction to resolve the parties’ constitutional challenges to the structure of the FTC and the SEC. “The answer is yes,” the court said in an opinion written by Justice Elena Kagan. “The ordinary statutory review scheme does not preclude a district court from entertaining these extraordinary claims.” Statutory language in the FTC and SEC acts doesn't “displace a district court’s federal-question jurisdiction over claims challenging as uncon­stitutional the structure or existence of the SEC or FTC,” she wrote. Legal experts predicted the high court would side with Axon (see 2211150083).

The decision has implications for many federal agencies, particularly those with ALJs such as the FCC. The FCC's process for sending cases to the ALJ differs from that of the SEC, which can choose whether to put cases in front of ALJs or the courts. Experts have debated the extent to which a Supreme Court decision could impact FCC ALJs (see 2205260050). An SEC spokesperson said the agency is reviewing the opinion. The FTC declined comment.

The court cited its 1994 decision in Thunder Basin Coal v. Reich, which established a set of factors for determining agency jurisdiction over a legal challenge. All three Thunder Basin factors “point in the same direction -- toward allowing district court review of Axon’s and Cochran’s claims that the structure, or even existence, of an agency violates the Constitution,” wrote Kagan.

Justices Clarence Thomas and Neil Gorsuch filed concurring opinions. Thomas said 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.” By allowing “administrative agencies to adjudicate what may be core private rights, the administrative review schemes here raise serious constitutional issues,” wrote Thomas.

Gorsuch agreed Cochran and Axon are “entitled to their day in court” but said the Thunder Basin factors have nothing to do with the reasoning. The Supreme Court must respect Congress’ choice when it withholds jurisdiction and when it grants jurisdiction to federal courts, he said: But the high court has “no authority to froth plain statutory text with factors of our own design, all with an eye to denying some people the day in court the law promises them.” He urged the court to be done with the Thunder Basin project.

Michelle Cochran said in a statement she’s “thrilled” a unanimous high court agreed a federal judge should decide whether “this costly, bruising and biased system is constitutional” before ALJ review: “I have been stuck in this system for seven years, with everything, including my CPA license, at risk.” For decades, defendants have been “haled before agencies which act as investigator, prosecutor, judge and their first court of appeal,” said New Civil Liberties Alliance Senior Litigation Counsel Peggy Little.

Friday’s decision will lead to more federal agency matters getting hashed out in the courts, said academics and attorneys in interviews. "Now it seems likely that every respondent sued in the FTC’s administrative court will immediately initiate a constitutional challenge to the FTC’s structure," said TechFreedom Senior Competition Counsel Bilal Sayyed, a former FTC official, in a release. “Expect to see plaintiffs jump straight to federal court whenever sued by the agencies, at least preliminary. This is going to create a lot of work for FTC attorneys,”tweeted former FTC Chief Technologist Neil Chilson.

Friday’s opinion will put pressure on SCOTUS to settle the question of whether ALJs are constitutional, said American University administrative law professor Jeffrey Lubbers. Jarkesy v. SEC, which tees up that issue, hasn’t been granted certiorari before the court, but while it remains undecided, most entities with issues before federal ALJs are now likely to try challenging their constitutionality in district court, he said. Agencies could look to short circuit those arguments by going to the courts themselves and shifting matters away from ALJs until SCOTUS settles the question of ALJ constitutionality, he said. The “relative price of using in-house litigation rather than federal court has increased on the margin. Expect some substitution to federal court,” tweeted former FTC Commissioner Joshua Wright.

Lubbers said he was surprised so many justices agreed on a single opinion, though he added it was “fairly moderate” one. The opinion doesn’t shed much light on how the justices would rule on ALJ constitutionality, but it could be significant that no other justices joined Justice Clarence Thomas’ concurrence against administrative agency authority, Lubbers said. "In 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," Thomas wrote.