Supreme Court Makes It Easier to Challenge Constitutionality of Administrative Agency Structure

Insights Supreme Court Makes It Easier to Challenge Constitutionality of Administrative Agency Structure Michael S. Lazaroff · May 12, 2023

On April 14, 2023, in Axon Enterprise, Inc. v. Federal Trade Commission et al., 143 S.Ct. 890 (2023) (No. 21-86), the Supreme Court issued a unanimous decision holding that district courts have jurisdiction to resolve constitutional challenges to the structure of the Federal Trade Commission (the “FTC”) and the Securities and Exchange Commission (the “SEC”) without any prior agency hearing or determination.  This decision permits, in appropriate circumstances, those challenged by agency administrative action to bring constitutional challenges directly to a federal district court without having to first expend the time, energy and money having these claims tried and decided by an administrative law judge from the agency itself.

The Supreme Court considered in this decision two different appeals from two different underlying actions ((a) Axon Enterprises, Inc. v. FTC, No. 21-86; and (b) SEC v. Cochran, No. 21-1239).  In the two underlying actions, administrative enforcement actions had been brought by the FTC and SEC respectively in front of administrative law judges.  However, respondents (Axon Enterprises and Michelle Cochran) sued the respective agencies directly in district courts to enjoin the administrative proceedings because respondents in those actions claimed that the FTC and SEC’s respective structures violate the Constitution.  Respondents argued that the district courts had jurisdiction based on “district courts’ ordinary federal-question authority—their power, under 28 U.S.C. §1331”.  Axon, 143 S.Ct. at 898.  The Supreme Court explained that these “challenges [from respondents] are fundamental, even existential.  They [the respondents] maintain in essence that the agencies, as currently structured, are unconstitutional in much of their work.”.  Id. at 897.

However, the district courts in both cases dismissed the claims by respondents for lack of jurisdiction.  The district courts claimed that the respective Congressional Acts (the FTC Act and the Securities Exchange Act) implicitly divested the district courts of jurisdiction.  On appeal, the Ninth Circuit affirmed the lower court decision in the Axon case finding that the FTC Act divested the district court of jurisdiction. See Axon Enterprises, Inc. v. FTC, 986 F. 3d 1173 (9th Cir. 2021).  However, the Fifth Circuit reversed the lower court and found that Cochran’s claim against the SEC could proceed in the district court because in this instance the factors identified by the Supreme Court in Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 212 (1994) showed that the district court retained jurisdiction.  See SEC v. Cochran, 20 F. 4th 194, 207–208 (5th Cir. 2021).  The Supreme Court granted certiorari to resolve this split in the Circuits and to consider the question of whether the review schemes set out for the FTC and SEC displaced district court jurisdiction over “far-reaching constitutional claims”.  Axon, 143 S.Ct. at 900.  A unanimous Court found that, in this instance, Congress had not displaced the jurisdiction of the district courts over these types of claims.  The Court found that Congress can divest district courts of their ordinary jurisdiction over federal questions through legislation according to which “[t]he agency effectively fills in for the district court, with the court of appeals providing judicial review.”  Id.  But, when Congress takes such action, as it had done in the FTC Act and the Securities Exchange Act, it does not necessarily mean that the district court was divested of jurisdiction from “every claim concerning agency action”.  Id.  The Court noted that it had previously identified three factors to consider in determining whether district courts had been divested of jurisdiction from particular claims.  These factors, “commonly known now as the Thunder Basin factors” (id.), were identified by the Court in Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 212 (1994).  The three identified factors are: (1) “could precluding district court jurisdiction ‘foreclose all meaningful judicial review’ of the claim?” (Axon, 143 S.Ct. at 900)(quoting Thunder Basin, 510 U.S. at 212–213); (2) “is the claim ‘wholly collateral to [the] statute’s review provisions’?” (Axon, 143 S.Ct. at 900)(quoting Thunder Basin, 510 U.S. at 212); and (3) “is the claim ‘outside the agency’s expertise’?” (Axon, 143 S.Ct. at 900) (quoting Thunder Basin, 510 U.S. at 212).  “When the answer to all three questions is yes, ‘we presume that Congress does not intend to limit jurisdiction.’” (cite) (quoting Free Enterprise Fund v. Public Company Accounting Oversight Bd., 561 U.S. 477, 489 (2010)).  The Court explained that these factors are intended to help a court decide “if a claim is ‘of the type’ Congress thought belonged within a statutory scheme.” (Axon, 143 S.Ct. at 902) (quotations omitted).  The Court here decided that the answer to all three questions is yes.  Thus, the Axon and Cochran claims were not the type of claims Congress intended to be within the statutory scheme.  And “[e]ach of the three Thunder Basin factors signals that a district court has jurisdiction to adjudicate Axon’s and Cochran’s (like the accounting firm’s) sweeping constitutional claims”.  Id.

While the decision was unanimous, Justices Gorsuch and Thomas issued separate concurring opinions.  Justice Gorsuch would have abandoned the Thunder Basin factors and simply determined that the district court had jurisdiction under 28 U.S.C. §1331.  Justice Gorsuch explained that “Section 1331 grants district courts the power to hear Ms. Cochran’s and Axon’s claims and no other law takes that power away. . .  . ‘Where the statutory language is clear, our sole function . . . is to enforce it according to its terms.’”  (Axon, 143 S.Ct. at 915) (quoting Rake v. Wade, 508 U.S. 464, 471 (1993).  Justice Gorsuch further noted that continuing to apply the Thunder Basin factors  (a) “leaves the law badly distorted”; and (b) “imposes serious and needless costs on litigants and lower courts alike” (Axon, 143 S.Ct. at 915).

Justice Thomas issued a concurring opinion joining in the decision, but also noting that “[b]y permitting administrative agencies to adjudicate what may be core private rights, the administrative review schemes here raise serious constitutional issues”.  Id. at 911.  Justice Thomas explained that the “rights at issue in these cases appear to be core private rights that must be adjudicated by Article III courts”.  Id. at 910.  Justice Thomas further stated that “merely labeling the deprivation of a core private right a ‘civil penalty’ cannot allow Congress and agencies to circumvent constitutional requirements”.  Id. at 911.  Thus, he concluded that the “administrative review schemes here raise serious constitutional issues”.  Id. at 911.  Justice Thomas provided a strong indication that, if given the opportunity, he would find these administrative review schemes unconstitutional.

This decision is technically a limited jurisdictional decision.  It permits individuals subject to an administrative litigation procedure to immediately challenge the constitutionality of the process in certain circumstances without first having to go through an administrative process and then have a right to appeal to an appellate court.  Yet, it is an important decision as the likely outcome of this decision will be to increase challenges to the constitutionality of administrative agencies.  It will now be less costly to bring such challenges and such challenges will receive fuller consideration.  As Justice Thomas described in his concurrence, the pre-Axon practice has been that administrative agencies (like the FTC and SEC) “may impose orders and penalties on private parties; adjudicate them before agency administrative law judges (ALJs); and only then be subjected to deferential review by an Article III court”.  Axon, 143 S.Ct. at 906.  Even then, the judicial review would be by a court of appeals which “must treat agency findings of fact as ‘conclusive’ so long as they are ‘supported by substantial evidence’ . . . a highly deferential standard of review.  The reviewing court also cannot take its own evidence . . . .”.  Id. at 906-907.  A direct challenge in the district court as permitted by Axon will not be so limited.  Also, the Axon decision removes the time and cost that was previously necessary to fully adjudicate the alleged violations prior to being able to bring a constitutional challenge to the federal courts.  Thus, this decision should eventually help provide greater clarity about the constitutional limits of various administrative agencies and their administrative processes.

Michael Lazaroff is a partner in the Rimon Litigation group in the New York office.  He is an experienced trial and appellate lawyer with over two decades of experience in complex commercial litigation and arbitration representing both defendants and plaintiffs.  His extensive experience includes international litigation and arbitration, multidistrict actions, class actions, partnership disputes, antitrust litigation and counseling, copyright litigation, complex contract disputes, and pharmaceutical litigation. Read more about Michael…