The U.S. Supreme Court just made it easier to raise constitutional challenges to the use of special administrative courts by federal agencies such as the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC). Companies pulled into time-consuming and expensive FTC and SEC administrative proceedings now have the option of going straight to federal court if they have constitutional challenges to these administrative tribunals.
In a unanimous decision written by Justice Elena Kagan on April 14, 2023, the Court held that companies and individual litigants subjected to administrative proceedings can seek to enjoin them by suing in federal court and raising constitutional arguments there. Read the decision here.
The decision arose from two related cases, Axon Enterprise v. FTC, No. 21-86 and SEC v. Cochran, No. 21-1239. Although the government argued that parties should exhaust their administrative remedies before bringing constitutional challenges in federal court, the Court ruled that federal agencies are not well-suited to decide constitutional questions about the separation of powers, and that the relevant factors point toward allowing district court review of claims that the structure, or even existence, of an agency violates the Constitution.
Axon Enterprise and certified public accountant Cochran are contesting the underlying powers of the FTC and SEC. Litigants in these two cases will now move forward in lower courts with constitutional arguments that in-house administrative law judges (ALJs) are too difficult for the president or his appointees to remove, violating the separation of powers. Axon claims the FTC’s in-house proceedings violate the constitutional rights of due process and equal protection, that ALJs’ protection from removal is unconstitutional, and that the FTC impermissibly functions as both prosecutor and adjudicator.
According to the Court, constitutional issues “are fundamental, even existential,” meaning they warrant immediate federal court review. Justices Thomas and Gorsuch wrote separate concurrences, with Thomas expressing “grave doubts” about the propriety of Congress giving agencies the primary authority to adjudicate core private rights.
The Court’s decision is limited to jurisdictional issues and does not address the merits of the constitutional challenges. But the ruling and concurring opinions underscore the openness on the part of some Justices to complaints by litigants that in-house administrative courts too often tip the scales in favor of federal agencies and against businesses. Some commentators have noted that the decision likely will result in the SEC filing fewer administrative proceedings until the Court issues a merits ruling at some point in the future.
Vince Farhat, Chair, White Collar Defense & Investigations Group
JMBM’s White Collar Defense & Investigations Group is keenly focused on our clients’ business objectives and is committed to minimizing the disruption, anxiety, and public scrutiny that can arise from criminal and civil investigations and litigation. We are leaders in the representation of companies, boards of directors, management, and individuals in connection with a broad range of government investigations, enforcement actions, remediation and compliance, administrative proceedings, internal investigations and white collar criminal investigations and prosecutions.
This update is provided to our clients, business associates and friends for informational purposes only. Legal advice should be based on your specific situation and provided by a qualified attorney.