The U.S. Supreme Court’s landmark decision unanimously reversing the Ninth Circuit in Axon Enterprise v. Federal Trade Commission is likely to represent a monumental shift in pre-enforcement challenges to administrative enforcement proceedings brought by federal agencies, including the FTC.

The decision held that agencies, including the FTC, are not empowered to decide whether their own enforcement procedures are constitutional, removing the thumb from federal agencies’ side of the scale. The Supreme Court emphatically ruled that such authority is reserved for the courts, and that collateral challenges to the constitutionality of administrative proceedings are appropriate.

As background, the FTC can elect to litigate a party’s alleged wrongdoing in an administrative proceeding overseen by an FTC-appointed administrative law judge (ALJ) or in a federal district court. Until the Supreme Court’s decision in AMG two years ago, the FTC’s favored enforcement path was to proceed straight to federal district court. With that avenue significantly constrained by AMG, the FTC is more frequently bringing enforcement actions in administrative proceedings before ALJs. Administrative proceedings, however, include several components that heavily favor the FTC. First, the fact finder in an FTC proceeding is appointed by the FTC. Second, the party subject to the enforcement proceeding is forced to wait until the proceeding ends to challenge the result in a federal appeals court. Moreover, the reviewing federal appeals court’s scope of review is limited to the record that the FTC produced.

As Justice Clarence Thomas noted in his concurrence, the appeals court must apply a highly deferential standard of review—treating the agency’s record as conclusive, provided there is substantial evidentiary support. In his own concurrence, Justice Neil Gorsuch also noted that this process can and often does take years and require substantial resources from targets of enforcement actions, many of which are unable to bear this type of burden and end up settling.

In Axon, Axon Enterprises was not content to let the administrative process play out while it had grave concerns about the constitutionality of that very process. As we’ve previously detailed, when Axon learned it was the subject of an FTC agency proceeding regarding an acquisition it wished to make, Axon challenged the constitutionality of the proceeding in federal district court in Arizona to attempt to stop the proceeding from moving forward. Axon argued that the FTC’s administrative proceeding was unconstitutional.

Specifically, Axon argued that:

  • The FTC’s method for appointing ALJs was unconstitutional because ALJs were insulated from presidential control—a direct violation of the Appointments Clause in Article II of the Constitution
  • The FTC’s administrative procedures, wherein it acts as the prosecutor, judge, and jury—violates Axon’s Fifth Amendment due process rights

Axon argued it would be irreparably injured if the proceeding continued. Ultimately, the district court ruled against Axon, and the Ninth Circuit affirmed that decision. When the Axon case arrived at the Supreme Court, it was consolidated with Securities and Exchange Commission v. Cochran, which involves similar constitutionality concerns about the Securities and Exchange Commission’s administrative proceedings. That case wound up in front of the Fifth Circuit with a different outcome, wherein the Fifth Circuit permitted the collateral challenge pending before the district court to proceed.

Using the existing Thunder Basin three-part framework, the Court’s opinion permits the petitioners in both cases to challenge the constitutionality of the administrative proceeding in federal district courts before the administrative proceeding is decided. Thunder Basin requires that a court considering whether to hear a collateral challenge of an agency proceeding must evaluate whether:

  • Precluding jurisdiction in district court would impede meaningful judicial review
  • The issues are wholly collateral
  • The issues are outside the agency’s area of expertise

Past cases considering the Thunder Basin factors have met with limited success. But, in Axon, Justice Elena Kagan, writing for the Court, reasoned that the injury to Axon and Cochran is “having to appear in proceedings” before an “unconstitutional agency authority.” The Court noted that this injury cannot be remedied once the proceeding concludes, and that an appellate court ruling to vacate the agency’s order is not sufficient remedy for a claim “about subjection to an illegitimate proceeding, led by an illegitimate decisionmaker.”

To be certain, the decision does not hold that the administrative proceedings at issue in the district court cases are unconstitutional. Instead, the Court ruled that federal district courts are empowered to make that decision. For the FTC, that decision now returns to the hands of a federal district court in Arizona—although it is almost certain to wind its way back to the Supreme Court.

When the case inevitably returns to the Court, the FTC should be wary of Justices Thomas and Gorsuch, who expressed serious doubt that the administrative proceedings—as currently formulated—could survive judicial scrutiny. Justice Thomas went so far as to specifically note that the rights at issue in both Axon and Cochran—infliction of civil penalties and divestiture of intellectual property rights, respectively—are core private rights that fall within the sole jurisdiction of Article III courts. Justice Gorsuch took a different approach, finding that the Thunder Basin framework is confusing, costly, and unnecessary because 28 U.S.C. Section 1331 already vests the district courts with jurisdiction to hear such claims.

This decision is likely to lead to a wave of challenges to how the FTC and other agencies conduct administrative proceedings. Whether those challenges ultimately upend or limit the ability of agencies to litigate in administrative forums remains to be seen.

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Photo of Liz Clark Rinehart Liz Clark Rinehart

Liz Clark Rinehart represents clients in complex class action and commercial litigation matters arising from breach of contract, misappropriation of trade secrets, violations of consumer protection statutes, professional licensing, arbitration, employment contracts, and other business torts. Liz also advises clients in litigation involving…

Liz Clark Rinehart represents clients in complex class action and commercial litigation matters arising from breach of contract, misappropriation of trade secrets, violations of consumer protection statutes, professional licensing, arbitration, employment contracts, and other business torts. Liz also advises clients in litigation involving the Telephone Consumer Protection Act (TCPA), Lanham Act, and other Federal Trade Commission (FTC), Consumer Financial Protection Bureau (CFPB), and state attorney general enforcement matters. Her litigation experience includes pre-litigation strategy, negotiation, trial, and appellate practice.

Photo of Leonard L. Gordon Leonard L. Gordon

Len Gordon, chair of Venable’s Advertising and Marketing Group, is a skilled litigator who leverages his significant experience working for the Federal Trade Commission (FTC) to help protect his clients’ interests and guide their business activity. Len regularly represents companies and individuals in…

Len Gordon, chair of Venable’s Advertising and Marketing Group, is a skilled litigator who leverages his significant experience working for the Federal Trade Commission (FTC) to help protect his clients’ interests and guide their business activity. Len regularly represents companies and individuals in investigations and litigation with the FTC, state attorneys general, the Department of Justice (DOJ), and the Consumer Financial Protection Bureau (CFPB). Len also represents clients in business-to-business and class action litigation involving both consumer protection and antitrust issues. He also counsels clients on antitrust, advertising, and marketing compliance issues.