District Courts Will Hear Constitutional Challenges to SEC and FTC Admin Courts
Last week, the U.S. Supreme Court paved a path for petitioners to assert constitutional challenges to the structure of U.S. Securities and Exchange Commission (“SEC”) and U.S. Federal Trade Commission (“FTC”) administrative hearings in federal courts.
At issue in the consolidated Axon Enterprise, Inc. v. FTC, No. 21-86 and SEC v. Cochran, No. 21-1239 was whether district courts have jurisdiction to hear constitutional challenges to the SEC and FTC’s administrative law judge-led hearings. In a unanimous decision authored by Justice Elena Kagan, the Supreme Court held that pursuant to 28 U.S.C. § 1331, district courts have jurisdiction to hear such challenges.[1] Op. at 2.
Under the Securities Exchange Act of 1934 (the “Exchange Act”) and the Federal Trade Commission Act (the “FTC Act”), objections to such administrative proceedings typically are made with the respective Commissions and then, if appealed, in a federal court of appeals. Op. at 2. Instead of going through this process, petitioners brought their constitutional claims in federal district courts in the first instance. Id. at 3. Petitioners contested the constitutional authority of the SEC and FTC, respectively, arguing, inter alia, that the administrative law judges are insufficiently accountable to the President, in violation of separation of powers principles. Id. at 3. While both district courts dismissed the challenges for lack of jurisdiction, the Ninth Circuit (addressing the challenge to the FTC) found that the district court lacked jurisdiction to hear petitioner’s claim, yet the Fifth Circuit (addressing the challenge to the SEC) reached the opposite conclusion. Op. at 6.
Whereas “[a] special statutory review scheme . . . may preclude district courts from exercising jurisdiction over challenges to federal agency action[,]” neither the FTC Act nor the Exchange Act were found to preclude district courts from exercising jurisdiction. Op. at 7. To reach this conclusion, the Supreme Court assessed the three Thunder Basin factors: (i) “could precluding district court jurisdiction ‘foreclose all meaningful judicial review’”; (ii) “is the claim ‘wholly collateral to [the] statute’s review provisions’”; and (iii) “is the claim ‘outside the agency’s expertise’?” Op. at 8 (citing Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 212-13 (1994)).[2]
Only after assessing the facts “from 30,000 feet” and noting the resemblance to those in Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010), where the Court previously found district courts had jurisdiction to assess the constitutionality of the Public Company Accounting Oversight Board’s structure, did the Supreme Court walk through the Thunder Basin factors, each of which favored district court review. First, the Supreme Court explained that while judicial review through an appeal would eventually occur, the “here-and-now injury” of “being subjected to unconstitutional agency authority” is “impossible to remedy once the proceeding is over[.]” Op. at 13 (internal quotations omitted). Second, the constitutional challenges “do not relate to the subject of the enforcement actions[.]” Op. at 15. Third, consistent with precedent, the SEC and FTC were found to lack the expertise to deal with these constitutional challenges as “agency adjudications are generally ill suited to address structural constitutional challenges[.]” Op. at 17 (quoting Carr v. Saul, 141 S. Ct. 1352, 1359 (2021)).
Having reached the conclusion that district courts possess jurisdiction to hear constitutional challenges to the SEC and FTC in-house administrative law judge structure, we will need to wait and see how these lower courts ultimately rule. It seems likely that the constitutionality of the structure of these in-house courts will find their way back to the Supreme Court. How soon remains to be seen. A current petition for a writ of certiorari is requesting review of the constitutionality of the SEC’s administrative courts. See SEC v. Jarkesy, No. 22-859. At least one Justice tipped his hand in indicating his view that the current structure is likely unconstitutional. See Op. at 1 (Thomas, J., concurring) (“I have grave doubts about the constitutional proprietary of Congress vesting administrative agencies with primary authority to adjudicate core private rights with only deferential judicial review on the back end.”).
[1] Notably, in granting certiorari to hear Axon Enterprise, the Court declined to hear petitioner’s request that the court opine on the constitutionality of the structure of the FTC itself.
[2] In a concurrence, Justice Neil Gorsuch rejected the use of the Thunder Basin factors, and instead found that jurisdiction was conferred directly by 28 U.S.C.§ 1331.
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