A security technology company and an accountant claiming unfair treatment at the hands of federal agencies’ in-house administrative tribunals urged a seemingly receptive Supreme Court on Nov. 7 to make it easier to challenge their structure.
The Supreme Court could use the opportunity to rein in the so-called administrative state and reaffirm the separation of powers doctrine that prevents any specific branch of the government from exercising the core functions of another. The idea behind the doctrine is to discourage the concentration of power and make sure there are checks and balances.
Critics of the administrative state claim that in-house adjudications are unfair because the tribunals, unlike regular courts, lack fixed evidentiary rules, allowing the agencies to function as prosecutor, judge, and jury. They argue that the tribunals are unconstitutional because they aren’t politically accountable.
The cases are Axon Enterprise Inc. v. Federal Trade Commission (FTC), court file 21-86, and Securities and Exchange Commission (SEC) v. Cochran, court file 21-1239.
The challenging parties say they should be able to contest in federal courts the way the tribunals are constituted without first having to launch a lengthy, expensive challenge within the administrative system.
But the Biden administration says challengers may only proceed to court after losing in agency proceedings. Even then, when the cases go to court, judges are required by legal precedent to defer to most agency decisions.
Scottsdale, Arizona-based Axon makes body cameras and digital evidence management systems for law enforcement. The firm purchased an insolvent competitor, Vievu LLC, for about $13 million in May 2018. A month later, the FTC sent Axon a letter indicating the acquisition raised antitrust concerns, according to the company’s petition.
Axon stated that it was subjected to “extensive and expensive investigatory proceedings,” and after 18 months of this, “with no end in sight, Axon offered to walk away from its acquisition entirely,” but this wasn’t satisfactory in the FTC’s eyes.
Axon even offered to unload its Vievu assets and provide millions of dollars in working capital to “a divestiture buyer,” but instead, the FTC demanded that Axon transform Vievu “into a ‘clone’ of Axon using Axon’s intellectual property,” and threatened Axon with “an administrative proceeding” if it failed to do so.
In April 2016, the SEC brought an enforcement action against Michelle Cochran, a certified public accountant in Texas, claiming that she violated the Exchange Act by failing to comply with auditing standards issued by the Public Company Accounting Oversight Board when performing quarterly reviews and annual audits between 2010 and 2013, according to the SEC’s petition.
An SEC administrative law judge, or ALJ, fined Cochran $22,500 and banned her from practicing before the SEC for 5 years. Cochran objected, but before the agency could rule on her objection, the Supreme Court held in Lucia v. SEC (2018) that SEC ALJs are officers of the United States, under the Constitution’s appointments clause, who must be appointed by the president, a court of law, or a department head.
Cochran’s case was reassigned to a new ALJ. Cochran sued in federal court to halt the SEC’s administrative enforcement proceedings against her, arguing that because the agency’s ALJs enjoy multiple layers of for-cause removal protection, they’re unconstitutionally insulated from the president’s power to fire federal officials. She also argued that the SEC violated her due process rights by failing to follow its own rules and procedures.
During oral arguments on Nov. 7, Axon attorney Paul Clement told the justices that federal courts should be able to entertain legal challenges against administrative tribunals.
“Congress has expressly granted district courts original jurisdiction over all civil actions arising under the Constitution, and it is common ground that Congress has never expressly withdrawn or restricted that jurisdiction with respect to the constitutional claims at issue here,” Clement said.
Justice Samuel Alito asked Deputy U.S. Solicitor General Malcolm Stewart, “What sense does it make for a claim that goes to the very structure of the agency having to go through the administrative process?”
Stewart replied that FTC commissioners “have expertise in the way that the adjudications are conducted.” Even though “the agency couldn’t declare the statute unconstitutional ... it could still provide something that could be useful to a reviewing court.”
Chief Justice John Roberts noted that the government has lost challenges to agency actions.
“Doesn’t that underscore the need for ... a direct proceeding to raise the constitutional claim rather than waiting however many years before the agency?” he asked.
There are many challenges related to “some fairly basic propositions” and “to have it go over and over and over again, it does make the case about the need for direct resolution of a related claim pretty strong,” the chief justice said.
In the Axon hearing, Justice Elena Kagan told Stewart that the government’s case seemed weak. Of three factors in a relevant precedent, “two factors are pretty darn bad for you.”
Justice Sonia Sotomayor seemed skeptical of Cochran’s arguments.
“I don’t know why we should be permitting district court interference in the process that Congress has given to the agency to conclude that matter,” she said.
