A Supreme Court ruling on April 14 made it easier to challenge the reach of two powerful federal agencies—the U.S. Federal Trade Commission (FTC) and the U.S. Securities and Exchange Commission (SEC).
In its new red tape-cutting decision that is a defeat for the Biden administration, the Supreme Court took steps 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.
Critics of the administrative state claim that in-house adjudications carried out by agencies 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 litigants challenging the agencies argued they should be able to contest the way the tribunals are constituted in federal courts without a lengthy, expensive challenge within the administrative system.
But the Biden administration argued that challengers may only proceed to court after losing in potentially expensive, protracted agency proceedings.
The new ruling encompasses two cases: Axon Enterprise Inc. v. FTC, court file 21-86, and SEC v. Cochran, court file 21-1239.
Axon, based in Scottsdale, Arizona, makes body cameras and digital evidence management systems for law enforcement.
Axon purchased an insolvent competitor, Vievu LLC, for about $13 million in 2018. A month later, the FTC sent Axon a letter indicating that the acquisition raised antitrust concerns. Axon claimed that it was subjected to “extensive and expensive investigatory proceedings.”
According to Axon, after 18 months and with no end in sight, the company 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 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.
An SEC administrative law judge (ALJ) fined Cochran $22,500 and banned her from practicing before the SEC for five 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 are 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.
Kagan noted that both Axon and Cochran challenged the constitutional authority of federal agencies, claiming that ALJs are “insufficiently accountable to the President, in violation of separation-of-powers principles.”
The challenges are “fundamental, even existential,” as the litigants argue that “the agencies, as currently structured, are unconstitutional in much of their work.” The function of the court isn’t to resolve those challenges but “to decide where they may be heard,” the justice wrote.
Objections to agency decisions follow a prescribed procedure laid out in statute. A party first makes a claim before the agency and then, if needed, to a federal court of appeals, she wrote.
But here, Axon and Cochran “sidestepped that review scheme” and went to federal district court to halt the administrative proceedings.
Kagan said the district courts have jurisdiction to hear the legal challenges.
“The ordinary statutory review scheme does not preclude a district court from entertaining these extraordinary claims,” she wrote.
The court reversed the decisions of the two federal courts of appeal involved and remanded the cases for “further proceedings consistent with this opinion.”
Pam Petersen, Axon’s vice president for litigation, welcomed the decision.
“[Axon is] thrilled [with the] unanimous decision ... vindicating what we have said all along: threshold constitutional challenges to the FTC’s structure and existence belong in federal court where unconstitutional action can be enjoined before it inflicts irreparable harm,” Petersen told The Epoch Times by email.
“We are heartened that no justice endorsed the alternative of making parties endure unconstitutional agency action before it can be challenged in court.”
The U.S. Department of Justice, which represents the two agencies, didn’t respond by press time to requests by The Epoch Times for comment.
