Deep Dive Episode 261 – Navigating the Axon Decision: Understanding its Implications for Federal Agencies and Administrative Law
In a highly anticipated decision, the Supreme Court held in Axon Enterprise, Inc. v. FTC (consolidated with Cochran v. SEC) that federal district courts have jurisdiction to resolve challenges to the structure and existence of federal agencies whose decisions are subject to review in a court of appeals. The decision confirms that regulated entities in enforcement proceedings before the FTC and SEC need not await a final agency decision to raise these fundamental challenges—and it raises a number of questions as well. What types of questions are covered by Axon? Which other agencies are implicated by the decision? What does this decision mean for the future of administrative enforcement?
Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.
[Music and Narration]
Introduction: Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.
On April 21, 2023, The Federalist Society’s Regulatory Transparency Project hosted a virtual event entitled, “Navigating the Axon Decision: Understanding its Implications for Federal Agencies and Administrative Law.” The following is the audio from the event.
Colton Graub: Good afternoon, and welcome to this Regulatory Transparency Project webinar. My name is Colton Graub. I’m the Deputy Director of RTP. As always, please note that all expressions of opinion are those of the guest speakers on today’s webinar.
If you would like to learn more about each of our speakers and their work, you can visit regproject.org, where we have their full bios. After a discussion between our panelists, we will go to audience Q&A. So please enter any questions you have into the Q&A function at the bottom of your Zoom window.
This afternoon, we’re pleased to host a discussion on the Supreme Court’s recent discussion in Axon v. FTC, which was consolidated with Cochran v. SEC, and the implications of the case for administrative law and executive branch agencies.
We’re very grateful to Russell, who is a Partner at Gibson, Dunn & Crutcher, who is moderating today’s conversation. Russell, I’ll pass it off to you.
Russell Balikian: Great. Thank you, Colton. Thank you all for joining us. This is a very exciting case, and we have a wonderful panel who’s going to be joining us. I’ll introduce them now, and then we will dig in.
Peggy Little is Senior Litigation Counsel at the New Civil Liberties Alliance. It’s a nonpartisan, nonprofit civil rights group, whose mission is to protect constitutional freedoms from violations by the administrative state. She has more than three decades of experience as a trial and appellate litigator. She directed The Federalist Society’s Pro Bono Center for many years. She regularly speaks, blogs, and publishes on the constitutional limits of government power. She’s a graduate of Yale University and Yale Law School and clerked for Judge Winter on the Second Circuit. And maybe most relevant and most important, she represented one of the respondents in this case, Michelle Cochran. So, Peggy, thanks for joining us.
We will also have Henry Su, who is a seasoned trial and appellate lawyer who focuses on antitrust, intellectual property, technology, and consumer protection law. He was previously a senior litigator and advisor with the Federal Trade Commission—one of the agencies at issue in this case. He had a long career in private practice as well. He’s currently chair of the Standing Committee on Pro Bono and Public Service at the ABA and is in leadership for the ABA’s Antitrust Law section. And he is a graduate of Yale University and UVA.
So we’re going to dive right in. I’m going to just briefly tee up the case, and then we’re going to talk about what the Court held and the implications for administrative law for agencies and practitioners. So I’ll briefly summarize, and we’ll dive in.
So this case is two cases, as Colton mentioned. One involved in the FTC. One involved the SEC. They both raise the same issue, though. In both cases, a regulated person was facing enforcement proceedings by an agency. In both cases, the person believed the agency lacked constitutional authority to proceed with the enforcement proceeding at all. They argued that the administrative law judges—or ALJs in their cases—were insufficiently accountable to the president in violation of Article II of the Constitution.
One of the parties also argued that the combination of prosecutorial and adjudicative powers in the same agency violated due process. And so both of them brought their claims directly to federal district court, but both of them had these claims dismissed for lack of jurisdiction. And the reason was that the agency’s orders by statute are reviewable in the Courts of Appeals. And so the district court held that, by implication, their jurisdiction was divested, and you couldn’t raise these important structural constitutional issues directly in district court. You needed to first go through the agency. And then on appeal from a final agency order, then raise it in the Court of Appeals.
And I want to stop there just so we can get a little bit more of a sense of what this means for regulated parties. The facts of Ms. Cochran’s case, I think, are particularly helpful to understand what’s at stake here. So, Peggy, could you talk about the facts of Ms. Cochran’s case, what relief you were seeking in district court, and why you were seeking it, and what her experience tells us about why this issue is important?
Margaret A. Little: I’d be happy to, Russell. I think that Justice Gorsuch did a great job of summarizing Michelle’s case, and I recommend people listening to this webinar to take a look at that. But to give you the short version, Michelle Cochran had already gone through one complete administrative hearing. That got set aside because of a case called Lucia, which is important to understand in this context. And Mr. Lucia, in 2018, had objected to the lack of proper appointment of his SEC ALJ, and he won on that issue in the United States Supreme Court.
Here’s the conundrum. Both Mr. Lucia and Ms. Cochran were then forced to go back and be retried by a newly correctly-appointed ALJ. But there were still objections to the removal protections. Moreover—and this is something that the Supreme Court did not talk about in the opinion, but it’s true—Mr. Lucia had raised the removal protections in his case.
Furthermore, the solicitor general agreed that the removal protections were unduly insulating ALJs from presidential control. In his case, that would have been a conceited issue had the Court reached that issue in 2018. It did not, saying that the lower courts had not reached that issue, so it had no lower court record on the removal issue.
We sued on Michelle’s behalf in federal court because she was in this awful dilemma of having gone through an administrative proceeding once, and she had to go through it again. And if she was right, she’d have to go through it a third time. That is illogical. It makes no sense. It’s costly to everyone. She was already seven — probably then six years into the administrative process when we filed her action for her in district court. We were also representing Ray Lucia as well, and we filed on his behalf in the district court in San Diego.
Now, Michelle is a single mom. She was working for the boss from hell, and he tried to make her become his partner with no additional pay—just additional exposure. And he was complaining about her taking too long to carefully complete audits. So she did what any self-respecting person would do. She quit her job. And that was in 2013, and all of the issues that she was charged with date from roughly 2010 to 2013.
Three years later, she’s astonished to be charged by the SEC for what Justice Gorsuch points out was essentially incomplete audit paperwork. And the proceeding did not go well. Michelle couldn’t even get a lawyer to represent her because the lawyer she consulted said, “They always win in the administrative proceedings. All we will be doing is taking your money, and we can’t do that.”
So she goes ahead pro se. What happens? Her boss from hell settles and then turns around and testifies against her, throws her under the bus for incomplete paperwork dating back by that time anywhere from three to six years. And so she goes to this proceeding, and her license to practice as a CPA is suspended.
This is a terrible ordeal for anyone to go through and particularly hard for somebody who had — no one had ever lost money, claimed fraud. There was simply no regulatory damage here having to do with the fact she didn’t complete all her audits when she quit because her boss was not just difficult, but as Justice Gorsuch noted, dishonest.
So she lost in the district court. At that point when we filed for Michelle, we had five circuits against us. We brought her appeal to the Fifth Circuit. We lost 2-1 with a good dissent, and there had also been a dissent in a similar case in the Second Circuit. But other than that, all of the circuit courts were going against us.
We moved for a rehearing en banc, and I argued Michelle’s case in January of 2021 before 16 judges on the Fifth Circuit Court of Appeals, who agreed that she should not have to go through yet another unconstitutional proceeding — then be able to bring her constitutional claims before a real court of law that was very likely to set aside the whole thing for a second time. And at that point, she would’ve been decades into administrative proceedings.
Russell Balikian: And so she’s stuck. That’s the issue here. She wants to raise this constitutional claim that the agency can’t go forward, but she can’t bring it in a court. And so she’s stuck in the agency for as many years as that process takes.
And Henry, on the FTC side, if a party goes before an administrative law judge at the FTC, how long can they expect that case to take? And are all cases litigated to final action, or do people settle? How does that process work?
Henry Su: Sure. Thank you, Russell. And first of all, apologies to everyone, the audience, The Federalist Society for my delay. I was teaching another program that literally ended at 2:00, and then we had people that ran over. So sorry to be a few minutes late. But thank you to The Federalist Society and the Regulatory Transparency Project and Svetlana for inviting me to speak.
To answer your question, Russell, I mean, the FTC’s rules regarding its adjudicative process are contained in what’s called “part three” of the rules. And there are specific timelines for how long an FTC adjudication is supposed to take place—assuming the FTC brings a complaint, right?
The intention, obviously, is to get to a hearing on the merits and ultimately through the entire process, which could include a petition for review to a circuit court of appeals. Obviously, it’s always possible that the case could settle along the way. But if not, the intention is that it’s going to go through adjudication. And there are specific timelines.
Basically, for a merger case, if the FTC is also seeking a preliminary injunction in federal district court, then the default — the presumptive timeline for getting to a hearing on the merits from — with an administrative law judge is five months. And if there’s no preliminary injunction, it’s eight months.
And then from that, after the hearing, assuming there are findings of fact — opposed findings of facts that are filed with the administrative law judge, the deadline for the initial decision from the administrative law judge is prescribed as well. It’s 70 days, so pretty quick. And then from there, if there is an appeal to the full commission, the full commission can have 45 days for a decision, or if there’s a preliminary injunction in place, or 100 days if there’s not.
So my point, though, is it’s pretty abbreviated. And there obviously are procedural guidelines for extending those dates somewhat. But it is pretty abbreviated. And a litigant in an FTC case can expect to get to the merits fairly quickly and hopefully avoid the tortuous path that Ms. Cochran had to go through with the SEC.
Russell Balikian: Yeah, that’s helpful. Thanks. And I guess it’s a matter of perspective, too, for the client or the regulated party who wants to bring their claim immediately and to argue that there’s a lack of constitutional authority. Even five months can seem like a long time. You’re paying attorneys to be litigating that, and you’re saying that the entire proceeding is unlawful. That’s a helpful background context. Thank you both for that.
And so now, let’s talk about the Court’s opinion. So both cases go up to the Supreme Court. The Court looks at its precedence and finds three that seem to be most on point. One is called Thunder Basin. In that case, the Court held that the statutory review scheme that put judicial review of an agency’s orders in a court of appeals did preclude district court jurisdiction over statutory claims and over a constitutional due process claim about the agency imposing a fine before holding a hearing.
Another case called Elgin was an equal protection challenge to a discharge decision. And the Court there also held that that constitutional claim couldn’t go immediately to district court. It needed to go through the agency and then to the Court of Appeals. And so the district court’s jurisdiction was divested.
And then a third case went the other way. That was Free Enterprise Fund, where the Court held that government officials were insufficiently accountable to the president. And the Court also held that that claim did not need to go first through the agency process and then to the Court of Appeals, that the district court had jurisdiction to adjudicate that claim in the first instance.
And so the Court articulated two different ways of approaching its precedence. One was to, what Justice Kagan called, the “30,000-foot view” to compare. Does this case look more like Free Enterprise Fund or look more like Thunder Basin and Elgin? And the other way was to evaluate three factors that the Court identified in Thunder Basin to see whether the statutory review scheme applied to the claim that was at issue. And those factors are whether precluding district court jurisdiction would foreclose all meaningful review of the claim, whether the claim is wholly collateral to the statute’s review provisions and whether the claim is outside the agency’s expertise.
The Supreme Court unanimously held that the claims that Ms. Cochran brought and that Axon brought were more like Free Enterprise Fund and were — and satisfied the Thunder Basin factors. And so the district court had jurisdiction. As I said, Justice Kagan authored that opinion, and there were two concurrences. One was by Justice Thomas making a constitutional argument that we’ll talk about in a bit, and then one was by Justice Gorsuch concurring only in the judgment and saying that the Thunder Basin factor — the entire process was convoluted. We’ll talk about those in a second.
But I want to talk first about the scope of the majority opinion written by Justice Kagan. Let’s start with these tests. We’ll start with you, Peggy. I mean, how should we understand the 30,000-foot test looking at this precedence and seeing which it’s most close to and the Thunder Basin factors? Are these two separate tests dissatisfying either mean that the claim can go forward? How do you understand what the Court was doing there?
Margaret A. Little: Well, the 30,000-foot test is something entirely new. It’s not in any lower court decision. I think it might usefully be seen more as dicta than a new test. But we always thought that this case—and that of Axon in which we had filed amicus briefs—was identical in its context to the Free Enterprise Fund test because it was challenging the very structure of the agency proceeding. It was not fact specific or claims specific. And finding out if you had to be tried before an administrative law judge that you claimed was unconstitutional was, by necessity, something that had to be decided before you underwent the proceeding.
Now, Justice Kagan goes on to go through all three of the Thunder Basin factors and with great ease has shown that both parties satisfied those tests because if you — I think the quote on the meaningful judicial rule is once you’ve had a proceeding that has already happened, it cannot be undone. And so it was a timing problem which we had been struggling with in the lower courts in three circuits on behalf of many clients. As well, it’s clearly collateral. It’s not case specific.
And finally, on the agency expertise—and this gets misquoted a lot, and it’s important not to do that—in Free Enterprise Fund, they describe the test as “beyond the agency’s competence and expertise.” And administrative law judges just do not have the competence to rule on their own constitutional qualifications to sit. It’s a very fundamental point.
One of our amicus in Cochran had argued that, essentially, it was asking a judge whether they should refuse themselves. But obviously, they can’t be ruling on their own constitutional validity. And in fact, I know of a case in the DEA context where an ALJ did just that. He said, “I can’t decide whether I am constitutionally protected from removal or unconstitutionally appointed.” And so it went to district court.
So it seems to us to be a very obvious thing that in these claims, whether it be a 30,000-foot test or applying all three factors, you get to the same result. These claims must be heard in district court before the proceeding happens.
Russell Balikian: Great. Thank you, Peggy. Henry, how about you? Do you see it the same way?
Henry Su: Yeah, I do. I mean, what I would say is I compliment Justice Kagan’s majority opinion for taking that 30,000-foot level because when we talked about this case last fall and I was reading the lower court’s opinions, I found it frankly kind of hard to follow the three factors under Thunder Basin—I mean, trying to parse what collaterality means or what agency expertise means or what meaningful review means. It was just hard to follow.
And the truth is I think the point is this is really kind of — if you’re going to use Thunder Basin, that 30,000-foot view is just fine because it’s really just like, “What’s our impression? What kind of a claim is this? And is this something that really should be subjected to the standard agency adjudicative process or not?”
And so I think that 30,000-foot view suffices if you’re going to apply Thunder Basin, although as we saw in the opinion, even the granular analysis makes sense. And I think so. I think I agree that the result is the result I think we all expected.
Russell Balikian: Yeah, that’s helpful. Thank you. And to your point on the granular test, there’s still a question about what happens if the factors point in different ways. The Court suggests that it may still come out the same way and that you could still end up with district court jurisdiction. But it points to the fact that the 30,000-foot view approach is just simpler and may end up leading you to the same result that you would be at after the Thunder Basin factors.
Peggy, I want to come back to you. So we have these two tests. What types of claims do you think are going to satisfy these? Obviously, in this case, we had the two that I mentioned. There’s a for-cause removal challenge, and there’s also the consolidation of adjudicative and prosecutorial functions in the same agency, which was framed as a due process claim. But what other claims do you think might be able to go forward?
Margaret A. Little: There’s a case called Jarkesy, which is working its way up. It’s on cert petition now. It would also include a jury trial Seventh Amendment violations, if these proceedings violate delegation claims that this is, in fact, Article II executive branch officers performing Article III judicial functions. And that violates the separation of powers and is not within the capacity of an Article II officer.
Russell Balikian: Great, thank you. Henry, anything else you would add to that?
Henry Su: No. I mean, I think there are going to be a number of theories that fit within this rubric of, “Okay. We’re challenging the constitutionality of the — either the agency’s structure or the adjudicative or enforcement process.” And certainly, if you read Justice Thomas’ concurrence, he gives a variety of arguments that litigants can now make in the first instance in a federal district court. So yes, that’s what I would say about that.
Russell Balikian: Yeah, thank you. Very helpful. And, I mean, I think there’s some room for creativity here and to see what courts are going to accept one — you could imagine nondelegation challenges being raised, appropriations clause challenges being raised under the same type of rubric.
And there’s an open question about whether certain types of statutory claims might even fit—the ones that really go to the fundamental authority of the agency as opposed to a minor interpretative issue. If the agency is barred from proceeding by a statute, might that fit in the same bucket? It’ll be interesting to see how the courts work out these claims.
Another question is what agencies will it apply to. Obviously, this decision involved the FTC and the SEC. But many other agencies are subject to similar judicial review mechanisms that place review of the final order directly on the Courts of Appeals. That would include the Consumer Financial Protection Bureau, the Federal Aviation Administration, the Federal Communications Commission, FERC, the Surface Transportation Board. There’s others as well.
It would seem that the same types of claims could be raised in that context as well because those review provisions operate similarly, at least in the absence of some agency’s specific reason why a district court couldn’t exercise jurisdiction.
Before we move on from the majority, I just want to ask. Does anything about the decision surprise you? I’ll start with you, Peggy. Does anything about the decision surprise you?
Margaret A. Little: Well, I was pleasantly surprised by the unanimity, although the oral argument had made it clear that that was a possibility, I think. There were not a lot of questions that would suggest a different outcome that seemed to hit home or that the solicitor general seemed to have convinced the Court on.
I was also surprised by the strong language right at the beginning of the decision. Justice Kagan says, “The challenges here are fundamental, even existential. They maintain, in essence, that the agencies, as currently structured, are unconstitutional.” And I think that’s a very broad statement. I think it endorses how important it is to get the separation of powers and constitutional limitations discovered. And I was pleased to see that in a majority opinion.
Russell Balikian: Yeah. Very, very interesting language, and it’ll be interesting to see how that plays out in future cases as well. Thanks. Henry, how about you? Does anything about the decision surprise you?
Henry Su: Not really because I think I had always looked at this as really purely procedural, right? Either it’s because you’re applying Thunder Basin to get into federal district court or if you accept Justice Gorsuch’s view, which is 1331—I think it’s in there. So either way, the whole point is you get there.
And we don’t need to agree on what theories work or don’t work to agree that parties who are faced with some sort of agency action should be able to go to a federal district court to challenge the constitutionality of the structure of the agency or the adjudicative process. Again, it’s going to be up to the courts and the Article III judges to decide whether these arguments work or don’t. And we all have our opinions about which ones may work or not, but it’s something that, I think, they should be allowed to do.
Russell Balikian: Yeah, yeah. And certainly, to go back to the point about the 30,000 foot, the claims here look a lot like what happened in Free Enterprise Fund. And so I think that goes to what you were saying, that the outcome here maybe wasn’t too much of a surprise. Although, to Peggy’s point, maybe the unanimity was.
Let’s turn to the concurring opinions. We’ve alluded to them a few times now. Peggy, would you mind telling us about Justice Thomas’ concurrence? What did he say, and how do you see it having a real-world impact on challenges to agency authority?
Margaret A. Little: Sure. He said—and this is going to be a quote—“I have grave doubts about the constitutional propriety of Congress’ vesting administrative agencies with primary authority to adjudicate core, private rights with only deferential judicial review on the back end.
He calls this—and he gives it a name. It’s the appellate review model. It does appear in many statutory review schemes. And he lists a number of deficiencies that he thinks these claims present. They include that it might violate the separation of powers by placing adjudicatory power within the authority of Article II agencies. It violates Article III by compelling the judiciary to defer to administrative agencies, violating the judicial vesting clause.
That may violate due process by empowering entities that are not courts of competent jurisdiction to deprive citizens of their core, private rights. And finally, they may run afoul the Seventh Amendment by allowing an administrative agency to adjudicate for private rights without a jury.
Those are very live questions right now—very important to Americans’ civil liberties. The current scheme, in my opinion, strips people of due process and jury trial rights, and we need to return to the courts so that these private rights are adjudicated by those who are independent and unbiased.
Russell Balikian: Great, thank you. And do you think that this is — that this tees up — I mean, you mentioned this is a live issue. Is this something litigants are going to be continuing to raise and to press—and maybe even in these — in the Axon context of going into a district court? These are live issues you’re saying that you expect people to continue to be raising in real cases.
Margaret A. Little: Absolutely. The jury trial, the unconstitutional delegation of legislative — excuse me — of adjudicative power. I mean, one way to look at this is Congress does not have adjudicative power, so it’s not power it has to delegate to an executive branch agency in the first place.
The Founders said, when it comes to core, private rights—and those are pertaining to life, liberty, and property—those issues must be adjudicated before a judge who sits in a separate branch of government and who has the constitutional protections and is sitting in a court that gives people the protections of a jury trial of the rules of evidence, of the rules of civil procedure.
I mean, Henry talked about the fact that the administrative adjudications are quick. Actually, it’s a very problematic thing because the investigations go on for years—sometimes many years—before people are charged. Then they are given a very short time to respond. And then the agency can sit on their claims forever.
And in Michelle’s case, she has waited a great deal of time. In Ray Lucia’s case, it took him six years to get to judicial review. And then he, by winning at the Supreme Court, his prize was to go back and do it all over again. And I think the most important thing that I hoped to and I think I did convey to the Fifth Circuit Court of Appeals on the en banc hearing was how long people were trapped in these administrative mazes.
George Jarkesy was seven years. Michelle Cochran, going on seven years. Ray Lucia was six years. There’s a litigant named Bandimere, ten years. I mean, no one would ever think that it was constitutional or even proper to require people to go through a decade — up to a decade of litigation in administrative courts before a tribunal that isn’t even constitutional in the first place.
Russell Balikian: Great, thank you.
Henry Su: And, Russell, if I might say, just hearing what Peggy just said, there’s a question in the chat that gets to this very point about the protracted investigation. So, Peggy, do you want to address that?
Margaret A. Little: Yeah. I think that the — I’m going to read you from a great amicus. This is not my writing. It’s somebody else’s, but it was terrific. “The result is the worst of both worlds for respondents. They’re hurried through the administrative hearing process with less time to prepare than if the same proceeding were held in district court and then forced to remain in limbo for more time than if the same action was filed in district court.” That was something that was noted at oral argument.
In addition, the investigating agency has had years to make its case. And very often, it does something. We file a document down, which puts years of documents of discovery before the charged respondent, and the respondent only has months—a very brief period of time to put his or her case together. And so the asymmetries of power and time between the charged person and the enforcement agency are dramatic and dramatically unfair.
Russell Balikian: Great, thanks. And for the record, that’s responding to a question about the big picture impact of agency habits of stretching out these investigations. And the questioner noted, it could even turn the process itself into a persecution. So thank you for responding to that.
Henry, let’s turn to Justice Gorsuch’s concurrence. He concurred only in the judgment. He didn’t join the majority opinion. He called the Thunder Basin factors “a roller coaster with twists and turns.” I don’t know if you had in mind the Thunder Mountain Railroad at Disneyland or something else. These are the important questions the Court watchers ask.
But do you share his assessment? Is Thunder Basin this difficult to apply? And what does it say about how courts and practitioners are going to approach these cases if he’s right about that?
Henry Su: Yeah. I mean, I do think it’s difficult to apply. I actually agree for the most part with Justice Gorsuch’s concurrence. I think that jurisdiction shouldn’t be a hard question, right? Congress has the power to define the original jurisdiction of the federal district courts. And given that they have 1331, it should be incumbent on Congress to spell out specific cases in other statutes where the district courts don’t have that jurisdiction.
And what Thunder Basin essentially is is, “Okay, Congress is silent, but did they do so by implication? How do we figure that out,” right? And that’s that roller coaster that Justice Gorsuch is talking about. And I think it’d be far easier to just tell Congress, “If you want to tell us that litigants can’t go to federal district court with this question, then do that. Put that in the statute.” It’s that easy, right? So I tend to agree with Justice Gorsuch. If I were a district judge, I would prefer not to have to apply Thunder Basin.
Russell Balikian: Yeah, very helpful. And it is interesting to wonder why the majority just didn’t adopt that rule and whether Justice Gorsuch’s view might have legs in the future. I suppose that the reason they didn’t go that far was because it would’ve — his view is in some tension with Thunder Basin and Elgin. And so maybe the majority thought there was no need to go there to limit or overrule those cases if you can reach the same result by applying the Thunder Basin factors.
But it does raise an interesting question about whether the justices will be interested in that view later, whether it can be implemented by lower court rulings without running afoul of Thunder Basin and these other cases. So I do think it’s — that’s an issue to watch as we’re going forward. Thank you, both.
And that kind of leads us to our last section of questions here on just the future implications of the ruling. Peggy, as you noted, the decision was unanimous as to the result, and it was authored by Justice Kagan. Is there anything significant about those facts? What does that tell us about the current Court?
Margaret A. Little: I think the Court is attuned to agencies getting beyond their regulatory guardrails. There was also a statement very early on in the decision in which Justice Kagan said, “The SEC is here to essentially ensure honest markets and the FTC to promote fair competition.”
And those were obvious things to say. But it certainly brought West Virginia v. EPA to mind. And it seemed to be a Court that is trying to remind agencies not to go beyond their guardrails—whether in this case they’re exercising adjudicative powers that they don’t have. But I think it has some implications for agencies reaching beyond what Congress has asked them to do—going beyond their organic commission to regulate.
So I think that’s a very helpful bit of language. And I also think going back to the Justice Gorsuch thing, I like to think he pulled the plug on and drained Thunder Basin. As someone who has argued it in San Diego district court, in the Ninth Circuit in the Northern District of Texas, and the Fifth Circuit twice, and the Eleventh Circuit, en — I tried to get en banc in the cert petition, and then through Michelle’s en bancs in the Court of Appeals, I can tell you I’ve read every case that tried to apply Thunder Basin. It is inconsistently applied.
One of the things Justice Alito pointed out at oral argument is, “What happens if one of the factors is set aside but not the other two? Which one is more important?” And the lower courts just tossed these things around like balls. They were juggling, but they all seemed to want to reach the very easy conclusion that you’ll dump the case on the agency.
And I think this is a great reminder of the fact that 1331 confers jurisdiction on district courts to hear constitutional questions. And when jurisdiction is conferred on a court, it is required to hear the case.
Henry Su: Yeah. The language “shall” rather than “may,” right?
Russell Balikian: Yeah, very helpful. Thank you. It does suggest that the current Court, as you said, is — this decision suggests the Court is very vigilant about keeping agencies accountable to the Constitution and statutes. And yeah, it’s in kind of another brick in that wall that the Court has been laying.
Before I ask Henry another question, just a reminder to the audience. Feel free to submit questions through the Q&A portal. We’re going to open it up for some questions here in just a minute. So if you have any, please submit those.
In the meantime, Henry, the FTC can choose to bring enforcement actions either before the agency, or they can go to district court, right? Do you think Axon is going to affect that choice? And more broadly, what does the decision mean for the future of FTC litigation and enforcement?
Henry Su: Well, so what I would say to you is, I think, let’s — sticking with just the Axon case, which is a merger case, this has been a recurring question over the years is why doesn’t the FTC challenge mergers in federal district court the same as the Antitrust Division?
And indeed, when I was at the Commission as a trial lawyer, we did just that. We challenged a hospital physician group merger in Idaho. And so we appeared before an Article III judge in Boise, Idaho, and got — persuaded that judge to see it our way and to break up the combination.
So it can be done. And, of course, there’s been proposed legislation, for instance, from Senator Lee under the title, “The Smarter Act,” which would basically make the process the same, right? So I think, if you’re the FTC, at least as far as mergers are concerned, I don’t think it makes that much of a difference to have to do exactly what the Antitrust Division does to have the same set of enforcement powers and remedies, same procedures, same jurisdiction—do exactly what they do.
And then, a public benefit is then there’s no kind of rolling the dice. “Oh, am I going to get the DOJ this time, or am I going to get an FTC this time?” Either way, it’s the same issues, same process. So I guess that’s what I would say about that.
Russell Balikian: Thanks, that’s very helpful. It seems like a win-win, right? But the litigants are going to get the benefit of being in court, and the FTC doesn’t have to worry about these kinds of collateral challenges. Do you agree with that, Henry? And then, Peggy, I didn’t mean to cut you off. We’ll come right back to you.
Henry Su: Well, I agree with you. I mean, now, I purposely limited my comment to merger litigation, merger enforcement because I think that’s where we have another agency—namely the Antitrust Division—that’s doing something different. And so, again, this idea of aligning the processes makes a lot of sense to me.
Obviously, there is another set of work that the FTC gets into where, I mean, it was Congress’ vision that the administrative adjudicative process might have certain benefits because it would allow the agency to basically bring to bear its expertise in certain areas in unfair methods of competition.
And so that’s another area where I don’t think — I think it’s a lot harder to say, “Well, what about that? Why should we dispense with that?” And indeed. In Axon, Axon’s motion—the constitutional arguments—were actually addressed by the Commission, right? So there is actually an opinion by the Commission where the Commission basically comes out. And it was a unanimous opinion. I think Commissioner Slaughter did not participate, but it was 4-0 with both Republicans and Democrats concluding the same thing.
But basically, they said, “Look. This isn’t Free Enterprise. Free Enterprise is about PCAOB, which is very different from our ALJs who strictly have an adjudicative role,” right? And that adjudicative role, that’s actually by design because that addresses that other argument about a single agency being both a prosecutor, a judge, and jury because you have an independent ALJ who does nothing but looks at the evidence, issues rulings—procedural rulings—conducts the hearing, and issues an initial decision.
You have a separate team within the agency that acts as complaint counsel. And then you have, finally, the full commission that reviews the initial decision and ultimately is accountable for what that’s going to be, right? And that was the Commission’s argument about the double cost-for-cost tenure issue, right?
Ultimately, it’s that presidentially-appointed congressionally-confirmed commission that is responsible for the decision that comes out of a commission.
Russell Balikian: Yeah, thanks. Peggy, I think you were going to chime in there. I didn’t mean to cut you off. Go ahead.
Margaret A. Little: No problem. Here’s my problem with the in-house agency adjudications. The FTC hasn’t lost before its own ALJs in 25 years. It has a 100 percent win rate. And the SEC is in the 90 percent. This is very different than the rates of success in the district courts. And I think that targets of enforcement are rightfully wary as to whether they are getting a fair shake in the administrative courts.
As far as Henry noting that the ALJs reached the constitutional questions, I go back to the ALJ who said, “Hey, I can’t decide on my own power to sit.” And Free Enterprise Fund talks about that. Is the ALJ competent? Do they have the competence and expertise? And they have, as Justice Kagan points out, “No special competence in separation of powers jurisprudence. In fact, they don’t have the power to rule upon that at all.”
I would also point out that in Ray Lucia’s case, it was really interesting to see how the Commission ruled. He took his case through to the five-member SEC. Two members dissent, and they dissented for two reasons: One, his ALJ, who was someone who bragged that he always ruled in favor of the Commission—and that’s the same judge that Michelle had—that he had made up a rule out of whole cloth in the agency enforcement. And this is a real genuine concern that the ALJs — and the specific language in Ray’s case was, “Under the meaning of back tests that I have found today, Ray Lucia has violated the securities laws.” Well, that’s retrospective regulation, and it’s totally unacceptable.
And the two dissenting commissioners not only pointed that out, but also pointed out that nobody — none of the five had competence to rule on a constitutional question. And finally, one of the things that has not received a lot of discussion because it’s still being litigated in Michelle’s case is, right as Michelle’s case was being considered for cert, the SEC filed a notice of control deficiency, noting that enforcement staff had accessed agency adjudicators files.
And that was also filed in George Jarkesy’s case. NCLA has a FOIA case going against the SEC in the D.C. district court because, in the FOIA process, they would give us no information about this. And so what you always suspect and fear is that when your prosecutor is also your judge’s employer happened, they were sharing files.
So the concern about impartiality and bias is very real. It’s very documented. And the SEC has been anything but forthcoming about the facts behind those controlled deficiencies.
Russell Balikian: Thanks.
Henry Su: If I may, Russell? I just want to respond quickly to Peggy.
Russell Balikian: Great.
Henry Su: Let me clarify what happened in Axon. In Axon, the ALJ actually entered an order saying, “I’m not qualified to decide the Constitution — constitutionality of my own position. So the motion was teed up to the full commission, and it was the full commission that issued that opinion that I’m referring to, right?
And I guess what I’m saying here is, I’m not suggesting that post-Axon litigants don’t have the ability to raise this constitutional question in the federal district court in the first instance. But I’m saying that at least if you look at the Commission’s opinion in Axon, it concludes that, at least the way it looked at it, this is different. The ALJ structure is different from PCAOB and Free Enterprise. That’s all I’m saying. And obviously, a federal district judge could disagree with that.
Margaret A. Little: There’s another really interesting thing that the Axon case presented that the Cochran case did not, and that is that the FTC was trying to force Axon—which, by the way, Axon abandoned the merger—but they were trying to force Axon to give over its intellectual property to the company that was now a competitor.
And that’s beyond the agency’s power to do. And footnote four of Justice Gorsuch’s opinion talks about the troubling fact that when so many people settle before agencies, they enter into consent decrees that, sometimes, the agency gets them to agree to give up something that they could never have won at trial.
That’s very disturbing that agencies are expanding their remedies—whether it be disgorgement, which is a hot topic, or whether it be surrendering your intellectual property to a company that you try to acquire and then you agreed you would not acquire, or in some related litigation that we do gag orders, where in which you agree you will never speak negatively about the SEC’s case against you. That’s something that the agency has no power to win a trial, and they admit it.
Russell Balikian: Great, thank you. We had a question in the chat that I want to pose to both of you if you’re able to answer it. It was a question about the win rate at the FTC. The question is, “Isn’t the win rate at the FTC 100 percent because the commissioners have the power to overturn the ALJs? And they use that power, so there’s no real independence in the ALJs.” The commenter mentions, “LabMD which got Thunder Basin, as it were, by the Eleventh Circuit was kept in court.”
But do either of you have a view on that? Is that part of the win rate percentage that you kind of have two levels of review, and so the ALJs end up getting overruled by the Commission?
Henry Su: I’ll say that I don’t have the win rate quote or stat in front of me firmly, so I’m not sure what it is exactly. But to respond to the commenter or the questioner, yes, it’s true. It’s true that the way the process works at the FTC is you have an initial decision from the ALJ based on the evidentiary hearing, which then is subjected to review by the Commission. And so the Commission obviously can affirm, adopt, modify, overturn, and it has overturned. Most recently, there was the adjudication in Illumina Grail, where the ALJ decided against the complaint counsel. But the Commission recently issued an opinion overturning that. So yes, they do disagree.
And so I’m not sure when we talk about win rate whether we’re really talking about the win rate at the ALJ level or at the Commission level. I don’t have that — I’m not going to be able to comment on that.
Margaret A. Little: Well, I have an observation to make about the Commission level of review because the Commission has to vote to prosecute somebody in the first place, okay? So they all agree that this person should be prosecuted. Then they’re prosecuted before an ALJ, who is an employee of the Commission. And then the first level of appeal is to the Commission that felt they should be prosecuted in the first place. I think it’s no wonder that Americans feel like they’re in a kangaroo court.
Russell Balikian: Great, thank you. We are running up on time, so I’m going to put one more question to both of you, and it’s this. “What is an important takeaway for practitioners from this case? For those who are in the practice of law who are representing clients before agencies, what’s a takeaway for them?”
Henry Su: If you want I go first, but I’m just going to steal from Peggy. It’s just that I do think that the 9-0 decision signals that this Court is very receptive to questions about the constitutionality of our administrative state.
And so the only way those questions get up to the Court is if they’re heard below. And so the point — the lesson here is, whatever arguments you want to make, you can make them. You can bring them before a federal district court.
Margaret A. Little: I agree, and I think that if you’re a practitioner with a client, you need to be very vigilant to be sure that they are getting before the tribunal that will offer them the most constitutional and fairest adjudication. And I think it’s incumbent upon practitioners to review whether this is a case that a jury might see differently.
I mean, if you read Justice Gorsuch’s recitation of Michelle Cochran’s case, I think there’s little doubt that a jury might have ruled other — in a different fashion than the ALJ did. So I think practitioners need to be attentive to the constitutional due process and jury trial rights of the clients.
Russell Balikian: Great, thank you. The only thing I would add is that the Court’s opinion doesn’t foreclose the ability to continue raising these structural challenges in the agency and Court of Appeals. So certainly, if it’s advantageous—and I think many clients will want to bring those structural challenges in district court and do that—but also, practitioners might want to be cognizant. Do you still want to preserve your arguments before the agency in case you end up deciding you want to take those up on appeal through the ordinary review mechanism as well?
But thank you both so much. It’s been a great discussion. As we said, it’s a major case. And the full implications are going to be developed over the course of the next few years, but this is an exciting time to be in administrative law. So thank you, Peggy and Henry, for joining us, and thanks to The Federalist Society for hosting us. Colton, I will turn it back over to you.
Colton Graub: Peggy, Henry, and Russell, we are especially grateful for you all for your time today and for the insightful discussion on this important issue. A special thank you to Henry, who managed to squeeze us into his busy schedule today. We really appreciate it.
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Gibson, Dunn & Crutcher LLP
Senior Litigation Counsel
New Civil Liberties Alliance
Program Director and Faculty
National Institute for Trial Advocacy
Federalist Society’s Administrative Law & Regulation Practice Group
Federalist Society’s Corporations, Securities, & Antitrust Practice Group