Federal Agencies Face Constitutional Fights After High Court Loss

The US Supreme Court’s decision allowing the FTC and SEC’s in-house litigation defendants to sue the regulators is the latest dent in the continued attenuation of federal agencies’ enforcement powers.

The unanimous ruling Friday in a pair of combined cases, Axon Enterprise v. FTC and SEC v. Cochran, allows the Federal Trade Commission and Securities and Exchange Commission’s enforcement targets to challenge the agencies’ constitutional authority in federal district court without waiting for an in-house judge’s decision, as has been required for decades.

The change will likely invite a wave of constitutional challenges against two of the most powerful regulators and other federal agencies with a similar structure.

Agencies will have to more aggressively defend their use of administrative law judges and in-house courts against accusations that they violate due-process rights, legal watchers predicted.

The agencies’ loss is part of the same trend that hamstrung the Environmental Protection Agency’s authority and saw the high court endorse the “major questions” doctrine, which says that Congress must explicitly dictate authority to agencies to decide matters of great national significance.

“It’s part of a continued skepticism of the role and the power of administrative agencies today,” said University of Pennsylvania Carey Law School professor Jill Fisch.

The ruling is “great news” for companies who can now shop for friendly district courts when they’re hit by administrative proceedings, such as an FTC suit attempting to block a merger, said Blake Emerson, a professor at UCLA School of Law.

“The court has been increasingly skeptical of broad grants of authority, attentive to separation of powers issues, dialing back the scope of congressional delegation to agencies and the like,” said Gus Hurwitz, the director of law and economics programming at the International Center for Law and Economics. “If you want some sense of what is likely to happen with future cases resulting from this—and generally the court’s jurisprudence—look to that broader trend.”

The first direct attack against SEC authority is already teed up at the Supreme Court.

In May 2022, the US Court of Appeals for the Fifth Circuit found in Jarkesy v. SEC that the agency’s use of administrative law judges violated three provisions of the US Constitution. Attorneys for the SEC filed in March a petition for Supreme Court review of the decision. If the high court grants review, a loss for the agency would hasten some of the constitutional challenges it will likely face under its loss in Axon and Cochran.

“The candy shop is open with regard to constitutional claims against administrative agencies, and this makes it easier to get into candy shop,” Emerson said.

Agency Tactics

Now that its use of in-house judges can more easily face constitutional challenges in court, the FTC may look more to district courts in filing lawsuits to block mergers, Hurwitz said.

The agency may also have to dedicate more attorneys to preemptively defend itself against attacks to constitutional authority, he said.

Fending off a constitutional challenge in district court while trying to pursue an enforcement action in-house could slow the agencies’ enforcement efforts and force them to expend more resources as they litigate on multiple fronts.

“From an agency perspective, I would be thinking that it may be prudent to bring my action in federal court, which mitigates the constitutional issues and allows me to proceed with my enforcement mandate,” DLA Piper US LLP partner Deborah Meshulam said.

The FTC has only one administrative law judge in-house, and he doesn’t get to hear every merger challenge. From 1977 to 2016, a total of 145 cases were heard and decided in the FTC’s in-house court, according to a study by former Commissioner Maureen Ohlhausen.

Meanwhile, the SEC has in recent years already shifted away from using in-house judges to hear cases, filing most contested disputes in federal court. But the agency still brings some matters in-house, including when it seeks suspensions against lawyers and accountants for improper conduct, attorneys said.

“The Cochran decision definitely will affect these proceedings, slowing the Commission’s enforcement efforts and encouraging respondents to sue the SEC in district court,” Haynes and Boone LLP partner Brad Foster said.

A SEC spokesperson said the agency is reviewing the Supreme Court’s opinion. The FTC declined to comment.

Challenges Ahead

The Supreme Court’s ruling shifts the focus to SEC v. Jarkesy, which could answer the constitutional questions left open by the court’s Axon ruling.

The Fifth Circuit held in Jarkesy that the SEC’s proceedings violated the right to a jury trial. The court also said restrictions on the removal of SEC judges were unconstitutional, and that Congress unconstitutionally delegated legislative power by allowing the agency to choose between suing in court and bringing an action in-house..

The SEC petitioned the Supreme Court for review in March.

“Jarkesy directly tees up the issue of whether the use of ALJs is constitutional,” Alston & Bird LLP partner Susan Hurd said.

In addition to emboldening litigants, the Axon ruling may also reinvigorate legislative interest in removing the FTC’s administrative law authority, said Gerald Stein, a partner at Norton Rose Fulbright and a former FTC attorney.

A 2018 proposal by a group of Senate Republicans, dubbed the SMARTER Act, would have standardized the merger review process between the FTC and the other agency that also scrutinizes mergers—the Justice Department’s antitrust division. The division, which has no in-house judge, only litigates in federal court.

Companies faced with FTC enforcement have already started to sound off on arguments invited by the Friday ruling.

In its April 5 appeal of an FTC order to divest the cancer start-up Grail, biotech developer Illumina Inc. alleged the agency violated the Constitution in several ways—including how its commissioners are protected from the president’s ability to fire executive branch employees at will.

Microsoft Corp. also alleged the FTC’s structure violated the Constitution as the company fights back against the agency’s attempt to block its $69 billion acquisition of video game developer Activision Blizzard Inc. Microsoft later amended the filing to remove the constitutional challenge.

“This ruling is planting the seeds to undermine the capability of the administrative state,” said Daniel Hanley, a senior legal analyst at the advocacy group Open Markets Institute. “It’s just a matter of time before you get conflicting district court decisions. It’s a flower that’s going to bloom regardless of the underlying conditions.”