ANALYSIS: Did SCOTUS Just Herald the Death of Expert Agencies?

Last week, the US Supreme Court opened the floodgates on collateral attacks against federal agencies seeking to stop bad mergers, securities fraud, and false advertising.

In a unanimous opinion on April 14, the court said that constitutional attacks against the structure and existence of administrative agencies can be brought in federal district court, rather than through the administrative processes set by the agencies’ empowering statutes. That result makes sense both in terms of the precedent on which the court relied and from the viewpoint of due process—maybe constitutional challenges to a proceeding shouldn’t have to endure that proceeding to be heard.

But what the outcome means for the two enforcement agencies involved in the Axon Enterprise Inc. v. Federal Trade Comm. case is likely to be dire. In the short run, expect constitutional attacks on expert agencies to spread prolifically (and particularly in specific jurisdictions), hampering enforcement. We also may face a long term without expert agencies that currently play an important enforcement role in many aspects of the US economy.

A Problem Merger

The FTC issued an administrative complaint in January 2020 challenging Axon Enterprise Inc.‘s completed acquisition of its body-worn camera systems competitor Vievu LLC. The FTC alleged that Axon is the dominant supplier of body cams to large police forces, and that the merger with VieVu (its nearest competitor) had worsened competition in an already very concentrated market.

Axon launched an attack on the legality of the agency’s administrative proceeding in a federal district court in Arizona. That court held that it lacked jurisdiction to entertain Axon’s claims because the FTC Act provides the exclusive path for claims once an administrative proceeding is underway. Axon appealed, and the US Court of Appeals for the Ninth Circuit affirmed the lower court’s decision.

Circuit Split

Meanwhile, in the Fifth Circuit, an accountant was fighting an SEC enforcement against her for allegedly failing to follow audit procedures.

The Securities and Exchange Commission fined Michelle Cochran in an administrative proceeding just before the Supreme Court’s decision in Lucia v. SEC, which held that administrative law judges in the SEC’s employ were unconstitutionally appointed. When the SEC reappointed its ALJs and restarted the proceedings against her, Cochran sued. While the Texas district court held that Cochran couldn’t sue until the administrative process concluded, the US Court of Appeals for the Fifth Circuit reversed and ruled that Cochran could challenge the SEC’s proceeding immediately.

With inconsistent rulings out of two circuits, the Supreme Court agreed to hear the cases together. It held that, under the three factors articulated in Thunder Basin v. Reich, Cochran and Axon can challenge the constitutionality of the enforcement actions against them in federal district court without waiting for a final order from the agency.

Justice Elena Kagan, writing for the court, said that constitutional claims about the structure or existence of expert agencies “cannot receive meaningful judicial review” through the agencies’ statutory processes. Those claims are “collateral to any decisions the Commissions could make in individual enforcement proceedings,” Kagan said, and they fall outside the agencies’ sphere of expertise. Therefore, the constitutional challenges aren’t “of the type” reached by the statutory review schemes Congress created for each agency.

In a concurring opinion, Justice Neil Gorsuch would have reached the same result under the federal court’s jurisdictional statute without the need for further analysis. In another concurring opinion, Justice Clarence Thomas opined that agencies shouldn’t be allowed to adjudicate “private rights” at all, and that administrative proceedings likely violate the constitution in several ways. Thomas found fault with a line of decisions dating to the 1930s holding that agencies can hear claims at all.

Fallout Likely

The Axon decision is about jurisdiction and procedure—but the case is likely to return to the Supreme Court like a flaming boomerang on the merits of whether the FTC and the SEC are constitutional. The current Court may indeed hold that the FTC, which has existed and worked for consumers for more than 100 years, never should have been. In the meantime, enforcement cases are likely to be enjoined while courts hash out which way the wind is blowing on the “structure and existence” of expert agencies erected before and during the New Deal.

What’s likely is evident in Axon’s case: The administrative trial before the FTC’s ALJ was scheduled to begin on Oct. 13, 2020, but the Ninth Circuit ordered a stay until further notice. Those proceedings are unlikely to resume (if ever) before the case completes a return trip to the Supreme Court on the merits.

That leaves the agency fundamentally hamstrung. Should the FTC undertake important merger investigations while this cloud gathers? If the agency can’t go to court to deal with legal violations that aren’t ongoing, as the Supreme Court has held it cannot, how can it enforce its core statutes if the administrative process is dismantled? Of course, other agencies face similar threats to their regulatory mission.

And according to Thomas, there’s an appetite to roll back the regulatory clock entirely to the time before the legal decisions that cleared the way for the New Deal. I wonder if that legal movement has considered the practical implications of each state independently deciding every type of enforcement currently carried out at the federal level. Economic and political uncertainty increases costs for everybody.

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