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ANALYSIS: 5th Cir.'s Stand on ALJs May Spell Trouble for the FTC

June 3, 2022, 9:00 AM

Over the past few years, federal courts have expressed a growing skepticism about administrative agencies, their rule-making authority, and their enforcement proceedings. In a string of recent cases, for example, the Supreme Court has reasoned that long-standing agency practices are either unauthorized by the underlying federal statute (as in AMG Capt’l Mgmt. LLC v. FTC) or in outright violation of the Constitution (as in Lucia v. SEC).

The latest case to invalidate agency enforcement, the Fifth Circuit’s May 18 opinion in Jarkesy v. SEC, has the potential to greatly impact the Federal Trade Commission—along with other agencies that employ administrative law judges. While it’s too soon to know whether Jarkesy is a tremor or an earthquake, it’s important to understand the case and keep track of the arguments the court accepted there. The case could strike a further blow to the FTC’s ability to enforce its mandate to protect consumers.

Administrative Cases, Constitutional Concerns

The SEC brought an administrative action for securities fraud against hedge fund manager George Jarkesy Jr. in 2013. Jarkesy filed suit in federal court to enjoin that administrative action, arguing that it violated his constitutional rights to due process and equal protection (in part because the decision to bring an administrative proceeding meant that Jarkesy would not receive a jury trial).

The D.C. district court, affirmed by the D.C. Circuit, dismissed Jarkesy’s court case for lack of jurisdiction. The courts both held that the statutory structure Congress created precludes federal court review of the SEC’s administrative proceeding before the commission enters a final order.

Deja Vu

If that sounds familiar, it is because the Supreme Court is considering a similar case arguing that federal courts have jurisdiction to consider constitutional challenges during an administrative proceeding by the FTC—on similar arguments about separation of powers and due process.

Axon Enterprise Inc. sued in court after the FTC brought an administrative proceeding to enjoin its merger with a competing company, arguing that its constitutional challenges to the administrative process shouldn’t be heard in that administrative process. As in Jarkesy, a district court and the Ninth Circuit held that courts lack jurisdiction because of how Congress structured statutory review of FTC decisions.

The Supreme Court accepted Axon’s petition on the question of whether Congress’s grant of jurisdiction to the court of appeals to “affirm, modify, or set aside” FTC orders impliedly strips federal district courts of jurisdiction over constitutional challenges to the FTC’s “structure, procedures, and existence.” The Court declined to consider the merits of Axon’s constitutional challenge to the FTC’s structure.

The Fifth Circuit Weighs In

When his administrative process concluded, Jarkesy had the choice to appeal the SEC’s final order against him either in the circuit where he resides or in the D.C. Circuit. Rather than return to the court that had previously tossed his case on jurisdictional grounds, Jarkesy filed his appeal in the U.S. Court of Appeals for the Fifth Circuit.

A split panel of the Firth Circuit held that the SEC’s administrative process violates the constitution for three separate reasons.

First, circuit judges Jennifer Walker Elrod and Andrew Oldham held that the administrative process violated Jarkesy’s Seventh Amendment right to a jury trial. They reasoned that the SEC’s charges are analogous to civil fraud claims, which would be subject to a jury right. They rejected the agency’s argument that SEC proceedings protect public rights, because the SEC protects the general populace, rather than private rights of the type a court adjudicates before a jury. The court reasoned that Congress can’t launder a private right of action like fraud into a public right “by simply giving the keys to the SEC to do the vindicating.”

Second, the majority also held that allowing the SEC to choose whether to bring actions in court or before an ALJ unconstitutionally provides the agency with too much discretion, effectively letting it subject some people to far less process (including a jury trial) than others receive for the same violation.

Finally, the majority held that the ALJ structure violates separation of powers by allowing ALJs a double layer of “for cause” protection from presidential removal. It concluded that the first two defects warrant reversal of the SEC decision against Jarkesy.

In dissent, Circuit Judge W. Eugene Davis disagreed with his compatriots on all three points, and said he would have held that the administrative process fully complies with the Constitution.

Repeated Challenges

The Fifth Circuit’s sweeping constitutional holdings in Jarkesy pose potential problems for the FTC’s administrative process. Most importantly, many of the allegations that the FTC brings in its administrative actions involve claims highly analogous to civil fraud. If those can only be brought in court before a jury, but the FTC lacks the power to seek meaningful penalties in court (as the Supreme Court held last year in AMG Capt’l Mgmt. LLC v. FTC), the FTC’s consumer protection mandate will be severely curtailed. A legislative remedy for such problems, already facing an uphill battle in Congress, would need to address these additional issues.

Furthermore, the FTC currently has the ability to decide whether to bring merger challenges in administrative proceedings or before a court. If the Fifth Circuit’s logic in Jarkesy stands, that ability may be considered unconstitutional.

Right now, Jarkesy is strictly limited to the Fifth Circuit, with all other circuit courts still holding that the SEC (and presumably all other agencies) can constitutionally bring administrative actions. But if relocating to Texas, Louisiana, or Mississippi is all that’s required for a company to get out from under an FTC enforcement action, that’s not a comforting fact.

And, as noted above, the Supreme Court has an active invitation to consider these issues in Axon, and could still decide to take up the merits of Axon’s challenge to administrative proceedings more broadly. Or it could overturn Jarkesy and repudiate the Fifth Circuit’s reasoning.

In short, while it’s too soon to tell if Jarkesy undermines what’s left of the FTC’s consumer protection enforcement, expect challenges like Axon’s to FTC enforcement to become more common. Challenging the whole existence of the FTC in response to a merger challenge or consumer fraud charge used to seem like a Hail Mary. But in the current legal climate, it might not be anymore.

To find cases that reference the AMG decision, Bloomberg Law subscribers can create an alert from this Federal Dockets search.

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