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Supreme Court Hears Argument Regarding Challenges to Administrative Agency Procedures

November 8, 2022

The Supreme Court yesterday heard oral arguments in Axon Enterprises v. The Federal Trade Commission and Securities and Exchange Commission v. Cochran, both of which present the question whether parties to administrative enforcement actions can promptly challenge the authority and structure of the agencies in federal district courts, or must await the conclusion of the administrative proceedings to raise their objections in the courts of appeals, as is provided for in the FTC Act, the Securities Exchange Act, and the Administrative Procedures Act. The two cases come at a time when the Supreme Court has been receptive to complaints about administrative agency authority and at least some of the justices appeared ready to clear the way for Axon and Cochran to return to the district courts to pursue their wide-ranging challenges to the authority of the FTC and SEC, respectively. 

Axon was commenced in response to the FTC’s 18-month investigation of Axon’s 2018 non-reportable acquisition of a rival following failed negotiations between the FTC and Axon. Seeking to enjoin the agency from commencing administrative proceedings to unwind the merger, Axon launched a broad-based constitutional challenge to the FTC’s structure, authority, and merger review procedures. In particular, Axon objected to what it viewed as the excessive independence of the FTC’s administrative law judges from the executive branch and, more broadly, the FTC Act’s assignment of investigatory, prosecutorial, adjudicative, and appellate functions within a single agency. Axon also took issue with the “black box” clearance process by which the FTC and DOJ divide merger investigations among the two authorities, a process that is not authorized by Congress, and which Axon argues can lead to different procedural tracks: either an administrative FTC process, or a direct challenge by DOJ in district court. The Ninth Circuit affirmed the district court’s dismissal of Axon’s claims, ruling that Axon could only make its constitutional claims in a federal appellate court after the conclusion of the FTC’s administrative proceedings.

The merits of Axon’s constitutional claims are not currently before the court; for now, the narrow issue is whether Axon can assert those claims in the district court before the conclusion of the FTC’s administrative proceedings (i.e., can Axon go directly to federal district court to challenge the structure of the enforcement regime, or must it first exhaust the agency enforcement process). A ruling in favor of the government would allow its administrative challenge to Axon’s 2018 acquisition of its rival to proceed, whereas a ruling in favor of Axon would allow Axon to immediately pursue its effort to enjoin the FTC’s challenge and open the door to its wide-ranging constitutional challenges.  More broadly, a victory for Axon could be a harbinger of more direct judicial challenges to agency authority.

At oral argument, the Court’s conservative justices appeared receptive to Axon’s arguments. Justice Thomas repeatedly pressed the government’s attorney for a clear textual argument as to why federal district courts do not have jurisdiction over these types of constitutional claims.  The justices were not satisfied with the government’s reply, which focused on language from the Administrative Procedure Act and the FTC Act, instead of the general federal question statute, 28 U.S.C. § 1331, which Axon argued controlled. Justice Alito also hinted at his skepticism for the government’s position, asking: “what sense does it make for a claim that goes to the very structure of the agency having to go though the administrative process?”

Expressing their concern for the potentially sweeping implications of Axon’s position, Justices Sotomayor, Kagan, and Jackson expressed their doubts with Axon’s arguments. Justice Kagan noted that there are several “analogous” situations where litigants must await a final administrative order until they can appeal and challenge the order on jurisdictional or constitutional grounds. Justice Jackson noted her concern that parties could raise constitutional claims as a method of obstructing the agency process. At the close of rebuttal, Axon’s counsel repeated one of the principal themes of Axon’s brief and argument: the burden should not rest on citizens to exhaust the administrative process if the process itself is unconstitutional.

The argument comes on the heels of several decisions limiting the FTC’s authority and administrative agencies more generally. Last year in AMG Capital Mgmt. LLC v. FTC, 141 S. Ct. 1341, 1344 (2021), the Supreme Court held that Section 13(b) of the FTC Act did not give the FTC the authority to seek disgorgement, a form of equitable monetary relief, in federal court. Although the text of Section 13(b) authorizes the Commission to seek “injunctive relief,” it does not mention broader “equitable” remedies, which are referenced elsewhere in the FTC Act. Despite the lack of textual support, however, some federal courts had ordered disgorgement for decades. For example, the Ninth Circuit in AMG Capital had affirmed the District Court’s order that AMG pay $1.27 billion for unfair or deceptive acts or practices in violation of Section 5 of the FTC Act. The Supreme Court ended this practice by making clear that the FTC has no authority to seek equitable monetary relief under Section 13(b).

The Supreme Court’s decision in AMG Capital was the most recent in a series of cases limiting the FTC’s enforcement authority under Section 13(b) of the FTC Act. Two years prior to AMG Capital, the Third Circuit similarly read Section 13(b) narrowly, citing its text to confine its reach in FTC v. Shire ViroPharma, Inc., 917 F.3d 147 (3d Cir. 2019). There, the Third Circuit held that Section 13(b) did not give the FTC enforcement authority over a defendant’s past conduct given its authorization to seek a federal court injunction only when a defendant “is violating, or is about to violate” an FTC-enforced law. Unlike AMG Capital, which limited the FTC’s ability to seek monetary relief, Shire ViroPharma limited the FTC’s ability to seek both injunctive and monetary relief. Nevertheless, both cases illustrate a broader trend of federal courts limiting the FTC’s enforcement authority and the circumstances under which the FTC may exercise such authority. If Axon’s argument succeeds at the Supreme Court, the courts may see further claims aimed at paring back the agency’s authority on a variety of grounds.

Crowell & Moring will continue to monitor developments on these important issues regarding challenges to FTC and federal agency procedures, and will provide further updates.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Jeane A. Thomas, CIPP/E
Partner – Brussels, Washington, D.C.
Phone: +32.2.282.4082, +1.202.624.2877
Email: jthomas@crowell.com
Andrew I. Gavil
Senior Of Counsel – Washington, D.C.
Phone: +1.202.628.2823
Email: agavil@crowell.com
Daniel W. Wolff
Partner – Washington, D.C.
Phone: +1.202.624.2621
Email: dwolff@crowell.com
Lauren T. Fleming
Associate – Washington, D.C.
Phone: +1.202.624.2727
Email: lfleming@crowell.com
Darshan Patel
Senior Law Clerk – Los Angeles
Phone: +1.213.443.5569
Email: dpatel@crowell.com
Aryeh Mellman
Associate – Washington, D.C.
Phone: +1.202.624.2706
Email: amellman@crowell.com