On April 14, the U.S. Supreme Court issued a unanimous decision in related cases, Axon Enterprise, Inc. v. Federal Trade Commission (FTC) and Securities and Exchange Commission (SEC) v. Cochran, holding that constitutional challenges to the agencies’ structures can proceed directly in federal district court before raising them in administrative hearings before the agencies. The Supreme Court found such “claims are not ‘of the type'” that administrative enforcement processes can reach.
As discussed here, both Axon Enterprise v. FTC and SEC v. Cochran raised the question of whether challenges to an agency’s constitutionality can go directly to federal district court, or whether the targeted party needs to complete the agency administrative process before bringing suit. A divided Ninth Circuit affirmed the district court’s ruling that it lacked jurisdiction to hear Axon’s lawsuit because the FTC Act requires targets to wait until the conclusion of an administrative proceeding to bring such challenges. The Fifth Circuit, on the other hand, ruled that the Cochran suit could proceed under the Supreme Court’s holding in Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB), which permitted the targets of an investigation to challenge the constitutionality of the appointment of PCAOB board members.
The Supreme Court held that “the statutory review schemes set out in the Securities Exchange Act and the Federal Trade Commission Act do not displace a district court’s federal-question jurisdiction over claims challenging as unconstitutional the structure or existence of the SEC or FTC.” The Court reached its conclusion by analyzing the factors outlined in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994), including determining if the constitutional claims asserted in the related cases were “of the type” Congress thought belonged in a statutory review scheme. In both cases, the plaintiffs alleged that the agencies were wielding unconstitutional authority in all or broad swaths of their work. The court found that “sweeping constitutional claims” such as these were not of the type that Congress intended for administrative review.
While the Court’s holding was unanimous, Justice Thomas wrote a separate concurring opinion where he expressed his “grave concerns” about the constitutional propriety of administrative tribunals more broadly. Justice Gorsuch also wrote a concurring opinion disagreeing with the application of the Thunder Basin factors and instead arguing that the same result should be reached by applying 28 U.S.C. § 1331: “Section 1331 grants district courts the power to hear Ms. Cochran’s and Axon’s claims and no other law takes that power away.”
Our Take:
Because the Consumer Financial Protection Bureau’s (CFPB) administrative powers and processes are modeled after the FTC and SEC, the Supreme Court’s decision should apply to the CFPB, as well as other federal agencies with similar administrative enforcement powers. We also believe that, between the Court’s joint decision in Axon Enterprise and Cochran and its Free Enterprise ruling, a company can likely bring constitutional challenges against an agency in federal court at any point during an administrative enforcement process, without waiting until the agency starts an administrative proceeding by formally asserting alleged violations.