U.s. Supreme Court Deals Latest Setback to Federal Government's Use of Administrative Law Judges

• Publication year: 2023

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Michael D. Birnbaum, Haimavathi V. Marlier, Gerardo Gomez Galvis, and Justin Young ^*

In this article, the authors explain that a recent decision by the U.S. Supreme Court created doubt about the administrative law judge procedure on which the Securities and Exchange Commission so critically relies.

In a setback to the use of administrative law judges (ALJs) by the Securities and Exchange Commission (SEC) and other federal agencies to conduct in-house enforcement proceedings, the U.S. Supreme Court recently issued a unanimous decision in Axon Enterprise, Inc. v. Federal Trade Commission, et al., ¹ holding that federal district courts can hear collateral constitutional challenges to administrative enforcement actions brought by the SEC and the Federal Trade Commission (FTC) before there is a final agency adjudication on the merits.

Background and Majority Opinion in Axon

The Axon decision involved administrative SEC and FTC proceedings where both respondents claimed "that the agencies' [ALJs] are insufficiently accountable to the President, in violation of separation-of-powers principles." In each case, the respondent sued in federal district court, before an ALJ decision, seeking to enjoin the respective commission's proceeding. Both challenges resulted in dismissal from the district courts for lack of jurisdiction.

On appeal from those decisions, the U.S. Courts of Appeals for the Fifth and Ninth Circuits split. While the Ninth Circuit, reviewing the FTC case, agreed with the district court "that Axon's constitutional challenges fell within the FTC Act's scheme," ² the Fifth Circuit disagreed on the equivalent SEC question because

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"Cochran's removal power claim is not the type of claim Congress intended to funnel through" the statutory-review scheme set forth in the Securities Exchange Act of 1934 (Exchange Act). ³

Resolving the circuit split, Justice Elena Kagan delivered the Court's unanimous opinion and wrote that "[t]he ordinary statutory review scheme does not preclude a district court from entertaining these extraordinary claims." In so ruling, the Court analyzed whether these collateral challenges were "of the type" Congress intended the FTC Act/Exchange Act's "statutory review schemes" to reach, as determined by three factors set forth in Thunder Basin Coal Co. v. Reich.

The Court described these three factors as: "First, could precluding district court jurisdiction foreclose all meaningful judicial review of the claim? Next, is the claim wholly collateral to the statute's review provisions? And last, is the claim outside the agency's expertise?" ⁴

In answering this three-prong test, the Court first found that precluding district court jurisdiction would foreclose all "meaningful judicial review." Although Axon and...