SCOTUS Decision Sets Up Constitutional Challenges to FTC Administrative Proceedings

Key Points

• In a unanimous decision, the Supreme Court held in Axon v. FTC that the FTC Act (and the SEC Act) do not prohibit a federal court from hearing challenges to the constitutionality of either Commission’s structure and processes without first going through its administrative process. Despite a famously divided Court on many issues, this is the second unanimous Supreme Court ruling against the FTC in the last couple years (in 2021 the Court limited the FTC’s ability to seek monetary remedies such as restitution or disgorgement).
• The decision is likely to touch off a wave of constitutional challenges to FTC (and SEC) authority to adjudicate matters through the administrative process. Although the Supreme Court declined to resolve those constitutional challenges at this time—it instead remanded the cases for further consideration in the lower courts—it found that federal courts can hear constitutional challenges to an agency’s administrative process, without first going through that process, including whether:
  • The dual layer system insulates an ALJ from sufficient Presidential oversight in violation of separation of powers.
  • The combination of prosecutorial and adjudicative functions at an administrative agency render all of its enforcement actions unconstitutional.
• In the months leading up to the Supreme Court’s decision in Axon, parties in other cases had already begun to raise challenges to the FTC’s structure and administrative processes, but challenges like these are sure to proliferate. While the substantive challenges threaten the existence of the Commission as currently comprised, these challenges could, more immediately, cripple the FTC’s ability to effectively carry out its mission.

Axon’s Challenge and the SCOTUS Decision

Axon’s original suit arose from the Federal Trade Commission’s (FTC) challenge to Axon’s acquisition of Vievu, a supplier of police body cameras, for $13 million in 2018. Two years later, the FTC brought an administrative action to unwind the consummated merger. Axon sued the FTC in federal court to challenge the constitutionality of the administrative process, alleging that the FTC’s administrative law judge (ALJ) was insufficiently accountable to the President, violating the separation of powers doctrine. Axon also claimed violation of its due-process rights by the combination of “investigatory, prosecutorial, adjudicative, and appellate functions within a single agency.”

The U.S. District Court for the District of Arizona dismissed Axon’s complaint, holding that company had to go through the FTC’s in-house proceedings before it could bring its constitutional claims in federal court. The 9th Circuit affirmed. A similar case involving the Securities and Exchange Commission (SEC) in the 5th Circuit came down the other way, finding that a plaintiff’s claim alleging constitutional issues in the SEC’s administrative process was “wholly collateral to the Exchange Act’s statutory-review scheme” and was subject to immediate review in federal court. The Supreme Court granted certiorari and combined the two cases.

In a unanimous decision, the Supreme Court agreed with the 5th Circuit decision (and reversed the 9th Circuit), holding that the statutory review schemes set out in the SEC and FTC Acts do not displace a district court’s federal-question jurisdiction over claims challenging as unconstitutional the structure of the SEC or FTC. Such claims, the Court held, fall outside the normal review process. Echoing the logic employed by the 5th Circuit, Justice Kagan, who authored the opinion, explained that the FTC isn’t well suited to deciding constitutional questions about its own power. “The Commission knows a good deal about competition policy, but nothing special about the separation of powers.”

Previewing his view of the substantive cases, Justice Thomas wrote a separate concurrence to address the “serious constitutional issues” raised by granting administrative tribunals too much authority to adjudicate what he views as private rights with deferential judicial review on the back end.

What Could this Decision Mean?

The Supreme Court explained that its decision addresses only the narrow question about where challenges, such as those brought by Axon and the plaintiff in the SEC case, may be heard. Thus, it declined to address the merits of their challenges, remanding those issues for lower courts to resolve. Ultimately, we expect that the cases will likely make their way back to the Supreme Court.

The ramifications of a court ultimately holding the FTC’s fundamental administrative structure unconstitutional are unclear, but they could threaten the FTC’s existence particularly as currently structured. Given these risks, the FTC may be less likely to pursue enforcement in its home court and choose instead to litigate in federal court.

The decision may also alter litigation in federal court, particularly merger litigation. Both the FTC and Department of Justice (DOJ) can seek preliminary injunctions to block mergers in federal court. The legal standards each has been required to meet to sustain a preliminary injunction, however, have not been the same. Courts often require the DOJ to demonstrate some version of a reasonable likelihood of success on the merits.¹ By contrast, the FTC has often sought a lower standard for a preliminary injunction in federal court, claiming that courts need not wade through complicated issues and should instead defer to the FTC administrative process since the merits of its case ultimately will be adjudicated there. Most courts have agreed with the FTC, requiring only that the FTC demonstrate “serious, substantial” questions on the merits to obtain a preliminary injunction.² With challenges to the FTC’s administrative process likely to proliferate, the argument for symmetry between the DOJ’s and FTC’s burden to sustain a preliminary injunction becomes more compelling. Specifically, merging parties may argue that the FTC administrative process should not be entitled to deference after Axon and that federal courts should require the FTC to meet the higher preliminary injunction standard required of the DOJ.

The decision may also influence decisions within the agency on how to handle existing enforcement while fundamental issues about the FTC’s structure and administrative process are resolved. Merging parties have already raised challenges to the FTC’s administrative process in anticipation of the Supreme Court’s decision. For example, Intercontinental Exchange, Inc. and Black Knight, Inc., whose proposed merger has been challenged in federal court and in parallel administrative proceedings, raised constitutional defenses in their answer to the FTC’s administrative complaint. Realistically, because these substantive challenge could take significant time to resolve³, parties may try to enjoin administrative proceedings during the pendency of constitutional challenges. Other existing cases in which the parties have raised constitutional challenges to the FTC include FTC v. Meta and Illumina/Grail.

¹ See, e.g., United States v. Siemens Corp., 621 F.2d 499, 505-06 (2d Cir. 1980).

² FTC v. Whole Foods Mkt., 548 F.3d 1028, 1035 (C.C. Cir. 2008) (“[By] raising questions going to the merits so serious, substantial, difficult, and doubtful as to make them fair ground for thorough investigation, . . . [the FTC] creates a presumption in favor of preliminary injunctive relief.”).

³ For example, in Carr v. Saul, 141 S. Ct. 1352, a case involving constitutional questions related to administrative proceedings, it took nearly a year to complete district court litigation, 11 months until the 10th Circuit’s opinion, and nine more months until the Supreme Court issued its opinion.