WBK Industry News - Litigation Developments

SCOTUS Allows District Courts to Hear Constitutional Challenges to SEC, FTC

27 Apr 2023

In Axon Enterprise Inc. v. Federal Trade Commission, the U.S. Supreme Court held that defendants subject to SEC and FTC administrative proceedings may first challenge the constitutionality of those proceedings in federal district court before having their claims adjudicated by an administrative law judge (ALJ). Although the decision applies only to two administrative agencies—the SEC and FTC—the ruling will likely have broader implications for other federal administrative agencies, such as the CFPB, HUD, and FDIC, all of which have similar administrative schemes.

The agencies had argued that the defendants were required to make their constitutional claims before an ALJ, and then, if needed, before a federal appeals court. The defendants in this case, however, sidestepped this review scheme and asserted their claims in federal district court. Both the district court and the appellate court dismissed the claims for lack of jurisdiction.

The Supreme Court reversed the lower courts’ decision and held that federal district courts have jurisdiction to hear the defendants’ constitutional claims. The Court reasoned that the claims here were not “of the type” Congress intended to be reviewed within the ordinary review scheme. To reach this result, the Court relied on a three-factor test known as the Thunder Basin test. Those factors are:

first, could precluding district court jurisdiction “foreclose all meaningful judicial review” of the claim?;
second, is the claim “wholly collateral to the statute’s review provisions”?; and
third, is the claim “outside the agency’s expertise?”

The Court found that these factors weigh in favor of the defendants. First, precluding district court jurisdiction could foreclose all meaningful judicial review because the defendants asserted a “here-and-now-injury,” namely being “subjected to an illegitimate proceeding, led by an illegitimate decisionmaker.” Second, the court found that the constitutional claims had “nothing to do” with the enforcement-related claims brought by the agencies. And third, the constitutional claims are outside the Commissions’ expertise because the claims are “detached from considerations of agency policy.”