Wednesday, August 10, 2022

SEC, FTC argue in support of exclusive appellate review of final agency orders

By Rodney F. Tonkovic, J.D.

The FTC and SEC have filed a joint brief defending the position that ongoing agency adjudications may not be challenged in district court. The brief addresses petitions brought by the subjects of FTC (Axon Enterprises) and SEC (Michelle Cochran) administrative proceedings who brought constitutional challenges in the district courts. Both cases present the question of whether constitutional challenges to ongoing proceedings may be brought in district courts. The brief for the federal parties argues that the answer is in each Act's statutory scheme: judicial review may be sought only after final orders are issued and only in appellate courts. Oral argument in both cases has been scheduled for Monday, November 7, 2022 (Axon Enterprise, Inc. v. FTC and SEC v. Cochran, August 8, 2022).

Axon v. FTC. The FTC raised antitrust concerns when Axon Enterprises, a maker of policing equipment such as body cameras, acquired a competitor in 2018. Axon sued the FTC in the federal district court in Arizona in 2020, while the administrative process was ongoing. The complaint asked the court to enjoin the FTC from pursuit of its enforcement action (filed on the day Axon sued), arguing that the tenure protections enjoyed by the FTC Commissioners and the ALJ violated Article II and that the enforcement procedures violated the Due Process Clause. The district court dismissed the complaint for lack of subject matter jurisdiction, stating that the FTC Act limits challenges to FTC adjudications to the appellate courts. The Ninth Circuit affirmed, explaining that that Axon could obtain meaningful judicial review at the conclusion of the administrative process.

Axon filed a petition for certiorari in July 2021. The petition raised two questions: whether the FTC Act provision limiting federal court review to the appellate courts stripped the federal courts of jurisdiction over the FTC itself; and whether the FTC ALJs' dual-layer for-cause removal protection is consistent with the Constitution. The petition asked the Court to apply its reasoning in Free Enterprise Fund v. PCAOB and allow federal courts to rule on the constitutionality question without first forcing the accused party to undergo the lengthy and expensive administrative process. Unless specifically excluded by the FTC Act, federal oversight of questions of agency constitutionality should exist before the end of the administrative process, Axon said.

SEC v. Cochran. In 2016, CPA Michelle Cochran was charged by the SEC with failing to comply with PCAOB auditing standards. After Lucia v. SEC was decided in 2018, her case was reassigned to a new, constitutionally-appointed ALJ. Cochran then filed suit to enjoin the proceedings against her, arguing that the ALJ was unconstitutionally insulated from the president’s removal power. A Fifth Circuit panel affirmed the district court's dismissal for lack of subject matter jurisdiction, noting that every appellate court has arrived at the same conclusion: the statutory review scheme is the only path to asserting a constitutional challenge to SEC proceedings. The Fifth Circuit, sitting en banc, then reversed the panel's decision, holding that the Exchange Act says nothing about those who have not yet received a Commission final order or who have claims unrelated to a final order. The court also concluded that Cochran's challenge was collateral to the Exchange Act's review scheme and outside of the SEC's expertise and that Cochran would be deprived of the opportunity for meaningful judicial review.

The SEC then petitioned the Supreme Court to overturn the Fifth Circuit's holding. The crux of the Commission's argument is the fact that every appellate court to consider the issue has held that the statutory review scheme may not be bypassed. Both Cochran and the SEC noted that the Court had granted certiorari to Axon in January 2022 and, respectively, asked the Court to consolidate the cases or hold the Cochran matter until a decision in Axon. Certiorari was granted in May 2022, and the solicitor general proposed coordinating briefing schedules for the two cases and the Court gave its assent, ordering a consolidated response brief on the merits on behalf of the federal parties.

Federal parties' brief. The solicitor general's response maintains that a party may not challenge ongoing FTC and SEC adjudications in district court. First, the FTC Act and Exchange Act (the Acts) set out schemes for judicial review of the agencies' orders, the brief says. Both Acts authorize review only after final orders are issued and only in appellate courts, and this review includes claims of constitutional error. The brief explains that agency proceedings can involve myriad preliminary steps, and allowing judicial intervention at each step would interfere with the efficient conduct of the proceeding and burden reviewing courts, which would be required to engage in "piecemeal review." Deferring review until a final order is entered avoids these costs, the brief says.

Next, non-final agency actions are not reviewable under the APA or any other more specific judicial review provision. Axon and Cochran both point to 28 U.S.C. 1331, granting district courts jurisdiction over civil actions arising under federal law. But, specific provisions control over general ones, and the Acts specifically grant appellate courts jurisdiction to review adjudications after final orders are issued. It is discernible from the structure of the Acts' provisions that no court has jurisdiction to review an administrative proceeding before the filing of the petition for review. In addition, the APA generally authorizes review only after "final agency action," and the challenged actions here are not final. And, the APA sets out that judicial review takes place 'in a court specified by statute," i.e., the appellate courts. There is no exception for constitutional claims, Article II claims, or removal-power claims, all of which are encompassed within the APA, and all of which have repeatedly been raised in petitions for review at the end of agency proceedings.

Finally, where there is an express statutory review scheme, courts cannot create new remedies that Congress has not authorized. The Acts provide what Congress considers to be adequate mechanisms to remedy errors connected to administrative adjudications and courts must refrain from creating their own remedies, the brief says.

Precedent. Continuing, the brief argues that the Supreme Court has also repeatedly held that Congressional authorization of appellate review of agency adjudications precludes district courts from reviewing those adjudications. And, for 100 years in the case of the FTC, until the Fifth Circuit's decision in Cochran, the appellate courts agreed that the Acts preclude district court review of ongoing administrative proceedings. Addressing the Fifth Circuit's holding, the brief rejects the argument that only district court review of final orders is precluded (meaning that the courts can review proceedings preceding the orders); this would lead to "bizarre" results, the brief remarks, and the Acts' structures show that no court—neither district not appellate—may exercise jurisdiction while the proceeding is ongoing.

The brief also says that Free Enterprise Fund is inapplicable here because that case turned on "idiosyncratic" factors that are not present here. That case held that the two layers of "for cause" protection granted to PCAOB members violated separation of powers principles. For one, the firm in Free Enterprise Fund did not challenge a final order, or any SEC action at all, but rather a PCAOB action that was not part of a Commission final order. In addition, to gain review, the firm would have had to commit a violation and trigger an enforcement proceeding, risking significant penalties. These concerns are not implicated in this case, the brief says.

In conclusion, the brief again states that there is no sound reason to exempt Axon's and Cochran's constitutional claims from the general rule that district courts may not review ongoing proceedings. Reviewing courts have repeatedly decided the types of claims made here, the brief observes, and a carveout would lead to duplicative review and parallel litigation. The brief also characterizes Axon's and Cochran's challenges as efforts to secure immediate review by framing their claims as challenges to the proceedings themselves, and the Court has consistently rejected such arguments and has deferred to Congress’s judgment that the costs of interlocutory review usually outweigh the benefits. Axon's and Cochran's other objections to the proceedings lack merit, the brief says, in the face of Congressional policy choices reflected in the FTC Act, Exchange Act, and the APA.