By Anne Sherry, J.D.
The PCAOB moved to dismiss a district-court action challenging its enforcement regime, arguing that the plaintiff must bring his challenge to the SEC and then to a federal court of appeals. The motion appeared just as the Supreme Court handed down Axon Enterprise, Inc. v. FTC, which confirmed that district courts have jurisdiction to hear constitutional challenges to agency structure. Many of the PCAOB’s arguments invoke a statutory review-channeling regime similar to those in Axon (Doe v. PCAOB, April 14, 2023).
The plaintiff, suing as John Doe, worked as an auditor at the Colombia branch of an international network of accounting firms. In 2019, the PCAOB opened an investigation against Doe related to a 2015 audit. In 2022, the Board warned that it would begin disciplinary proceedings and offered a settlement; Doe refused. The Board then instituted formal disciplinary proceedings against Doe. With the aid of the New Civil Liberties Alliance, Doe filed a lawsuit in the Northern District of Texas challenging the constitutionality of the PCAOB proceedings.
Represented by former Solicitor General Donald B. Verrilli Jr., the PCAOB argues for dismissal on several bases: lack of personal jurisdiction over the Board, lack of subject-matter jurisdiction over the plaintiff’s due process claims, improper venue, and the non-jurisdictional grounds that Doe failed to exhaust administrative remedies and lacks a valid cause of action.
For its jurisdiction and venue arguments, the PCAOB maintains that the district court has no general personal jurisdiction over it because PCAOB is incorporated and headquartered in the District of Columbia, and Doe did not allege sufficient contacts between the Board and Texas to render Texas the PCAOB’s home. The complaint fails to connect the Board’s alleged Texas contacts to the controversy at issue, the defendant argues. For similar reasons, the case should be dismissed for improper venue, or in the court’s discretion, transferred to the District Court for the District of Columbia. This would promote efficiency and rehome the case in a location with a strong local interest in the outcome of the suit.
The Board’s remaining arguments invoke a statutory claims-channeling procedure that is newly in doubt post-Axon. According to the defendant, the court lacks subject-matter jurisdiction over the plaintiff’s due process claim because the Sarbanes-Oxley Act establishes a review scheme that reflects a Congressional intent to channel claims first to the SEC, and then to a federal court of appeals. In Free Enterprise Fund v. PCAOB, the Supreme Court determined that an accounting firm’s Article II challenge to the PCAOB’s structure landed outside the Exchange Act’s review scheme. Here, however, the PCAOB distinguishes Free Enterprise Fund—and Cochran, which Axon affirmed—as involving structural constitutional challenges, whereas Doe’s due process claim focuses on the Board’s conduct in the disciplinary proceeding such as the evidentiary standards it applied, the potential for adverse inferences, and limits on pre-hearing discovery.
The PCAOB finally argues on non-jurisdictional grounds that because Doe did not exhaust his administrative remedies, the court should dismiss the action. Doe also lacks a cause of action because he asserts only generic, equitable claims that cannot sidestep the statutory channeling procedure.
In Axon, the Supreme Court held that the statutory review schemes for SEC and FTC administrative actions did not displace district court authority over constitutional challenges to agency structure. The underlying respondents asserted “here-and-now” injuries by being subjected to enforcement processes that they maintained were unconstitutionally structured. Accordingly, they would lose their rights not to undergo the defective proceedings if they could not assert those rights until the proceedings were over. Their challenges were wholly collateral to the statutes’ review provisions, and the claims fell outside the agencies’ expertise. (The FTC “knows a good deal about competition policy, but nothing about the separation of powers,” Justice Kagan wrote).
Last month, another individual’s challenge to FINRA disciplinary proceedings was rejected on jurisdictional grounds by a district and an appellate court. The individual sought Supreme Court review.
The case is No. 23-cv-00149.