Supreme Court Rules Against Biden Admin in Agency Lawsuit Dispute

A Supreme Court ruling on April 14 made it easier to challenge the reach of two powerful federal agencies—the U.S. Federal Trade Commission (FTC) and the U.S. Securities and Exchange Commission (SEC).

In its new red tape-cutting decision that is a defeat for the Biden administration, the Supreme Court took steps to rein in the so-called administrative state and reaffirm the separation of powers doctrine that prevents any specific branch of the government from exercising the core functions of another. The idea behind the doctrine is to discourage the concentration of power and make sure there are checks and balances.

Critics of the administrative state claim that in-house adjudications carried out by agencies are unfair because the tribunals, unlike regular courts, lack fixed evidentiary rules, allowing the agencies to function as prosecutor, judge, and jury. They argue that the tribunals are unconstitutional because they are not politically accountable.

The litigants challenging the agencies argued they should be able to contest the way the tribunals are constituted in federal courts without first having to launch a lengthy, expensive challenge within the administrative system.

But the Biden administration argued that challengers may only proceed to court after losing in potentially expensive, protracted agency proceedings.

The new ruling encompasses two cases: Axon Enterprise Inc. v. FTC, court file 21-86, and SEC v. Cochran, court file 21-1239.

Scottsdale, Arizona-based Axon makes body cameras and digital evidence management systems for law enforcement.

Axon purchased an insolvent competitor, Vievu LLC, for around $13 million in 2018. A month later the FTC sent Axon a letter indicating the acquisition raised antitrust concerns. Axon claimed it was subjected to “extensive and expensive investigatory proceedings,” and after 18 months of this “with no end in sight, Axon offered to walk away from its acquisition entirely,” but this did not satisfy the FTC.

Axon offered to unload its Vievu assets and provide millions of dollars in working capital to “a divestiture buyer,” but instead the FTC demanded that Axon transform Vievu “into a ‘clone’ of Axon using Axon’s intellectual property,” and threatened Axon with “an administrative proceeding” if it failed to do so.

Michelle Cochran is a certified public accountant in Texas.

In 2016, the SEC brought an enforcement action against Cochran, claiming she violated the Exchange Act by failing to comply with auditing standards issued by the Public Company Accounting Oversight Board when performing quarterly reviews and annual audits between 2010 and 2013.

An SEC administrative law judge (ALJ) fined Cochran $22,500 and banned her from practicing before the SEC for 5 years. Cochran objected but before the agency could rule on her objection, the Supreme Court held in Lucia v. SEC (2018) that SEC ALJs are officers of the United States under the Constitution’s Appointments Clause, who must be appointed by the president, a court of law, or a department head.

Cochran’s case was reassigned to a new ALJ. Cochran sued in federal court to halt the SEC’s administrative enforcement proceedings against her, arguing that because the agency’s ALJs enjoy multiple layers of for-cause removal protection, they are unconstitutionally insulated from the president’s power to fire federal officials. She also argued that the SEC violated her due process rights by failing to follow its own rules and procedures.

On April 14, the Supreme Court ruled (pdf) unanimously against the agencies. The court’s opinion was written by Justice Elena Kagan. Justice Neil Gorsuch did not join the court’s opinion; instead, he concurred in the judgment of the court but filed a separate opinion explaining his reasons for supporting the end result.

Kagan noted that both Axon and Cochran challenged the constitutional authority of federal agencies, claiming that ALJs are “insufficiently accountable to the President, in violation of separation-of-powers principles.”

The challenges are “fundamental, even existential,” as the litigants argue that “the agencies, as currently structured, are unconstitutional in much of their work.” The function of the court here is not to resolve those challenges but “to decide where they may be heard,” the justice wrote.

Objections to agency decisions follow a prescribed procedure laid out in statute. A party first makes a claim before the agency and then, if needed, to a federal court of appeals, she wrote.

But here Axon and Cochran “sidestepped that review scheme” and went to federal district court to halt the administrative proceedings.

Kagan said the district courts have jurisdiction to hear the legal challenges.

“The ordinary statutory review scheme does not preclude a district court from entertaining these extraordinary claims,” she wrote.

The court reversed the decisions of the two federal courts of appeal involved and remanded the cases for “further proceedings consistent with this opinion.”