SCOTUS Considers Federal Court Jurisdiction Over Constitutional Challenges to Pending Agency Actions

SCOTUS Considers Federal Court Jurisdiction Over Constitutional Challenges to Pending Agency Actions

Legal Sidebari
SCOTUS Considers Federal Court Jurisdiction
Over Constitutional Challenges to Pending
Agency Actions
November 7, 2022
On November 7, 2022, the Supreme Court is scheduled to hear oral arguments in two cases with
potential y far-reaching consequences for agency adjudications: Securities and Exchange Commission
(SEC) v. Cochran and Axon Enterprise, Inc. v. Federal Trade Commission (FTC). Both cases involve
constitutional chal enges to agency proceedings with significant legal implications in their own right, but
the central issue before the Supreme Court this term is whether federal district courts can hear those
chal enges before the agencies decide them in the first instance. This Legal Sidebar begins with an
overview of federal court jurisdiction. It then provides background on the Axon Enterprise and Cochran
cases and the circuit split that prompted these petitions to the Supreme Court. Lastly, the Sidebar
highlights the significance of these cases for Congress and other agencies.
Federal Court Jurisdiction
Article III, Section 1, of the Constitution vests the judicial power in “one supreme Court, and in such
inferior Courts as the Congress may from time to time ordain and establish.” Article I, Section 8, Clause
9, grants Congress the power to “constitute Tribunals inferior to the supreme Court.” By al owing
Congress to establish lower federal courts, the Constitution implicitly gave Congress the power to define
the jurisdiction of those courts (i.e., the types of cases the courts may adjudicate), which Congress has
done through federal statutes. In particular, 28 U.S.C. § 1331 grants federal district courts “original
jurisdiction of al civil actions arising under the Constitution, laws, or treaties of the United States”—also
known as “federal question jurisdiction.”
The Supreme Court has long recognized that Congress can also limit the jurisdiction of federal courts,
including by assigning initial review of a dispute to an administrative agency. If Congress does so, the
Administrative Procedure Act or another statute may authorize judicial review of the agency’s final
decision, but judicial review of the agency’s proceedings before a final decision wil general y be
precluded. Instead, a litigant must general y make its arguments first to the agency, preserving those
arguments for later review by an Article III court.
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While Congress’s instruction to foreclose district court jurisdiction over claims involving non-final
agency actions need not be explicit, it must be “fairly discernible” from the statutory scheme. In Thunder
Basin Coal Co. v. Reich, the Court identified reasons why a federal statute implicitly precluded initial
review in federal district court based on “the statute’s language, structure, and purpose, its legislative
history,” and “whether the claims can be afforded meaningful review.” The Court explained that, by
comparison, a statute does not preclude a district court from exercising jurisdiction where (1) preclusion
“could foreclose al meaningful juridical review,” (2) the claims are “wholly collateral to a statute’s
review provisions,” and (3) the claims are “outside the agency’s expertise.” These three factors came to
be known as the Thunder Basin factors, and the Court subsequently applied them in other cases.
Axon Enterprise, Inc. v. FTC
Axon Enterprise, Inc. v. FTC stemmed from an FTC administrative action, on antitrust grounds, against
Axon Enterprise’s acquisition of a competitor. While that action was pending before the FTC, Axon sued
the FTC in federal district court to stop the proceedings. Axon argued, among other claims, that an
administrative law judge (“ALJ”) could not preside over the FTC’s action because the agency’s ALJs
were unconstitutional y insulated from removal under the Supreme Court’s reasoning in Free Enterprise
Fund v. Public Company Accounting Oversight Board (PCAOB). (The Free Enterprise decision and
removal chal enges to ALJs are discussed in more detail in this Legal Sidebar.) The district court
concluded that it lacked jurisdiction to hear Axon’s chal enge because a federal statute, the FTC Act,
precluded initial review of Axon’s arguments in federal court. That statute authorizes the FTC to serve a
complaint, hold a hearing, and issue a cease-and-desist order against a corporation that has violated the
FTC Act, and it states that a corporation subject to a cease-and-desist order “may obtain a review of such
order” in a federal court of appeals.
On appeal, the Ninth Circuit held that the FTC Act “reflects a fairly discernible intent to preclude district
court jurisdiction.” The court explained that the statute “includes a detailed overview of how the FTC can
issue complaints and carry out administrative proceedings.” Additional y, the court observed, the statute’s
language concerning judicial review is “almost identical” to a provision in an SEC statute (discussed
below) that courts have concluded strips district courts of jurisdiction. The court then applied the three
Thunder Basin factors. First, the court concluded that the statute provided “meaningful judicial review” of
Axon’s constitutional chal enge even if an ALJ could not decide the issue, because Axon could appeal the
agency’s final decision on the antitrust action to a federal court of appeals, which could consider the
constitutional claim at that time. Second, the court reasoned that Axon’s constitutional claim was not
“wholly collateral” to the statutory review scheme because it was the “vehicle by which” Axon sought to
prevail at the agency level. By comparison, the court concluded that the third Thunder Basin factor
weighed against stripping the federal court of jurisdiction, finding that the FTC lacked the “agency
expertise” to resolve Axon’s constitutional chal enge. Although the Thunder Basin factors “point[ed] in
different directions,” the court followed the lead of other circuits in placing more emphasis on the first
factor—meaningful judicial review. The Ninth Circuit concluded that “Axon can have its day in court—
but only after it first completes the FTC administrative proceeding.”
SEC v. Cochran and the Circuit Split
SEC v. Cochran started as an SEC enforcement action against Ms. Cochran, a certified public accountant.
The SEC ALJ assigned to the case found that Ms. Cochran violated the Exchange Act, a federal statute,
and imposed a $22,500 penalty and five-year suspension on practicing before the SEC. While Cochran
was appealing the ALJ’s decision to the Commission, the Supreme Court ruled in Lucia v. SEC that SEC
ALJs are “officers of the United States” who were not properly appointed in accordance with the
Constitution’s Appointments Clause. As a result, the SEC reassigned Cochran’s case to a new, properly
appointed ALJ. Cochran sought to enjoin the new proceeding in federal court, arguing that it was stil

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defective for the reason argued in Axon Enterprise—because ALJs have unconstitutional removal
protections.
The district court concluded that it did not have jurisdiction to hear the chal enge. The court applied 15
U.S.C. § 78y, which provides that a “person aggrieved by a final order of the Commission ... may obtain
review of the order in [a] United States Court of Appeals.” The district court held that this provision
requires a defendant in an SEC enforcement action to raise her constitutional claims before the agency for
final resolution by the ALJ or the Commission and that the sole path to appeal that decision leads to
circuit, not district, court. Cochran appealed the jurisdictional ruling to the Fifth Circuit. A three-judge
panel affirmed, and the full circuit agreed to rehear the case en banc.
On rehearing, the Fifth Circuit reversed the district court’s decision in part, creating a circuit split with
five other courts of appeals. The Fifth Circuit held that Section 78y “did not explicitly or implicitly strip
the district court of jurisdiction” over Cochran’s constitutional claim. First, the court explained, the
federal question statute grants district courts jurisdiction over “all civil actions arising under the
Constitution.” By comparison, the court reasoned, Section 78y gives courts of appeals some jurisdiction
(i.e., over appeals from final SEC orders) without precluding district courts from exercising jurisdiction
over other claims, including constitutional chal enges raised before the entry of a final order. Second, the
court interpreted Free Enterprise Fund to hold that Section 78y does not strip district courts of
jurisdiction over constitutional removal chal enges to pending agency actions. In that case, the Supreme
Court had applied the three Thunder Basin factors and held that the district court properly exercised
jurisdiction over the plaintiff’s removal chal enge to an investigation launched by the PCAOB, a board
overseen by the SEC. According to the Supreme Court, the plaintiff could not obtain meaningful judicial
review of its removal claim through the statutory process because the PCAOB’s investigation had not
yielded formal sanctions and might not result in a final SEC order. Additional y, the constitutional
chal enge to PCAOB’s structure was “collateral” to any reviewable SEC order and not within the
agency’s expertise. The Fifth Circuit found Free Enterprise Fund to be controlling, even though the SEC
had instituted not just an investigation of Cochran but an administrative action against her. The en banc
court found this difference to be immaterial, reasoning that Cochran “is stil not guaranteed an adverse
final order, as the SEC might resolve her case in her favor.” Conducting its own analysis, the court further
held that al three Thunder Basin factors suggested that Congress did not intend to divest district courts of
jurisdiction over “structural” constitutional claims, such as Cochran’s removal chal enge, which contest a
feature of the statutory review scheme itself.
Considerations for Congress
Axon Enterprises and Cochran could pose a direct chal enge to the concept of “implied preclusion of
district court jurisdiction” because the parties advance different ways of discerning Congress’s intent in
defining federal jurisdiction. Cochran, for instance, urges the Court to apply a “plain reading” of the
Exchange Act, arguing that because she is not chal enging a “final order of the Commission,” Section 78y
does not divest district courts of their federal question jurisdiction over her constitutional claim. In
contrast, the United States points to the statutes’ structure and context, arguing that the acts’ specific
procedures for review supersede the general grant of district-court jurisdiction in 28 U.S.C. § 1331. It
remains to be seen whether the Court wil adhere to the Thunder Basin factors or require a more explicit
statement of intent to preclude district court jurisdiction. As the Supreme Court has moved toward a more
textualist approach to statutory interpretation, it has general y declined to “ventur[e] beyond Congress’s
intent” as expressed in the text and structure of a statute. For example, while the Court once recognized
implied causes of action based on the purpose and legislative history of a statute, it has come to
“abandon” that approach.
The government posits that a Supreme Court decision in line with the Fifth Circuit’s ruling would yield
several negative consequences. First, it would turn constitutional avoidance—the doctrine that courts

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should decide constitutional issues only when necessary—“upside down” by “accelerating judicial
consideration of constitutional claims while deferring consideration of non-constitutional claims” that
might have disposed of the case. Second, authorizing district courts to hear constitutional claims during
an ongoing administrative proceeding would, in the government’s view, “produce paral el litigation” in
the district and circuit courts and “interfere with the orderly and efficient conduct” of the administrative
proceeding. The government also expressed concerns about the difficulty of distinguishing between
“structural” constitutional claims and other constitutional arguments.
A Supreme Court decision in Axon Enterprise or Cochran is likely to have implications for other
administrative review schemes. The judges who dissented from the Fifth Circuit’s decision noted that
federal statutes likewise provide for appel ate review of final agency actions by the Occupational Safety
and Health Review Commission and the National Labor Relations Board. If the Supreme Court were to
require a more explicit statement from Congress in order to foreclose direct review of non-final SEC and
FTC decisions in the district courts, then Congress would face consideration of whether these or other
statutes require amendments to bring them in line with congressional intent and which, if any, types of
claims should be immediately reviewable by federal district courts.

Author Information

Victoria L. Killion

Legislative Attorney

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