On April 14, the Supreme Court decided Axon Enterprise, Inc. v. Federal Trade Commission et al. — along with its companion case, Securities and Exchange Commission et al. v. Cochran. In these two cases, the court held that federal district courts have jurisdiction to hear challenges to the enforcement proceedings against the regulated parties after balancing certain factors. In these cases, the Federal Trade Commission (FTC) and the Securities and Exchange Commission (SEC) were pursuing certain entities for statutory violations. However, the agencies were doing so through administrative proceedings, not federal courts. In these agency proceedings, first, an Administrative Law Judge (ALJ) decides the dispute through an initial adjudication — by resolving the motions raised, holding a hearing, and rendering a decision — with review available at the pertinent federal court of appeals. Those regulated entities sued the agencies in federal district court, challenging the constitutionality of the ALJs themselves, thus bypassing the normal administrative proceedings. The Supreme Court rewarded the strategy, but not without caveats.

Highlights:

  1. Speaking through Justice Kagan, the Supreme Court held that while 28 U.S.C. § 1331 provides that “district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States,” the district court may exercise subject-matter jurisdiction only if the balance of certain factors favors that result: (1) precluding district court jurisdiction would “foreclose all meaningful judicial review” of the claim; (2) the claim raised in federal district court is “wholly collateral” to the administrative review provisions; and (3) the claim raised in district court lies “outside the agency’s expertise.” Those are known as the Thunder Basin factors, named after a 1994 Supreme Court precedent, Thunder Basin Coal Co. v. Reich.
  2. The Thunder Basin factors unequivocally pointed towards allowing federal district courts to exercise subject-matter jurisdiction in a case of this sort. First, precluding district court jurisdiction would prevent a plaintiff from questioning the very validity of the initial agency adjudicator — the ALJ. Next, such a claim is unrelated to the issues addressed by the agency adjudication process, which would be mainly technocratic and would drill down to the minutiae of the regulated parties’ conduct. As the court explained, the ALJ’s validity — the basis of the suit — has “nothing to do with” the enforcement issues within the FTC’s or the SEC’s purview or those at issue “in assessing the charges against Axon and Cochran.” Finally, the agency knows nothing at all about the constitutionality of its ALJs that a federal district court does not. This is a question of law, not one of agency expertise. Plus, in deciding that question, an agency has skin in the game in the way that a federal judge does not.
  3. The Axon court explained that its 2010 decision in Free Enterprise Fund v. Public Company Accounting Oversight Board is the most salient precedent for the type of challenge brought by the Axon challengers. There, an accounting firm had claimed that the federal agency investigating it was unconstitutionally structured. Essentially applying the Thunder Basin factors, the Supreme Court allowed it to sue directly in federal district court to have this claim litigated, without having to jump through the agency adjudication process’ hoops.
  4. Concurring in the judgment, Justice Gorsuch argued that Axon’s case-by-case approach marks a step towards enfeebling inappropriate adjudication by federal agencies, but it does not overrule Thunder Basin and thus subjects regulated parties to its unfounded and vexatious balancing test. Nor does Thunder Basin give regulated parties much certainty — for example, what if the Thunder Basin factors point in different directions? — or spare them the expense of litigation to figure out where a claim should be heard. Justice Gorsuch would have overturned “the Thunder Basin project.”
  5. Thunder Basin’s practical consequences concerned Justice Gorsuch. In his words: “That review is available in a court of appeals after an agency completes its work hardly makes up for a day in court before an agency says it’s done. When a case eventually makes its way to an appellate court, judges sometimes defer to the agency’s conclusions (especially when it comes to disputed questions of fact).” He added: “The cost, time, and uncertainty associated with litigating a raft of opaque jurisdictional factors will deter many people from even trying to reach the court of law to which they are entitled.” And that “[a]ware … that few can outlast or outspend the federal government, agencies sometimes use this as leverage to extract settlement terms they could not lawfully obtain any other way.” Furthermore, Justice Gorsuch pointed out that the SEC plaintiff’s “administrative proceedings have already dragged on for seven years.” Concurring separately, Justice Thomas expressed “grave doubts about the constitutional propriety of Congress vesting administrative agencies with primary authority to adjudicate core private rights with only deferential judicial review on the back end.”
  6. Going forward, the most important lesson of Axon is that as long as the claim(s) presented to the federal district court are distinct from any subject of — or issue underlying — agency adjudication, presumably, the district court will be able to hear the case. A presumption against the district court’s subject-matter jurisdiction due to Thunder Basin — now enfeebled (but not overruled) — has now been flipped in favor of such jurisdiction. Section 1331’s unambiguous language is slowly gaining ascendancy over the judge-made test of Thunder Basin. It is not inconceivable that one day the court will do away with Thunder Basin altogether and enable district courts to decide all such claims under Section 1331