The Supreme Court Questions The FTC's Administrative Process During Oral Arguments In Axon Enterprise, Inc. v. FTC

On November 7, the United States Supreme Court heard oral arguments for an appeal of Ninth Circuit's ruling in Axon Enterprises v. FTC. This case presents a rare opportunity for the Court to address the Federal Trade Commission's administrative process—which Axon argues is unconstitutional—and is being watched closely in the antitrust community.

The issue before the Court is whether a party subject to an agency administrative proceeding (here, Axon) has the right to pursue constitutional challenges to the agency in federal district court prior to the conclusion of the agency administrative proceeding. The Ninth Circuit held that parties do not, hence this appeal.  But the Court's majority appeared skeptical of the FTC's ability to trap constitutional claims within administrative proceedings, and seemed sympathetic to Axon's argument that it cannot obtain meaningful judicial review of its constitutional claims. 

If the Court reverses the Ninth Circuit and finds that parties can challenge this process as unconstitutional in federal court prior to going through a costly and time-consuming administrative hearing, this will have broad implications for both the FTC and businesses subject to administrative proceedings before the agency.

Procedural History

This case arises from a body camera manufacturer's (Axon) acquisition of a small competitor (Vievu) in 2020.  Citing antitrust concerns, the FTC began investigating this transaction after closing and announcement of the deal.  After an eighteen month-long investigation, Axon offered to divest the acquired Vievu assets and walk away from the transaction.  The FTC rejected this offer and proposed an alternative settlement—that “Axon turn Vievu into a 'clone' of Axon using Axon's intellectual property” or face an administrative proceeding.¹ The FTC itself characterized this demanded relief as a “blank check.”² Axon then brought constitutional claims against the FTC in federal district court in Arizona.  Specifically, Axon challenged the FTC's “clearance process” for divvying up merger investigations with the DOJ Antitrust Division, the authority of the FTC's Administrative Law Judge to preside over the administrative case given their “impermissible” dual-layer-for-cause removal protections, and the constitutionality of the FTC's structure, which Axon claimed violated Fifth Amendment due process by combining investigative, prosecutorial, adjudicative, and appellate functions and had resulted in a 25-year win streak in its administrative court.  The FTC initiated an administrative proceeding that same day, and Axon sought to enjoin the administrative proceeding in the district court pending its previously asserted constitutional claims.

The district court dismissed Axon's complaint for lack of subject-matter jurisdiction and denied Axon's motion for preliminary injunction as moot.  Axon filed an expedited appeal, and on the eve of trial before an Administrative Law Judge (ALJ), the Ninth Circuit stayed the FTC proceeding pending appeal.

The Ninth Circuit's Opinion

In a 2-1 decision, a three-judge panel affirmed the district court's decision.  The Ninth Circuit's analysis, however, was not a slam-dunk for the FTC.  Despite the Ninth Circuit's holding that Axon must wait until after exhausting the administrative process to have its day in court, the majority opinion emphasized that Axon's “serious concerns about how the FTC operates” should not be discounted.³ The court agreed with Axon's concerns regarding the insulation of ALJs from political accountability and the FTC's virtually undefeated record over the past 25 years.  This record, the court noted, “raises legitimate questions about whether the FTC has stacked the deck in its favor in its administrative proceedings.”⁴ In his dissenting opinion, Judge Bumatay also noted that he would have permitted district court review of Axon's removal-power claim and challenge to the FTC's merger clearance process.⁵ This distinction comes from Judge Bumatay's reasoning that, absent statutory language stating otherwise, “challenges to an agency's structure, procedures,  or existence, rather than to an agency's adjudication of the merits on an individual case, may be heard by a district court.”⁶ The majority of the court agreed with this distinction and suggested that if they were not bound by precedent, Bumatay's argument would have won the day.⁷

However, the Ninth Circuit panel nonetheless insisted that its evaluation of the applicable factors under the Supreme Court's 1994 decision in Thunder Basin Coal Co. v. Reich required a finding of implied preclusion.  The court therefore affirmed the district court's dismissal of Axon's complaint for lack of subject-matter jurisdiction, and held that a party may not sue the FTC in federal district court to challenge the constitutionality of an administrative proceeding.

After the Ninth Circuit denied Axon's petition for a re-hearing en banc, Axon appealed to the Supreme Court, presenting both jurisdictional and constitutional questions.  The Court declined to take up the constitutional issues related to the FTC's structure and procedures, but granted the petition for writ of certiorari only as to the jurisdictional question.  

Notably, the Court has also paired this case with an appeal from the Fifth Circuit, Cochran v. SEC,⁸ where the Fifth Circuit created a circuit split when it ruled in favor of a respondent seeking to enjoin an SEC administrative proceeding as unconstitutional.  The same attorney—Deputy Solicitor General Malcom Stewart—argued both cases on behalf of the government.

Analysis

Axon's appeal centers on the practical implication that FTC administrative proceedings strongly favor the FTC and almost entirely insulate the agency from accountability.  This grievance is particularly pressing, as FTC Chair Lina Khan has made it clear that she intends to push the limits of Section 5 of the FTC Act, and courts have limited power to check this extension of authority.  The ability of parties to challenge the FTC's process as unconstitutional in federal court prior to going through a costly and time-consuming administrative hearing would provide parties with a novel avenue for accountability.

When the FTC wants to bring an action against a company for purported violations of the antitrust laws, three of its five commissioners simply vote and then bring an administrative complaint.  The FTC's staff then tries the case, in the FTC's administrative court, before the FTC's ALJ.  The FTC has exclusive jurisdiction, and the parties do not have the option of a hearing before an impartial Article III judge in a federal district court.  After the trial and an “initial” decision by the ALJ, the FTC commissioners that voted to bring the complaint decide whether to sustain the ALJ's ruling.

To no one's surprise, the FTC almost always wins.  Indeed, the FTC has ruled in favor of itself on appeal—either affirming the ALJ when the FTC wins or reversing the ALJ when it loses—nearly 100% of the time in the past 25 years.  These results cast doubt on whether the FTC's statutory review scheme is fair.  Even the Ninth Circuit's majority opinion discussed above acknowledges that the FTC's success rate “raises legitimate questions about whether the FTC has stacked the deck in its favor in its administrative proceedings.” 

The FTC argues its administrative adjudicatory process is fair because parties can ultimately appeal its decisions to any federal circuit court.  But, as Axon argues, such appeals must come after the years-long FTC administrative process is over.  This process takes years and oftentimes, like in Axon's case, millions of dollars. ⁹ And Axon argues that by the time its constitutional challenge reaches the appellate court, the timeframe to grant meaningful relief has already passed.  This is because Axon's alleged injury, namely “endur[ing] unconstitutional agency authority,” is “a 'here-and-now' injury that cannot be unsuffered.”¹⁰

And even in federal circuit courts of appeals, the FTC's findings of fact get considerable deference.  As a recent appellate court confirmed in Impax v. FTC, the Commission's findings of fact are “conclusive” as long as they are “supported by evidence,” even where “alternative conclusions may be equally or even more reasonable and persuasive.”¹¹ This is not a difficult standard for the FTC to meet.¹² District court review of these proceedings could provide parties with a more impartial record.  For example, at least one amicus curie argues that the Axon was unable to sufficiently develop this factual record via the limits placed on discovery by the ALJ.¹³

Underlying Axon's arguments is the concern that with the FTC acting as its own prosecutor, judge, and court of appeals, the merger-review process deprives parties of the constitutional right to a fair hearing before an impartial decision-maker.  The reality is that because of this costly process, nearly every party settles.  And, like the “blank check” demand from the FTC to Axon, these settlements are often on more onerous terms than what the parties would likely get in federal court.¹⁴

During oral argument, Justice Thomas zeroed in on this issue and asked Axon what percentage of cases settle. Axon responded that an overwhelming majority of cases settle before reaching a cease-and-desist order, the only mechanism parties have to appeal to the circuit courts of appeals.

And when these parties settle, they are unable to meaningfully pursue their constitutional claims. The Justices' questions during oral argument suggest that it makes little sense to require parties to exhaust FTC's administrative proceedings, which trap constitutional challenges within the agency for years, to eventually receive an appealable cease-and-desist order. This is inefficient and has left constitutional questions—like Axon's challenge to ALJ removal protections—unanswered and hanging over the agency's head.

Monday's oral argument provides a window into how the Court is thinking about these issues. Overall, at least a few of the Justices—and specifically Justice Gorsuch—appeared unconvinced that any statute stripped district courts of jurisdiction to hear these constitutional challenges. Stay tuned for an update on how the Justices ultimately resolve this jurisdictional challenge with potentially constitutional consequences.

Footnotes

1 Brief for Petitioner at 12, Axon Enter., Inc. v. FTC, et al. (U.S. 2022) (No. 21-86).

2 Id. at 12-13.

3 Axon Enter., Inc. v. FTC, 968 F.3d 1173 (9th Cir. 2021).

4 Id.

5 The Federal Parties argue that Judge Bumatay and other court's opinions permitting some constitutional claims to proceed and not others show that “a special exception for [district court review] of constitutional claims would be difficult to administer and contrary to the doctrine of constitutional avoidance.” Brief for Respondent at 45, Axon Enter., Inc. v. FTC, et al. (U.S. 2022) (No. 21-86).

6 Brief for Petitioner at 28-29, Axon Enter., Inc. v. FTC, et al. (U.S. 2022) (No. 21-86) (citing Axon Enter., Inc. v. FTC, 968 F.3d 1173, 1191 (9th Cir. 2021) (Bumatay, J. dissenting)). 

7 Axon Enter., 968 F.3d at 1184.

8 20 F.4th 194 (5th Cir. 2020).

9 The Federal Parties' brief recognizes that “Axon and Cochran will incur expenses during the administrative proceedings” but distinguishes the cases from other pre-enforcement challenges. However, they argue that, unlike in those cases, Axon does not need to violate the law to obtain judicial review because it is already subject to administrative proceedings. See Brief for Respondent at 41, Axon Enter., Inc. v. FTC, et al. (U.S. 2022) (No. 21-86).

10 Brief for Petitioner at 21, Axon Enter., Inc. v. FTC, et al. (U.S. 2022) (No. 21-86) (discussing Free Enter. Fund v. Pub. Co. Acct. Oversight Bd., 561 U.S. 477 (2010)).

11 Impax Labs Inc., v. FTC, 994 F.3d 484 (5th Cir. April 13, 2021) (affirming the Commission's reversal of the ALJ's ruling against the Commission).

12 Brief of Amicus Curiae Americans for Prosperity Foundation in Support of Petitioner, Axon Enter., Inc. v. FTC, et al. (U.S. 2022) (No. 21-86)

13 Brief of Amicus Curiae Pacific Legal Foundation in Support of Petitioner, Axon Enter., Inc. v. FTC, et al. (U.S. 2022) (No. 21-86) (citing In the Matter of Axon Enter., Inc., No. 9389, 2020 WL 4346544 (F.T.C. July 21, 2020) (denying Axon's motion to compel documents responsive to requests for production seeking internal, privileged FTC documents)).

14 And, as Axon has noted, the FTC's administrative procedure stands in stark contrast to the DOJ Antitrust Division's process for challenging a merger. The DOJ brings merger challenges directly in federal district court, with no comparable “in-house” administrative proceeding. 

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