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On April 14, 2023, the Supreme Court issued a unanimous opinion[1] settling a circuit split concerning whether a party to an administrative enforcement action can sue directly in federal district court to challenge the agency’s constitutional authority to proceed, or whether the party must first complete the administrative process before seeking review in a federal court of appeals. Axon Enter. v. FTC, 2023 U.S. LEXIS 1500 (2023) (Kagan, J.). Affirming Cochran v. SEC, 20 F.4th 194 (5th Cir. 2021) and reversing Axon Enterprise v. FTC, 986 F.3d 1173 (9th Cir. 2021), the Court held that federal district courts have jurisdiction to hear lawsuits challenging the constitutionality of agency proceedings and to resolve such constitutional challenges.

The Thunder Basin Factors Signal That District Courts Have Jurisdiction

In Cochran, the SEC brought an administrative enforcement action against a CPA alleging that she failed to comply with PCAOB auditing standards, while in Axon, the FTC brought an action against a manufacturer, alleging that its purchase of its closest competitor violated the FTC Act’s ban on unfair methods of competition. Cochran and Axon both challenged the constitutionality of agency proceedings before administrative law judges (“ALJs”) on the theory that the ALJs’ dual-layer tenure protection unconstitutionally insulated them from presidential removal. 

Justice Kagan, writing for the Court, concluded that “each of the three Thunder Basin factors signals that a district court has jurisdiction to adjudicate [these] sweeping constitutional claims.” In Thunder Basin Coal v. Reich, 510 U.S. 200 (1994), the Court set forth three factors designed to determine whether a claim was “of the type” Congress intended to be reviewed within a statutory review scheme. A court should consider whether: (i) precluding district court jurisdiction “could foreclose all meaningful judicial review” of the claim; (ii) the claim is “wholly collateral to the statute’s review provisions”; and (iii) the claim is “outside the agency’s expertise.” If the answer to all three questions is yes, it is presumed that Congress did not intend to limit jurisdiction.

As to the first factor, Justice Kagan focused on the interaction between the alleged injury and the timing of review. Justice Kagan contrasted situations where an appellate court could undo an agency action (such as revoking a fine) with situations where a party faces allegedly unconstitutional agency authority that “is impossible to remedy once the proceeding is over, which is when appellate review kicks in.” The Court concluded that “[j]udicial review of [these] structural constitutional claims would come too late to be meaningful.”

As to the second factor, the Court concluded that the claims “have nothing to do with the enforcement-related matters the Commissions ‘regularly adjudicate’—and nothing to do with those they would adjudicate in assessing the charges against [the CPA and the manufacturer].” Therefore, the claims were “collateral” to any orders or rules from which review might be sought.

Regarding the third factor, the Court determined that the parties’ claims were outside the agencies’ expertise. The Court noted that dual-layer tenure protection claims “raise standard questions of administrative and constitutional law, detached from considerations of agency policy.” The Court stated that the manufacturer’s separate constitutional challenge to the combination of prosecutorial and adjudicative functions was “distant from the FTC’s competence and expertise” regarding competition policy. Thus, the claims were not “of the type” that the statutory review schemes reach and a district court could review them.

The Court’s decision could open the district courts to a wave of new constitutional challenges to administrative adjudications and stall government enforcement actions.