Axon Enterprise, Inc (Axon), an entity whose 2018 acquisition of a competitor was investigated by the Federal Trade Commission (FTC) in 2020, has taken its challenge to the constitutionality of the structure of the FTC all the way to the US Supreme Court. Axon filed an action against the FTC in a district court in 2020 that sought to enjoin the FTC from challenging Axon’s acquisition on the ground that the FTC’s structure, as well as some of its procedures, were unconstitutional. Later the same day the FTC authorized an administrative complaint challenging Axon’s 2018 acquisition (for more information, see “FTC under attack as parties challenge its structure and participation of chairperson“).

Since that time, the question of the constitutionality of the FTC’s structure and procedures has not taken center stage. Instead, the federal court litigation and appeals have focused on a procedural, yet hugely impactful, issue: the timing for respondents to raise constitutional challenges to an agency’s structure. While Axon has argued that it can bring such a challenge before an imminent FTC administrative challenge (or during a challenge), the FTC has argued that Axon needs to go through the full administrative litigation process before it can raise such issues on appeal.

In January 2022, the Supreme Court agreed to hear Axon’s appeal from a Ninth Circuit Court of Appeals ruling agreeing with the FTC’s position. The parties have since briefed the issue, with amicus curiae briefs filed by entities such as the Chamber of Commerce of the United States (supporting Axon) and the American Antitrust Institute (supporting the FTC).The Supreme Court heard oral argument on 7 November 2022.

Oral argument before Supreme Court

A primary theme of Axon’s argument was that the FTC does not have the power to declare its own structure or existence unconstitutional, differentiating this case from standard cases in the federal courts where parties may initially get a ruling on a constitutional challenge and then, generally, must wait until the case is over to appeal those rulings. While the government argued that the FTC could still provide valuable expertise about those processes, it acknowledged that the FTC could not declare its own structure unconstitutional.

The government’s argument focused primarily on the Administrative Procedure Act (APA), claiming that section 704 makes clear, when combined with the FTC Act, that Congress intended challenges such as these to be reviewable only when the administrative action is reviewed by a court of appeals. However, some justices questioned whether that argument had previously been waived by the government, and also questioned whether that provision of the APA applies to agency’s decisions to pursue administrative actions. The government argued that even apart from the APA, the Court should infer that Congress intended the FTC Act’s resort to courts of appeals for review of cease-and-desist orders as the exclusive mechanism of review.

Some justices expressed surprise that the FTC did not focus more on the factors set forth in Thunder Basin Coal Co v Reich, a 1994 case in which the Supreme Court delineated specific characteristics of constitutional challenges to an agency structure or process that could inform whether congress intended certain claims to be reviewed within the agency’s statutory review scheme. Those factors, which were later applied by the Supreme Court in cases in 2010 and 2012, are whether:

• the agency’s statutory scheme provides meaningful review of the claim;
• the claim is wholly collateral to the review provisions in the statute; and
• the agency lacks expertise in the challenger’s claim.

Axon relied heavily on Thunder Basin and the 2010 case applying the same factors, Free Enterprise Fund v Public Co Accounting Oversight Board, in which the Court held that a company’s similar constitutional challenge to the structure of the Public Company Accounting Oversight Board within the Securities and Exchange Commission (SEC) could be heard by a federal court outside the SEC’s statutory review framework. The FTC attempted to distinguish that case and pointed to a more recent 2012 case, Elgin v Department of Treasury, in which the Court applied the same factors to determine that an administrative statutory scheme was the exclusive vehicle for a facial constitutional challenge to that same statute. However, throughout its briefing and oral argument, the FTC seemed to be trying to avoid the Thunder Basin factors, instead repeatedly directing the justices’ attention back to the APA.

Multiple justices expressed concern that it would be impossible to draw a bright-line rule about the types of constitutional challenges that could be heard immediately in a federal court and those which would have to wait for the agency to finish its process and then be raised on appeal. For instance, Chief Justice Roberts emphasized that while Axon uses “easy case[s]” as examples, there would be many cases where it is hard to distinguish between challenges to an agency’s structure that can be heard right away and challenges to an agency’s process that cannot be challenged until later.

Justices Sotomayor, Jackson, Barrett and Thomas all raised questions related to the remedy sought by Axon’s challenges and whether the remedy sought made a practical difference regarding going to a district court judge before being heard by the FTC. Justice Thomas expressed concern that, due to the overwhelming majority of cases settling, few cases ever reach a final order that could be used to challenge the constitutional structure of an agency if such arguments cannot be heard immediately in the district court. However, Justice Sotomayor later pointed out that the same is true in cases heard in the district court in the first instance.

Several justices suggested that a straightforward reading of the texts of the relevant statutes would mean the district court has jurisdiction because the FTC Act’s statute about review by a court of appeals applies only when there is a cease-and-desist order being challenged. However, Justice Sotomayor expressed concern that this construction might enable many statutory challenges (in addition to constitutional challenges) to be heard immediately in the district court, an outcome which she seemed to view as troubling.

The justices also raised several other issues, such as whether a party could seek mandamus in egregious cases, if resorting to a district court for constitutional challenges under federal question jurisdiction was not permitted.

Comment

It is unclear how the Court will rule, particularly with Justice Kavanaugh and Chief Justice Roberts (justices who are often deciding votes) both expressing concerns about whether and how the Court could craft a clear rule regarding which constitutional challenges to agencies’ structures and processes can and cannot be heard immediately in a district court. However, the Free Enterprise Fund opinion, on which Axon heavily relied, was authored by Chief Justice Roberts, suggesting that, while he may have questions about how to craft a clear rule, he likely would not shy away from allowing an early constitutional challenge to an agency’s structure in federal court.

On the other hand, the later Elgin case, which justices acknowledged was helpful for the FTC, was authored by Justice Thomas, with Chief Justice Roberts and Justice Sotomayor joining. Justice Alito authored a dissent in which Justice Kagan joined, arguing that constitutional challenges similar to those at issue should not need to be funneled through an administrative review process before being ruled upon by a federal court. However, Axon worked to distinguish Elgin on the ground that the plaintiff there sought the same remedy provided by the agency’s statutory scheme.

The then-serving justices’ votes in Free Enterprise Fund and Elgin, as well as the justices’ inquiries at oral argument, do make one thing clear: there is a good chance that, whatever the outcome, the decision in Axon v FTC will not be split along traditional liberal and conservative lines.

Regardless of the outcome, it appears that Axon, among other companies, will continue its attack on the FTC’s structure which may create uncertainty for the FTC for years to come. Some of the constitutional issues raised by Axon have also been raised in the Altria Group/Juul Labs FTC administrative proceeding, in which the FTC’s loss before an administrative law judge is now being appealed to the full commission. Counsel for Altria Group made clear during oral argument that it did not expect the commissioners to rule on the constitutional challenges but was instead preserving the issues for its eventual appeal to a federal court of appeals. So, while the Supreme Court admonished Axon’s counsel to avoid the merits of their constitutional challenges, some of those challenges, if the justices allow it to proceed, may be addressed by a court of appeals in the Altria Group case before Axon’s own case and could be heard on the merits.

This content was originally published on November 17, 2022, via the International Law Office (ILO) newsletter. It can be found here: Axon Enterprise, Inc v Federal Trade Commission: where are they now?

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