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FTC under attack as parties challenge its structure and participation of chairperson

September 16, 2021
W. Todd Miller, Donald I. Baker, Erin Glavich, and Lucy S. Clippinger

Introduction

At a time when the Federal Trade Commission (FTC) states that it is overwhelmed with merger review matters, its very existence is being attacked in two distinct ways. In one challenge, a party to an FTC administrative proceeding attacked the Commission’s structure on the basis that it was unconstitutional and deprives respondents of due process because the commissioners sit as “judge and jury”. In the other not completely unrelated approach, Amazon and Facebook are each respectively arguing that Chairperson Lina Khan is required to recuse herself from matters involving either company because she had prejudged the matters before her based on her academic writings and other public statements.

While serious, these matters may not hit their mark. The FTC’s “judge and jury” structure has been in place since it was created in 1914. And as the courts have thus far noted in response to the attack, respondents can appeal against what they believe are non-meritorious findings of wrongdoing. But this is at the center of the complaint about the structure: a party must suffer through a long administrative process before getting a chance to appeal to a court. The Ninth Circuit Court of Appeals found that argument inviting but did not grant the party in question, Axon Enterprises, the relief it sought. Whether this will be of interest to the Supreme Court is open to question. It really is no different than parties that find themselves before a federal judge who they believe is destined to rule against them. They must suffer through a prolonged, often multi-year litigation process before they may appeal – but the current makeup of the Court is much less deferential to the federal agencies than prior justices have been.

The motions seeking recusal of Chairperson Khan are somewhat different in that they are based on the factual argument that Khan has pre-judged matters based on her past academic and other work. But even here, similar concerns have been raised before regarding both FTC commissioners and judges. Forced recusals are relatively rare, particularly where, as here, Chairperson Khan is very likely to respond as she testified during her confirmation hearings that she will be impartial and judge the matters on the facts before the Commission, and not on those in the public domain, which may not be accurate or may reflect other’s interpretations of fact.

The Axon petition and the recusal motions are somewhat related because Chairperson Khan and her fellow commissioners serve as the ultimate finders of fact and law in an administrative proceeding. Prior to becoming a commissioner and chairperson, Khan had been unusually explicit in her critiques of Amazon and, to a somewhat lesser extent, of Facebook.

Attack on FTC’s structure

Following the challenge that resulted in the Supreme Court’s clarification of the FTC’s limited powers in federal court actions, a different party, Axon Enterprises, recently asked the Supreme Court to review the dismissal of its challenge to the constitutionality of the FTC (for further details, please see “Supreme Court clarifies scope of FTC’s powers and prohibits it from common strategy for seeking monetary relief“). Axon essentially argued that the FTC acts as “judge and jury” and that parties have no ability to challenge the process, structure, or existence of the agency until after they suffer through an administrative proceeding.

Axon acquired a competitor in 2018, a move the FTC later challenged. After a lengthy investigation, the FTC offered a choice:

  • settlement terms that Axon found untenable; or
  • the FTC would initiate administrative proceedings involving a trial before an administrative judge whose decision would then be reviewed by five commissioners.

In response, Axon filed for a preliminary injunction to stop the FTC in federal court, arguing that the administrative proceedings violated its Fifth Amendment rights to due process and equal protection and that the FTC’s structure violated the Constitution. The same day, the FTC stayed true to its threat and instituted administrative proceedings to challenge Axon’s acquisition.

Lower courts rejected Axon’s arguments, citing current precedent which finds that if some outlet exists to challenge the administrative process, then a party’s due process rights are protected. The fact that it is necessary to start an administrative action first, and the fact that the agency itself cannot hear the constitutional challenge, is not relevant. However, this rejection was not absolute. The Ninth Circuit found logic in Axon’s argument that process, structure, and existential questions should be heard in federal court before bearing the burden of administrative proceedings, and all but asked the Supreme Court to clarify.

Axon’s challenge attacked on two fronts:

  • the structure of FTC where administrative law judges make reports and recommendations to the commissioners but are not subject to removal by anyone except the commissioners; and
  • the timing of raising constitutional issues related to the agency’s proceedings.

Axon also suggested that the entire structure of the FTC may be unconstitutional, but it did not develop this argument.

Regarding the first attack, Axon is hopeful that an earlier Supreme Court precedent striking down a board appointed by another independent agency will be applied to the FTC. But the functions and role of an administrative law judge are very different from the powers of the board that the Court previously found improper. It would be somewhat surprising if the Court cast doubt on the role of administrative law judges at an agency that has been in existence for over 100 years, as well as the use of administrative law judges at several other federal agencies.

Axon’s timing challenge has broad implications. A favorable ruling would mean that Axon, or any party, could raise constitutional questions in federal court and seek a stay of any administrative proceedings. While there is some precedent that these structural questions should be heard in federal court first, those rulings are limited to specific factual situations where the potential harm of the structure is clear. In this regard, there is tension between requiring final agency action before permitting court intervention and permitting challenges to the administrative process in the first instance. But in Axon’s case, it seems to be merely complaining that the FTC’s offered resolution of its challenge to Axon’s acquisition was not acceptable. While an agency’s potentially forceful tactics in dealing with resolution of a matter before that agency may interest a conservative Supreme Court, and the current Court may also be fascinated by the question of when and how such constitutional challenges should be heard, the Court will also be mindful of the broader implications of permitting such challenges. At the time of writing, several conservative interest groups have filed amicus briefs in support of Axon’s request that the Supreme Court hear their appeal.

In contrast, the attacks on the participation of the current FTC chairperson – Lina Khan – are based on specific facts and thus have some potential for success, which in turn may hinder the Biden administration’s goal of pursuing antitrust cases against Amazon and Facebook.

Amazon’s recusal motion

On June 30, 2021, Amazon filed a motion with the FTC seeking to recuse Chairperson Lina Khan from any FTC antitrust proceeding involving Amazon where her prior statements “create the appearance of her having prejudged facts and/or legal issues relevant to the proceeding”.

A recusal motion for an FTC Commissioner is not unheard of. There is a provision in the FTC Rules of Practice specifically addressing the disqualification of commissioners and setting forth a procedure to seek recusal. That provision applies to “any adjudicative or rulemaking proceeding”. And over the years there have been a variety of court cases addressing, on appeal from an FTC decision or during a rulemaking, whether commissioners involved in decision-making should have recused themselves. In this regard, the standard applied has been essentially the same as that applied to the federal judges:

the standard for disqualifying an administrator in an adjudicatory proceeding because of prejudgment is whether “a disinterested observer may conclude that (the decisionmaker) has in some measure adjudged the facts as well as the law of a particular case in advance of hearing it”. (Emphasis added).

Citing this standard, Amazon detailed the numerous ways in which Chairperson Khan has “adjudged” Amazon. Most apparent is her law review article entitled “Amazon’s Antitrust Paradox” in which she details the basis for her conclusion that Amazon has violated the antitrust laws and proposes that Amazon be broken up. Chairperson Khan had also worked for an antitrust advocacy group where she authored articles pronouncing her view that Amazon had violated the antitrust laws, as well as the Majority Staff of the House Antitrust Subcommittee, which issued a report concluding that Amazon had engaged in unlawful conduct.

Given the extensive record of Chairperson Khan’s attacks on Amazon and based on prior rulings finding that FTC Commissioners had improperly failed to remove themselves, Amazon’s petition has a reasonably good chance of success. Chairperson Khan predicted she would face such challenges when she acknowledged during her confirmation hearing before the Senate that recusal motions would be filed against her. Her situation echoes the situation over 50 years ago when then-Chairman Paul Rand Dixon repeatedly had motions for recusal approved by the courts because he had made public statements that created the appearance that he had prejudged matters to be heard by the FTC.

Facebook

The Facebook motion is very similar to Amazon’s. On July 14, 2021, Facebook filed a similar motion requesting that Chairperson Khan remove herself “from participating in any decisions concerning whether and how to continue the FTC’s antitrust case against [Facebook]”.

Maintaining virtually the same structure as the Amazon motion, Facebook outlined the ways in which Chairperson Khan appears to have prejudged the merits of the action against Facebook. Like Amazon, these include her academic writings, her work on the Antitrust Subcommittee Report, and her work for an antitrust advocacy group. Facebook also supplied other public statements by Chairperson Khan where she characterized the FTC’s decision in 2012 to allow the Instagram acquisition to go forward as an “institutional failure.” This statement was made before Chairperson Khan was nominated to the FTC. Her prior comments about Facebook are much less extensive than her indictment of Amazon. It is thus possible that the Amazon and Facebook petitions might be decided differently on the merits, but it is doubtful that Facebook is engaged in an “adjudicatory” proceeding before the FTC. Such terminology is normally applied to the administrative litigation process that is conducted within the FTC (and subject to court review afterwards). More accurately, Facebook is engaged in federal court litigation with the FTC.

Chairperson Khan has yet to respond to either recusal motion. But several members of Congress wrote to Amazon and Facebook suggesting that their recusal efforts appeared to be an attempt to “bully your regulators” and “avoid accountability”.

Implications

There is a critical distinction between the Amazon and Facebook situations: in the Amazon matter, it is not clear what the ultimate forum for any antitrust challenge would be. While the investigation of Amazon’s acquisition of Metro-Goldwyn-Mayer is currently ongoing at the FTC, the FTC could challenge that acquisition either in federal court to seek a preliminary injunction or in an FTC adjudicatory proceeding to obtain final relief. If the FTC decides to seek (preliminary) relief in federal court, Chairperson Khan would not be the final decisionmaker on the merits of the FTC’s position. Rather, she would be involved only in the decision to bring the complaint in the first instance. Because Chairperson Khan does not decide the merits, the potential harm of any alleged bias would seem diminished. Having a federal court hear any challenge to Amazon’s acquisition (or other behavior) would seem to weaken Amazon’s position.

This is the position that Facebook is in. Chairperson Khan did participate in the decision to refile the complaint against Facebook (and since it was a three-to-two vote by the Commission to do so, hers was the deciding vote), and the FTC is continuing a challenge that had begun before Chairperson Khan was even nominated, but a federal judge will be the arbiter of the merits of that renewed complaint. Hence, it is not clear that Chairperson Khan’s views, even if biased, will ultimately impact on the outcome.

While Chairperson Khan is required to recuse herself where “a disinterested observer may conclude that (the decisionmaker) has in some measure adjudged the facts as well as the law of a particular case in advance of hearing it”, and even the courts have indicated that the cases on recusal are confusing, Chairperson Khan is not “hearing” the Facebook case.

But there is a larger dynamic at play that should be considered. The Supreme Court’s decision in AMG Capital Management, LLC v Federal Trade Commission severely limited the FTC’s ability to seek relief in the courts, forcing the FTC to pursue more actions through its own administrative litigation. Combining this with the risk of recusal suggests that Chairperson Khan will have a difficult time ultimately sustaining any actions that she takes against Amazon, Facebook and perhaps others where she has created a record of her views.

Should Chairperson Khan refuse to recuse herself, and should the FTC pursue an administrative action against Amazon, Facebook or others where Chairperson Khan has made a record, the FTC would run the risk that a federal court might force the FTC to essentially start over if it found that Chairperson Khan’s participation was improper. This would naturally cost the FTC significant time and resources. For an FTC that has repeatedly emphasized that it is overwhelmed and lacks necessary resources, the potential costs of keeping Chairperson Khan involved may not be worth the substantial risks.

At the same time, Chairperson Khan has plenty of latitude to influence agency action that does not involve “an adjudicatory or rulemaking proceeding”. For example, the FTC repealed a 1995 policy statement that allowed parties settling a merger case with the FTC to avoid a provision that required the parties to seek prior approval of future transactions. Similarly, the FTC repealed a 2015 policy statement that limited the use of the FTC Act to situations where its application would be consistent with the other antitrust laws. Chairperson Khan noted that the 2015 policy statement improperly restricted the FTC’s ability to pursue “unfair methods of competition” that may be “outside the ambit” of the other antitrust laws.

Comment

Neither the constitutional challenge nor recusal efforts are likely to completely disable the FTC. However, both present opportunities to hobble the efficiency and effectiveness of the agency while it tries to broaden its reach. Considering decisions that the Supreme Court has already made that may undermine the administrative state, these attacks may very well reflect emboldened targets of FTC action where such parties feel encouraged to take aggressive measures to protect their interests, such as closing mergers while an investigation is proceeding or commencing parallel proceedings to attack FTC jurisdiction or process.

This content was originally published on September 16, 2021, via the International Law Office (ILO) newsletter. It can be found here: FTC under attack as parties challenge its structure and participation of chairperson

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