Supreme Court's 9-0 Ruling Paves Way For Constitutional Challenges To Administrative Proceedings

• Jurisdiction: United States,Federal
• Law Firm: Holland & Knight
• Subject Matter: Corporate/Commercial Law, Government, Public Sector, Litigation, Mediation & Arbitration, Corporate and Company Law, Constitutional & Administrative Law, Trials & Appeals & Compensation, Securities
• Author: Evan Nelson and Scott Mascianica
• Published date: 02 May 2023

The U.S. Supreme Court on April 14, 2023, issued a unanimous opinion holding that federal district courts can consider constitutional challenges to administrative proceedings before such agencies issue final rulings. In Axon v. FTC (consolidated with Cochran v. SEC), the Court held that the statutory review schemes for the Securities and Exchange Commission (SEC) and Federal Trade Commission (FTC) do not displace a district court's federal-question jurisdiction over claims challenging the constitutionality of the agency's in-house administrative proceedings.

In this post, we provide a brief background on the underlying action in Cochran, an overview of the Court's opinion and some notable takeaways, including peeking into the crystal ball to see how one concurrence may foreshadow the Court's position on broader administrative questions.

Background

In 2016, a certified public accountant named Michelle Cochran was banned from practicing before the SEC for five years because Cochran allegedly engaged in improper professional conduct, as defined by the SEC's Rules of Practice, by failing to comply with auditing standards established by the Public Company Accounting Oversight Board.¹ After a hearing, an SEC administrative law judge (ALJ) agreed with the SEC that Cochran caused and aided and abetted certain violations of the federal securities laws and, thus, engaged in improper professional conduct.²

Although Cochran objected to the decision, before the SEC could rule on her objection, the Supreme Court decided Lucia v. SEC,³ which held that SEC ALJs are officers of the United States who must be appointed by the President, a court of law or a department head. Therefore, the SEC remanded all pending administrative proceedings, including Cochran's, for new proceedings before constitutionally appointed ALJs.⁴ Thereafter, Cochran filed a lawsuit in federal district court, arguing that although SEC ALJs may be constitutionally appointed, they remained unconstitutionally insulated from Presidential removal power because of their multiple layers of "for cause" removal protections.

The district court dismissed her case for lack of subject-matter jurisdiction on the view that the Securities and Exchange Act of 1934 (Exchange Act) implicitly stripped district courts of jurisdiction to hear challenges to ongoing SEC enforcement proceedings.⁵ The U.S. Court of Appeals for the Fifth Circuit panel affirmed the district court's decision.⁶ However, the Fifth Circuit, sitting en banc, reversed, holding that Cochran's constitutional challenge was "wholly collateral" to the SEC's administrative proceedings and, thus, within the jurisdiction of the district court.⁷

The SEC appealed to the Supreme Court, posing the question: Does a federal district court have jurisdiction to consider claims challenging the constitutionality of the Securities...