Authors: Steven Cernak and Aaron Gott
Last week, the U.S. Supreme Court ruled against the Federal Trade Commission and allowed Axon Enterprise to raise certain constitutional objections to FTC processes in federal court before going through the FTC’s internal administrative proceedings. That decision teed up an “existential” threat to the FTC that seems likely to return to the Court in a few years. In the meantime, however, different cases raise similar questions and might reach the Court earlier.
Axon Background and Summary
In May 2018, Axon purchased one of its competitors in a transaction that did not require an HSR filing. The FTC investigated and decided in January 2020 to challenge the consummated transaction. As is always possible with such challenges, the FTC chose to bring it in front of its internal Administrative Law Judge rather than in a federal court. In that procedure, the ALJ makes an initial decision, which then can be appealed by the parties or FTC Complaint Counsel to the Commissioners. The parties can then appeal any negative decision by the Commissioners to a federal court of appeals of their choosing.
Immediately after the FTC issued the administrative complaint, Axon sued in federal court to raise constitutional challenges to FTC procedures. Both the district court and Ninth Circuit ruled that Axon must go through the FTC’s procedures before eventually raising the constitutional issues to a federal court. Procedurally, the Ninth Circuit did issue a stay on the FTC’s proceedings in October 2020 while Axon pursued the appeal of its constitutional challenges.
On April 14, 2023, the Court unanimously ruled that Axon could pursue its constitutional challenge to the FTC in court now and did not need to wait until going through the FTC’s administrative proceedings. (The Court’s opinion also applied to a companion case involving the Securities and Exchange Commission.) Writing for the Court, Justice Kagan applied the Court’s “Thunder Basin factors” and concluded that a federal district court had jurisdiction to hear such “fundamental, even existential” challenges to the FTC’s procedures even before those procedures had run their course. That is because such constitutional challenges implicate federal courts’ general subject-matter jurisdiction to consider questions of federal law, rather than implicate the exception to questions of federal law that Congress has determined should be heard in agencies instead of the courts in the first instance. Justice Gorsuch concurred in the judgment on different grounds. The case was remanded for a trial to consider the merits of those constitutional challenges.
The Constitutional Challenges to be Decided on Remand
And what were those “fundamental, even existential” constitutional challenges? Axon explicitly identified two in its original complaint. First, Axon claims that it violates the separation of powers to have an FTC ALJ removable only for good cause — and then only by a Board whose members are also only removable for good cause — and not freely by the President. Second, Axon claims that having the FTC investigate and initiate, adjudicate, and review the complaint unconstitutionally combines prosecutorial and adjudicative functions. Finally, Axon also at least implicitly raised due process concerns because of the “black box” clearance process to determine whether the Justice Department Antitrust Division or FTC will review any individual merger under their different standards and procedures. (Justice Kagan did not think Axon’s complaint explicitly raised the clearance issue and so did not address it.)
Justice Thomas concurred fully in the Court’s opinion but wrote separately to express “grave doubts about the constitutional propriety” of having agencies, not federal courts, adjudicating private rights, as compared to governmental privileges, and with only highly deferential judicial review at the end of the proceedings.
Any antitrust attorney who has ever dealt with the FTC will agree with the Court’s description of these challenges as “fundamental” to how the FTC operates. Since 1914, the FTC has been the agency developing its alleged expertise in policing unfair methods of competition by playing prosecutor, judge, and jury. Specifically regarding potentially anticompetitive mergers, the FTC and Antitrust Division have decided which agency will perform the review based on opaque, historical, difficult-to-explain precedent. (For example, traditionally the FTC has reviewed mergers involving light-duty vehicles while the Antitrust Division reviewed those involving medium and heavy-duty vehicles.) With the Court’s remand in Axon, the FTC will soon be forced to defend these practices in a district court and, presumably, eventually again in the Supreme Court.
Will JLI/Altria or Illumina/Grail Reach the Court Before Axon?
While Axon now will have its day in district court to raise these issues, two other FTC competition matters that have already gone through the administrative proceedings might raise similar constitutional issues in courts of appeals more quickly.