CHALLENGING AGENCY POWER:
AXON, PART I
By
Prof. Anthony Michael Sabino
When a respondent to a regulatory enforcement action counterattacks with a “fundamental, even existential” challenge to the very constitutionality of the prosecuting agency, may that claim be decided in the first instance by a district judge? Or must it await appellate review by a circuit court of appeals after the regulators have taken final action?
In the very recent case of Axon Enterprise, Inc. v. F.T.C., 598 U.S. ___ (No. 21-86) (April 14, 2023), the United States Supreme Court, invoking the separation of powers and speaking virtually as one, ruled that, agency expertise notwithstanding, administrative law judges are not well suited to resolve constitutional challenges, whereas, in sharp contradistinction, such controversies very much fall within the purview of the Article III bench. This holding should come as no surprise, given that the Justices in recent terms have devoted much jurisprudence to resolving separation of powers controversies implicating the authority of administrative agencies in strikingly similar circumstances.
The foregoing assertion is best exemplified by a triumvirate of contemporary antecedents which form the foundation stones for the high Court’s newest landmark. For that reason, this first of two articles shall exposit that trio of precedents, while the second installment in the series shall dissect Axon itself.
Thunder Basin—Agency or District Court?
The first leg of the relevant triad is Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994). Thunder Basin promulgated a sophisticated three-pronged analysis, which, if satisfied, authorizes a district judge to effectively enjoin regulatory proceedings, so that the Article III bench may assert jurisdiction over the controversy.
The requirements are: a) the continuation of the agency suit “as is” would foreclose the opportunity for meaningful judicial review; b) the respondent seeking to block regulatory action raises claims “wholly collateral” to the general scope of the agency’s administrative bailiwick; and c) said allegations fall outside the regulators’ expertise. Notably, the foregoing assessment operates conjunctively, meaning that obtaining judicial intervention is a formidable task, indeed.
To be sure, the petitioner in Thunder Basin failed to meet the strict conditions articulated by the high Court, amply demonstrating that it is an uphill battle to satisfy all of the three prerequisites needed for the subject of an enforcement action to succeed in enjoining the regulators from proceeding, while a district court asserts jurisdiction over what is, almost invariably, a constitutional challenge to agency authority.
For nearly three decades, it has been axiomatic that Thunder Basin does not condone premature intercession by a lower court; rather, this landmark provides but a narrow opportunity for such intervention, provided that the stringent requirements of the high Court’s carefully crafted test are met. Put another way, Thunder Basin does not readily displace statutory regimes postponing judicial review (almost invariably to be conducted by a circuit court of appeals) to a date subsequent to final agency action, if the regulators, in fact, reach a terminal decision.
Free Enterprise—Unconstitutional Tenure Protection
The next pillar of our precedential trio is Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010). Subsequent to revelations of massive accounting fraud at, among others, the nefarious Enron and Worldcom corporations, Congress promulgated the Sarbanes-Oxley Act (“Sarb-Ox”). For all intents and purposes, this regulatory enhancement was designed to deeply reform accounting practices for publicly traded companies; yet, it also mandated stricter oversight of the accounting profession, via a new regulatory body called the Public Company Accounting Oversight Board or “PCAOB” (colloquially referred to as “Peek-A-Boo”). The agency was delegated the task of administering Sarb-Ox’s new regime of registering all public accounting firms that audit publicly traded companies, regimenting their standards of practice, and imposing rigorous oversight to assure their compliance.
The PCAOB was not without its challengers, however, and these opponents set out to stop the Board in its tracks. Their attack strategy was to invoke the Appointments Clause of Article II of the Constitution, see U.S. CONST., art. II, § 2, cl. 2, which, inter alia, authorizes the President to appoint two classes of officers within the Executive Branch to assist in carrying out the laws of the United States. The first grouping of appointees is familiar, consisting of ambassadors, federal judges, and cabinet members, usually called “principal officers,” whom the President appoints with the advice and consent of the Senate.
And here is where Free Enterprise found the fatal flaw in constituting the PCAOB. Chief Justice Roberts explained how its Board was selected by the Securities and Exchange Commission, and not appointed by the President. Once in place, the five Board members could only be removed “for cause.”
Another key link in the chain for Appointments Clause purposes was that the SEC Commissioners themselves likewise could not be terminated, again except “for cause.” Chief Justice Roberts characterized this as not just one, but two levels of “tenure,” shielding the PCAOB from dismissal by the Chief Executive.
This attribute of the PCAOB led to its downfall. The Appointments Clause is predicated upon the notion (as articulated by Founder James Madison while serving in the First Congress) that only the Chief Executive holds the executive power accorded by the Constitution, and part and parcel of her accountability to the people in exercising that power is the unrestricted ability to dismiss appointees who are inadequate to the task of executing the Nation’s laws. In other words, the Appointments Clause does not merely regulate the manner of taking office; it assures that those selected shall be accountable to the President appointing them, and, ergo, the People who elected that President.
Accordingly, the Free Enterprise Court found that the Sarb-Ox methodology for populating the PCAOB was antithetical to the rigors of Article II. Moreover, the Appointments Clause was further disparaged by the two levels of insulation enjoyed by the Board. This near-complete immunity made the PCAOB fundamentally untethered to the Chief Executive’s will, given the clear lack of a recall prerogative. The resultant lack of accountability to the President only exacerbated this constitutional infirmity.
While the high Court left the vast bulk of Sarb-Ox undisturbed, this imposition of the Appointments Clause’s requirements vis-à-vis the PCAOB set in place a vital imperative for the constitutional delegation of administrative authority, cutting across a wide swath of regulatory agencies. Indeed, as our upcoming discussion of Axon shall reveal, Free Enterprise continues to serve as a vital touchstone in cases questioning the apportionment of power within our tripartite system of government.
Lucia v. SEC—Appointments Clause Violation
Our triumvirate is made complete by Lucia v. S.E.C., 585 U.S. ___ (2018), which resolved, at least in part, a simmering internecine controversy amongst the lower courts as to whether there was a constitutional violation in the methodology by which the administrative law judges presiding over the Commission’s enforcement actions attained, and then continued in, office. See generally Michael A. Sabino & Anthony Michael Sabino, “Challenging the Power of SEC ALJs: A Constitutional Crisis or a More Nuanced Approach,” 43 Securities Regulation Law Journal 369 (2015).
The petitioner, having been charged with improprieties by the nation’s paramount securities regulator, complained that the ALJ presiding over his case had not been appointed by the President, with the advice and consent of the Senate. Moreover, Lucia pointed out that the agency’s internal jurist enjoyed a dual layer of tenure protection, such that he was beyond the Chief Executive’s removal power.
Writing for a strong majority, and relying upon the precepts of Free Enterprise, Justice Kagan found that these in-house adjudicators exercised authority sufficient to classify them as “officers of the United States.” As such, the lack of absolute compliance with the strictures of the Appointments Clause constituted an irretrievable constitutional violation. Notably, the high bench left unresolved the question of the apparent inability of the President to remove the ALJs from office. See Michael A. Sabino, “’Liberty Requires Accountability’: The Appointments Clause, Lucia v. SEC, And The Next Constitutional Controversy,” 11 William & Mary Business Law Review 173 (2019) (analyzing Lucia and the potential for future controversy).
But what this third landmark speaks to most fluently is the bedrock principle that “[l]iberty requires accountability” to the People, via their elected President. Dep’t of Transportation v. Association of American Railroads, 575 U.S. ___, ___, 135 S. Ct. 1225, 1234 (Alito, J., concurring). And Lucia was most explicit in decreeing that agency jurists unconstitutionally evade accountability to the citizenry when those officeholders are not appointed by the Chief Executive.
One cannot understate the immediate impact Lucia had upon the manner in which ALJs take office at their respective agencies. More important for our purposes, this recent landmark would prove to be a harbinger of what was yet to come in Axon.
Making Ready for Axon
In overviewing Axon’s predecessors, it is undeniable that each put in place an important component of what has emerged as the Supreme Court’s most recent pronouncement upon the separation of powers and the authority of administrative agencies. First comes Thunder Basin, and its tutorial in the procedure for enjoining agency action, in order to transfer constitutional challenges to an Article III court, an outcome which we are reminded is not easily achieved, nor should it be.
Next, Free Enterprise and, subsequently, Lucia, uphold the sanctity of the separation of powers, and the concomitant lack of tolerance for Appointments Clause violations. Most of all, these companion cases stand as guardians for the principle of accountability to the Chief Executive, and, therefore, to the People.
In sum, this noble triad made Axon inevitable, as the next installment in our two-part series shall reveal.
Prof. Anthony Michael Sabino, partner, Sabino & Sabino, P.C., is also a Professor of Law, Tobin College of Business, St. John’s University. Anthony.Sabino@sabinolaw.com.
FINAL Axon Part I AMS v.1