Challenging the Constitutionality of the FTC’s Fundamental Structure/Processes

Supreme Court to Hear Oral Arguments in Axon Enterprises

With the October 2022 term of the U.S. Supreme Court (“Court”) now underway, health care providers and others in the health care industry contemplating merger and other transactions subject to Federal Trade Commission (“FTC”) review should take note of a case set for oral argument on November 7 that will likely have significant implications. The case is captioned Axon Enterprise, Inc. v. Federal Trade Commission and is on appeal from the Ninth Circuit Court of Appeals.  A companion case, Cochran v. SEC, which is on appeal from the Fifth Circuit, will be argued the same day.

What follows is a detailed discussion of the Axon case, the issues presented and background of the case. After the oral argument on November 7, this article will be supplemented with a detailed discussion and analysis of what took place that day.

The Question Presented in Axon

Axon involves the question whether parties seeking to undertake a transaction subject to FTC review and who seek to challenge the constitutionality of the FTC’s fundamental structure/processes:

  • are required to go through the regular FTC review process, which is routinely time-consuming, burdensome and expensive, and more often than not results in the parties either calling off the transaction or submitting to a review, which in turn has the FTC concluding that the transaction violates the antitrust law, only then to have the right to seek review at the federal court of appeals; or
  • may instead bypass FTC review and submit the constitutional questions to immediate review in federal district court.

The case is an appeal from a decision by a three-judge panel of the Ninth Circuit Court of Appeals, which concluded that Congress in the FTC Act impliedly stripped federal district courts of jurisdiction over constitutional challenges to the FTC’s structure, procedures and existence when it granted the courts of appeal jurisdiction to “affirm, enforce, modify, or set aside” FTC cease-and-desist orders. 986 F.3d 1173 (9th Cir. 2021).

The fundamental constitutional issues that ultimately undergird the case involve a full-on constitutional challenge by Axon to the FTC’s administrative structure and processes. At the moment, those issues (which are discussed in more detail  below) are not before the Court as the Court granted certiorari only as to the question whether a constitutional challenge must first be “adjudicated” through the FTC administrative process before being considered in federal court.

That said, the question being presented to the Court is itself of importance not only to the FTC (and as described below the American Hospital Association has filed an amicus brief in the case), but to all federal regulatory agencies. If the Court affirms that a party subject to the FTC’s administrative process in connection with a proposed merger or acquisition must first submit to the FTC’s review process before seeking relief in a federal appellate court as to the constitutional questions, it will remain extremely difficult and, in some cases, impossible to obtain that review.

On the other hand, if the Court reverses the Ninth Circuit, it will be much easier for parties to challenge the constitutionality of the structure and operation of regulatory agencies including the FTC, challenges that will almost certainly soon follow and will impact the health care community. And as of late, the Court has expressed an interest in considering questions of delegation and separation of powers in the context of administrative agencies and the congressional and executive branches.

Background Facts

Axon makes, among other things, body cameras for use by law enforcement. In May 2018, it acquired a competitor body camera company named Vievu LLC. About a month later, the FTC sent Axon a letter stating that the Vievu acquisition raised antitrust concerns.

For about 18 months, Axon cooperated with the FTC’s investigation. In December 2019, the FTC demanded that Axon turn Vievu into a “clone” of Axon using Axon’s intellectual property. If Axon refused this settlement demand, the FTC threatened to initiate an administrative proceeding to obtain this relief.

In response, Axon filed suit in district court on January 3, 2020. The FTC filed an administrative complaint challenging the Vievu acquisition later that same day.

Axon made three substantive claims: (1) the FTC’s administrative proceeding violates Axon’s Fifth Amendment due process rights, (2) the FTC’s structure violates Article II by providing improper insulation from the president, and (3) Axon’s acquisition of Vievu did not violate antitrust law.

Axon argued that the FTC’s administrative enforcement scheme violates its due process rights because the agency effectively acts as the prosecutor, judge and jury, and that it is entitled to a trial in district court. Axon noted that the FTC has not lost an administrative proceeding trial in the past quarter-century and it asserted that the FTC’s administrative law judges (“ALJs”) impermissibly enjoy “dual-layer” insulation from presidential control because only the FTC commissioners can remove them for cause and the commissioners, in turn, can be removed only for cause by the president.

Thereafter, Axon filed a motion for a preliminary injunction to halt the administrative proceeding and the constitutional injury it inflicted pending the district court’s resolution of Axon’s constitutional claims. The FTC opposed the preliminary injunction motion, relying mainly on jurisdictional grounds. The district court agreed with the FTC and dismissed Axon’s complaint without prejudice due to a lack of subject matter jurisdiction and denied Axon’s preliminary injunction motion as moot. It determined that Congress impliedly precluded jurisdiction over Axon’s claims when it enacted the FTC administrative review scheme.

Axon filed a motion for expedited appeal, which the Ninth Circuit granted. The Ninth Circuit also stayed the FTC proceedings. In January 2021, the Ninth Circuit in a split decision affirmed the district court’s denial of the relief requested by Axon.

Thereafter, the Supreme Court granted certiorari as to the threshold question. That question, in its simplest form and as explained above, is whether a party such as Axon must submit to the FTC administrative process before filing a complaint in federal court to challenge the constitutionality of the FTC’s basic structure.

The Subject-Matter Jurisdiction Question Before the Supreme Court

As explained above, the question now before the Court is whether Congress, in passing the FTC Act of 1914 and establishing the authority of the FTC and the scope of its investigatory and adjudicatory power, intended either expressly or impliedly to strip federal district courts of authority to hear constitutional challenges.

The parties agree that there is no express preclusion, but disagree as to whether there is implied preclusion.

With respect to the question of implied preclusion, courts have fashioned a two-step inquiry to determine whether Congress impliedly precluded jurisdiction.

First, a court asks whether Congress’s intent to preclude district court jurisdiction is fairly discernible in the statutory scheme. In Axon, the Ninth Circuit concluded that the FTC Act’s “detailed overview of how the FTC can issue complaints and carry out administrative proceedings” reflects a “fairly discernible intent to strip district court jurisdiction.”

Second, the court applies a three-factor analysis: (1) whether the party asserting that there is no implied preclusion can obtain meaningful judicial review of its claim in the statutory scheme; (2) whether the claim is “wholly collateral” to the statutory scheme: and (3) whether the claim is outside the agency’s expertise.

In Axon, the Ninth Circuit held that (1) Axon could obtain meaningful judicial review via its right to appeal an adverse FTC decision to the court of appeals; (2) while not free of doubt, the constitutional claim was not wholly collateral to the statutory scheme since that claim was the vehicle through which Axon could challenge an adverse decision at the FTC level; and (3) the claim was more likely than not outside the FTC’s expertise.

Accordingly, having concluded that two of the three factors were present, the court held that there was implied preclusion and that Axon was required to submit to the regular FTC administrative review process.

Interestingly, and perhaps importantly, the majority, in holding that there was implied preclusion, also embraced the dissent filed by Judge Bumatay, the third member of the three-judge panel. “As the dissent cogently points out,” the two-judge majority stated in their opinion “it makes little sense to force a party to undergo a burdensome administrative proceeding to raise a constitutional challenge against the agency’s structure before it can seek review from the court of appeals. And if we were writing on a clean slate, we would agree with the dissent.”

Constitutional Challenges for Future Adjudication

Fifth Amendment Due Process/Equal Protection Claim

The  question here is two-fold: (a) whether the combination of investigatory, prosecutorial, adjudicative and appellate functions within a single agency, in this case the FTC, violates the Due Process clause of the Fifth Amendment and the Equal Protection Clause of the Fourteenth  Amendment; and (b) whether the clearance process, whereby the FTC and the Department of Justice (“DOJ”) divide their overlapping jurisdictions to review mergers and enforce antitrust laws by assigning merger investigations to either an administrative-enforcement track or a district-court-enforcement track, is constitutionally defective for the same reasons.  (Axon refers to this clearance process as an uncodified “black box” that is not only opaque but outcome determinative.)

As a practical matter, the clearance process decides if companies must answer to either the DOJ, with the prospect of a federal lawsuit in district court, or the FTC, with its administrative proceedings, the outcome of which has great substantive implication.

Quoting Judge Bumatay in his dissent in Axon:

“Which agency has purview over an industry can mean a world of difference for the companies involved. For example, unlike federal court proceedings, the FTC’s administrative hearings do not trigger the protections of the Federal Rules of Civil Procedure or Evidence.  Furthermore, the FTC administrative hearings are presided over by an FTC Commissioner or an ALJ rather than an impartial Article III judge. Despite the importance of the DOJ–FTC split, the clearance process is, according to Axon, a “black box” that is not codified in any statute, rule, or regulation, but is instead seemingly made by a “coin flip.” And such an arbitrary process, Axon asserts, violates due process and equal protection under the Fifth Amendment.”

Dual-Layer Removal Protections Afforded FTC Administrative Law Judges

The constitutional issue here concerns whether there are, in the case of the FTC and its ALJs, dual-layer removal protections that are unconstitutional infringements on presidential power.

The constitutional provisions most directly implicated are those contained in Article II, namely: Section 1, which provides that the executive power shall be vested in the president; Section 2, which concerns presidential appointments (the “Appointments Clause”); and Section 3, which provides in part that the president “shall take Care that the Laws be faithfully executed.” (the “Take Care Clause”)

Certain prior Supreme Court decisions will be of significance in resolving this question. These include the Court’s decisions in Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477 (2010) and in Lucia v. SEC, 138 S. Ct. 2044 (2018).

In Free Enterprise Fund, the Court considered the constitutionality of two layers of for-cause protection for members of the Public Company Accounting Oversight Board (“PCAOB”). While the members of the PCAOB reported to the SEC Commissioners, the SEC could remove them only for willful violations of the Sarbanes–Oxley Act, PCAOB rules, or the securities laws, among other for-cause reasons. With respect to the Commission itself, the president could only remove SEC Commissioners for “inefficiency, neglect of duty, or malfeasance in office.”

The Supreme Court held that this dual-layered insulation of PCAOB members from removal deprived the president of the ability to adequately oversee the board’s actions and therefore violated separation of powers principles.

In Lucia, the Court invalidated, pursuant to the Appointments Clause in Article II, Section 2, the method by which SEC ALJs were appointed – that they were inferior officers who must be appointed by the president or a “Head of Department” rather than hired by the agency staff.

With respect to the FTC’s administrative structure, the argument here is that there is impermissible dual-layer protection because the FTC’s ALJs enjoy insulation from presidential control on account of the fact that they can only be removed by the FTC commissioners for-cause and the Commissioners, in turn, can be removed only for-cause by the president.

If it is ultimately determined that under the FTC Act there is impermissible dual-layer protection, a significant question that will flow from that is whether the remedy for the violation is a “do-over” — i.e., a new administrative adjudication undertaken by an ALJ as to whom dual-layer protection has been eliminated — as opposed to rendering all of the Commission’s actions and authority in violation of the Constitution. See Free Enterprise (the Board’s freedom from presidential oversight and control does not render it and all power and authority exercised by it in violation of the Constitution; instead concluding that the unconstitutional tenure provisions are severable from the remainder of the statute). See also Lucia (after finding an Appointments Clause violation, the appropriate remedy for an adjudication tainted with an appointments violation is a new hearing before a properly appointed official).

Other Related Cases of Importance

As explained above, when the Axon case is argued on November 7, there is a companion case that will be argued the same day. That case is Cochran v. SEC, 20 F.4th 194 (5th Cir. 2021), and while it involves the same “implied preclusion” subject-matter jurisdiction issue as in Axon, unlike Axon it involves the SEC rather than the FTC.

More importantly, in that case, the Fifth Circuit — unlike the Ninth Circuit in Axon — held that there was no implied preclusion and that the petitioner could directly commence her constitutional challenge in district court without having to go through the FTC’s administrative process.

Like the Ninth Circuit, the Fifth Circuit in Cochran, having held that the district court had subject-matter jurisdiction, did not address the constitutional claims but remanded the case to the district court for consideration of those issues. As in Axon, the grant of certiorari in Cochran is only as to the jurisdictional issue.

Interestingly, at the same time that briefs were being filed with the Court in Axon and just days after certiorari was granted in Cochran, the Fifth Circuit issued an opinion in a case captioned Jarkesy v. Sec. & Exch. Comm’n, 34 F. 4th 446 (5th Cir. 2022).

This case involves an SEC enforcement action within the SEC against the petitioners, an individual who had set up hedge funds and an investment advisor entity that the petitioners established. An SEC ALJ adjudged petitioners liable and ordered various remedies, and the SEC affirmed on appeal over several constitutional arguments that the petitioners raised.

The petitioners then appealed to the Fifth Circuit which held that: (1) the SEC’s in-house adjudication of petitioners’ case violated their Seventh Amendment right to a jury trial; (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle by which the SEC would exercise the delegated power, in violation of Article I’s vesting of “all” legislative power in Congress; and (3) statutory removal restrictions on SEC ALJs violate the Take Care Clause of Article II.

Going Forward from Here

At this point and most importantly, in light of Axon and Cochran and now Jarkesy, constitutional questions concerning both the process by which parties challenge fundamental aspects of the FTC’s structure and operation and the core constitutionality of that structure and operation are and will continue to be “front and center” in the courts. Ultimately, the implications for health care organizations planning mergers, affiliations and acquisitions subject to FTC review will be of major importance.

The AHA’s Position with Respect to Axon

As noted above, the AHA filed an amicus brief on behalf of its member-hospitals and in support of Axon. In that brief the AHA discusses the issues with particular reference to the hospital industry.

What follows is a detailed summary:

  • Member hospitals often face significant cost and sometimes insurmountable obstacles to efficient consolidation from unwarranted and constitutionally infirm FTC enforcement proceedings.
  • The health care sector is the target of nearly half of the FTC’s enforcement actions and the agency has declared hospitals to be a priority target for the coming decade.
  • Hospitals’ ability to obtain timely judicial relief can force them to divert resources better spent on providing care or other services, or to forgo consolidation and restructuring that would improve the quality of care while reducing its cost.
  • Unless federal courts have jurisdiction to review pre-enforcement challenges, it will be impracticable, if not impossible, for hospitals to obtain timely and impartial judicial relief.
  • When a hospital is targeted by the FTC, the process that results is costly, protracted and stacked against the hospital, regardless of the merits.
  • The chilling effects of enforcement actions permit the FTC to win even by losing, as hospitals too often conclude that it is best to simply fold, even when the enforcement action is unconstitutional, the merger would be pro-competitive and the community would receive better care at a lower cost.
  • Hospitals should not be compelled to endure years of costly and inequitable administrative proceedings before being permitted to challenge the constitutionality of those proceedings in federal court.
  • Article III courts are far better suited than agency tribunals to decide whether the agencies’ own structure complies with the Constitution.
  • The FTC’s unchecked power is particularly harmful to hospitals and the patients and communities they serve because hospital mergers often reduce costs, improve care and benefit patients.
  • The prospect of having to defend transactions on multiple fronts and at great cost, has deterred many hospitals and health systems from pursuing lawful, pro-competitive transactions that would benefit the community and consumers that they serve.
  • The essential constitutional promise of “due process” is the right to a fair opportunity to rebut the government’s factual assertions before a neutral decision maker.
  • The FTC‘s Commissioners and their staff investigate claims. Like a prosecutor, the Commissioners initiate enforcement proceedings by filing a complaint. The ALJ then adjudicate the complaint. But the commissioners then circle back and act as the final judges of whether the party has violated any laws, effectively review the validity of their own actions and seek to impose liability.
  • The contrast between the DOJ Antitrust Division’s approach to antitrust enforcement and that of the FTC underscores the due process concerns and the question of fundamental fairness. The two agencies have separate portfolios in the health care industry with the DOJ handling health insurance and the FTC handling hospitals. But, there are material differences between the Justice Department merger challenges and those of the FTC.  As a result, the choice of which antitrust enforcement agency is to review a proposed merger is outcome determinative.
  • Whereas the DOJ litigates transactions in a full hearing on the merits in federal court before an impartial judge, the FTC’s practice is to pursue a preliminary injunction in federal court while at the same time commencing an internal administrative proceeding in which the agency has a decided advantage. The DOJ generally seeks a permanent injunction resolving the question fully and completely in a single proceeding before a judge, whereas the FTC seeks only a preliminary injunction in federal district court while pursuing administrative proceedings that continue even if it fails to obtain the injunction.
  • Federal judges apply a different and arguably more deferential standard of review to a request for a preliminary injunction from the FTC as compared to the same request from the DOJ. Thus, parties whose proposed transaction is reviewed by the FTC can expect a more burdensome enforcement process, a higher likelihood of having to abandon the transaction and potentially a different substantive outcome.
  • As a primary target in FTC enforcement, hospitals have been harmed by the different process and standard of review applicable to FTC enforcement action under Section 7 of the Clayton Act.
  • Although hospitals are technically subject to antitrust enforcement by both the FTC and the DOJ, the two agencies have developed a “black box” clearance process through which the agencies consult and decide which will investigate the merger.
  • Although not codified in any statute, rule or regulation, as a matter of recent historical practice, the FTC reviews all transactions involving hospitals. Thus, every hospital transaction challenged by the FTC is subject to the FTC’s unfair and punitive two-track enforcement process as well as the arguably more lenient standard of review that applies to FTC requests for preliminary injunctions.
  • The outcome of this nowhere codified “black box” clearance process makes a massive difference in terms of the process afforded to regulated parties and these different processes are outcomes-determinative.