AXON ENTERPRISE, INC.

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Has Axon Dealt Another Blow To FTC Authority?

01/27/2022 | 04:41am EDT

Last year, the Supreme Court unanimously ruled that the Federal Trade Commission (FTC) is not authorized to impose civil penalties on parties who violate the FTC Act unless the party is violating a previous cease and order. The ruling took away a major enforcement tool. Now, Axon Enterprises is seeking to attack the entire structure of the FTC while it simultaneously defends its acquisition of VieVu, LLC in administrative court. It will be interesting to see whether the Supreme Court is going to deliver a blow to the FTC two years in a row.

Axon and the FTC's parallel suits

According to the FTC's complaint, Axon was the leading manufacturer and supplier of body-worn cameras, while VieVu was its closest competitor in the market for such systems sold to large metropolitan police departments. ." The FTC sued Axon in January 2020 in FTC administrative court to challenge Axon's May 2018 acquisition of VieVu. Axon, in turn, sued the FTC in Arizona federal court. Axon challenged the FTC's structure and constitutional ability to hold trials in its own administrative court. Specifically, Axon claimed the FTC's administrative enforcement system - which uses Administrative Law Judges (ALJs) to make binding administrative decisions - violated the Constitution's principles of separation of powers and right to due process.

ALJs are appointed and removed by the FTC, and FTC executives are then appointed and removed by the executive branch. ALJs therefore have a "dual-layer of removal protection" that limits the executive branch's ability to remove any appointed ALJ. Axon argued this insulation of ALJs from presidential removal violates the Constitution (Article II). Axon claims that only individuals who are subject to more direct removal by the executive branch can decide the antitrust merits of its 2018 acquisition.

The District Court in Arizona held that it lacked jurisdiction to hear the challenge. The court held that all such challenges must be brought in the pending FTC administrative proceeding. It also held that only after there is a final order in that court could Axon seek review of that order, including its constitutional challenge, in federal court. Axon appealed to the Ninth Circuit, which affirmed the District Court's ruling. Specifically, the Ninth Circuit held that "[b]ecause the FTC statutory scheme ultimately allowed Axon to present its constitutional challenges to a federal court of appeals after the administrative proceeding, Axon did not suffer any cognizable injury." Nevertheless, the Ninth Circuit agreed to stay the administrative trial while Axon appealed to the United States Supreme Court.

Axon is seeking review by the Supreme Court, and its efforts to have the Supreme Court take the case were just aided by the Fifth Circuit.

The circuit split created by the Fifth Circuit

The Supreme Court previously decided a similar issue in 2010 when it considered Free Enterprise Fund v. Public Company Accounting Oversight Board. The court held that the Exchange Act did not strip a federal trial court of jurisdiction to determine a separation-of-powers challenge regarding the makeup of the oversight board. The Second, Fourth, Seventh, Eleventh and D.C. Circuit Courts of Appeals, however, have distinguished Free Enterprise Fund by holding that a federal trial court only has jurisdiction to hear the challenge as long as there is no pending administrative enforcement proceeding or if that proceeding has produced a final, appealable order. These circuits held that if a plaintiff is already rightly before an administrative agency, the plaintiff must raise those constitutional claims in the agency's adjudicative forum first. Only after a final administrative decision may a party appeal the decision to the appropriate federal court of appeals. The practical effect is that the constitutional challenge may never be heard because so many parties abandon the litigation right before an administrative trial or never appeal an adverse decision. Few wish to spend the time and resources appealing the matter to a federal court of appeals.

Recently, however, the Fifth Circuit decided differently. In a Dec.13 ruling, the Fifth Circuit Court of Appeals split from the other circuits. The Fifth Circuit held that in certain situations, a plaintiff suing an administrative agency can bring a complaint in federal district court to block an ongoing administrative proceeding. The decision held that district courts have jurisdiction to consider complaints that concern a constitutional issue - such as a deprivation of due process or another fundamental right guaranteed by the United States Constitution. The Fifth Circuit, in its Dec.13 opinion en banc, decided the distinction held by the other circuits as to whether jurisdiction is proper was immaterial. The Fifth Circuit held that a plaintiff could bring a constitutional appeal in federal court against the U.S. Securities and Exchange Commission (SEC) while an SEC proceeding was ongoing. The court recognized that if the SEC administrative proceeding were resolved in the plaintiff's favor, then there would be no adverse order for an appeal and the plaintiff would be without recourse on the constitutional matter.

Axon filed its original petition in August 2021 and a supplemental brief, after the Fifth Circuit decision, on Dec. 20, 2021. Now that there is a circuit split, Axon's chances of having the Supreme Court review the matter have increased.

The Supreme Court has rescheduled its conference to consider Axon's petition for review.

Takeaway

Facially, Axon's bid to the Supreme Court may not seem all that significant. After all, the specific issue is only whether a federal district court can hear the constitutional challenge while the administrative proceeding is ongoing. And that is a long way from declaring the FTC's structure unconstitutional. But, FTC administrative orders are rarely appealed to a federal appellate court. Therefore, if the Supreme Court allows for a simultaneous federal constitutional challenge, the structure of the constitutionality of the FTC and other administrative enforcement mechanisms could be heard. In this day and age, when the FTC has become the target of much criticism for its aggressive policies, this could become quite significant.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Ms Grace E. Karabinus
Porter Wright Morris & Arthur
41 S High St Suites 2800-3200
Columbus
OH 43215
UNITED STATES

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