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Supreme Court Hears Oral Arguments in SEC v. Cochran, a Case Concerning Challenges to Federal Administrative Proceedings

On November 7, 2022, the U.S. Supreme Court heard oral arguments in the cases of SEC v. Cochran[1] and Axon Enterprise, Inc. v. FTC,[2] which address whether respondents in federal administrative proceedings have the ability to pose constitutional challenges to those proceedings in federal court prior to exhausting the administrative process.  Decisions on these cases, expected in June 2023, could have far-reaching consequences for the federal administrative state.

As we reported this past May, SEC v. Cochran concerns an appeal from a decision by the U.S. Court of Appeals for the Fifth Circuit, which held that a respondent in an SEC administrative proceeding can pursue a constitutional challenge in federal district court to the authority of SEC Administrative Law Judges (ALJs), based on their removal protections, without exhausting the administrative appeals process.  The decision follows Lucia v. SEC, where the Supreme Court held that the President, a court of law, or a department head must appoint SEC ALJs, who are officers of the United States under the Appointments Clause of Article II, Section 2 of the Constitution.  Cochran v. SEC[3].  In that case, SEC staff members appointed the ALJ who presided over the administrative proceeding against Lucia.  Therefore, the Court deemed the ALJ unconstitutionally appointed.  But Lucia left open the issue of whether ALJs are unconstitutionally insulated from the President’s removal powers under Article II of the Constitution.

Cochran, the subject of an SEC enforcement action in an administrative proceeding, sued to enjoin the proceeding on the ground that the presiding ALJ was unconstitutionally insulated from removal.  The district court dismissed Cochran’s claim for lack of subject-matter jurisdiction, and the Fifth Circuit affirmed the dismissal.  Sitting en banc, the Fifth Circuit held that the Securities and Exchange Act of 1934 (“Exchange Act”) did not divest the district court of jurisdiction to hear Cochran’s challenge to the constitutionality of the ALJ.

The SEC filed a petition for cert. with the Supreme Court, asking the Court to resolve a circuit split that the Fifth Circuit’s ruling created, as the Second, Fourth, Seventh, Eleventh, and D.C. Circuits all reject attempts to seek injunctions in federal court to bypass the statutory review scheme before parties have exhausted all administrative remedies.

Summary of the Arguments and Justices’ Questions

At oral argument, Cochran challenged the SEC’s entire administrative review scheme by arguing that SEC ALJs’ “dual-layered protection from removal . . . taints their very existence and vitiates their authority to act at all.”  Cochran argued that the Exchange Act does not prohibit respondents in SEC administrative proceedings from seeking pre-exhaustion relief on structural constitutional claims in district court; it simply grants federal courts of appeals jurisdiction to review challenges from final SEC orders.

Cochran argued that this case is distinct from Thunder Basin Coal Co. v. Reich,[4] which outlines the factors for determining whether a statutory-review scheme precludes a district court from asserting subject-matter jurisdiction over a pre-enforcement challenge to the governing statute, because the challenged agency action here is not the subject of an exclusive administrative scheme.[5]  Thunder Basin’s application to this case likely would undermine Cochran’s argument because the Court often infers Congress’s intent to confer exclusive jurisdiction from Congress’s creation of an administrative scheme for reviewing specific kinds of agency action.  Additionally, in the context of both agency proceedings and the collateral order doctrine, the Supreme Court routinely rejects arguments that subsequent judicial review of constitutionally defective proceedings is inadequate because the petitioner allegedly suffers an injury by partaking in such proceedings, unless the denial of a statutory or constitutional immunity (e.g., the Double Jeopardy Clause of the Fifth Amendment) is the subject of the appeal.

Justices Kagan, Sotomayor, and Jackson each expressed concern that Cochran’s desired outcome would contradict Congress’s intent for federal subject-matter jurisdiction under 28 U.S.C. § 1331 to require final agency action.  The justices queried why Cochran’s constitutional claim could not wait until the SEC renders final agency action, which is typically when such claims are brought.  On this point, Justice Sotomayor asked why Cochran’s “structural constitutional claim” is different from a due process claim.  Garre responded that “the mere fact of having to proceed before an unconstitutional agency decisionmaker inflicts . . . a here-and-now injury that exists wholly apart from the ultimate outcome of that proceeding.”  He cited Carr v. Saul,[6] where the Supreme Court held that exhausting administrative remedies was not a prerequisite to bringing an Appointments Clause challenge in an Article III court.[7]  Justices Kagan, Sotomayor, and Jackson struggled to understand how they could accept Cochran’s argument as to structural constitutional claims without opening the door to any other interlocutory claims.  Justice Kavanaugh also acknowledged that Cochran’s desired outcome would require the Court to completely overhaul its analytical approach to this area of the law and provoke a “tsunami of litigation.”

Malcolm Stewart, Deputy Solicitor General and counsel for the SEC, cited Myers v. Bethlehem Shipbuilding Corp.[8] and Federal Power Commission v. Metropolitan Edison Co.[9] to support the argument that even constitutional challenges to the pending administrative proceedings to which one is subject must wait until the agency has taken final action on the issue.  Justice Kavanaugh asked Stewart to explain which outcome makes the most sense for the government, citizens, and court system, and suggested that the heavy burden of demonstrating likelihood of success on the merits would deter frivolous challenges to agency procedures.  As previously mentioned, Stewart explained that litigants challenging proceedings in cases like Myers and under the collateral order doctrine argue that future judicial review would be inadequate to remedy the present injury incurred during the proceedings; however, the Court has repeatedly found such arguments unpersuasive in deciding whether to permit litigants to seek immediate review during ongoing agency proceedings.  The one exception is that the Court generally views orders denying a statutory or constitutional immunity as “appealable immediately.”  Justice Alito suggested that, because (1) section 1331 grants Article III courts jurisdiction over any suit arising under federal law, and (2) the Exchange Act does not expressly divest that jurisdiction, the district court has jurisdiction to hear Cochran’s structural constitutional challenge to the SEC’s administrative proceedings.

Justices Kavanaugh and Gorsuch asked questions about how the Administrative Procedure Act might inform the Court’s analysis.[10]  Justice Kavanaugh asked about the relevance of section 703, which provides that “[t]he form of proceeding for judicial review is the special statutory review proceeding relevant to the subject matter in a court.”[11]  Stewart explained that provision is highly relevant because the Court often infers “that Congress intended that scheme to be exclusive and that no other court will be able to review the same agency action” when Congress establishes a “detailed, specific scheme for review of a particular category of agency action.”  Justice Gorsuch disagreed with the SEC’s argument that section 704 implicitly confers jurisdiction on the SEC ALJs to review Cochran’s claim because “the court that reviews the final decision should review the antecedent steps.”

Predicted Outcome and Impact

The majority of the justices seemed amenable to some variation of Cochran’s argument.  Both liberal and conservative justices appeared concerned about reversing decades of clear precedent, burdening district courts, and fatally undermining administrative review schemes.  Therefore, we predict that the Supreme Court will decide the case in favor of Cochran, but it will likely support Cochran’s narrow argument that a respondent in an administrative proceeding can bring a pre-exhaustion, constitutional challenge to the structure of the SEC in district court because it is wholly collateral to the administrative proceeding.  Also, as Justice Kavanaugh suggested, the bar to seeking an injunction in such cases will be high, as the respondent will need to demonstrate a likelihood of success on the merits at the outset.

Such a decision, resulting in potential constitutional challenges in federal district court to the authority and jurisdiction of SEC ALJs, may deter the SEC from bringing contested administrative proceedings.  The purpose of the administrative process was to expedite the resolution of disputes.  Rule 360(a)(2) of the SEC Rules of Practice states that hearings shall occur within approximately four months of the date of service of an order, and the SEC hearing officer shall render an initial decision within ten months of the date of service of the order; however, as the parties noted in oral argument, there are some cases that lasted many years before an SEC ALJ issued a decision constituting final agency action. 

As a practical matter, since the decision in Lucia, the SEC has generally filed contested actions against respondents in federal district courts to avoid constitutional challenges, such as those posed by Lucia.  Another case from the Fifth Circuit, Jarkesy v. SEC,[12] however, has questioned whether Congress unconstitutionally delegated legislative authority to the SEC by granting the SEC discretion to determine whether to file cases in federal court or in administrative proceedings.[13]  We expect the SEC to seek review of the Jarkesy decision before the Supreme Court, and we anticipate that a holding in that matter will pose further ramifications for the SEC’s ability to pursue administrative proceedings.

This blog will continue to monitor and report on any significant updates on this case, as well as other related cases.

[1] 20 F.4th 194 (5th Cir. 2021) (en banc), cert. granted, 142 S. Ct. 2707, No. 21-1239 (May 16, 2022).

[2] 986 F.3d 1173 (9th Cir. 2021), cert. granted, 142 S. Ct. 895, No. 21-86 (Jan. 24, 2022).

[3] 20 F.4th 194, 198 (5th Cir. 2021) (en banc) (citing Lucia v. SEC,138 S. Ct. 2044 (2018))

[4] 510 U.S. 200 (1994).

[5] In deciding such questions, Thunder Basin instructs courts to determine (1) whether “Congress has allocated initial review to an administrative body where such intent is fairly discernible in the statutory scheme,” and (2) whether the clams at issue “are of the type Congress intended to be reviewed within this statutory structure.”  Id. at 207, 212 (cleaned up).  Courts should consider the following three factors when evaluating the second question: (i) whether “a finding of preclusion could foreclose all meaningful judicial review”; (ii) whether the claims at issue are “wholly collateral to a statute’s review provisions”; and (iii) whether the claims at issue are “outside the agency’s expertise.”  Id. at 212–13.

[6] 141 S. Ct. 1352 (2021).

[7] Article III courts comprise the federal judiciary and consist of “one supreme Court, and . . . such inferior Courts as the Congress may . . . ordain and establish,” namely the U.S. courts of appeals and district courts.  U.S. Const. art. III, § 1.

[8] 303 U.S. 41 (1938).

[9] 304 U.S. 375 (1938).

[10] Arguments on the APA were waived because they were not raised below.

[11] 5 U.S.C. § 703 (2022).

[12] 34 F.4th 446 (5th Cir. 2022).

[13] For more information on the Jarkesy decision, see our blog post from May 24, 2022, titled, “Pair of Legal Developments leave SEC In-House Legal Courts in Crosshairs.”