United States: A Constitutional Challenge To Watch: Axon Sets Its Sight On The Structure Of The FTC

On January 3, 2019, Axon Enterprise, Inc. ("Axon"), a manufacturer of body-worn cameras for law enforcement, filed a complaint against the Federal Trade Commission seeking a declaratory judgment in the District of Arizona. In the complaint, Axon alleges that the FTC's administrative procedures and structure are unconstitutional, and seeks to enjoin the FTC from pursuing an administrative enforcement action against Axon. Although an antitrust case, the matter provides interesting issues that also involve the FTC's consumer protection mission.

A little background: On June 14, 2018, the FTC opened an investigation into Axon's attempted acquisition of Vievu, which also sells public safety camera systems. Axon contends that it cooperated with the FTC's investigation over an 18-month period, only to result in the FTC threatening to sue in an administrative proceeding unless Axon "surrender[ed] a 'blank check' divestiture." Axon protested that it did not violate the Clayton Act or any other antitrust laws in its acquisition of Vievu and filed the pending lawsuit, arguing that the FTC's structure and administrative adjudication procedures violate the U.S. Constitution.

As for the constitutional challenges, Axon first argues that the FTC's administrative procedures — whereby it acts as prosecutor, judge, and jury — violate Axon's Fifth Amendment due process rights. Essentially, Axon asserts that when the FTC brings an administrative proceeding against a party, it infringes on that party's right to a fair trial before a neutral judge in accordance with the Fifth Amendment. Accordingly, subjecting Axon to an FTC administrative proceeding will force it to "submit to a hearing process with a preordained result." As Judge Posner noted years ago, "It is too much to expect men of ordinary character and competence to be able to judge impartially in cases that they are responsible for having instituted in the first place." Remember, however, that Axon is not the first company caught in the FTC's crosshairs to raise this argument, and these prior challenges have failed.

Axon also alleges that the very structure and makeup of the FTC violate Article II of the Constitution, and therefore any action the FTC takes is unconstitutional. Currently, as an independent agency, FTC Commissioners and Administrative Law Judges (i.e., the judges who hear FTC administrative proceedings) are not subject to at-will removal by the President. Though FTC Commissioners are nominated by the President and confirmed by the Senate, they can only be removed by the President for "inefficiency, neglect of duty, or malfeasance in office." Further, FTC-appointed ALJs can only be removed by the FTC for "good cause." However, Axon alleges that the FTC commissioners and ALJs are "Executive officials exercising law-enforcement power" who are constitutionally required to be subject to at-will removal by the President under Article II.

Important to Axon's "at-will removal" argument is the fact that in Lucia v. SEC, the Supreme Court recently held that the appointment of SEC ALJs violated Article II. The Lucia  decision did not, however, resolve whether statutory "for cause" removal protections afforded administrative law judges are unconstitutional. In moving to preliminarily enjoin the administrative proceedings, Axon asks the district court to answer this question in the affirmative. Specifically, Axon contends that there is a growing consensus that FTC Commissioners' and ALJs' protection from at-will removal violates Article II.

The FTC responded to the Axon lawsuit by arguing that the district court lacks jurisdiction over Axon's claims because Axon did not follow the review procedure of the FTC Act and did not challenge any final agency action.

This case provides another example of the increasing focus on the FTC, along with other independent agencies such as the SEC and CFPB, regarding whether its actions and structure can survive constitutional scrutiny. Those who are subject to pressure from the FTC are continuing to challenge its ability to serve as the prosecutor, the judge, and the jury in administrative proceedings that have far-reaching implications. As we've written previously, the FTC's ability to obtain relief in federal court also is being re-examined by several courts, including the Third Circuit and the Supreme Court.

As this case was filed just last month, Axon has several hurdles to clear before getting to the merits of its claims. One major hurdle is whether the court will decide to exercise its jurisdictional discretion under the Declaratory Judgment Act. We may not have to wait long, though, as Axon recently requested that the district court expedite the proceedings in light of the administrative proceeding hearing currently scheduled for May 19, 2020. Given the Supreme Court's penchant for taking cases challenging the constitutional and statutory authority of independent agencies, those following might want to hit the "record" button.

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