The Supreme Court Gets Another Chance to Rein in the Administrative State

T he Constitution vests its executive power in the president of the United States. But in the 1935 case of Humphrey’s Executor v. U.S., the Supreme Court ruled that Congress could shield the heads of executive agencies imbued with “quasi-legislative and quasi-judicial” powers from removal-at-will by the chief executive.

Thus was born one of the most anti-democratic principles in American constitutional law: An agency that exercises executive powers must be controlled by the president, but an agency that exercises all three powers of government must be controlled by nobody.

On November 7, 2022, the Supreme Court will hear a challenge to the constitutionality of this scheme, in which agencies act as rule-maker, investigator, prosecutor, and judge all in one. In the case of Axon v. Federal Trade Commission, defendants subject to agency proceedings are seeking relief from such proceedings before the conclusion of the proceedings themselves, which they argue are inherently unconstitutional.

The narrow question before the Court is whether the congressional statutes creating these agencies bar constitutional challenges in district courts by requiring lengthy administrative appeals of an agency’s final decision before the decision can be subjected to judicial review. Critics argue that if the answer to that question is yes, then the statutes violate the Constitution’s separation of powers.

Such agencies can impose onerous requirements and penalties on defendants even before issuing final orders, sometimes costing them millions and causing them irreparable harm. In this case, Axon, maker of tasers and other technologies used by military and law-enforcement personnel, acquired a virtually insolvent competitor for $13 million. About a month later, the FTC sent Axon a letter raising antitrust concerns and began subjecting the company to interminable investigatory demands. In a matter of months, the company had racked up more than $1 million in legal fees, and the following year it offered to walk away from the acquisition altogether. The FTC rejected that offer and demanded that Axon transfer its intellectual property to the subsidiary prior to any divestiture, threatening a full-blown administrative proceeding if it did not comply.

Compliance with the FTC’s demands could have bankrupted Axon, so the company asked a federal district court to intervene. The same day, the FTC initiated its administrative proceeding, and asked the district court to dismiss Axon’s lawsuit until the agency had conducted an internal adjudication of its own conduct. The district court agreed to do so, a federal court of appeals affirmed that ruling, and after Axon appealed again, the Supreme Court granted certiorari.

This is not just a matter of the FTC’s arbitrary persecution of yet another good American company; it impacts all Americans. The FTC is using these unconstitutional powers to interfere with innovative and pro-competitive business arrangements. That the quaint economic nonsense of mid 20^th-century antitrust enforcement is coming back in fashion would be bad regardless, but it couldn’t be happening at a worse time: The bottom of a business cycle — especially a recession — is precisely when a rapid and efficient reallocation of resources is most needed. Federal and state antitrust enforcement are striving to freeze the economy in a downward spiral.

The FTC claims that the target of its investigation will eventually have its day before the agency’s own tribunal. But not surprisingly, in those kangaroo-court proceedings, the agency wins virtually every time. In fiscal year 2014, the SEC “won” every case in its internal court but only prevailed in 61 percent of its cases before federal courts. In a recent 20-year period, the FTC’s internal tribunals ruled to uphold every one of the agency’s decisions imposing liability on a defendant, and to reverse every decision that did not impose liability on a defendant.

Due-process concerns with these tribunals abound. Their proceedings lack motions to dismiss, counterclaims, and a right to a jury; have very limited discovery; and generally do not allow interrogations or discovery depositions. These concerns may prove lethal to the very existence of the agency courts.

Judicial review is not guaranteed under the status quo. If the defendant prevails in an administrative court on the merits, there will be no final verdict of guilt to challenge in an Article III court and no opportunity to consider the constitutionality of the process itself. And by the time the defendant can challenge a guilty finding and seek judicial review, they will have already suffered through an unconstitutional, detrimental, and expensive administrative process. In this sense, justice for the defendant is either denied or woefully delayed.

The Supreme Court should allow constitutional challenges to such kangaroo-court proceedings in federal district courts. In doing so, it would begin the important work of reigning in a bloated regulatory state that is insufficiently accountable to any of the three branches of government.

That brings us to the other major issue presented in these cases: Whether the agency officials in these independent kangaroo courts can be shielded by multiple layers of protection from removal by the president.

The answer to that question should follow from the reason those layers of protection exist in the first place, which is to confound the Constitution’s separation of powers. The Constitution vests legislative power in Congress, executive power in the president, and judicial power in one Supreme Court and such lower courts as Congress may establish. Any office exercising one of those powers must be accountable to the branch of government in which that power is constitutionally vested. That means that Congress can’t be allowed to delegate unfettered rule-making authority to agencies. It means administrative tribunals must be accountable to Article III courts. And it means that any agency official must be removable at will by the president.

In Axon, the Supreme Court should reverse Humphrey’s Executor and reassert its role as guardian of the Constitution’s separation of powers. Independent agencies have become increasingly unmoored from the Framers’ vision for checking government powers. It’s time for the Court to rein them back in.

Jessica Melugin is the director of the Center for Technology & Innovation at the Competitive Enterprise Institute (CEI). Mario Loyola is a senior fellow at CEI.