Dive Brief:

• Executives facing an administrative law proceeding have grounds to challenge the administrative law judge’s jurisdiction over the case in federal district court, the U.S. Supreme Court ruled on Friday in a unanimous decision.
• The ruling means company officers and others who are accused of wrongdoing by the Securities and Exchange Commission and other agencies can argue directly before a federal district court that their case should be heard by the court, with a jury, rather than wait until the administrative process plays out. 
• “If you’ve been charged, this is a good case to show to your counsel, because there are a number of constitutional objections” that you can raise to the administrative proceeding,” Peggy Little, senior litigation counsel at the New Civil Liberties Alliance (NCLA), told Legal Dive.

Dive Insight:

People caught up in a regulatory enforcement action have been complaining for years that, before they can get their case heard in court, they’re forced to defend themselves in an expensive and time-consuming proceeding that’s overseen by an administrative law judge (ALJ) that is supposed to be independent but, critics say, in reality works for the agency that brings the case. 

“All too often people just fold and submit to what is a ruinous process,” Little said at a press conference after the decision was released. 

Even though the ALJs are ostensibly independent, they tend to overwhelmingly rule in favor of the agency that employs them, critics say, and only later can respondents appeal in federal court, a process that can take years to play out. 

What’s more, an appeals court traditionally applies a deferential standard in which it limits its review to the record provided by the agency, a process that can seem weighted against people who are trying to clear their name. 

You just want to “get before a group of your peers who can fairly look at the evidence against you,” said Little. 

Constitutional objections

In its decision, the Supreme Court looked at two cases raising constitutional objections to the administrative process, SEC v. Cochran and Axon Enterprise v. FTC. The court said it’s appropriate for respondents in a federal action to challenge the use of the administrative proceeding at the outset, rather than wait to file an appeal after the proceeding has played out.  

“The ordinary statutory review scheme does not preclude a district court from entertaining these extraordinary claims,” Justice Elena Kagan said in the decision she wrote for the court.

In a previous case, the Supreme Court used a three-part test to decide when it's appropriate for a federal district court, rather than an ALJ, to look at a case, and in her ruling, Kagan said both the Cochran and Axon cases met the test. 

Cochran refers to Michelle Cochran, an accountant who the SEC accused of misapplying accounting standards on behalf of a client. Axon refers to a company fighting an effort by the Federal Trade Commission to block its acquisition of a police body-camera company. 

Cochran has already been through administrative proceedings and was fined $22,000 by the ALJ. Under the ordinary statutory review scheme, she was entitled to take her case to a federal appeals court, but before she could make that move, the SEC, responding to constitutional challenges to how it selects its ALjs, changed its process. 

Because of the change, Cochran faced having to go through the administrative proceedings a second time, with a new ALJ, before she could take her case to a federal appeals court, prompting the lawsuit taken up by the Supreme Court.

Under Friday’s ruling, Cochran can now have her case taken up directly by a federal district court.

“This isn’t over for her even though she won at the Supreme Court,” said Mark Chenoweth, president and general counsel of NCLA. “Just now, after four years of litigation, she’s getting to start at the starting line to vindicate her rights.”

Although the ruling strikes a blow against agencies’ use of administrative proceedings, it leaves unaddressed the more fundamental question of whether ALJs are constitutional, given the way they’re appointed and not subject to direct removal by the President, as head of the federal executive branch.

Under the current structure, ALJs can be removed by a commission, whose members can be removed by the President. But ALJs themselves are not subject to direct presidential removal, calling their independence into question. 

That question, said Chenoweth, is likely to be taken up by the top court eventually, but the question remains open for now. 

“The Supreme Court didn’t reach the merits of whether or not undue levels of protection from removal make SEC ALJs unconstitutional,” Chenoweth said.  

Bottom line, for executives subject to an SEC or other agency enforcement action, they can now challenge the administrative proceeding as the appropriate venue immediately, potentially saving them years of legal uncertainty before an agency-appointed ALJ.