The FTC’s Recent Moves Could Cost It in the Supreme Court, by Asheesh Agarwal
The Federal Trade Commission appears on a collision course with the Supreme Court. Even as the Court reins in the discretion of independent agencies to increase their accountability to the President and Congress, the FTC is charging ahead with new rules and novel theories that stretch the limits of its authority. For instance, the FTC is seeking to cripple the ad-supported Internet, cancel the gig economy, reimagine the merger guidelines, and expand the scope of its mandate beyond consumers to encompass workers, health and safety risks, and equity for historically underserved communities.
These initiatives could prod the high court to take a hard look at the FTC’s place in the constitutional order. Later this year, the Court will hear oral argument in Axon Enterprise, Inc. v. Federal Trade Commission on a narrow procedural question, namely, whether someone can raise certain structural constitutional challenges to the FTC directly in federal court or must first wade through the agency’s administrative processes. By expanding its regulatory reach in ways that may exceed its mandate, the FTC could persuade the Court that companies need the ability to go into federal court immediately to challenge activities that exceed the agency’s statutory authority. Moreover, by pushing the envelope on rulemakings and policy guidance, the FTC may well lay the groundwork for the Court to revisit the FTC’s constitutionality in future cases.
This article outlines the FTC’s constitutional history and explains how its current agenda could raise questions about the agency in Axon and future cases.
I. The FTC’s Ongoing Constitutionality Remains Open to Debate
A creature of the first progressive era, the Federal Trade Commission’s powers have always been subject to scrutiny. In 1914, Congress created the agency as a multimember body with features of all three branches of government. The FTC could investigate, prosecute, adjudicate, and even legislate rules of conduct for the business community. At the time, President Woodrow Wilson’s Attorney General (and later Supreme Court Justice) James Clark McReynolds publicly doubted the agency’s constitutionality. Although President Wilson, a progressive, ultimately supported the agency, even he wanted to constrain its authority to avoid empowering a “smug lot of experts.” As the president explained, “God forbid that in a democratic country we should resign the task and give the government over to experts. What are we for if we are to be scientifically taken care of by a small number of gentlemen who are the only men who understand the job?”
These concerns helped to shape the agency’s authority. In Humphrey’s Executor v. United States, 295 U.S. 602 (1935), the Supreme Court upheld for-cause limits on the president’s ability to remove a commissioner, somewhat insulating the FTC from the rest of the executive branch, but only because the agency had a limited mandate and operated under multiple constraints. Most importantly, the FTC’s mission was “neither political nor executive, but predominantly quasi-judicial and quasi-legislative.” Any executive functions were strictly limited to implementing these “quasi-legislative or quasi-judicial powers.”
Moreover, in the Court’s view at the time, the commission did not set policy or operate in a partisan manner. The FTC was “nonpartisan,” acted with “entire impartiality,” and “charged with the enforcement of no policy except the policy of the law.” Indeed, it was “essential that the commission should not be open to the suspicion of partisan direction.”
Finally, the Court placed great stock in the wisdom of the individual commissioners. The commissioners were “called upon to exercise the trained judgment of a body of experts.” As the Court explained, the commission’s work demanded “persons who have experience in the problems to be met — that is, a proper knowledge of both the public requirements and the practical affairs of industry.”
Of course, in the nine decades since Humphrey’s Executor, constitutional jurisprudence has become even more skeptical of agency authority. In West Virginia v. Environmental Protection Agency, No. 20-1530 (2022), the Supreme Court invoked the “major questions doctrine” to find that the Clean Air Act did not grant the EPA authority to devise carbon emission caps. In a recent lower court decision, Jarkesy v. Securities and Exchange Commission, 34 F.4th 446 (2022), the Fifth Circuit held that Congress unconstitutionally delegated legislative power to the SEC, another multimember agency.
The courts have also reined in the FTC. In AMG Capital Management v. FTC, 593 U.S. __ (2021), the Supreme Court unanimously held that the FTC lacked statutory authority to seek equitable monetary relief in federal court under Section 13(b) of the FTC Act. The Court found that the agency had improperly stretched its statutory language to circumvent various procedural guardrails for defendants. Perhaps unused to a judicial rebuke, the agency’s Acting Chair responded that “the Supreme Court ruled in favor of scam artists and dishonest corporations, leaving average Americans to pay for illegal behavior.”
Other opinions call into question the agency’s very existence, as currently structured. In Seila Law v. Consumer Financial Protection Bureau, 591 U.S. __ (2020), the Court, reading Humphrey’s Executor narrowly, held that the President can remove the head of the CFPB without cause, thereby tying the agency closer to the rest of the executive branch. In a dissent in PHH Corp. v. Consumer Financial Protection Bureau, No. 15-1177, (D.C. Cir. 2018), then-Judge Kavanaugh wrote that the FTC and other independent agencies “collectively constitute, in effect, a headless fourth branch of the U.S. Government.” Echoing President Wilson’s original concerns with a “smug lot of experts,” Kavanaugh wrote that independent agencies “hold enormous power over the economic and social life of the United States. Because of their massive power and the absence of Presidential supervision and direction, independent agencies pose a significant threat to individual liberty and to the constitutional system of separation of powers and checks and balances.”
II. The FTC’s Aggressive Agenda Could Lead to a Significant Loss in the Supreme Court
The pending case of Axon v. FTC could bring many of these issues to a head. Axon itself involves a narrow procedural issue about when companies can bring a structural constitutional challenge to the FTC in federal court, but the case’s outcome could affect the agency’s ability to implement its broader agenda. The FTC is contemplating new rules and guidelines to regulate everything from privacy and mergers to the gig economy and the ad-supported Internet. With a win in Axon, the FTC likely could implement its full agenda while keeping judicial scrutiny at bay for years; with a loss, companies likely could challenge, and quite possibly forestall, questionable rules much earlier in the process. Beyond these very practical questions, the case also could lay the groundwork for a full-scale review of Humphrey’s Executor. Although the Court declined to consider that question, some pending lower court cases raise the same issues and the FTC’s current agenda is likely to lead to significant legal questions sooner rather than later. Moreover, several sitting justices, including Justices Kavanaugh and Thomas, have shown an interest in examining the role of independent agencies in our constitutional system.
A. Axon and Alleged Agency Overreach
By itself, Axon presents a case study in the costs of administrative processes. Axon manufactures body cameras and other equipment for law enforcement. In 2018, Axon purchased a failing competitor; the FTC investigated on antitrust grounds. After eighteen months of back and forth, $1.6 million in legal fees, and a demand that Axon spin-off the acquired company and share its own intellectual property, Axon sued the FTC in federal court. Axon specifically requested a reversal of Humphrey’s Executor, contending that the FTC’s structure and selection process for Administrative Law Judges were unconstitutional. In response, the FTC filed an administrative enforcement petition and argued in court that the administrative proceedings had to play out before the court could assert jurisdiction. The district court agreed with the FTC.
On appeal, a split panel of the Ninth Circuit reluctantly affirmed. (While the certiorari petition was pending, the en banc Fifth Circuit held that district courts have jurisdiction over these constitutional challenges. Cochran v. SEC, 20 F.4th 194 (5th Cir. 2021). The Supreme Court then granted certiorari to resolve the circuit split.) The majority concluded that, under controlling precedent, Axon had to navigate the administrative process before moving to federal court. Still, the majority acknowledged that Axon had “serious concerns about how the FTC operates,” including “legitimate questions about whether the FTC has stacked the deck in its favor in its administrative proceedings.” The court noted that the FTC “has not lost a single case [internally] in the past quarter-century.” In a partial dissent, Judge Bumatay reasoned that Axon should have the ability to file its constitutional claims directly in federal court, both because the FTC’s adjudicators had no special expertise in constitutional law and because lengthy administrative processes could effectively deny Axon judicial review.
The Supreme Court granted certiorari on the procedural question of whether someone can challenge the FTC’s constitutionality directly in federal court. The Court declined to consider the second question presented in the petition, which was whether the FTC’s structure is consistent with the Constitution. Oral argument is set for November 7th.
B. The FTC’s Agenda Could Help to Shape Axon – and Vice Versa
As the Supreme Court prepares to hear Axon, it will likely evaluate the procedural rights of defendants and the objectivity of the agency’s internal processes, with an eye toward future cases involving the FTC. In particular, the Court may think about future cases that raise statutory challenges to the FTC’s activities: if the FTC promulgates a rule that exceeds its statutory authority, should someone have to wade through years of administrative litigation before challenging that rule in federal court? Axon could shed light on that question.
With these future cases in mind, the Court may consider, or at least note, the fact that the FTC is currently contemplating one of the most aggressive agendas in its history. That agenda seeks to reshape broad swaths of the U.S. economy with little regard for its statutory constraints or judicial precedent. The FTC’s current chair, Lina Khan, has argued for the government to play a larger role in “shaping markets and economic outcomes” while decrying the free market as a “product of metaphysical forces.” According to two commissioners, the agency’s leadership intends to “embark on a sweeping campaign to replace the free market system with its own enlightened views of how companies should operate … goals that are ripe for political manipulation.”
Without immediate recourse to federal courts, the FTC could force the business community to abide by arguably illegal rules for years to come, with profound consequences for the U.S. economy, technological innovation, and global competitiveness.
In perhaps its most significant initiative, the FTC has issued an Advance Notice of Proposed Rulemaking (ANPRM) regarding “commercial surveillance and data security.” According to the two commissioners who dissented from the ANPRM’s issuance, the potential rulemaking could ban or severely restrict “common business practices we have never before even asserted are illegal.” For instance, the FTC could promulgate a rule to do the following:
(1) restrict or ban “personalized” or “targeted” online advertising, which for decades has served as a cornerstone of the free, ad-supported Internet;
(2) declare that consumers cannot consent to sharing personal data online, either for themselves or their children;
(3) ban any computer programs that produce disparate outcomes, a rule that could cripple the development of advanced artificial intelligence; and
(4) by limiting data collection, effectively eliminate customer loyalty programs.
Any one of these rules would land like a giant asteroid in the middle of the U.S. economy, setting off tsunamis and dust clouds that could drive many companies past the point of extinction and leave consumers with fewer choices and higher prices.
Faced with such consequences, the question becomes paramount of when an affected party could challenge such a rule in federal court. As both dissenting commissioners explain, the FTC lacks the statutory authority to issue a broad rule (and likely the requisite constitutional authority, given the major questions and non-delegation doctrines). Still, there is no guarantee that anyone could bring an immediate facial challenge to such a rule. The FTC could easily craft a somewhat amorphous rule – e.g., “companies shall not use computer programs that result in a disparate impact on workers” — that imposes no definitive requirements on companies. Such a rule could leave the agency with discretion to apply the rule as it sees fit, insulated from effective challenge while chilling legitimate business activity for years.
In another major initiative, the FTC and the Department of Justice’s Antitrust Division are planning to re-imagine the horizontal and vertical merger guidelines. Companies rely on the guidelines to structure their transactions and to gain insights into the thinking of the antitrust agencies. Last updated during the Obama administration and approved by unanimous vote, the guidelines affect hundreds of billions of dollars in deals every year.
Unfortunately, based on their Request for Information (RFI) and public messaging, it appears that the agencies are seeking to rewrite the antitrust laws in ways that would usurp the authority of Congress and the courts. For instance, the agencies repeatedly cite cases from the 1960s that have long been discredited by economists, lawyers, the agencies themselves, and the Supreme Court. Likewise, the RFI frequently asks about topics that the courts have long settled, such as Questions 2(g) (“Should the guidelines’ traditional distinctions between horizontal and vertical mergers be revisited in light of recent economic trends in the modern economy?”) and 6(a) (“Is it necessary to define a market in every case?”). The case law already answers these questions. Neither the FTC nor DOJ should ignore judicial guidance on the distinction between horizontal and vertical mergers and the necessity of market definition.
Here again, a strong Axon opinion could help to keep the FTC in line with its statutory constraints and judicial precedent. As an ordinary matter, of course, a federal court likely would not entertain a challenge to an agency’s guidance or policy documents, as such pronouncements typically lack the force of binding law. Nevertheless, courts have recognized that sometimes agencies attempt to create substantive law through guidelines. For example, in describing some of the EPA’s activities, the D.C. Circuit explained that “as years pass, the agency issues circulars or guidance or memoranda, explaining, interpreting, defining, and often expanding the commands on the regulations. … Law is made, without notice and comment, without public participation, and without publication in the Federal Register or the Code of Federal Regulations. … The agency may also think there is another advantage — immunizing its lawmaking from judicial review.” Appalachian Power Co. v EPA, 208 F. 3d. 1015, at 1020 (D.C. Cir. 2000).
Indeed, the FTC is actively seeking to avoid judicial review when possible. As a condition of approving mergers, the FTC has started to pressure companies into accepting ten-year “prior approval language” that allows the agency to veto mergers without having to go to court. As part of a contentious merger review, the agency appeared to coordinate with a foreign regulatory agency to deprive a U.S. company of the ability to challenge the FTC’s actions in federal court. More generally, the FTC has simply delayed clearing or challenging mergers with the effect that the merging parties abandon their transactions, again negating the possibility of judicial review. This appears to be part of the plan. In an interview, the FTC’s Chair asked Congress to make it easier for the agencies “to pursue some of the worst violations that we’re seeing, without having to, you know, face the potential of losing significantly.”
A strong Axon opinion, upholding aggrieved parties’ right to immediate judicial review when the FTC exceeds its authority, would help keep the FTC within its constitutional and statutory bounds. Such an opinion would hold that defendants can bring constitutional challenges directly in federal court and signal that courts will apply meaningful judicial review of agency actions that exceed the commission’s statutory bounds. Such a decision would be limited in scope and judicially manageable, but also would remind the agency that it operates in a system of government with checks and balances on all three branches of government, including independent agencies.
C. The FTC’s Agenda Could Reinvigorate a Review of Humphrey’s Executor
More fundamentally, Axon could lay the groundwork for a complete review of Humphrey’s Executor. Although the Court declined to grant certiorari on that question, several justices have expressed interest in the general topic, similar cases are percolating in the lower courts, and the FTC’s aggressive agenda undoubtedly will create new questions for the courts.
Even a cursory review would show that almost none of Humphrey’s Executor’s rationales have held up over time. Far from being “neither political nor executive,” the FTC at times has sought to set the economic policy agenda for the entire country. In the 1970s, for example, the FTC promulgated numerous rules to regulate the economy, many of which exceeded the FTC’s statutory mandate. In just one year, the FTC launched sixteen rulemakings that sought to “transform entire industries that touch everyday life, from antacids to used cars to vocational schools.” One proposal sought to ban advertising to children. This regulatory excess led the Washington Post to deem the FTC the “national nanny.”
Today, and just as President Wilson feared, the FTC again sees itself as a national driver of broad economic policy. After taking office, the FTC’s current chair described her belief that the agency “shapes the distribution of power and opportunity across our economy.” The FTC’s current Strategic Plan condemns “unwarranted health, safety, and privacy risks” and seeks “equity for historically underserved communities,” important issues but ones that lie far outside the agency’s statutory mandate or historic competence. Current FTC Commissioner Christine Wilson – no relation to Woodrow – complained that the FTC has abandoned its statutory mission of protecting consumers in pursuit of “prevailing but mercurial political winds.” Similarly, a bipartisan group of agency veterans has publicly warned that the commission’s agenda could lead courts to reconsider Humphrey’s Executor.
The Humphrey’s Executor Court also relied heavily on its view that the FTC acted with “entire impartiality” and “should not be open to the suspicion of partisan direction.” Contrary to this view, today the FTC appears to act in concert with the White House — and though it is entirely appropriate for the President to direct the rest of the executive branch, constitutional problems arise when that executive branch agency also exercises quasi-legislative and quasi-judicial powers. In an Executive Order on Promoting Competition in the U.S. Economy, President Biden encouraged the FTC to use its authority to implement a “whole-of-government” competition policy, including using its rulemaking authority to curtail the unfair use of “agreements that may unfairly limit worker mobility.” Although the Executive Order does not direct the FTC to do anything, its issuance certainly creates a “suspicion of partisan direction.” The FTC’s head of policy is a former advisor to the White House and a brief review reveals that, during the last two years, the FTC’s majority Democratic commissioners voted in lockstep to override the concerns of their dissenting Republican counterparts more than a dozen times.
Finally, Humphrey’s Executor placed too much reliance on the experience of the agency’s individual commissioners. The Court expected that those commissioners would have “experience in the problems to be met — that is, a proper knowledge of both the public requirements and the practical affairs of industry.” Oftentimes, however, the FTC’s commissioners have little or no background in the private sector. Many commissioners have substantial (and impressive) experience in academia or on Capitol Hill, but very little practical experience working for or advising the companies that they seek to regulate.
Without such practical experience, how can commissioners fully appreciate the difficult tradeoffs for businesses as they strive to develop innovative products, serve their customers, and satisfy their responsibilities to their shareholders? The FTC recently eliminated language from its Strategic Plan declaring that the agency should enforce the law “without unduly burdening legitimate business activity” – would anyone who has ever run a business vote to remove such language? For people without such experience, businesses are merely soulless entities to be taxed, regulated, and controlled, rather than vibrant organizations, staffed and owned by actual human beings, that satisfy consumer demand, drive innovation, and secure the nation’s economic and military needs.
To be sure, the Humphrey’s Executor Court expected commissioners to gain some of that practical experience on the job, but one suspects that even President Wilson, hardly an advocate of limited government, would have worried about a government given over to “experts” without experience.
The passing decades have borne out many of President Wilson’s concerns even as they have cast doubt on most of the assumptions that underlay Humphrey’s Executor. In Axon, the Supreme Court will have a chance to subject the FTC to judicial scrutiny and to revisit its place in the nation’s constitutional order.
Asheesh Agarwal served as Assistant Director of the FTC’s Office of Policy Planning under former Chairman Timothy Muris. For their helpful review and comments, he thanks Ted Gebhard, Matt Perault, Alden Abbott, John Delacourt, Geoff Manne, Bilal Sayyed, and Todd Zywicki.