Constitutional challenges facing FTC may find receptive audience in nominee to lead the Commission

Increased challenges to FTC authority

In recent years, defendants in FTC merger lawsuits have increasingly raised constitutional challenges to the FTC’s authority, including that:

• the FTC’s “unfettered discretion” to choose whether to bring an enforcement action in administrative court or federal court violates the Non-Delegation doctrine because that choice is a legislative decision “for which Congress provided no ‘intelligible principle’” to govern the FTC’s decision-making¹ ;

• the FTC’s administrative proceedings violate Article III of the Constitution because it allows the agency to adjudicate a defendant’s private rights within the Executive Branch rather than the Judicial Branch²;

• the FTC’s administrative litigation process violates the Due Process Clause because the FTC “play[s] the role of investigator, prosecutor and judge³;”

• FTC administrative proceedings deny defendants their right to a jury trial in violation of the Seventh Amendment⁴; and
  the FTC ALJs are insulated from at-will removal by the president by two layers of removal protection in violation of Article II and the doctrine of separation of powers.⁵

• Commissioner Ferguson’s statements to date have focused on this last argument, that the ALJ structure at the FTC violates Article II.  

Background on ALJs

FTC ALJs have the statutory authority to preside over the initial fact-finding in FTC administrative complaint proceedings, and are authorized to issue a “recommended decision” that sets out “relevant and material findings of fact with record citations, explains the correct legal standard, applies the law to the facts, and, where appropriate, issues an order on remedy.”⁶ These recommended decisions are subject to an automatic review by the Commission. The Commission reviews both legal and factual issues de novo and is not required to give any deference to the ALJ’s findings of fact.⁷

The removal standards for FTC ALJs are a contested area of law because 5 U.S.C. §7521(a) provides that the FTC Commissioners may generally remove an ALJ “only for good cause established and determined by the Merit Systems Protection Board (MSPB);” in addition, FTC Commissioners and MSPB members are themselves only removable for cause.  At issue, then, is whether this “multilevel protection” from removal unduly restricts the President’s at-will removal power under Article II.  In Free Enterprise Fund v. Public Company Accounting Oversight Bd., the Supreme Court deemed multi-layer protections from removal unconstitutional with respect to executive officers, holding that it is “contrary to Article II’s vesting of the executive power in the President.”⁸ However, the Supreme Court has not explicitly addressed the constitutionality of dual-layer protection from removal for ALJs.⁹

The U.S. Court of Appeals for the Fifth Circuit, however, addressed this issue with respect to SEC ALJs in its 2022 decision in Jarkesy v. SEC.¹⁰  In Jarkesy, the Fifth Circuit held that SEC ALJs are “inferior officers” of an executive agency, and as such, “they are sufficiently important to executing the laws that the Constitution requires that the President be able to exercise authority over their functions.”¹¹ Since removal of an SEC ALJ requires (1) a good-cause finding by the MSPB; and (2) that the SEC acts on that finding, the Fifth Circuit held that SEC ALJs are afforded unconstitutional dual-layer removal protections in violation of Article II.¹² The Supreme Court granted certiorari to review the Fifth Circuit’s opinion in Jarkesy, but did not address the removal issue and ruled instead that the SEC’s in-house adjudication of an enforcement action for civil penalties violated the defendant’s Seventh Amendment right to a jury trial.¹³   

Commissioner Ferguson argues that the removal system for FTC ALJs is unconstitutional

In In the Matter of H&R Block, Inc. et al.,¹⁴ the FTC denied a motion to disqualify the presiding ALJ, finding that multi-level protections do not disqualify FTC ALJs.  Distinguishing the Supreme Court’s holding in Free Enterprise Fund, the FTC’s order says that, because ALJs neither set policy nor issue non-recommendatory decisions to enforce the FTC Act, dual-level protection from removal for ALJs is not unconstitutional.¹⁵

Although he concurred in the denial of the motion to disqualify, Commissioner Ferguson dissented from the majority’s view regarding the constitutional status of ALJs.¹⁶ He outlined his support for the application of the Fifth Circuit’s Jarkesy decision to FTC ALJs, and argued that “[d]ual-layer tenure protections for FTC ALJs insulate subordinate officers from the President’s control,” and “unconstitutionally deprive the President of his Article II authority to supervise and direct those officers in violation of Article II.¹⁷ According to Commissioner Ferguson, “SEC and FTC ALJs are far more similar than they are different,” with both maintaining the power to control discovery, admit or exclude evidence, punish contemnors, and rule on procedural and other motions “as justice may require.”¹⁸ Commissioner Ferguson also took issue with the majority’s view that the “essential distinction” between FTC and SEC ALJs is that “[FTC] ALJs’ FTC Act decisions are recommendatory only, while . . . SEC ALJs’ decisions are ‘often . . . final and binding.’”¹⁹ He argued that the so-called “recommended decision” provided by FTC ALJs is not meaningfully distinct from the “initial decision” delivered by their SEC counterparts, in part because FTC ALJ decisions were referred to as “initial decisions” until July 2023 when the FTC made certain changes to its administrative rules of practice.²⁰ Commission Ferguson noted that, regardless of the change in nomenclature, the FTC reviews ALJ decisions de novo and “[t]he fact that [the FTC] must announce that [it is] adopting an ALJ’s decision, whereas the SEC may adopt an ALJ’s decision through declination, does not alter the extent of the ALJs’ executive authority in the first instance.”²¹

Ultimately, Commissioner Ferguson voted to deny defendants’ motion on the basis that “the provision conferring for-cause removal protections to FTC ALJs is severable from the remainder of the statutory scheme.”²² In his view, “[e]xcluding ALJs entirely from administrative adjudication would exacerbate all of the evils Congress sought to address in the [Administrative Procedures Act] and [Civil Service Reform Act].” Commissioner Ferguson rejected Respondents’ argument that the only remedy to the constitutional issue is to “disqualify Commission ALJs from adjudicating cases, and instead advocated for “’severing’ the unconstitutional provision of the challenged statute ‘while leaving the remainder intact.’”²³

In response, Chair Khan and Commissioner Alvaro Bedoya issued a joint concurring statement blasting Commissioner Ferguson’s partial dissent, which they saw as evincing “a troubling lack of restraint increasingly evident across a growing number of [Commissioner Ferguson’s] writings.”²⁴  They noted that “never in modern history has an [FTC] Commissioner gone to such lengths to declare that core institutional features of the FTC are unconstitutional.”²⁵ Chair Khan and Commissioner Bedoya also pointed out that the Supreme Court has expressly declined to address the Article II question in the context of “that subset of independent agency employees who serve as administrative law judges[.]”²⁶ And they argued that Commissioner Ferguson’s analysis of the issue “involves several leaps that sidestep the limiting language in the Court’s opinions.”²⁷

Notably, Republican Commissioner Melissa Holyoak voted with the majority in the H&R Block matter, concurring “only in the result”²⁸ of the Commission’s 5-0 decision.  She reportedly “declined to comment on Ferguson’s statement” when contacted by Bloomberg News.²⁹ It is not clear how President-elect Trump’s nominee to fill the upcoming vacant Commissioner seat at the FTC, Mark Meador, views the issue.   

Looking ahead

It remains to be seen what weight Commissioner Ferguson’s views on the constitutional powers of the FTC will carry when he assumes the chairmanship of the FTC early next year.  Specifically, it is an open question whether Republican Commissioner Holyoak and nominee Mark Meador share Commissioner Ferguson’s views, and even if they do, what actions the Republican majority would—and could— take as a result.  The majority could wait to see how the issues play out in the courts, while continuing to provide useful fodder—via opinions or other public statements— for defendants to cite in current and future constitutional challenges.  Or, the majority could entertain motions to dismiss existing administrative matters that turn on constitutional issues.³⁰ At a minimum, targets of the FTC’s enforcement efforts challenging the constitutionality of the FTC’s structure and processes may soon get a more receptive audience at the FTC itself.

Authored by Chuck Loughlin, Edith Ramirez, Jenny Feury, and Jill Ottenberg.