The FTC and SEC were taken to court to challenge the agencies’ actions on the grounds their structures are not constitutional—similar to the upcoming case the Supreme Court will hear on the CFPB.
04/26/2023 1:05 P.M.
4.5 minute read
The Supreme Court recently issued a decision on two consolidated cases related to the constitutionality of federal regulators, holding that federal district courts have jurisdiction over these cases.
The Supreme Court also has a pending case to review a 5th Circuit Court of Appeals’ decision declaring the Consumer Financial Protection Bureau’s funding structure is unconstitutional in Community Financial Services Association of America Ltd. v. CFPB.
There are multiple possible outcomes for how the court will rule in the CFPB case, but should it be sent back to the district court level, the consolidated cases could show some precedent on the issue.
For now, let’s look at those cases, Axon Enterprises, Inc. v. FTC, No. 21-86, and SEC v. Cochran, No. 21-1239, reported on in a blog post by Faegre Drinker.
The Supreme Court held that, “federal district courts have jurisdiction to hear extraordinary claims challenging the constitutionality of the structure of the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC),” according to the blog post.
Respondents in the cases, who were separately subject to actions from the agencies, sought to prohibit those proceedings.
“Both respondents claimed that some fundamental aspect of the [c]ommissions’ structure and use of (administrative law judges) is unconstitutional, including that (administrative law judges) are insufficiently accountable to the [p]resident, so as to violate separation of powers,” according to the blog post.
The cases were initially dismissed at the district court level for lack of jurisdiction, a decision that was affirmed in the 9th Circuit but reversed after an en banc review in the 5th Circuit.
The Supreme Court accepted a petition to determine federal district courts’ jurisdiction to hear the cases, ultimately finding it is true for the arguments against the SEC and FTC.
“The [c]ourt held that the Securities Exchange Act and the FTC Act do not displace district courts’ federal question jurisdiction to hear the respondents’ claims,” Faegre Drinker reports. “The [c]ourt relied on three considerations identified in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994), to determine whether Congress intended to limit district court jurisdiction to hear these types of claims, concluding that all three factors weighed against such limitation.”
In February, the Supreme Court granted the CFPB’s petition (PDF) for certiorari to review the decision on its constitutionality, requesting that the court address whether the 5th Circuit Court of Appeals erred in its ruling that the bureau’s funding structure through the Federal Reserve rather than the congressional appropriations process violates the U.S. Constitution’s separation of powers, ACA International previously reported.
The case is slated to be heard as part of the Supreme Court’s next term, which begins in October 2023. The court denied a request for an expedited review of the case. That means a decision may not be issued until next year.
According to a client alert from the Brownstein Hyatt Farber Schreck team, including ACA’s lobbyist Leah Dempsey, while it is still early in the process, possible outcomes to the case include:
- “The Supreme Court could strike just the offending language from the Dodd-Frank Act and send the funding question back to Congress to decide how the CFPB should be funded by passing new legislation. It is possible the court could set a time frame for Congress to act, but given the likely timing for a decision to be in the spring of 2024, the heated politics of a presidential election in the final stretches, and a divided government, will almost certainly mean Congress would face challenges meeting any prescribed deadline.
- The court could strike the language concerning funding with no directive to Congress. This would effectively freeze the ability of the CFPB to function until Congress acts on its own. In this scenario it is possible that everythingthe CFPB has done would be found null and void. If Congress does successfully restructure the CFPB to meet constitutional requirements, a new director might attempt to go back and ratify all past actions, which arguably could then prompt even more litigation.
- The court could take the pen and rewrite Dodd-Frank to place the CFPB under the authority of the House and Senate Appropriations committees. We view this as a less likely scenario since the Supreme Court does not usually like to take the pen out of Congress’ hand.”
In designing the CFPB, Congress debated various structures and ultimately, in a partisan manner, opted for as little accountability as possible, which has been problematic ever since, according to Dempsey.
ACA has long advocated for the bureau’s funding to be through the congressional appropriations process and respects the process that is about to unfold before the Supreme Court.
While there are many possible outcomes for this Supreme Court case, it certainly isn’t the first time the issue specific to the CFPB has been a legal matter. There was the Seila Law case, where the Supreme Court in 2020 ruled the CFPB’s single director structure is unconstitutional, ACA previously reported, and others on CFPB leadership in the 2nd Circuit and the D.C. Circuit Court of Appeals.
ACA has long advocated for the bureau’s funding to be through the congressional appropriations process and is continuing to follow this topic closely both in the courts and at the legislative level.