Antitrust Law Daily Harm occurs when ‘unconstitutional ALJ presides over the case,’ Axon argues in FTC case
Monday, July 20, 2020

Harm occurs when ‘unconstitutional ALJ presides over the case,’ Axon argues in FTC case

By Peter Reap, J.D., LL.M.

In arguments for its appeal to the Ninth Circuit, Axon contended it would first be harmed not by an adverse final ruling in the merger case, but by being forced to argue its constitutional challenges in the FTC’s own administrative proceeding.

Oral arguments before the U.S. Court of Appeals in San Francisco were held in a case brought by the FTC challenging Axon Enterprise’s acquisition of its competitor, in which Axon is appealing the federal district court in Phoenix’s holding that it lacked subject matter jurisdiction to entertain constitutional challenges to the FTC’s structure, role, and processes. Instead, the district court ruled, Axon must bring those challenges, and its request for an injunction enjoining the FTC’s administrative proceedings, in the FTC’s administrative action.

Procedural background. Axon, formerly known as TASER International, acquired its competitor Vievu in 2018. The FTC announced an antitrust investigation into the transaction and Axon cooperated. According to Axon, after the investigation the FTC told it that it could either: (1) agree to a "blank check" settlement that would rescind its acquisition of Vievu and transfer some of its intellectual property to the newly restored Vievu; or (2) face an administrative complaint by the agency. Axon then filed this complaint alleging a violation of its Fifth Amendment rights to due process and equal protection and seeking an injunction halting the administrative proceedings before the FTC.

Specifically, Axon alleged three constitutional claims in this action: (1) the FTC’s structure violates Article II of the Constitution because its commissioners are not subject to at-will removal by the President and its administrative law judges (ALJs), who are appointed by its commissioners, are also insulated from at-will removal; (2) the FTC’s combined role of "prosecutor, judge, and jury" during administrative proceedings violates the Due Process Clause of the Fifth Amendment; and (3) the FTC and the Antitrust Division of the U.S. Department of Justice, which are both responsible for reviewing the antitrust implications of acquisitions but employ different procedures and substantive standards when conducting such review, utilize an arbitrary and irrational "clearance" process when deciding which agency will review a particular acquisition, in violation of the Equal Protection Clause of the Fifth Amendment.

Prior to the start of oral argument, the plaintiff Axon filed its Corrected Opening Brief, the FTC filed its Answering Brief, and Axon then filed its Reply Brief.

Axon’s oral argument. When Ninth Circuit Judge Butamay asked Axon’s counsel, Pamela Petersen: "wouldn’t the harm to Axon only occur if the administrative law judge (ALJ) gives you an adverse ruling?" she argued to the contrary that no, the harm occurs when the "unconstitutional ALJ presides over the case." Petersen continued that it is a harm that would continue throughout the entire case and it "is harm that cannot be remedied after the fact by an appellate court because it already has occurred." Appellate court judge Lee quickly stepped in to counter Axon’s argument, asking: "hasn’t the U.S. Supreme Court in the Thunder Basin and Standard Oil cases essentially said that that is not enough of a harm being subjected because, at the end of the day, as long as you get meaningful judicial review by an appellate court, that is sufficient?"

Petersen tried to differentiate Axon’s plight from threat of Standard Oil, stating that Axon’s injury was much more than the increased litigation costs Standard Oil faced but that Axon "would be subjected to an unconstitutional process presided over by an unconstitutional judge and that harm cannot be remedied." Judge Butamay then asked if he had the correct framework in mind for the issue before the court—that the Elgin and Free Enterprise cases represented opposite ends of the spectrum and the court had to determine where on that spectrum this case stood. Petersen agreed that he had the right framework, she characterized Elgin as the "poster-child case for a constitutional claim being totally intertwined with the administrative merits," and Free Enterprise which "is this case and is controlling" she said. She also argued that in Free Enterprise the Supreme Court was looking at a statutory scheme, the SEC Act, which is the "counterpart of the FTC Act and the most clearly applicable" to the FTC statutory scheme and Section 45 of the FTC Act in particular.

Judge Butamay then asked whether the fact that the FTC does not have exclusive jurisdiction over the Clayton Act and the antitrust laws but shares it with the Justice Department impact the analysis of congressional intent for vesting jurisdiction for this case? Axon’s counsel said yes, there was never an intent by congress to "consolidate this type of enforcement of administrative claims in the FTC and the shared jurisdiction with the Justice Department proves that." Its clear that the FTC does not have the authority, or expertise, or even competence" to decide these constitutional claims, she argued.

Judge Butamay pressed Petersen on the issue of injury and asked "When, exactly, does Axon sustain the injury for the clearance claim.?" "as soon as you get put in the FTC’s bucket, which determines your destiny from there on forward," she responded. Once the decision is made "that you have to go the FTC route, as opposed to the DoJ route, which gets you to a neutral Article III court with completely different standards," and certainly when the FTC starts its investigation and serves the civil investigative demand, that is the point at which the Supreme Court has said there is standing.

The FTC’s oral argument. Arguing for the FTC, Danial Aguilar contended that the district court correctly decided the jurisdiction issue. He argued that all three of the factors the courts in Thunder Basin and Elgin (the Thunder Basin factors) used to determine the jurisdictional analysis "can you seek to receive meaningful judicial review, is it fully collateral, and can the agency bring its expertise to bear on this were all satisfied in the present case. First, it was undisputed that if Axon is aggrieved by an FTC order then it can seek judicial review in the court of appeals." At that point, Judge Butamay interrupted and pointed out that Axon is arguing that it was injured when it received the CID and asked "how can they appeal that question?" Aguilar countered that Axon’s claim for relief doesn’t say anything about the CID and they want an order saying that the acquisition was unlawful and the FTC structure is unlawful. When Butamay appeared to begin attempting to push back on Aguilar’s characterization of their demands, Aguilar said that even assuming they are protesting the CID, this case is just like the Thunder Basin and Standard Oil cases. He went on to say that those cases indicated that what Axon is challenging is not final agency action.

Butamay then asked Aguilar how he would distinguish this case from Free Enterprise which he said was "pretty close on point." Aguilar disagreed, because the plaintiffs in Free Enterprise were not subject to any enforcement proceedings. Through facial expressions, Butamay seemed clearly unpersuaded by Aguilar’s attempts to respond to his repeated questions about how this case was distinguishable from Free Enterprise because Axon is arguing they were aggrieved right from the start of the FTC’s investigation.

Moving on to the issue of agency expertise, Judges Lee and Butamay both questioned Aguilar about what exactly was the agency expertise that the FTC brought to bear in this case. Lee cited Free Enterprise and its holding that the agency there did not have expertise on the constitutional questions at issue. When pressed, Aguilar admitted that this holding of Free Enterprise had not been overruled, but merely clarified two years later by Elgin.

When asked how he would weigh the three Thunder Basin factors in this case, Aguilar stated that the courts have said that meaningful judicial review is the most important factor. When asked again by Butamay how this case differs from Free Enterprise Aguilar said they were different because in Free Enterprise "there were no impending enforcement proceedings." Judge Butamay seemed to disagree asking "does that matter" and stating that "just because they started enforcement proceedings that does not negate their claim." Aguilar seemed to regroup and stated that "the only reason they can file a separation of powers challenge to the ALJ is because they are in administrative proceedings," to which Butamay said "I agree with that." Axon’s claims are not wholly collateral to the administrative process because they are seeking relief from that process, Aguilar continued.

Aguilar concluded by stating "the district court’s decision her is well-reasoned and is consistent with the decisions of the Second, Fourth, Seventh, Eleventh, and D.C. Circuits, and it is consistent with the Supreme Court’s decisions in Thunder BasinElginStandard Oil, and is meaningfully distinguishable from what the Supreme Court rejected in Free Enterprise because here, the plaintiffs can avail themselves of the administrative proceedings where they are already a party."

Axon rebuttal. Allowed a short time for a rebuttal, Petersen argued that there is no final agency action required here because Axon’s constitutional claims do not arise under the Administrative Procedure Act, they arise directly under the Constitution. She stated that "we were in exactly the same procedural posture as the Free Enterprise plaintiffs when we filed suit." She concluded that the district court’s failure to decide their request for an injunction because it lacked jurisdiction was an error and the case should be remanded for a decision on the merits.

Attorneys: Pamela B. Petersen, Axon Enterprise, Inc., and Thomas King-Sun Fu (Orrick, Herrington & Sutcliffe LLP) for Axon Enterprise, Inc. Daniel Aguilar, U.S. Department of Justice, for the FTC.

Companies: Axon Enterprise Inc.

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