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Administrative Law

Cochran v. SEC

Fifth Circuit Creates Circuit Split by Allowing Prefinal Judicial Review of SEC Enforcement Proceeding

In 2010, the Supreme Court decided Free Enterprise Fund v. Public Company Accounting Oversight Board,1×1. 561 U.S. 477 (2010). a landmark case that invalidated certain limitations on the President’s removal power over executive branch officials.2×2. Id. at 492. Free Enterprise’s removal power discussion has been the focus of intense debate: its critics disparage its “rhetorical excesses”;3×3. Gillian E. Metzger, The Supreme Court, 2016 Term — Foreword: 1930s Redux: The Administrative State Under Siege, 131 Harv. L. Rev. 1, 35 (2017). its supporters predict that it will one day reach the canonical status of Marbury v. Madison.4×4. Neomi Rao, A Modest Proposal: Abolishing Agency Independence in Free Enterprise Fund v. PCAOB, 79 Fordham L. Rev. 2541, 2544 (2011). An important aspect of the decision, however, has been ignored — namely, its implications for prefinal review of agency enforcement proceedings. To reach the removal power issue at stake in Free Enterprise, the Supreme Court quickly concluded that it had jurisdiction to review a challenge to the legitimacy of an ongoing Securities and Exchange Commission (SEC) investigation, even though that investigation had yet to result in a final order.5×5. See Free Enter., 561 U.S. at 489–91. Ever since, the circuit courts have struggled to square Free Enterprise with § 78y of the Securities Exchange Act,6×6. 15 U.S.C. §§ 78a–78qq. which provides that “[a] person aggrieved by a final [SEC] order . . . may obtain review of the order in the United States Court of Appeals.”7×7. Id. § 78y(a)(1) (emphasis added). Until recently, every circuit to have reviewed this provision concluded that § 78y implicitly strips jurisdiction over prefinal challenges to enforcement proceedings.8×8. See Bennett v. SEC, 844 F.3d 174, 188 (4th Cir. 2016); Hill v. SEC, 825 F.3d 1236, 1241 (11th Cir. 2016); Tilton v. SEC, 824 F.3d 276, 291 (2d Cir. 2016); Jarkesy v. SEC, 803 F.3d 9, 30 (D.C. Cir. 2015); Bebo v. SEC, 799 F.3d 765, 775 (7th Cir. 2015). But in Cochran v. SEC,9×9. 20 F.4th 194 (5th Cir. 2021) (en banc). the Fifth Circuit, sitting en banc, read Free Enterprise to require the opposite conclusion.10×10. Id. at 199. In the process, the Fifth Circuit brought to light a formerly overlooked implication of Free Enterprise: the idea that being subject to an administrative proceeding is, on its own, an injury sufficient to justify prefinal review. Yet this implication conflicts with other lines of cases where courts have expressly denied that the burden of legal proceedings constitutes an injury sufficient to justify prefinal review. In making this implication explicit, Cochran highlights a growing tension in the law.

In 2016, the SEC brought an enforcement action against accountant Michelle Cochran, alleging that she had “aid[ed] and abett[ed] the performance of audits that did not comply with [SEC] standards.”11×11. Defendant’s Response to Plaintiff’s Motion for Preliminary Injunction at 4, Cochran v. SEC, No. 19-CV-066-A (N.D. Tex. Mar. 4, 2019). After an evidentiary hearing, an administrative law judge (ALJ) issued a ruling against Cochran, which the SEC then adopted as its final order.12×12. Cochran, 20 F.4th at 198. Cochran objected, contending that she had not been given proper notice of the ALJ’s initial decision.13×13. Complaint for Declaratory and Injunctive Relief para. 42, Cochran, No. 19-cv-066-A (N.D. Tex. Jan. 18, 2019). Before the SEC had time to consider the objection,14×14. Cochran, 20 F.4th at 198. however, the Supreme Court held that, under Article II of the Constitution, ALJs must be appointed by the President or another delegated officer of the United States.15×15. Lucia v. SEC, 138 S. Ct. 2044, 2055 (2018). The SEC subsequently remanded all pending cases, including Cochran’s, to new, properly appointed ALJs.16×16. Cochran, 20 F.4th at 198. But before the new ALJ could hear her case, Cochran filed a complaint in district court that challenged the constitutionality of SEC enforcement proceedings.17×17. Id. Cochran specifically alleged that ALJs enjoy “multiple layers of tenure protection” that unconstitutionally impede the President’s removal authority.18×18. Complaint for Declaratory and Injunctive Relief, supra note 13, para. 6.

The district court dismissed Cochran’s complaint, holding that it lacked jurisdiction over her claim.19×19. Cochran v. SEC, No. 19-CV-066-A, 2019 WL 1359252, at *1 (N.D. Tex. Mar. 25, 2019). In a brief opinion, the court concluded that § 78y of the Securities Exchange Act “implicitly divest[ed] district courts of jurisdiction . . . by creating a statutory scheme of administrative review followed by judicial review in a federal court of appeals.”20×20. Id.

A Fifth Circuit panel initially affirmed.21×21. Cochran v. SEC, 969 F.3d 507, 518 (5th Cir. 2020). Writing for the panel, Judge Costa22×22. Judge Costa was joined by Chief Judge Owen. found that by explicitly granting jurisdiction only to some circuit courts, § 78y implicitly stripped jurisdiction from all district courts.23×23. See Cochran, 969 F.3d at 511–12. To determine whether Cochran’s claim was of a type that Congress intended to exclude from prefinal judicial review, Judge Costa applied the three-pronged test established in Thunder Basin Coal Co. v. Reich.24×24. 510 U.S. 200 (1994); see Cochran, 969 F.3d at 514–16 (applying Thunder Basin to § 78y). Under Thunder Basin, courts assume that a claim is funneled through the relevant statutory scheme unless (1) doing so would “foreclose all meaningful judicial review”; (2) the claim is “wholly collateral” to the agency’s review scheme; and (3) the claims are “outside the agency’s expertise.”25×25. Cochran, 969 F.3d at 512 (quoting Free Enter. Fund v. Pub. Co. Acct. Oversight Bd., 561 U.S. 477, 489 (2010)). Judge Costa held that all three factors weighed against Cochran.26×26. Id. at 514–16. First, Cochran could appeal an adverse SEC ruling to a circuit court, allowing for “meaningful” review.27×27. Id. at 514. Second, Cochran’s challenge to the constitutionality of ALJ hearings was closely related, rather than “wholly collateral,” to the SEC’s review scheme.28×28. Id. at 515. Finally, the possibility that the SEC might use its securities-related expertise to resolve the proceeding in Cochran’s favor could “obviate the need to address the constitutional challenge.”29×29. Id. at 516 (quoting Elgin v. Dep’t of the Treasury, 567 U.S. 1, 22–23 (2012) (Alito, J., dissenting)). Consequently, Judge Costa held that the district court lacked jurisdiction to hear the case.30×30. Id. at 518.

Judge Haynes dissented in part, contending that Cochran’s claim fell outside of § 78y.31×31. Id. at 518 (Haynes, J., dissenting in part). Considering the Thunder Basin factors, Judge Haynes found that all three counseled against limiting jurisdiction.32×32. Id. at 519–21.

The Fifth Circuit, sitting en banc, reversed,33×33. Cochran, 20 F.4th at 198. with Judge Haynes this time writing for the majority.34×34. Judges Jones, Smith, Elrod, Duncan, Engelhardt, Oldham, and Wilson joined Judge Haynes’s opinion. Judge Willett concurred in the judgment. The court began by analyzing the text of § 78y, which provides that “only ‘person[s] aggrieved by a final order’” can seek review in a court of appeals.35×35. Cochran, 20 F.4th at 200 (alteration in original) (quoting 15 U.S.C. § 78y(a)(1)). The statute thus “sa[id] nothing about people, like Cochran, who ha[d] not yet received a final order.”36×36. Id. Next, the majority looked to Free Enterprise, wherein the Supreme Court applied Thunder Basin to conclude that § 78y did not strip jurisdiction over collateral constitutional challenges to SEC investigations.37×37. See id. at 201–04; Free Enter. Fund v. Pub. Co. Acct. Oversight Bd., 561 U.S. 477, 489 (2010). There, the Supreme Court emphasized that not every action the agency took during its investigation would be “encapsulated in a final Commission order or rule” that the petitioners could then challenge in court.38×38. Free Enter., 561 U.S. at 490. The Fifth Circuit extended this reasoning to SEC enforcement proceedings. While an enforcement proceeding — unlike an investigation — was guaranteed to result in a final order, there was no guarantee that such an order would be adverse to Cochran.39×39. Cochran, 20 F.4th at 203.

Lastly, even if Congress intended § 78y to have a “jurisdiction-stripping effect,” the Thunder Basin test indicated that Cochran’s constitutional claim nonetheless fell outside the statute’s review scheme.40×40. Id. at 207. For one, a finding of preclusion could deprive Cochran of the opportunity for “meaningful judicial review.”41×41. Id. at 208. Again invoking Free Enterprise, the court emphasized that the SEC may rule in Cochran’s favor.42×42. Id. at 209. And because “a final adverse order is a prerequisite for judicial review,” the court worried that Cochran would be “unable to seek redress for the injury of having to appear before the SEC.”43×43. Id. The court acknowledged that the Supreme Court had previously characterized “[m]ere litigation expense” as “part of the social burden of living under government” rather than an “irreparable injury.”44×44. Id. (alteration in original) (quoting FTC v. Standard Oil Co., 449 U.S. 232, 244 (1980)). But “Cochran challeng[ed] the entire legitimacy of her proceedings, not simply the cost and annoyance.”45×45. Id. at 209–10. Even assuming such a burden did not constitute an “irreparable harm,”46×46. Id. at 210. it was “sufficiently serious to justify pre-enforcement review.”47×47. Id. at 210 n.16. Moreover, Cochran’s challenge to the constitutionality of enforcement proceedings was “wholly collateral” to the Securities Exchange Act’s review scheme and outside the SEC’s expertise.48×48. Id. at 207. The majority thus remanded Cochran’s claim.49×49. Id. at 213.

Judge Oldham wrote a concurring opinion,50×50. Id. (Oldham, J., concurring). Judges Smith, Willett, Duncan, Engelhardt, and Wilson joined the concurring opinion. explaining that because Cochran was not “aggrieved by a final order,” she did not “fall within § 78y’s purview.”51×51. Id. at 227. Judge Oldham also offered a lengthy discussion of intellectual history, purporting to ground § 78y in an “anti-democratic” vision that he traced to Woodrow Wilson.52×52. Id. at 214. Scholars have disputed Judge Oldham’s retelling of history. See Julian Davis Mortenson (@jdmortenson), Twitter (Dec. 16, 2021, 1:03 PM), https://twitter.com/jdmortenson/status/1471541528023601152“>https://twitter.com/jdmortenson/status/1471541528023601152”>https://twitter.com/jdmortenson/status/1471541528023601152 [https://perma.cc/N6WL-QDQE] (noting “objections on substance”).

Judge Costa dissented,53×53. Cochran, 20 F.4th at 236 (Costa, J., dissenting). Chief Judge Owen and Judges Stewart, Dennis, Southwick, Graves, and Higginson joined the dissenting opinion. reiterating that § 78y implicitly precludes district courts from reviewing preenforcement claims by “allocat[ing] initial review to an administrative body.”54×54. Id. Judge Costa again balanced the Thunder Basin factors against Cochran, finding, first and foremost, that limiting the district court’s jurisdiction would not “foreclose all meaningful judicial review.”55×55. Id. at 242. Though Cochran’s ability to secure postenforcement review was contingent on the SEC’s ruling against her, the availability of meaningful judicial review matters only when the agency respondent loses and faces an irreparable injury.56×56. Id. at 243. In this vein, the dissent contested the majority’s assertion that having to appear before the SEC constituted a cognizable injury.57×57. Id. at 243–44. Further, Judge Costa repeated his initial analysis of the “wholly collateral” and “agency expertise” prongs, finding that these too weighed against Cochran.58×58. Id. at 246–49.

The Fifth Circuit’s conclusion that, without prefinal review, Cochran would have no ability to seek redress for the injury of having to participate in an enforcement proceeding is consistent with Free Enterprise. There, similar reasoning guided the Supreme Court’s conclusion that the subjects of an investigation would be unable to pursue their claims meaningfully without prefinal review.59×59. See Free Enter. Fund v. Pub. Co. Acct. Oversight Bd., 561 U.S. 477, 490 (2010). Yet the idea that having to participate in a legal proceeding is a redressable injury is inconsistent with other lines of Supreme Court precedent. In other contexts, the Court has in fact rejected claims that litigation-related burdens constitute injuries sufficient to justify prefinal review.60×60. See, e.g., Lauro Lines SRL v. Chasser, 490 U.S. 495, 499 (1989); FTC v. Standard Oil Co., 449 U.S. 232, 244 (1980). By bringing Free Enterprise’s implications for prefinal review to light, Cochran highlights a growing tension in the law.

In Free Enterprise, the Supreme Court considered whether a district court had jurisdiction over a prefinal challenge to the constitutionality of the Public Accounting Oversight Board (“the Board”) — a body under the SEC’s oversight — despite § 78y’s review scheme.61×61. Free Enter., 561 U.S. at 489. The Board had initiated an investigation into an accounting firm, and the firm challenged the legitimacy of this investigation, arguing that the Board’s structure rendered it unconstitutional.62×62. Id. at 487. The Supreme Court ultimately held that § 78y does not implicitly strip the district court of jurisdiction over the constitutional challenge.63×63. Id. at 489. Crucially, the Board’s investigation into the firm had “produced no sanction” that the petitioners could challenge,64×64. Id. at 490. depriving them of a vehicle to raise their constitutional claims in court. The Court rejected the argument that the firm could purposefully incur a sanction, noting that this would not provide a “‘meaningful’ avenue of relief.”65×65. Id. at 491 (quoting Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 212 (1994)). Yet the Court did not explain why, in the absence of a sanction, the firm had any need to seek meaningful relief.66×66. At oral argument, the firm suggested that though it had incurred no sanctions, it had still suffered the harm of being “subject to a burdensome investigation.” Transcript of Oral Argument at 12, Free Enter., 561 U.S. 477 (No. 08-861). But the Court never clarified whether such a harm constituted a redressable injury.

The Cochran court, on the other hand, did explicitly address the idea that being subject to a proceeding constitutes a harm that is sufficient to justify prefinal review. The court started by interpreting Free Enterprise to compel a finding that § 78y does not strip district courts of jurisdiction over constitutional challenges to the legitimacy of SEC enforcement proceedings.67×67. Cochran, 20 F.4th at 209. Of course, every other circuit to address the issue had found Board investigations to be distinguishable from ALJ hearings.68×68. See Bennett v. SEC, 844 F.3d 174, 182 (4th Cir. 2016); Hill v. SEC, 825 F.3d 1236, 1243 (11th Cir. 2016); Tilton v. SEC, 824 F.3d 276, 284 (2d Cir. 2016); Jarkesy v. SEC, 803 F.3d 9, 20 (D.C. Cir. 2015); Bebo v. SEC, 799 F.3d 765, 767 (7th Cir. 2015). Several of these circuits also found Elgin v. Department of the Treasury, 567 U.S. 1 (2012) — a case where the Supreme Court read a statute to strip jurisdiction implicitly over a prefinal constitutional challenge to an agency action, id. at 8 — to be instructive. See Hill, 825 F.3d at 1249; Jarkesy, 803 F.3d at 22; Bebo, 799 F.3d at 771–72. But, as the Fifth Circuit noted, the constitutional claim at issue in Elgin did not involve a challenge to the legitimacy of an agency proceeding itself. See Cochran, 20 F.4th at 208–09. The distinction between the two proceedings is plausible — ALJ hearings are part of a continuous SEC enforcement scheme that inevitably results in a final order,69×69. See Bennett, 844 F.3d at 182. while Board investigations may never lead to an adjudication of any kind.70×70. Id. Nonetheless, Cochran’s interpretation of Free Enterprise is plausible too. Like the investigation of the firm in Free Enterprise, Cochran’s administrative proceeding could conclude without a challengeable final order.71×71. Cochran, 20 F.4th at 209. Should that happen, Cochran would have no avenue for “meaningful judicial review.”72×72. Id. (quoting Free Enter. Fund v. Pub. Co. Acct. Oversight Bd., 561 U.S. 477, 489 (2010)).

The Fifth Circuit then attempted to explain something the Supreme Court left unaddressed in Free Enterprise: why a party would have any need for meaningful review in the absence of an adverse outcome. After all, if the SEC were ultimately to find in Cochran’s favor, it is unclear that the allegedly unconstitutional proceeding would result in any type of redressable harm — unless, of course, having to participate in the enforcement proceeding itself is sufficient. That is precisely the position the Fifth Circuit adopted. To start, the court emphasized that Cochran “challenge[d] the entire legitimacy of her proceedings, not simply the cost and annoyance”73×73. Id. at 209–10. — though the court never clarified how, beyond the cost and annoyance of litigation, the alleged illegitimacy of the proceedings stood to harm Cochran. The court merely characterized this harm as “the injury of having to appear before the SEC.”74×74. Id. at 209. The court further denied that Cochran needed to demonstrate that this injury would cause her “irreparable harm.”75×75. Id. at 210. Without deciding just what level of harm Cochran needed to demonstrate, the court found that “the injury of having to appear before the SEC”76×76. Id. at 209. was “sufficiently serious to justify pre-enforcement review in federal court.”77×77. Id. at 210 n.16. The Fifth Circuit thus made explicit a previously hidden implication of Free Enterprise — that being subject to a legal proceeding is, on its own, a redressable injury that warrants prefinal review.

Supreme Court precedent in other contexts challenges the validity of this implication. Cochran acknowledged as much in its discussion of the “irreparable harm” standard in administrative exhaustion cases.78×78. See id. at 209. These cases require claimants to complete internal agency review processes before challenging agency actions in court.79×79. E.g., Reiter v. Cooper, 507 U.S. 258, 269 (1993). But when claimants can demonstrate that they “would be irreparably injured were the exhaustion requirement now enforced against them,” they may seek immediate judicial review.80×80. Bowen v. City of New York, 476 U.S. 467, 483–84 (1986). Immediate judicial review is not available, however, to those claimants who can point only to the “expense and disruption of defending [themselves] in protracted adjudicatory proceedings.”81×81. FTC v. Standard Oil Co., 449 U.S. 232, 244 (1980). Such inconveniences are simply “part of the social burden of living under government.”82×82. Id. (quoting Petrol. Expl., Inc. v. Pub. Serv. Comm’n, 304 U.S. 209, 222 (1938)). While the Fifth Circuit attempted to distinguish Cochran from this line of cases, it did not offer much of an explanation as to how the injury of “having to appear before the SEC” differed from injuries related to “the cost and annoyance” of litigation.83×83. See Cochran, 20 F.4th at 209–10. Nor did it explain why this injury was “sufficient” to warrant prefinal review.84×84. Id. at 210 n.16.

Limiting prefinal review is not unique to administrative law. The “final judgment rule” prevents the federal courts of appeals from reviewing most nonfinal orders that arise in the lower courts.85×85. 15A Charles Alan Wright et al., Federal Practice and Procedure § 3905 (2d ed. 2021). And while there are exceptions to this rule under the collateral order doctrine, these exceptions are “narrow.”86×86. Mohawk Indus., Inc. v. Carpenter, 558 U.S. 100, 113 (2009) (quoting Will v. Hallock, 546 U.S. 345, 350 (2006)). The doctrine permits interlocutory review only for judgments that “have a final and irreparable effect on the rights of the parties.”87×87. Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 545 (1949). But litigants who cite the collateral order doctrine are limited in their ability to invoke a general “right not to stand trial.”88×88. Michael E. Harriss, Note, Rebutting the Roberts Court: Reinventing the Collateral Order Doctrine Through Judicial Decision-Making, 91 Wash. U. L. Rev. 721, 729 (2014). Indeed, the Supreme Court has “declined to find the costs associated with unnecessary litigation to be enough to warrant allowing the immediate appeal of a pretrial order.”89×89. Lauro Lines SRL v. Chasser, 490 U.S. 495, 499 (1989).

There are good reasons why courts seek to limit prefinal review. Doing so prevents piecemeal litigation, avoids overburdening appellate courts, and protects against the risk that a party will file multiple appeals in an attempt to delay the adjudication of meritorious claims.90×90. See Lloyd C. Anderson, The Collateral Order Doctrine: A New “Serbonian Bog” and Four Proposals for Reform, 46 Drake L. Rev. 539, 542 (1998). But a finality rule that does not take certain exceptional circumstances into account would be unnecessarily harsh.91×91. See id. at 543. In Free Enterprise, the Supreme Court left open the possibility that the burden of being subject to an administrative proceeding was one such exceptional circumstance. The Fifth Circuit explicitly reached this conclusion92×92. Cochran, 20 F.4th at 210 n.16. and set the stage for the Supreme Court to make a similar finding in an upcoming case involving a prefinal challenge to a Federal Trade Commission enforcement proceeding.93×93. See Carrie G. Amezcua et al., Supreme Court Takes Up Challenge to FTC Administrative Process, Mondaq (Feb. 2, 2022), https://www.mondaq.com/unitedstates/antitrust-eu-competition-/1156692/supreme-court-takes-up-challenge-to-ftc-administrative-process“> [https://perma.cc/RXY3-FFJ3]. In that case, the petitioner has explicitly argued that having to participate in an unconstitutional proceeding is a redressable injury requiring immediate judicial review94×94. Petition for Writ of Certiorari at 32–33, Axon Enter., Inc. v. FTC, No. 21-86 (July 20, 2021). — and has cited Cochran to do so.95×95. Supplemental Brief for Petitioner at 2, Axon, No. 21-86 (Dec. 20, 2021). Depending on how the Supreme Court rules, Cochran has the potential to crystallize a growing tension in the way courts understand prefinal review.