Litigants must generally exhaust all arguments before administrative agencies, but structural constitutional claims are unique.
In Carr v. Saul, the U.S. Supreme Court unanimously held that a party can raise a challenge under the Constitution's Appointments Clause to an Administrative Law Judge's ("ALJ") decision, even if the party did not raise the issue at the ALJ hearing. Although Carr involved Social Security benefits, the Supreme Court's decision sheds light on how litigants can bring structural constitutional challenges to agency decisions more generally.
As a general rule, parties seeking judicial review of an ALJ ruling must "exhaust" all of their claims by raising them at the ALJ hearing first. Typically, issue-exhaustion rules are creatures of statute or regulation. Even if no statute or regulation explicitly imposes an exhaustion requirement, courts will infer one if the hearing was sufficiently "adversarial." Failure to exhaust the claim forfeits the ability to raise it in court.
Lower courts had split on how to apply this general rule in the context of ALJ hearings for Social Security benefits, because these proceedings have both adversarial and inquisitorial characteristics. On the one hand, claimants have a right to press arguments in favor of their benefits claims. But on the other hand, the ALJ has an independent duty to develop arguments both for and against benefits, and the Supreme Court has held that issue exhaustion is not required at the final stage of the Social Security administrative process. Some courts had imposed an administrative-exhaustion requirement before the ALJ, while others had not.
In Carr, the Supreme Court resolved the split by considering not only the extent of the adversarial nature of the ALJ proceeding but also the nature of the claim asserted. It would make no sense, the Court held, to require a claimant to raise an Appointments Clause challenge at the ALJ hearing for two reasons. First, ALJs do not have any special "expertise" in resolving this type of structural constitutional claim. And second, because ALJs do not have any power to remedy defects in their own appointments, it would be "futile" to raise the issue with them. Based on these two features, "taken together" with the inquisitorial features of the ALJ hearing, the Court held that no exhaustion requirement should be imposed.
Unfortunately, the multifactor nature of the Court's decision leaves some ambiguity as to when exhaustion will be required in other contexts. For example, the Court expressly declined to decide whether "routine," nonconstitutional claims must be exhausted in this type of quasi-adversarial ALJ hearing. And, even more importantly, the Court did not address whether the existence of a fully adversarial ALJ hearing would by itself be enough to impose an exhaustion requirement, even on constitutional claims that the ALJ is powerless to remedy (and about which the ALJ has no expertise). The answer to these important questions will have to await another case.
The decision in Carr may have its most immediate impact in connection with the administrative process for post-grant patent reviews before the U.S. Patent and Trademark Office's Patent Trial and Appeals Board. The Court presently has another case on its docket involving an Appointments Clause challenge to the appointment of Patent Office ALJs, Arthrex, Inc. v. Smith & Nephew, Inc., No. 19-1434 (argued March 1, 2021). In that case, the Court of Appeals for the Federal Circuit ruled in late 2019 that the system for appointing Patent Office ALJs violated the Appointments Clause and severed a provision that restricts removal of ALJs from the statute to remedy the unconstitutional appointment. After that 2019 ruling, several cases presented the issue of whether other litigants could take advantage of the Arthrex decision even though they had not first raised the issue before the agency. Indeed, the petitioner in Arthrex itself had presented the same issue decided in Carr as a second question in its petition, but the Court limited its review in Arthrex to the Appointments Clause issue.
Given the unanswered questions after Carr, businesses litigating cases before administrative agencies should consult with counsel about whether to exhaust their claims before seeking judicial review.