Scharf-Norton Center for Constitutional Litigation at the GOLDWATER INSTITUTE Timothy Sandefur (033670) 500 E. Coronado Rd. Phoenix, AZ 85004 (602) 462-5000 litigation@goldwaterinstitute.org Attorneys for Amicus Curiae Goldwater Institute

COP

IN THE SUPERIOR COURT OF ARIZONA IN AND FOR THE COUNTY OF MARICOPA

KADIMA. VENTURES, LLC, et al.,

Plaintiffs,

vs.

ARIZONA CORPORATION COMMISSION, et al.,

Defendant.

Case No. LC2018-000163-001 DT

MOTION FOR LEA VE TO FILE BRIEF AM/CVS CURIAE IN SUPPORT OF PLAINTIFFS

(The Honorable Daniel Kiley)

Pursuant to Ariz. R. Civ. P. 7.1 and this Court's inherent authority to regulate its own

proceedings, amicus curiae Goldwater Institute hereby respectfully moves for leave to file the attached

brief amicus curiae in support of the Plaintiffs.

All parties to this proceeding were notified of the Goldwater Institute's intent to file this motion

on or before May 30, 2018. This motion is supported by the following memorandum of points and

authorities.

MEMORANDUM OF POINTS AND AUTHORITIES

I. INTEREST OF AMICUS CURIAE

The Goldwater Institute was established in 1988 as a nonpartisan public policy and research

foundation dedicated to advancing the principles of limited government, economic freedom, and

individual responsibility through litigation, research papers, editorials, policy briefings and forums.

Through its Scharf-Norton Center for Constitutional Litigation, the Institute litigates and files amicus

briefs when its or its clients' objectives are directly implicated.

Among the Institute's main priorities is to ensure that administrative agencies, particularly at the

state level, are kept within carefully delineated boundaries. Institute attorneys have therefore

participated in proceedings involving state administrative agencies and have litigated cases involving the

powers of these agencies, including Arizona Free Enter. Club 's Freedom Club PAC v. Bennett, 564 U.S.

721 (2011), Boice v. Aune, No.CV2011-021811 (Maricopa Cnty. Super. Ct. 2012), Vong v. Aune, 235

Ariz. 116 (2014), cert. denied, 135 S. Ct. 1845 (2015), and Goldwater Institute v. US Dep 't of Health

& Human Servs. , (D. Ariz. No. CV-15-01055-PHX-SRB) (pending). Institute scholars have also

published extensively on the dangers of excessive administrative power, including TIMOTHY SANDEFUR,

THE PERMISSION SOCIETY (2016), Christina Sandefur, PP A CA 's Corrupting Lawlessness, Regulation,

Winter 2013-14 1•

II. THE ATTACHED AMICUS CURIAE BRIEF WILL AID THE COURT IN CONSIDERATION OF THIS CASE.

This Court has the inherent authority to regulate its own proceedings and broad discretion to

determine whether or not to allow an appearance by an amicus curiae. Although uncommon, amici do

appear at times in Superior Courts, see, e.g., State v. Wagner, 2015 WL 1395226, *l ,i 5, n.1 (Ariz. App.

Mar. 26, 2015) (amicus appearance in Superior Court); State v. Jessup, 2015 WL 1605349 at *2 ,i 5, n.2

(Ariz. App. Apr. 9, 2015) (same); Cubbison v. Cubbison, 45 Ariz. 14, 18 (1935) (same).

Amici "perform a valuable role for the judiciary" because they "facilitate informed judicial

consideration of a wide variety of information and points of view that may bear on important legal

1 https://object.cato.org/sites/cato.org/files/serials/files/regulation/2014/1 /regulation-v36n4-1 . pdf 2

questions" and help broaden the court' s perspective on issues raised by the principal litigants. Connerly

v. State Pers. Bd., 129 P .3d 1, 5-6 (Cal. 2006) ( citations omitted). That is particularly true in a case

that- like this one- involves issues that are recurring and are the subject of controversy throughout the

state or the nation. City of Flagstaff v. Mangum, 164 Ariz. 395, 397 (I 990). This case involves the

power of administrative agencies to assert jurisdiction with virtually no recourse on the part of the

regulated individual- a matter that is often the subject of judicial controversy. See, e.g. , U.S. Army

Corps of Eng 'rs v. Hawkes Co., 136 S. Ct. 1807 (2016), Sackett v. E.P.A., 566 U.S. 120 (2012).

The attached amicus brief particularly focuses on the question of whether the Corporation

Commission's issuance of a mandatory subpoena- premised on the Commission' s assertion that

Kadima is engaged in the purchase or sale of securities-qualifies as a final action asserting jurisdiction.

If it is, amicus contends, Kadima is entitled by the principles of due process of law to a hearing in the

ordinary course to challenge that jurisdictional determination, or, at a minimum, to review of that action

under the Administrative Procedures Act.

In Sackett, the U.S. Supreme Court ruled that a property owner was entitled to a hearing to

challenge a determination by the Environmental Protection Agency that held that the property owner

was violating the Clean Water Act. The Agency argued that the determination was not a final act but

only a preliminary contention by the Agency that the property owner appeared to be in violation; the

property owner could- the Agency said-simply disregard the order, and then argue that the Agency

lacked jurisdiction once an enforcement action was brought. The Court rejected this and held that the

property owner was entitled to some form of hearing to challenge the Agency's jurisdiction. 566 U.S. at

126-27. In Hawkes, the Court extended this reasoning to "jurisdictional determinations" that fall short

of a substantive command or judgment. 136 S. Ct. at 1814. Amicus contends that the subpoena in this

case functions as a jurisdictional determination and that Kadima is therefore entitled to challenge the

jurisdiction of the agency and quash the subpoena.

Amicus believes its experience and policy expertise will aid this Court in consideration of this

case.

3

CONCLUSION

The motion for leave to file a brief amicus curiae should be granted.

RESPECTFULLY SUBMITTED this 31st day of May, 2018 by:

Isl Timothy Sandefur Timothy Sandefur (033670) Scharf-Norton Center for Constitutional Litigation at the GOLDWATER INSTITUTE Attorneys for Plaintiffs

CERTIFICATE OF SERVICE

ORIGINAL FILED this 31st day of May, 2018, with:

Clerk of the Maricopa County Superior Court

COPY hand-delivered May 31 , 2018 to:

The Honorable Daniel Kiley Superior Court of Arizona, Maricopa County East Court Building-911 Phoenix, AZ 85003

COPIES mailed and emailed May 31, 2018 to:

Alexander Michael del Rey Kolodin KOLODIN LAW GROUP PLLC 3443 N. Central Ave., Ste. 911 Phoenix, AZ 85012 Alexander.kolodin@kolodinlaw.com Attorneys for Plaintiffs

Paul Kitchin ARIZONA CORPORATION COMMISSION 1300 W. Washington, 3rd Fl. Phoenix, AZ 85007 pki tchin@azcc.gov Attorneys for Defendants

Isl Kris Schlott Kris Schlott, Paralegal

4

Scharf-Norton Center for Constitutional Litigation at the GOLDWATER INSTITUTE Timothy Sandefur (033670) 500 E. Coronado Rd. Phoenix, AZ 85004 (602) 462-5000 liti ation oldwaterinstitute.or

C y 8 1 2018

CHk ~ ~•'" U,:,E. CU:RK A~ t<O 1::RO

D~Pun CL. ·1~K

Attorneys for .,_1?:ft,jq,tjjs iC i1S[UV1C1 e G,u):;{w1,fe,rvnSfiJvcf-e_

IN THE SUPERIOR COURT OF ARIZONA IN AND FOR THE COUNTY OF MARICOPA

KADIMA. VENTURES, LLC, et al.,

Plaintiffs,

vs.

ARIZONA CORPORATION COMMISSION, et al.,

Defendant.

Case No. LC2018-000163-001 DT

BRIEF AMICUS CURIAE IN SUPPORT OF PLAINTIFFS

(The Honorable Daniel Kiley)

The Plaintiffs ("Kadima") have received a subpoena from the Arizona Corporation Commission

("ACC"), pursuant to A.R.S. § 44-1822, on the grounds that Kadima is involved in the purchase and sale

of securities. Kadima has no statutory mechanism to quash the subpoena or to otherwise challenge

ACC's jurisdiction. This Court should hold that Kadima is entitled to challenge ACC's jurisdiction

here-and that the ACC does, in fact, lack jurisdiction.

When an administrative agency asserts jurisdiction over a matter as the result of a decision­

making process, and that determination gives rise to direct and appreciable legal consequences, it

constitutes final agency action for purposes of the Administrative Procedure Act ("APA"). United 1

States Army Corps of Eng 'rs v. Hawkes Co., 36 S. Ct. 1807, 1813- 14 (2016). Although a subpoena is

an investigative tool, it can also constitute a final determination by the agency that it believes it has

jurisdiction over a matter. That appears to be the case here. When that is so, the affected individual has

a right to challenge that assertion of jurisdiction under the AP A, even aside from the validity of the

subpoena.

I. THE SUBPOENAS ARE PLAINLY OVERBROAD AND UNREASONABLE.

The ACC asserts that it can investigate just to assure itself that the law is not being violated.

Defs.' Mot. to Dismiss ("MTD") at 3 ( citing Carrington v. Arizona Corp. Comm 'n, 199 Ariz. 303, 305 ,i

8 (App. 2000)). But that is a misreading of Carrington, where the agency acted only after it was aware

that the company was issuing what it believed to be securities. Id. at 305-6 ,i 11. Here, by contrast, the

ACC does not assert any basis for its demands except that the documents it seeks "might reveal" the

sales of securities. MTD at 6. This "might reveal" standard is plainly overbroad. It indicates nothing

more than a "fishing expedition" with no specific grounds of suspicion. State ex rel. DeConcini v.

Superior Ct., in &for Pima Cnty., 20 Ariz. App. 33, 35 (1973) ("mere 'fishing expeditions' are not to be

countenanced.") (citation omitted); US. E.E.O.C. v. Aaron Bros. Inc., 620 F. Supp. 2d 1102, 1105 (C.D.

Cal. 2009) (citation omitted) ("administrative subpoena[s] may not ... 'be so broad so as to be in the

nature of a " fishing expedition.""'). Carrington did not hold that agencies have absolute discretion to

subpoena whomever they please on the off-chance that the information sought might reveal lawbreaking.

Amazingly, the ACC even contends that the burden is not on it, but on Kadima- that Kadima

must "prov[e] [the] irrelevance" of the items subpoenaed. MTD at 5. That is not how the law works­

or ought to work. It is black-letter law that the initial burden of making the (minimal) showing of

relevance rests with the party seeking the information, cf Bartlett v. Superior Ct. , in &for Pima Cnty.,

150 Ariz. 178, 183 (App. 1986), because it is impossible to prove a negative. Of course, once that initial 2

showing is made, the person seeking to quash the subpoena bears the burden of proving his contention

that the subpoena is faulty, Helge v. Druke, 136 Ariz. 434, 438 {App. 1983), but that is true only where

the law provides a mechanism for quashing the subpoena- which is lacking here.

Information should be "sought by narrow, pointed discovery without wholesale invasion of ...

confidential records." Styers v. Superior Ct., in &for Cnty. of Mohave, 161 Ariz. 477, 480 (App. 1989).

However broad the ACC's authority may be, it has no authority to demand the inspection ofrecords

without some specific grounds of suspicion. In Resolution Trust Corp. v. Walde, 18 F.3d 943, 949 (D.C.

Cir. 1994), the court of appeals put the point well:

Justice Holmes observed: "Anyone who respects the spirit as well as the letter of the Fourth Amendment would be loath to believe that Congress intended to authorize one of its subordinate agencies to sweep all our traditions into the fire and to direct fishing expeditions into private papers on the possibility that they may disclose evidence of crime .. . . " [T]he Court has traveled some distance since [Holmes' day, but subsequent precedents] ... dealt with the power to investigate suspicions of wrongdoing.... If the [agency] has no such specific basis, however, upon which to suspect that the target engaged in wrongdoing, then the subpoena cannot be enforced.

Id. (quoting FTC v. American Tobacco Co., 264 U.S. 298, 305-06 (1924)).

True, agencies can issue administrative subpoenas without probable cause- but the initial

burden of showing grounds for the subpoena still rests with the agency. And the U.S. Supreme Court

has explained that subpoenas without probable cause are legitimate only where there is some statutory

mechanism in place that offers "an opportunity for precompliance review." City of L.A., Cal. v. Patel,

135 S. Ct. 2443, 2454 (2015); see also See v. City of Seattle, 387 U.S. 541 , 544-45 (1967)

("administrative warrants" without probable cause are permissible only where "the subpoenaed party

may obtain judicial review of the reasonableness of the demand prior to suffering penalties for refusing

to comply."). Arizona law provides no such mechanism in the case of ACC subpoenas. That means

Kadima must comply, not only at significant financial cost to themselves, and risk of the public

3

disclosure of the information provided, but also at the cost of being subjected to ACC's jurisdiction.

That concern was what led the Carrington court to say that "a party may resist the Commission' s

subpoena on grounds that the inquiry is not within its scope of authority." 199 Ariz. at 305 ,r 9.

Carrington supported that statement with a citation to People ex rel. Babbitt v. Herndon, 119

Ariz. 454, 456 (1978), which said that "a party may resist an administrative subpoena on any appropriate

grounds," including "that the inquiry is not within the agency's scope of authority." Id. As for how to

do that, the court said, "[t]he only effective method ... is to require the Attorney General, if challenged

on that ground, to make some showing at the enforcement hearing that there is reasonable cause to

believe that there has been a violation of the [law]." Id.

Yet here, the ACC is demanding nothing short of a roving commission to subpoena businesses

without suspicion, simply because the records "might reveal" that the company is selling securities. It

provides no other basis for its demands. An administrative subpoena is valid only where "the inquiry is

within the authority of the agency, the demand is not too indefinite and the information sought is

reasonably relevant." United States v. Morton Salt Co. , 338 U.S. 632, 652 (1950). Yet the ACC has not

shown any basis for thinking that Kadima is within its jurisdiction. Its demands are indefinite, and the

closest it can come to relevancy is to say that its demands "might" yield useful information.

That is not appropriate. It is "ancient law" that the government may not "conduct an unlimited

and general inquisition into the affairs of persons within its jurisdiction solely on the prospect of

possible violations oflaw being discovered, especially with respect to subpoenas duces tecum." Matter

of A 'Hearn v. Committee on Unlawful Practice of Law of N.Y. Cnty. Lawyers ' Ass 'n, 23 N.Y.2d 916,

918 (1969). Instead, there must be "some basis for inquisitorial action" beforehand. Id. " [E]ven under

broad investigation statutes the [government] does not have an ' arbitrary and unbridled discretion as to

the scope of his investigation." ' Id. (citations omitted). 4

II. IN THE ABSENCE OF AN OPPORTUNITY FOR PRE-ENFORCEMENT REVIEW, THE SUBPOENA OPERA TES AS A JURISDICTIONAL DETERMINATION WHICH SHOULD ENTITLE PLAINTIFFS TO DISPUTE THE ACC'S JURISDICTION.

There is no statutory mechanism to challenge ACC's subpoena or requirement that the ACC

show reasonable cause. Rather, as noted in paragraph 6 of the Plaintiffs' complaint, the statutes give

them no option but to disregard the subpoena and wait for the ACC to enforce it with penalties. See

A.R.S. § 44-3134. But that raises due process concerns.

Those due process concerns were central to Sackett v. E.P.A., 566 U.S. 120 (2012), which held

that a "compliance order" issued by the Environmental Protection Agency ("EPA") was a final action by

the Agency which the recipient could challenge under the federal AP A. The EPA argued that such

review was improper, because the order did not technically require the recipient to do anything; she

could, in theory, disregard it, and wait for the EPA to bring an enforcement action. At that point, it

argued, the recipient would have the opportunity to challenge the EPA' s jurisdiction. Id. at 129.

The Court rejected this argument because "the next step will either be taken by the Sacketts (if

they comply with the order) or will involve judicial, not administrative, deliberation (if the EPA brings

an enforcement action)." Id. The order represented a conclusion by the EPA that the recipient was

violating the law and that the Agency had jurisdiction; it was therefore a final agency action under the

AP A. If the property owner had no such right, then it would have offended due process. See id. at 132

(Alito, J ., concurring).

A similar situation is presented here. In the absence of some "opportunity for precompliance

review," Patel, 135 S. Ct. at 2454, the subpoena in this case operates in substance as a finding by the

ACC that it has jurisdiction over Kadima. The ACC offers no option other than breaking the law and

awaiting enforcement- the same illusory option offered in Sackett.

Sackett might be distinguishable because the compliance order officially found the recipient to 5

have violated the law. But in Hawkes, the Court broadened the Sackett rule when it applied the same

reasoning to a "jurisdictional determination" that lacked any finding ofliability. Such determinations

were still not "advisory in nature," the Court held; they represented a conclusion by the agency that it

had authority in the matter. 136 S. Ct. at 1812- 13. "By issuing respondents an approved [jurisdictional

determination]," the Court noted, "the [agency] for all practical purposes 'has ruled definitively' that

respondents' property contains jurisdictional waters." Id. at 1814. Here, notwithstanding the ACC' s

representation of the subpoena as a mere inquiry, that subpoena operates- in the absence of some

mechanism for precompliance review- as a finding by the ACC that the plaintiffs' business falls within

its authority.

The lack of a procedure for quashing the subpoena also distinguishes this case from Commodity

Futures Trading Comm 'n v. Monex Deposit Co., 824 F.3d 690 (7th Cir. 2016), which held that the

company was required to comply with a subpoena issued by the Securities and Exchange Commission

before the question of jurisdiction could be resolved. The court said that the Hawkes rule did not apply,

id. at 692, because there was "no doubt" that the SEC had jurisdiction. Id. at 694. But in a case such as

this one, where "it was not established that the agency had any role to play and thus it was possible that

the information sought was not relevant," it would be proper for a court to "resolve a question of

statutory coverage before enforcing a subpoena." Id. That case relied on E.E.O. C. v. Sid ley Austin

Brown & Wood, 315 F .3d 696 (7th Cir. 2002), in which the court recognized that "a subpoena may be

challenged as unreasonable" if"the agency clearly is ranging far beyond the boundaries of its statutory

authority." Id. at 700. The Sidley Aus tin court held that " the district court acted prematurely in ordering

the subpoena complied with," because the agency that issued the subpoena "ha[ d] not earned the right to

force the law firm ... to go on and produce the voluminous and sensitive documentation" regarding a

matter over which the agency lacked jurisdiction. Id. at 707. Where a statutory mechanism exists for an 6

affected person to challenge a subpoena, then the person must use that. Sprecher v. Graber, 716 F.2d

968, 973 (2d Cir. 1983 ). But no such mechanism exists here.

These cases show that where there is some procedure whereby the recipient of the subpoena can

challenge it- and as part of that challenge, argue that the agency lacks jurisdiction- then the party can

be required to either comply or move to quash. But here, where no such process is available, the

subpoena functions as a jurisdictional determination as in Hawkes, and, as in that case, it would violate

due process to deny the recipient an opportunity to for a precompliance challenge ACC jurisdiction.

CONCLUSION

The motion to dismiss should be denied.

RESPECTFULLY SUBMITTED this 31st day of May, 2018 by:

Isl Timothy Sandefur Timothy Sandefur (033670) Scharf-Norton Center for Constitutional Litigation at the GOLDWATER INSTITUTE Attorneys for Plaintiffs

7

CERTIFICATE OF SERVICE

ORIGINAL FILED this 31st day of May, 2018, with:

Clerk of the Maricopa County Superior Court

COPY hand-delivered May 31 , 2018 to:

The Honorable Daniel Kiley Superior Court of Arizona, Maricopa County East Court Building-911 Phoenix, AZ 85003

COPIES mailed and emailed May 31 , 2018 to:

Alexander Michael del Rey Kolodin KOLODIN LAW GROUP PLLC 3443 N. Central Ave., Ste. 911 Phoenix, AZ 85012 Alexander. kolodin@kolodinlaw.com Attorneys for Plaintiffs

Paul Kitchin ARIZONA CORPORATION COMMISSION 1300 W. Washington, 3rd Fl. Phoenix, AZ 85007 pkitchin@azcc.gov Attorneys for Defendants

/s/ Kris Schlott Kris Schlott, Paralegal

8

Scharf-Norton Center for Constitutional Litigation at the GOLDWATER INSTITUTE Timothy Sandefur (033670) 500 E. Coronado Rd. Phoenix, AZ 85004 (602) 462-5000 litigation@goldwaterinstitute.org Attorneys for Amicus Curiae Goldwater Institute

IN THE SUPERIOR COURT OF ARIZONA IN AND FOR THE COUNTY OF MARICOPA

KADIMA. VENTURES, LLC, et al. ,

Plaintiffs,

vs.

ARIZONA CORPORATION COMMISSION, et al.,

Defendant.

Case No. LC2018-000163-001 OT

[PROPOSED] ORDER GRANTING MOTION OF THE GOLDWATER INSTITUTE FOR LEAVE TO FILE AM/CVS CURIAE BRIEF IN SUPPORT OF PLAINTIFFS

(The Honorable Daniel Kiley)

Before the Court is the Goldwater Institute's Motion for Leave to File Amicus Curiae Brief in

Support of Plaintiffs. Having reviewed the Motion, the Comt finds that it should be and is hereby

GRANTED.

Accordingly, it is hereby ORDERED that the Goldwater Institute' s amicus brief in suppo11 of

Plaintiffs is hereby filed.

The Honorable Daniel Kiley Judge of the Maricopa County Superior Court