The Federal Trade Commission has historically achieved significant and almost unchecked success fending off challenges to the agency’s authority to use the FTC Act to collected money and hold individuals liable. Until now.
Remedial Arsenal Under Attack
Section 13(b) of the FTC Act authorizes the FTC to seek preliminary injunctive relief where the agency has “reason to believe” that a defendant “is violating, or is about to violate” a law that it enforces. Section 13(b) of the FTC Act also permits the FTC to seek a permanent injunction.
Over the years, the FTC has relied on Section 13(b) for access to the federal courts and to recover equitable monetary relief in the form of redress and disgorgement. Those defending FTC litigation matters that have consistently argued that only Section 19(b) of the FTC Act permits monetary relief – following the exhaustion of administrative remedies – and that reading monetary remedies into the language of Section 13(b) permits the FTC to expand its authority beyond the express command of Congress.
Despite the U.S. Supreme Court never having approved the FTC’s use of Section 13(b) to seek monetary remedies, such defense arguments have proven unsuccessful.
An antitrust case initiated by the FTC in the U.S. District Court for Delaware made big news in 2018 due to the potential for its holding to limit the FTC’s ability to bring consumer protection cases.
In FTC v. Shire ViroPharma, Inc., the court held that the FTC is only permitted to file in federal court seeking permanent injunction relief and ancillary equitable relief (e.g., disgorgement and restitution) when the defendant is violating or imminently about to violate the FTC Act. In doing so, the court rejected the Federal Trade Commission’s argument that the appropriate pleading standard should be whether the wrongful conduct was likely to recur. The FTC has appealed the court’s decision.
On the heels of the Shire decision, the U.S. District Court for the Northern District of Georgia in FTC v. Hornbeam Special Situations reached a similar conclusion pertaining to the FTC’s so-called Section 13(b) authority to seek injunctive and monetary relief.
In Hornbeam – a consumer protection case – the FTC’s position was that the potential threat of future unlawful conduct was sufficient, and that the “reason to believe” issue was one of prosecutorial discretion and thus not subject to judicial review. In rejecting the FTC arguments, the court turned to the plain language of the statute and ruled that the FTC is required to allege facts that it has a reason to believe that a violation of law is occurring or about to occur. Conclusory, threadbare allegations are not enough to satisfy Section 13(b).
Of particular interest here is that the Hornbeam court took notice that the FTC’s aggressive use of Section 13(b) has transmogrified the plain language of the statute. The court’s editorial is worth stating, in full.
“The difficulty of statutes like §3(b) arises from the accretions of time, those well-meaning or oversighted judicial glosses that encrust themselves upon a law through loose interpretation. Among these encrustations is the ubiquitous holding of the courts of appeals that equitable relief under §13(b) other than injunctions is available. This is not supported by the plain text of the statute, but has been read into it by well-meaning judicial efforts to effect the “purpose” of the statute. These meta-textual pontifications seem good in the short run, but a long journey on even a narrowly wrong heading can be ruinous. Section 13(b) clearly states that it is a provision for injunctive relief, temporary or permanent. It mentions nothing of disgorgement or otherwise. The Court is, of course, bound to accept the binding interpretations of higher courts on this matter. But if it can prevent further encrustation through linguistic fidelity, it will.”
Why is This Significant?
To date, the FTC has turned a misused a statue that should be narrowly confined to enjoining ongoing or imminent violations. Although minority views, if the two decisions referenced above are followed by other district courts, the FTC’s enforcement authority could be significantly limited.
The Federal Trade Commission would first have to initiate administrative litigation and obtain a cease and desist order. Then, it would be required to initiate an action in federal court seeking damages pursuant to Section 19 of the FTC Act and establish that the defendant objectively knew or should have known that the conduct at issue was fraudulent or dishonest. The threshold standard to award consumer redress in such actions is higher than in Section 13 proceedings.
Contact the author at email@example.com if you are interested in learning about recent judicial rulings pertaining to the limits on the Commission’s ability to proceed in federal court under Section 13(b) of the FTC Act when prosecuting prior FTC Act violations. You can also follow FTC defense lawyer on Twitter.
Richard B. Newman is a digital marketing attorney at Hinch Newman LLP.
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