Bad facts for the Federal Trade Commission?  Maybe. 

Resulting in bad law from the FTC’s perspective?  Maybe. 

What is certain is that the Third Circuit has issued a significant decision that may very well flip the Federal Trade Commission’s ability to challenge prior conduct in federal court on its head.

FTC defense lawyer Richard B. Newman has been following these important regulatory enforcement developments here, here and here. 

How This All Started

In 2017 the FTC initiated an antitrust matter against Shire ViroPharma in the U.S. District Court for Delaware – five years after the alleged unlawful conduct had ceased.  It did so pursuant to

§ 13(b) of the FTC Act (15 U.S.C. § 53(b)), which gives the FTC authority to file a case when it has “reason to believe” that a defendant “is violating” or “is about to violate” any provision of law enforced by the FTC.

Much to the FTC’s dismay, the lower court ruled that the FTC is only permitted to file in federal court seeking permanent injunctive relief and ancillary equitable relief (e.g., disgorgement and restitution) when the defendant is violating or imminently about to violate the FTC Act. 

The FTC appealed. 

The Third Circuit was not persuaded. 

The FTC lost. 

Digital marketers should take note.

What the Third Circuit Said

The FTC argued that § 13(b) is governed by a “likelihood of recurrence” and “reason to believe” standard.  The court rejected the agency’s position of how “is violating, or is about to violate” should be interpreted.

The court referred to the legislative purpose of § 13(b) – to stop unfair and deceptive practices while an administrative case was pending.  “Section 13(b) thus empowers the FTC to speedily address ongoing or impending illegal conduct, rather than wait for an administrative proceeding to conclude,” it stated.

In unequivocally rejecting the FTC’s policy argument that application of the “likelihood of recurrence” standard was necessary to prevent “the wrongdoer” from avoiding “an injunction by voluntarily ceasing its illegal conduct,” it referenced Section 5(b)’s administrative proceeding for past violations.

In pertinent part, the court considered the FTC’s “parade of horribles” argument – a prediction that wrongdoers will simply “evade Congress’ purposes” (unless the FTC could allege and prove an imminent re-violation) by simply stopping unlawful activities when it believes a regulatory investigation or enforcement action is in the works.

The court opined, “there is no reason to believe that our decision today unnecessarily restricts the FTC’s ability to address wrongdoing.  Section 5 authorizes administrative proceedings based on past violations.  And, of course, if the FTC believes that a wrongdoer is “about to violate” the law during the pendency of an administrative proceeding, it could then come to court and obtain an injunction under Section 13(b).”

The court goes on to state that “the FTC’s understandable preference for litigating under Section 13(b), rather than in an administrative proceeding, does not justify its expansion of the statutory language.  If the FTC wants to recover for a past violation—where an entity “has been” violating the law—it must use Section 5(b). 15 U.S.C. § 45(b).  If the FTC instead chooses to use Section 13(b), it must plead that a violation of the law “is” occurring or “is about to” occur. § 53(b).”

As to Shire, the court determined that “the FTC wants to use the most advantageous aspects of each statutory provision—to punish Shire for a past violation using the less onerous enforcement mechanism.  But the FTC’s attempt to squeeze Shire’s conduct into the “about to violate” category distorts Section 13(b) beyond its intended purpose.”

Takeaway:  The Third Circuit described the “about to” standard as addressing “impending conduct,” not conduct that has ceased.  It held that § 13 is not “meant to duplicate Section 5, which already prohibits past conduct.”  The FTC’s interpretation – that “about to violate” means only that a violation could recur at some future point – was rejected by the court.  According to the Third Circuit, the FTC must plausibly – not ambiguously – plead that a defendant is about to violate a law enforced by the FTC (particularly when the alleged misconduct ceased almost five years before filing of the complaint).  Specific allegations that a defendant is poised to violate the law may be required.  Of course, the Federal Trade Commission could seek rehearing, Supreme Court review, legislative intervention or a different outcome in states other than Delaware, New Jersey and Pennsylvania.

FTC Administrative Proceedings are Less Onerous

The gravity of this ruling is perhaps best understood by fully considering why the FTC disfavors administrative proceedings.

Typically, the Federal Trade Commission initiates cases in federal court pursuant to § 13(b) instead of an administrative proceeding under FTC Act § 5.  The latter authorizes the FTC to bring an administrative action to obtain a cease and desist order whenever it “has reason to believe that a defendant has been or is engaged in any unfair method of competition or unfair or deceptive act or practice in or affecting commerce.

In consumer protection matters, the FTC prefers federal court to administrative proceedings because the ability to recover monetary remedies in the latter is limited. 

Following an administrative proceeding in which the FTC obtains a cease and desist order, the Federal Trade Commission may proceed to federal court to seek (i) monetary penalties for any violation of the order (15 U.S.C. § 45(b)); or (ii) penalties (or other equitable relief) based on a showing that the act or practice to which the cease and desist order relates is one which a reasonable man would have known under the circumstances was dishonest or fraudulent (15 U.S.C. § 57b).  The latter is also subject to a three-year statute of limitations. 

Give the limitations period and other remedial restrictions, it is clear to see why the FTC prefers to use § 13(b) of the FTC Act as the vehicle to immediately proceed in federal court to seek injunctive and monetary relief.

Contact the author at rnewman@hinchnewman.com if you are interested in learning more about the Shire decision and how these issues are being perceived by other courts, or if you are the subject of a FTC investigation or enforcement action.

Richard B. Newman is an FTC investigation and defense attorney at Hinch Newman LLP.  Follow him on LinkedIn and Twitter.

Attorney Advertising. Informational purposes only. Not legal advice.