Recent Court Decisions Threaten FTC’s Power to Protect Consumers
Published: December 26, 2018
Author: Richard Newman
The Federal Trade Commission’s streak of having its way with federal courts has hit some roadblocks in 2018. The FTC, an independent agency of the U.S. government, was founded over 100 years ago to bolster consumer protection and promote competition. A recent string of court losses suggests more latitude for marketers when hauled into federal court for conduct that is no longer continuing.
Earlier this year, the agency rejected an offer from DIRECTV in a negative option matter, only to have the court subsequently find that the FTC’s evidence was weak enough to justify dismissing all but one count. The FTC eventually dropped the case entirely.
Calendar year 2018 has also brought with it the dismissal of an FTC antitrust lawsuit accusing Shire Plc of violating antitrust laws by abusing government processes to manipulate the marketplace. The operative issue in Shire pertained to Section 13(b), the statue that the FTC relies upon to seek injunctive and monetary relief. Historically, when the alleged misconduct is no longer ongoing, the FTC has argued that an injunction should still be issued because of the “likelihood” that the conduct will recur.
Shire argued that its alleged conduct occurred in the past and that the FTC did not allege that another violation was imminent. A Delaware federal court found that FTC had failed to establish that the minimum threshold for seeking an injunction – by showing that the defendant was about to violate a law enforced by the FTC. Oral argument before the Third Circuit Court of Appeals court was subsequently heard, the FTC believing that the lower court’s ruling threatens its enforcement abilities.
Shire is not the only recent decision that deals a potentially devastating blow to the FTC’s authority to initiate legal action and recover consumer restitution in federal court. In FTC v. Hornbeam Special Situations, a federal district judge held that Section 13(b) prevents the FTC from proceeding in federal court against a violation that had ceased prior to the filing of the FTC’s lawsuit and was not about to recur.
The court held that the FTC, like every other plaintiff, must meet threshold pleading requirements and that mere “conclusory allegations” of a reason to believe the defendants were violating, or were about to violate, FTC law do not suffice. The court also considered what “about to” violate meant. Consistent with the Shire court, it held that “questions of whether injunctive relief was appropriate and whether the FTC was entitled to bring suit in the first place were distinct inquiries.” It said the “statutory text of § 3(b) must be given its plain meaning” and that the “ordinary meaning” of “about to,” as set forth in standard dictionaries, “evokes imminence,” when one is “on the verge of doing something; presently going to do something.”
Adhering to the plain meaning of the statue, Hornbeam court held that to state a claim in a §13(b) action, the FTC must allege sufficient facts to have reason to believe someone is “about to” violate its law, and “[w]hen the FTC’s reason to believe is predicated upon past conduct, it must show that a defendant is ‘about to’ violate the law—requiring more than mere likelihood of resuming the offending conduct—in order to state a claim.”
Of most recent note are concurring opinions in FTC v. AMG Capital Management, LLC. Here, Judges O’Scannlain and Bea called on the Ninth Circuit to sit en banc to revisit its prior decisions allowing for “inherently equitable” monetary judgments under Section 13(b). Judge O’Scannlain stated that “we have implausibly construed the word ‘injunction’ in § 13(b) to authorize the extensive power to order defendants to repay ill-gotten gains.” “Our interpretation of § 13(b) is thus an impermissible exercise of judicial creativity … these past errors, even if common, do not justify our continued disregard of the statute’s text and the Supreme Court’s related precedent,” he said.
Several justices of the Supreme Court tackled similar issues recently. In Kokesh v. SEC, the Supreme Court grappled with the authority of the SEC to seek disgorgement. For example, Justice Sotomayor stated “Can we go back to the authority? … if they’re not doing restitution, how could that be the basis of disgorgement?” Justice Roberts tellingly stated his opinion, to wit, that “one reason we have this problem is that the SEC devised this remedy or relied on this remedy without any support from Congress.” Justice Gorsuch stated that “here we don’t know, because there’s no statute governing [disgorgement]. We’re just making it up.”
Section 13(b) says nothing of monetary relief, let alone of penalties. Yet, the FTC has long claimed broad authority under the FTC Act to obtain injunctions and monetary judgments. Defendants have begun attacking that authority with greater frequency.
The agency is no doubt concerned about whether this line of recent “regulatory overreach” cases signals a minority view, or if other district courts will begin to adopt similar reasoning. It will be interesting to see what trends develop and whether the FTC will ultimately appeal to the Supreme Court or to Congress to amend §13(b).
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