Federal Court Clips FTC Judicial Enforcement Wings
The Federal Trade Commission (FTC) actively uses its authority under Section 5 of the FTC Act and other consumer protection statutes to initiate enforcement actions against marketers in federal court based upon a broad range of unfair or deceptive conduct, including, but not limited to advertising practices.
Under the FTC Act, the FTC can initiate formal legal proceedings in federal court against marketers if it has reason to believe they are violating or about to violate the law. Historically, the FTC has successfully argued that prior conduct is evidence that a defendant is about to violate the law.
However, a judicial trend is slowly developing that places limits on the FTC’s ability to initiate lawsuits in federal court rather than via an FTC administrative enforcement proceeding where the agency, with narrow exception, is limited to seeking cease-and-desist orders.
That trend spells good news for marketers and bad news for the FTC.
Abandoned Conduct Defense
Challenges to the FTC’s authority to obtain monetary damages and injunctions in federal court without reasonably showing unlawful current or imminent conduct have found some recent success.
In FTC v Shire ViroPharma, the FTC alleged that the defendant submitted numerous filings with the Food and Drug Administration, including alleged “sham” Citizen’s Petitions, as well as a handful of lawsuits against the FDA, in a purported effort to delay generic competition to its branded prescription drug. Approximately five years later, the FTC filed suit in the District Court for the District of Delaware alleging that the defendant violated the FTC Act.
Shire moved to dismiss, arguing that the FTC’s allegations of its past petitioning activity did not satisfy the requisite “is violating” or “is about to violate” the law standard. The FTC argued that Shire was likely to engage in similar conduct in the future.
The court agreed with Shire and dismissed the case. The FTC appealed the case and lost, in part, because it failed to plead ongoing or imminent conduct.
In FTC v. Hornbeam Special Situations, LLC, the FTC alleged that discount club marketers were likely to deceive customers in the future based solely upon misconduct that they ceased long before. However, a federal court in Georgia held the FTC was not entitled to monetary relief, including restitution and disgorgement, based solely upon past conduct. In doing so the court expressed that a loose interpretation of a “likely to recur” standard was not supported by any statute.
No Right to Restitution Defense
Six months after the Third Circuit’s Shire holding, the Seventh Circuit Court of Appeal in FTC v. Credit Bureau Center et al. held that the FTC Act only authorizes injunctions but not monetary restitution. The opinion goes much further than Shire and Hornbeam, concluding that long-standing precedents were incorrect to allow for monetary remedies.
The defendant in this case, who had been ordered to pay $5.2 million after being found liable for deceptively promoting a credit monitoring service, may now be entitled to return of his money.
The dissenting opinion stated, “[t]he majority’s interpretation upends what the agency and Congress have understood to be the status quo for 30 years, and in so doing grants a needless measure of impunity to brazen scammers.”
Credit Bureau case represents a substantial limitation to the FTC’s enforcement power. The potential significance of this decision to marketers accused of deceptive marketing practices cannot be overstated.
The Seventh Circuit’s controversial opinion in Credit Bureau effectively barring the FTC from obtaining restitution in cases of deceptive marketing overturns well-established precedent and has created a split with a majority of other circuits. It is unclear whether the FTC intends to live with the decision and cross its regulatory fingers that it is not followed by other circuit courts, or whether it will take up the matter with the U.S. Supreme Court.
There is now a circuit split on key aspects of the FTC’s enforcement authority so the issue may indeed be ripe for Supreme Court review. It is also possible for the FTC to ask Congress for explicit authority to obtain disgorgement and restitution under the FTC Act.
Takeaway: Shire and Hornbeam suggest limits to the FTC’s judicial enforcement authority. Credit Bureau adds another level of uncertainty about the agency’s remedial powers. The FTC routinely freezes assets, forces receiverships and obtains monetary settlements in federal court enforcement lawsuits against marketers. When the agency demands turnover of assets in settlement negotiations, marketing defendants often have little recourse. While these decisions discussed in this article may not be binding outside of their respective jurisdictions, the potential impact of these trends for digital marketers is significant and potentially presents interesting opportunities for defendants facing FTC enforcement lawsuits. Now, the FTC will likely have to defend its substantive and procedural legal playbook against aggressive challenges by FTC defense attorneys before it can use its monetary-related statutory weapons against marketers it suspects of breaking the law.
Richard B. Newman represents digital marketers in advertising substantiation proceedings and investigations conducted by the Federal Trade Commission and state attorneys general. Follow him on Facebook @ FTC Defense Lawyer.
Please contact us at (212) 756-8777, via email to info@hinchnewman.com or via our Online Case Submission Form.