The FTC has long asserted it has the authority to bring actions in federal court to obtain injunctive relief and equitable monetary remedies (e.g. disgorgement, consumer redress) for unfair and deceptive practices. This view of the agency's scope of authority has stood for years without much question or challenge. But two recent district court decisions may change all that by limiting the agency's ability to petition a federal court to those situations in which it can demonstrate a defendant is "about to violate" the law. On December 11, 2018, the United States Court of Appeals for the Third Circuit Court heard oral argument in one of the district court cases – FTC v. Shire ViroPharma, Inc. – with a decision expected in the first half of 2019. If the Third Circuit upholds the district court's ruling, it will complicate FTC enforcement efforts and push more cases into the agency's administrative process.
The FTC's Enforcement Powers
The FTC can initiate an enforcement action if it has "reason to believe" that the consumer protection or antitrust laws are being violated. Before 1973, the FTC could exercise its enforcement powers only through administrative adjudications, which do not allow for financial relief or an immediate prohibition on future wrongdoing.1 While the FTC has the power to seek financial remedies through its administrative process, the penalties are limited by a three-year statute of limitations, and the FTC must demonstrate that the conduct was clearly "dishonest or fraudulent."2
In 1973, Congress amended the FTC Act to add Section 13(b) and give the FTC the authority to (1) seek injunctive relief in federal court pending the completion of the FTC administrative proceeding when the FTC "has reason to believe" that a person or entity "is violating, or is about to violate" any law enforced by the FTC, and (2) seek a permanent injunction "in proper cases." Following the enactment of Section 13(b), the FTC adopted an expansive view of its power to bring federal court enforcement actions, and started bringing cases in federal court seeking monetary relief under equitable doctrines such as restitution, disgorgement, and rescission of contracts. The FTC also asserted that its statutory power to seek a "permanent injunction" was a standalone grant of authority that entitled the FTC to bring a federal court action irrespective of whether a defendant "is violating, or is about to violate" the law. By tying its theories to these doctrines, the FTC took much of its enforcement activity outside otherwise applicable requirements, including the three-year statute of limitations and proof of a defendant's dishonesty or fraud. Until this year, courts universally accepted the FTC's expansive view of its authority under Section 13(b). As a result, it is the FTC's policy that "[a] suit under Section 13(b) is preferable to the adjudicatory process because, in such a suit, the court may award both prohibitory and monetary equitable relief in one step."3
Two recent court decisions have raised questions about the FTC's view of its authority to sue in federal court solely over a defendant's prior conduct. In FTC v. Shire ViroPharma, Inc., the FTC sued the defendant in the U.S. District Court for the District of Delaware, alleging that between 2006 and 2012 ViroPharma had engaged in an anticompetitive campaign of repetitive and meritless filings with the FDA to delay generic competition and therefore maintain its monopoly on its branded drug. ViroPharma moved to dismiss the FTC's complaint, arguing that the FTC had exceeded its authority under Section 13(b). Specifically, ViroPharma asserted that Section 13(b) does not provide the FTC with independent authority to seek a permanent injunction under Section 13(b), but rather limits permanent injunction actions to those cases where the FTC can show that a defendant "is violating or is about to violate" the law. On March 20, 2018, Judge Richard Andrews granted ViroPharma's motion to dismiss, and rejected the FTC's long-held assertion that Section 13(b) provides it with the independent authority to seek permanent injunctive relief in federal court, including relief for past violations of the FTC Act and regulations.4 Judge Andrews held that the FTC's authority to seek permanent injunctive relief is dependent on the FTC alleging facts that plausibly suggest a defendant is either (1) currently violating a law enforced by the FTC or (2) is about to violate such a law. Because the FTC's complaint against ViroPharma was based on conduct that occurred five years before the filing of the complaint, the court found that the FTC failed to plead facts that demonstrate that ViroPharma was either violating or "about to" violate the law.
Subsequently, on October 15, 2018, Judge Timothy Batten, in the Northern District of Georgia, cited the ViroPharma decision in finding that the FTC's permanent injunction authority under 13(b) authority is limited to situations where a defendant is "about to" violate the law. In FTC v. Hornbeam the FTC brought a federal court enforcement action alleging that the defendants were marketing memberships in online discount clubs to consumers seeking payday, cash advance or installment loans, in ways that violated the FTC Act, the FTC's Telemarketing Sales Rule, and the Restore Online Shoppers' Confidence Act. The court rejected the FTC's argument that courts must defer to the FTC's determination that it has "reason to believe" that the defendants were about to violate the law.5 Rather, the court – citing the decision in ViroPharma – held that when the FTC exercises its Section 13(b) authority it must meet federal court pleading standards and set forth sufficient facts that each defendant is "about to" violate the law.
If followed, the ViroPharma and Hornbeam decisions could significantly limit the FTC's ability and willingness to pursue claims in federal court, and shift enforcement actions to the FTC's administrative process. It is unclear how such a shift to administrative enforcement will impact how the FTC approaches enforcement actions and negotiates consent orders to resolve its investigations. On the one hand, companies may be hesitant to go through the FTC's administrative process given that it is a notoriously slow process over which the FTC Commissioners exercise the final decision-making authority. On other hand, the FTC's limited ability to seek financial remedies through the administrative process may provide companies greater leverage in negotiating consent decrees.
The FTC is acutely aware of the potential threat posed by these decisions, as evidenced by its decision to forgo filing an amended complaint in favor of immediately appealing the court's ruling in ViroPharma to the Third Circuit. In its appeal to the Third Circuit, the FTC stated that if the ViroPharma holding had been applied in past cases it "would likely have doomed hundreds of other Section 13(b) actions that the FTC has filed over the years – cases that collectively have recovered many billions of dollars for victimized American consumers."6
On December 11, 2018, the Third Circuit heard oral argument in ViroPharma. During oral argument the three-judge panel expressed skepticism at the FTC's argument that Judge Andrews applied the wrong pleading standard by requiring that the FTC plead sufficient facts to show that a violation of federal law was "imminent." A decision by the Third Circuit is expected in the first half of 2019. The Hornbeam case is still pending in the Northern District of Georgia as the FTC decided to amend its complaint following the court's ruling on the motion to dismiss.
1 15 U.S.C. § 45(b).
2 15 U.S.C. § 57b.
4 FTC v. Shire ViroPharma, Inc., No. 17-131-RGA, 2018 WL 1401329 (D. Del. 2018).
5 FTC v. Hornbeam, No. 1:17-cv-03094-TCB (N.D. Ga. Oct. 15, 2018).
6 FTC v. Shire ViroPharma,Inc., No. 18-1807, Document No. 003112960825 at 47 (3d Cir. June 19, 2018).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.