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Key Takeaways
The Eastern District of Pennsylvania recently ruled that where the government lacks substantial justification for bringing a regulatory enforcement action, it can be liable to reimburse the corporate defendant for attorney fees and costs, potentially deterring such actions in the future.
A federal court recently ordered the FTC to pay attorney fees and litigation expenses incurred by a publishing company who defeated claims related to improper telemarketing. Fed. Trade Comm'n v. Am. Future Sys., Inc., 2025 WL 1435629 (E.D. Pa. May 16, 2025). Judge Joel H. Slomsky of the Eastern District of Pennsylvania read the Equal Access to Justice Act to expand the circumstances under which the government is liable for the fees and costs incurred from a failed attempt at regulatory enforcement. Instead of holding a prevailing defendant to the standard of showing that the government's enforcement action was frivolous, the Eastern District of Pennsylvania held the government must have "substantial justification" to support its enforcement actions to the degree that a reasonable person would be satisfied. Id. at 7-8.
The court focused on the protracted length and intrusiveness of the government's investigation. FTC's investigation into AFS began in 2017 and culminated in the first complaint being filed in May of 2020. Id. at 9. At the same time that the FTC began its investigation, the Pennsylvania Attorney General's Office began its own. However, when the Attorney General's Office concluded its investigation and found no evidence of wrongdoing, the FTC still filed an enforcement action two years later.
The Eastern District of Pennsylvania further held that the government must demonstrate its reasonableness by showing a basis in truth for the facts alleged, a reasonable basis in law for its legal theory, and a reasonable connection between the government's alleged facts and the legal theory used. Id. at 26. Here, the Eastern District of Pennsylvania held that the government failed to meet its burden to establish these three factors by inadequately verifying the truthfulness of the original complaints it received from the defendant's customers that served as the basis for its investigation. The court also noted that the defendant thoroughly complied with the Attorney General's investigation. The court found that the FTC knew of this cooperation and still engaged in "cherrypicking" evidence it presented at trial. For example, although the FTC had access to over 17,000 recorded phone calls between the defendant and its customers, it presented only the few of these recordings that most closely supported its position and withheld the thousands of others that refuted its action.
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