The multiverse is abuzz about the recent Third Circuit ViroPharma decision and other like-minded courts that have placed significant limitations on the ability of the Federal Trade Commission to obtain an injunction in federal court against allegedly unlawful behavior that companies have already ceased.
The FTC Act as originally written required that the agency bring any enforcement action in an administrative proceeding. However, as anyone who has ever been involved in an administrative proceeding knows, such proceedings can move slowly (think “watching paint dry”) and do not provide for preliminary injunctive relief before any final order is issued even in situations where there could be considerable harm to consumers from an ongoing practice.
As a result, in 1973 Congress came to the rescue and amended the FTC Act in the form of Section 13(b). Section 13(b) provides that the FTC can bring suit in federal district court to enjoin an action whenever it has reason to believe that an entity is “violating or is about to violate” the law. And therein lies the rub when the entity being sued has ceased its unlawful practices. Up until recently the FTC has relied on the argument that it satisfies the requirements of 13(b) by establishing a past violation of the law and a “reasonable likelihood of recurrent future conduct,” with the latter being demonstrated simply by showing incentive and opportunity.
In the past the FTC has typically followed a practice of not seeking injunctive relief if the allegedly unlawful practice stopped before any investigation was initiated. However, if the practice stopped only after the hand was allegedly caught in the cookie jar, the FTC has been far more likely to seek 13(b) injunctive relief. Yet the Third Circuit opinion makes clear that the FTC may no longer simply presume that past unlawful conduct coupled with incentive and opportunity is alone sufficient to satisfy 13(b).
What remains to be seen is how closely courts will scrutinize the FTC’s efforts in this regard. The FTC is already signaling that it may prevail on this argument in other pending cases and that ViroPharma can be distinguished on its facts, for example, the FTC sued five years after the conduct it had complained of had stopped, which permitted the court to take note of the fact that during that five-year period there had been no recurrence of the unlawful activity. In addition, belatedly realizing that it risked defeat in court, the FTC provided additional facts during oral argument to support its position. However, the court said it could rely only on the “paucity of allegations” in the complaint. There is no doubt that in future cases the FTC will pay more heed to this issue in drafting its complaint. Intent might also become a more significant factor. As many of you likely know, intent is not a prerequisite for a Section 5 violation, but might it be relevant with respect to whether a company is “about to violate” the law or whether there is a “reasonable likelihood of recurrence”? Presumably a company that has inadvertently violated Section 5 is less likely to do so again than one that has engaged in outright fraud.
If the ViroPharma decision also portends much stricter scrutiny of FTC injunction requests under 13(b), the FTC in the long run could adapt in ways that may not always benefit advertisers. For example, as the Third Circuit suggests, in situations where the conduct has stopped, the FTC could seek a cease-and-desist order administratively but rush to federal court if it suddenly seems that the conduct is likely to recur. Further, except in cases involving hardcore fraud, the FTC typically does not rush to court to seek preliminary injunctive relief, and an investigation might unfold over the course of many months or even years before the FTC files a complaint in federal court. The FTC could opt to go more quickly to federal court in an effort to obtain injunctive relief before a party decides to discontinue a particular practice. This might also force parties in the investigative process to decide more quickly whether to discontinue a practice or gamble that the commission can be persuaded to close its investigation.
One additional downside to the FTC pursuing injunctions administratively is that consumer redress is not available in an administrative proceeding, which is likely one of the key reasons the FTC proceeds so often in federal court. While this approach is more cumbersome, the agency could first obtain a cease-and-desist order administratively and, if successful, then seek equitable relief (consumer redress) in federal court. This approach itself, however, is not without controversy. Section 19 of the FTC Act explicitly authorizes the FTC to seek monetary relief in federal court after the conclusion of an administrative proceeding but only in situations where a reasonable person would have known the practices were “dishonest or fraudulent.” Clearly this might be a difficult showing to make in a typical claims substantiation case. Limiting redress to such situations would almost certainly derail the current commission’s push to become even more aggressive with respect to the kinds of cases where it seeks redress. To overcome this limitation the commission has relied upon Section 13(b). Some, such as former FTC chairman Timothy Muris, have argued even prior to ViroPharma that any redress authority under 13(b) should not be broader than that provided under Section 19. Increased judicial scrutiny of the injunctive power granted under Section 13 will almost certainly increase scrutiny of the commission’s related redress authority under this section. Finally, the commission also has authority under Section 5(m)(1)(B) to obtain civil penalties when a company engages “in an act or practice that the [c]ommission had previously determined in a litigated proceeding … was unfair or deceptive” if the company had actual knowledge of the determination. On a few occasions the commission has sought to trigger such actual knowledge by serving third parties with copies of litigated decisions. The risk of civil penalties is, of course, one of the key deterrent rationales behind seeking injunctive relief. If injunctive relief becomes more difficult to achieve, the commission could still seek to deter future misconduct by utilizing this provision more aggressively to preserve its ability to seek civil penalties even absent the presence of injunctive relief against a party.
Lastly, much as it did in 1973, Congress could also come to the rescue by clarifying and potentially expanding the scope of Section 13(b). As much as it may seem absurd to suggest that Congress could do any such thing in the current political environment, this could well be an issue for which there is bipartisan support.
In summary, in the short run some companies may benefit if more and more courts adopt the reasoning of the Third Circuit, and the commission may find it harder and harder to impose injunctive relief. In the longer run, there are likely strategies that the commission can adopt as workarounds to its 13(b) difficulties. In the meantime, expect companies to use the Third Circuit’s decision both to try to limit the scope of any proposed settlement and, should settlement discussions fail, to argue in court that injunctive relief is not available when the conduct at issue has stopped.