Has the FTC Lost Its Legal Mojo – Again?

Three years ago, I reported that the Federal Trade Commission, which is so used to having its way with federal judges, appeared to find itself on a bit of a losing streak, if not in an outright slump. (“FTC Claim Against Commerce Planet ‘Discharged’ in Bankruptcy,” May 2015; “Has the FTC Lost its Legal Mojo,” June 2015).  Since then, reverting to form, it has won many more cases than it has lost.  Lately, though, it’s been whiffing again, badly, almost embarrassingly. As I wrote in “FTC Gambles and Loses in DIRECTV Negative Option Case” (Sept. 2018), after the FTC rejected a settlement of its $4 billion claim against DIRECTV because the amount of consumer redress was “insufficient,” the court found the FTC’s evidence to be so weak that it tossed out all but one of its counts without even needing to hear DIRECTV’s defense.  In a total surrender, the FTC later agreed to drop the case entirely.

On the heels of that loss, the FTC suffered another stinging defeat last month in a decision that deals a potentially devastating blow to its authority to sue and recover consumer restitution from violators in federal court.  In most cases, when the FTC uses its so-called “Section 13(b)” authority to seek injunctive and monetary relief, the alleged misconduct is ongoing.  When it isn’t, the FTC has successfully argued that an injunction should still issue because of the “likelihood” that the conduct will recur.  In FTC v. Hornbeam Special Situations, however, a federal district judge begged to differ, rejecting the “likelihood of recurrence” argument and holding that the plain text of 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 is not about to resume.

Section 13b states that the FTC may seek an injunction in federal district court when it has “reason to believe” someone “is violating, or is about to violate,” one of the laws it enforces. (Emphasis added.)  Terming this the “reason to believe” standard, the court said the language “plainly creates a precondition to the FTC’s statutory authorization to bring suit under §[1]3(b)]. That is, the FTC may sue only when it has a ‘reason to believe’ that a violation of law is occurring or about to occur….”

The first issue the court had to decide was whether the FTC could meet this standard with mere “conclusory allegations” or needed to allege facts to support a reason to believe the defendants were “violating,” or were “about to” violate, FTC law. The FTC argued it didn’t have to state facts because no court ha[d] imposed any such requirement in any other case involving § [1]3(b),” and because its conclusory allegations deserved judicial deference. The court found both arguments unconvincing.  On the lack of precedent, it said there could be several plausible explanations for that “silence,” and, in any event, the FTC’s “reason to believe” was now in dispute.  On its deference claim, the court found no statutory support for it in the federal court context and held the agency, like any plaintiff, must meet normal federal pleading requirements.

Having held that the FTC had to allege more than conclusory allegations to proceed under §13(b), the court next had to decide what “about to” violate meant where the challenged conduct was no longer occurring.  The FTC argued that it meant it was likely to recur – the same standard used in a mootness inquiry for an injunction.  The court disagreed, finding that such an interpretation was “inconsistent with the plain language of § [1]3(b).”  Echoing the same conclusion reached in FTC v. Shire Viropharma (an antitrust rather than consumer protection case) earlier this year, the court held that the “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 § [1]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.”  In contrast, the mootness standard of likelihood of recurrence is “less immediate than ‘about to’… and therefore cannot be considered synonymous with ‘about to.’ Conflating them would do violence to the plain language, jiggering it by judicial sleight.”

The FTC complained that this interpretation required it to show more to survive a motion to dismiss than is required to obtain the injunctive relief it sought under §13(b).  The court said that while that may be true, and even odd, the outcome is consistent with the statute’s plain meaning. While it said it would be “admittedly easier to apply an already existing framework (i.e., the injunction mootness standard) to the statute,” doing so, and ignoring the clearly distinct statutory language, “risk[]ed making the Court a super-legislature; it would be substituting its own judgment for Congress’s. This is not the Court’s role. The Court’s role is to apply the text of a statute, and it ends there.” In keeping with the plain meaning of the statute, the court therefore 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.”

The court did not stop there, though.  In dicta (extraneous judicial editorializing), it attacked, in unusually candid and florid judicial rhetoric, the tendency of courts to distort and broaden the meaning of statutes through loose interpretations, to the point where, in the case of §13(b), they create powers and remedies for the government out of whole cloth.  It is worth quoting the passage in full:

The difficulty of statutes like §[1]3(b) arises from the accretions of time,
those well-meaning or oversighted judicial glosses that encrust themselves
upon a law through loose interpretation. Among these encrustations is the
ubiquitous holding of the courts of appeals that equitable relief under §[1]3(b)
other than injunctions is available. This is not supported by the plain text of
the statute, but has been read into it by well-meaning judicial efforts to effect
the “purpose” of the statute. These meta-textual pontifications seem good in
the short run, but a long journey on even a narrowly wrong heading can be
ruinous. Section [1]3(b) clearly states that it is a provision for injunctive relief,
temporary or permanent. It mentions nothing of disgorgement or otherwise.
The Court is, of course, bound to accept the binding interpretations of higher
courts on this matter. But if it can prevent further encrustation through linguistic
fidelity, it will.

The judge in Hornbeam clearly is a “textualist” and not a fan of the manner in which his judicial brethren have been complicit with the FTC in turning a statute that should be plainly and narrowly confined to enjoining ongoing or imminent violations, into a blunt instrument for shutting down and forcing disgorgement from businesses whether or not they pose an immediate threat to consumers.  While his remains the distinct minority view in FTC jurisprudence, is it possible that other district judges will adopt his thinking, as he adopted that of the judge in Shire, and will a distinct minority trend begin to emerge?  Will the FTC appeal Hornbeam, as it has Shire (if its recently amended complaint fails)  and, if so, will one or both of the reviewing courts affirm and be the first to go against the grain?  If so, will the FTC appeal to the Supreme Court or to Congress to amend §13(b)?

Over the last 30 years, no weapon in the FTC’s arsenal has been more powerful and effective in enforcing its laws and obtaining injunctions and money judgments than §13(b).  Is the availability of this fearsome weapon now imperiled? Perhaps not yet, but stay tuned!

Talking about FTC, Online Marketing

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