In “Has the FTC Lost Its Legal Mojo – Again?” (Nov. 2018), I wrote about the decision last October in FTC v. Hornbeam Special Situations kicking the Federal Trade Commission out of federal court over a consumer protection complaint that sought to enjoin a company over past, but no longer continuing, violations. As reported, this decision mirrored a similar result that had been reached by another federal district judge earlier in the year, in FTC v. Shire Viropharma (an antitrust rather than consumer protection case). Both decisions rejected the FTC’s long-held argument, which heretofore has found wide judicial acceptance, that Section 13(b) of the Federal Trade Commission Act (“FTCA”) authorizes the FTC to seek an injunction against alleged past misconduct, even if it has stopped, as long as it can show a “likelihood” that it will recur. They said the “likelihood of recurrence” rationale was not supported by the plain text of Section 13(b), which on its face authorizes an injunction only against someone who “is violating, or is about to violate,” an FTC-enforced law. (Emphasis added.)
The FTC immediately appealed the dismissal of its complaint in Shire to the Third Circuit Court of Appeals but rather than appealing right away in Hornbeam, filed an amended complaint. This tactic proved successful as a second motion to dismiss was denied this month. The defendant has indicated it will appeal to the Eleventh Circuit.
Meanwhile, as that appeal gets underway, the Third Circuit just this week upheld the lower court ruling in Shire, becoming the first appellate court to reject the “likelihood of recurrence” interpretation of Section 13(b) to justify FTC actions against past misdeeds in federal court, and to hold that the FTC’s injunctive authority is strictly limited to ongoing and imminent violations. In a full throttle embrace of the district court’s reasoning, it stated that Section 13(b):
requires that the FTC have reason to believe a wrongdoer “is violating” or “is about to violate” the law….We conclude that this language is unambiguous; it prohibits existing or impending conduct. Simply put, Section 13(b) does not permit the FTC to bring a claim based on long past conduct without some evidence that the defendant “is” committing or “is about to” commit another violation.
The FTC argued that such a narrow reading of the statute would make it easy for wrongdoers to evade the law because “[a]s soon as a potential defendant got wind that the FTC was investigating its activities, it could simply stop those activities and render itself immune from suit in federal court unless the FTC could allege and prove an imminent re-violation.” The court disagreed, pointing out that the FTCA authorizes administrative actions based on past violations (including for consumer redress) and if the FTC believes that a wrongdoer is “about to violate” the law during the pendency of an administrative case, it could then come to court and obtain an injunction under Section 13(b). Indeed, reviewing the legislative history, the court noted that “[w]hen Congress added Section 13(b), the provision was expected to be used for obtaining injunctions against illegal conduct pending completion of FTC administrative hearings.” It was not to be used as a device for bypassing the administrative route and rushing straight to federal court to confront a violation that was no longer occurring or imminent.
For decades Section 13(b) has been the hammer of the FTC’s enforcement program, not only because of the injunctive powers it grants but also because of the FTC’s success in persuading courts that it also impliedly authorizes equitable monetary relief, such as disgorgement or restitution. Lately, however, a counter, or “revisionist,” judicial trend has been building which is challenging the legal underpinnings of the provision. It began with the Supreme Court’s 2017 decision in Kokesh v. SEC, which contains reasoning that, if applied by analogy to the FTC, would eviscerate the FTC’s ability to obtain monetary relief under Section 13(b). Then came the district court decisions in Shire and Hornbeam, with the latter going even further to condemn other courts for over-construing Section 13(b) to allow monetary relief, and now the Third Circuit’s opinion in Shire – the most direct and authoritative assault yet on the provision. It remains to be seen how the Eleventh Circuit will rule. If it agrees with Shire, it will be another major crack in the legal edifice of Section 13(b) and afford further ammunition to defense attorneys to use in FTC litigation and settlement negotiations. If it disagrees, the conflict could set up an appeal to the Supreme Court.
None of these scenarios bodes well for the FTC. No weapon in its arsenal has been more powerful and effective in enforcing its laws and obtaining injunctions, money judgments (and asset freezes!) than §13(b). In over 30 years as an FTC lawyer, I have seen it strike holy terror in clients over and over again. After Hornbeam, I asked whether the availability of this fearsome weapon was now imperiled? With the first appellate endorsement of a strict “plain reading” view of Section 13(b) now on the books, the answer has to be a definite yes. But with another appellate decision to come, the FTC hasn’t been knocked out yet, so for those who believe it and the courts have misapplied Section 13(b) and thus misused their enforcement powers against defendants, don’t pop the champagne just yet.