The Federal Trade Commission suffered a significant blow yesterday. In a decision that many saw coming—bloggers here included—the Third Circuit curtailed authority the FTC has been using for decades to confront allegedly unlawful past conduct. The decision has a direct impact on the ability of the FTC to obtain injunctions against defendants for alleged past misdeeds. In its ruling, the Third Circuit held that the FTC can only go directly into federal court where it can allege a defendant is violating or about to violate the law.
Let us first review the legal landscape. In broad terms, the FTC Act provides the FTC several avenues to address consumer harm. The FTC could bring an administrative action to obtain a cease and desist order against a defendant. In addition, after all judicial review of the order is complete, the Commission may file an action for consumer redress under Section 19 of the FTC Act (15 U.S.C. § 57b) if the FTC can allege that the conduct in question was such that “a reasonable man would have known under the circumstances was dishonest or fraudulent.” Claims for redress under Section 19, however, are subject to a three-year statute of limitations. As one can imagine, that administrative process and the subsequent court proceeding are time consuming. To avoid the statute of limitations and the cumbersome two-step process, the FTC has, in recent decades, overwhelmingly chosen a different option. It has used its authority expansively under Section 13(b) of the FTC Act (15 U.S.C. § 53(b)) to go straight into federal court and seek both injunctive and equitable monetary relief.
We have written previously—here, here, and here—about a trend in the courts to re-examine the FTC’s expansive reading of its authority. And, we have warned that that trend suggests that courts are poised to seriously curtail the FTC’s authority to proceed in federal court under 13(b).
Well, that’s exactly what the Third Circuit just did in FTC v. Shire ViroPharma, Inc. In short, the Third Circuit held, based on the plain language of the statute, that to obtain an injunction under Section 13(b), the FTC must plead facts sufficient to show that the defendant “is” or “is about to” violate the law. The Court further found that it is not enough, as the FTC has been arguing for decades, to assert that the unlawful conduct is “likely to recur.” A small, semantic difference you may say? To the contrary. The Shire decision means that the FTC cannot use Section 13(b) to address wholly concluded past harm. That is profound and could dramatically change how the FTC brings cases.
If that is not enough, the Shire case should have an impact on the FTC’s ability to obtain monetary relief. Remember, the FTC has been claiming 13(b) authority as a way of imposing monetary relief on defendants, even though 13(b) makes no mention at all of such relief. There is ample language in the Shire case—dicta, to be sure—that calls such authority starkly into question. The Third Circuit looked at the legislative history of 13(b) and pointed to evidence that Congress intended 13(b) to provide the FTC a way to stop unlawful conduct while an administrative process was proceeding, nothing more.
Shire matters. It remains to be seen if the FTC will seek further review of the case, either in the Third Circuit or the Supreme Court. And, it remains to be seen whether other courts will follow Shire and its reasoning. Stay tuned.