The National Advertising Division (“NAD”) held its Annual Conference in New York yesterday. Andrew Smith, the head of the Bureau of Consumer Protection for the FTC, delivered the keynote address and provided attendees with an excellent overview of the past year’s landmark decisions in FTC jurisprudence. For those who frequent this blog, it comes as no surprise that the hottest discussions focused on the recent trend among courts to question the FTC’s broad interpretation of its enforcement authority under Section 13(b), concentrating on rulings in the Shire ViroPharma decision from the Third Circuit, the LabMD decision from the Eleventh Circuit, and the recent Seventh Circuit decision in Credit Bureau Center.
In Shire ViroPharma, the Third Circuit ruled that, pursuant to the plain language of Section 13(b), to obtain an injunction under Section 13(b), the FTC must plead facts sufficient to show that a defendant “is” violating or “is about to” violate the law. Essentially, the Shire decision means that the FTC cannot use Section 13(b) to address wholly concluded past harm—a profound finding that could dramatically affect how the FTC pursues cases. For more analysis, see our past blogs on both the district court‘s and Third Circuit’s opinions. The FTC chose not to seek Supreme Court review of the Shire ViroPharma decision and instead appears to be trying to limit that case to its facts.
Consistent with that, in his keynote, Mr. Smith compared the Third Circuit’s decision in Shire to a case currently pending in the Eleventh Circuit—FTC v. Hornbeam, in which a district court judge ruled that even though all the defendants’ alleged wrongful conduct had concluded (and some defendants were even deceased), the FTC had a reasonable belief that the defendants “were violating” or were “about to violate” the law and thus could proceed under Section 13(b). Mr. Smith failed to emphasize what is perhaps the most interesting aspect of the Hornbeam decision—that a district court judge previously assigned to the case first issued a ruling aligned with the Shire decision before a newly appointed district court judge reconsidered and reversed that ruling. Currently, the case is awaiting a decision from the Eleventh Circuit as to whether it will accept the defendants’ interlocutory appeal. If accepted, the court can reconcile the most recent district court judge’s opinion with the trend among courts to apply the plain language of Section 13(b).
In addition to Shire, Mr. Smith also discussed an Eleventh Circuit case dealing with data security issues: FTC v. LabMD. Specifically, in LabMD, the Eleventh Circuit held that the FTC’s consent order, which required the defendant to employ “reasonable data security” measures, was unenforceably vague. The court held that this standard would ultimately set up a “battle of the experts” to determine what constitutes “reasonable.” Mr. Smith acknowledged that in response to this ruling, the FTC has revamped its consent orders. New orders, such as that issued in the Dealer Built matter, are extremely specific, listing 8-10 specific requirements that the defendant must meet, including training employees about safeguarding data, employing data access controls, and encryption of Social Security numbers and account numbers. At the end of his discussion, Mr. Smith expressed concern regarding the increased specificity in new orders, wondering aloud whether it will be better or worse for the industry.
The Credit Bureau Center case was certainly the most hotly anticipated case in Mr. Smith’s discussion. Just last month, a three-judge panel in the Seventh Circuit overruled 30 years of precedent when it held that the plain language of Section 13(b) does not authorize the FTC to obtain restitution from defendants, instead limiting the FTC’s recourse to injunctive relief. Mr. Smith noted that although other defendants have made this argument in the past, it has uniformly been rejected until now. Mr. Smith is correct that no court has taken the dramatic step taken by the Seventh Circuit, but one could certainly read the judicial tea leaves and predict that challenges to the FTC’s right to seek monetary relief will be likely to receive more receptive judicial audiences.
Although Mr. Smith expressed alarm regarding the implications of the Seventh Circuit’s ruling, he also noted that the FTC has strong authority in the majority of circuits to obtain restitution and other forms of monetary relief pursuant to 13(b). Indeed, Mr. Smith highlighted a recent favorable ruling from the Ninth Circuit in FTC v. AMG Capital Management, in which the Ninth Circuit affirmed the FTC’s ability to obtain redress under 13(b). Mr. Smith noted that AMG’s deadline to petition for certiorari to the Supreme Court falls before the FTC’s deadline in the Credit Bureau matter. Thus, there is a good chance it will hit the Supreme Court’s docket before Credit Bureau. Either way, Mr. Smith expects that this issue will ultimately be solved either at the Supreme Court or by Congress.
So what is the key takeaway from Mr. Smith’s keynote? The FTC appears to be acutely aware that it is facing a multifront battle from defendants seeking to confine the FTC’s expansive enforcement authority under Section 13(b) to only that authority expressly granted by Congress. Although the FTC is currently willing to face this battle in the court system, it appears Mr. Smith is aware that these efforts to constrain the FTC’s authority to proceed in federal court under Section 13(b) may end up being resolved where all of this started back in the early 1970s—in the halls of Congress.