FTC Headed Back to the Future?

FTC logo

GordonA recent decision in an antitrust case brought by the Federal Trade Commission (FTC) in the U.S. District Court for Delaware could significantly limit the Commission’s ability to bring consumer protection cases in federal court and return the FTC to an enforcement model that it largely abandoned in the early 1980s. 

In FTC v. Shire ViroPharma Inc., the court held that the FTC can only sue in federal court where it is able to allege that the defendant is violating or about to violate a law the FTC enforces. This decision, if broadly accepted, could severely limit the ability of the FTC to pursue cases in federal court for companies that are only accused of past violations by the FTC.

Understanding the Law

The FTC routinely brings enforcement actions in federal court pursuant to Section 13(b) of the FTC Act, seeking permanent injunctions and equitable monetary relief (both consumer redress and disgorgement). Under the first proviso of Section 13(b), the FTC is authorized to seek preliminary injunctive relief where the FTC has “reason to believe” that a defendant “is violating, or is about to violate” a law enforced by the FTC. Under the second proviso, the FTC may seek a permanent injunction. The FTC traditionally relied on the second proviso of Section 13(b) for access to the federal courts. 

The District Court for Delaware considered the statute’s procedural requirements, ultimately concluding that to adequately plead jurisdiction under Section 13(b), the FTC must also satisfy Section 13(b)(1) by alleging sufficient facts to demonstrate that the defendant was “violating, or is about to violate” a law over which the FTC has enforcement authority.

The FTC brought the action against Shire for allegedly using the Food and Drug Administration’s (FDA) citizen petition process to delay the FDA’s approval of a generic version of its drug, Vancocin, in violation of Section 5(a) of the FTC Act. The FTC brought suit, relying on its purported grant of authority under Section 13(b)(2).

Shire, however, filed a motion to dismiss, arguing that because it had sold the rights to Vancocin in 2014 – several years before the FTC filed suit – the FTC could not adequately allege facts supporting its right to injunctive relief. Shire argued that the second proviso of Section 13(b) is not an independent grant of authority allowing the FTC to run to court whenever it seeks a permanent injunction, regardless of whether the defendant – like Shire – was only being sued for alleged past violations. Instead, Shire argued that the FTC must satisfy the requirement set forth in Section 13(b)(1). 

The FTC argued that the appropriate pleading standard for a 13(b) action should be the standard for determining whether a permanent injunction should issue, i.e., whether the wrongful conduct was “likely to recur,” and further, that even if “about to violate” were the applicable standard, it should be construed identically to the “likely to recur” standard.

The District Court rejected the FTC’s argument, holding that the FTC cannot file an enforcement action seeking permanent injunctive relief, and ancillary equitable relief, under Section 13(b) unless it establishes that a party “is violating, or is about to violate” a law the FTC enforces. It granted Shire’s motion to dismiss, finding that the FTC failed to plead facts necessary to invoke its authority to sue for permanent injunction because it did not adequately allege that Shire was “about to violate” the FTC Act.

The District Court’s ruling could, if accepted and applied by other courts, serve to limit the FTC’s ability to bring suit in federal court against defendants for past violations without adequately alleging an imminent future violation, thus forcing the FTC to first engage in administrative litigation to obtain a cease-and-desist order.

If the FTC sought financial redress, it would then have to bring a separate subsequent action in federal court pursuant to Section 19 of the FTC Act, under which it could obtain consumer redress only if it proved that the defendant’s conduct was such that a reasonable person would have known it was dishonest or fraudulent. That is a much higher standard than required in a Section 13(b) proceeding, and is the manner in which the FTC proceeded until Section 13(b) was added to the FTC Act in the 1970s.

The court dismissed the FTC’s complaint against Shire without prejudice, allowing the FTC to amend its complaint, but it is not clear that the FTC can allege an ongoing or incipient law violation. Alternatively, the FTC could seek an appeal. Given the impact of this decision and the pending changes in the FTC’s roster of commissioners, the FTC’s response to the decision will be interesting and difficult to predict.