I was on this very interesting panel about the FTC's current enforcement practices:
FTC in the courts
Ed Glynn, moderator
Where the FTC is in terms of its use of federal court litigation. FTC received stronger powers by amendment—not just an administrative agency but one with the power to go into court and seek injunctive relief. This was aimed mostly at antitrust, with relatively little focus on permanent injunctions/consumer protection. First big test in consumer fraud, Singer, 1973: The challenge was not proving a §5 violation, but that the defendants were taking consumer money and sending it overseas; the need was to seize assets before the defendants caught on. Now an ex parte TRO to freeze a bank account is relatively common, but then it was a big issue. Redress power has moved on from there.
Tim Muris, former chair of 2 FTC bureaus: Legislative history—after Nader reports and other reports, FTC was rejuvenated with efforts to increase its statutory power. Desire to give it redress authority. Initially: Redress was available after admin proceeding if a reasonable person would’ve known the conduct was misleading. In the 1970s, the FTC tried to become the second most powerful legislature in DC; proposed one rule a month. He came in under Reagan and had a different idea: there are basic rules like antifraud rules, but procedural problems in enforcing them for consumers—class actions didn’t work well, and consumers lacked sufficient incentives to use small claims court. Problem in going after fraud: traditional C&D against fraudster didn’t seem like a very effective remedy. Fall 1981: experiment with going after fraudsters and getting the money back as a remedy. To do that, had to face fact that §19 wasn’t effective as a remedy—the money would be long gone after first admin procedure, then federal court enforcement procedure. So you first have to tie up the assets; you can’t ask a judge to wait 3-4 years after that to try an administrative case. Judges want to control their dockets better than that. So instead of using the traditional §19 redress procedure, we used §13(b) to tie up the assets first, then use a permanent injunction to get the money back for consumers.
That turned out to be spectacularly successful. One year we got $900 million back. This acts as a deterrent; there’s an active criminal component too. The fraud program is now a staple of FTC enforcement. 8 circuit courts have blessed the use of §13(b) in fraud cases.
Result: people at the FTC no longer remember the 1970s and are overreaching. FTC is asserting it can use §13(b) beyond the historical fraud program. Congress was concerned about imposing these penalties; there were lots of opportunities to expand them beyond fraudulent/dishonest conduct. The 8 circuit court cases involve fraud. But the FTC’s position hasn’t been tested in court. §19 should be used in non-fraud cases.
1994 amendments to FTC Act: explicitly bless the fraud program, but didn’t reference or contemplate routinely seeking redress. §19 does remain effective for dishonest/fraudulent conduct involving novel legal issues or settlements against legit companies where ex parte asset freezes are unnecessary. You can settle a case against a nonfraudster and get redress through §19.
Attacking national advertisers with publicly traded stock imposes a significant penalty on their stock price even without money penalty—a C&D is not just a slap on the wrist. Whether someone will actually take the FTC to court on this is unclear because of the pressure to settle.
Heather Hippsley, Division of Advertising Practices: where the FTC views its current federal enforcement program. Does not agree that FTC has overreached! Views on when §13(b) should be used: statute covers deception, not fraud. §13(b) as a tool fits certain fact patterns for certain remedies from particular defendants.
We are interested in stopping deception: §5 for deceptive acts/practices, §12 for false advertising to induce purchase of foods, drugs, and devices. Deception has been defined through litigation. A big constraint: does the FTC have reason to believe the defendants are liable using the deceptiveness test? Is it likely to mislead consumers, acting reasonably under the circumstances, about something material to the decision to use the product or service?
Three paths: (1) §13(b) 2d proviso, in federal court for whole case; (2) § 13(b) first proviso—uncommon—in fed court for preliminary injunction, in front of ALJ for remainder (might be more attractive with reforms that are speeding up ALJ proceedings); (3) Part III: in front of an ALJ.
How do you pick? (1): where we want a TRO/PI; where we want a permanent injunction; where we want redress (because alternate paths take much more time); disgorgement of ill-gotten gains; other equitable relief. On the other side: admin practice can avail ourselves of administrative expertise. Monetary factors: there’s only been one fully litigated §19 case. 9th Circuit found: it’s a statutory remedy for consumer redress, restitution; doesn’t give disgorgement to strip defendants of ill-gotten gains. This is a critical remedy because the deterrence factor is very high if you can get disgorgement. Defendants care about keeping the money. Advertisers don’t want to give up profits any more than fraudsters do. Only §13(b) allows disgorgement. Courts have been trending to tie redress to disgorgement: Verity case in 2d Circuit; recently affirmed a weight-loss supplement case—in equity, the anchoring theory is disgorgement. Ancillary relief in §13(b) entitles FTC to take ill-gotten gains. This most often equals what the consumer paid, but not always.
Other reason for federal court action: TRO/PI for ongoing consumer harm.
Commission expertise/admin actions: where there is a new liability theory and FTC desires to interpret the Act—FTC will exercise discretion to go to ALJ there, such as in privacy cases; where issues of interpreting the ad—are they making this claim?—are key; need for extrinsic evidence/copy testing; what’s the basis for the claim—complex substantiation/whether the science is enough? Most recently, have turned to administrative forum in, e.g., Pom Wonderful, to test a new remedy: more clear and precise injunctive/fencing in remedy. Also compliance issues: civil penalties (admin) or contempt (federal court injunction).
Recent cases: Iovate: federal court settlement—routine diet supplement false advertising matters. The claims were hard-core for cold/flu/allergy prevention & treatment and weight loss, high disconnect from science. Important to get redress because products are worthless if they don’t do what they say. Nestle: administrative. Short ad campaign—the product basically failed in the market. Most important to us: get remedies for going forward with the company for other products; redress less important. Danone: Administrative to get order relief, no money relief. The states had already gotten substantial consumer redress, so no need for FTC to go to federal court and get redress. Reebok: redress important; the claims were specific and were the raison d’etre for the ad campaign, and they were false—another huge disconnect between science and claims, $100 million campaign based on 5-person study—pretty darn close to a fraud; we wanted to deter a company like this from doing it again. We at the FTC tell consumers to rely on reputable advertisers, and so when a reputable advertiser goes awry, that’s a greater concern for us.
John Graubert, Covington & Burling, formerly deputy counsel: defense perspective.
FTC’s ability to obtain substantial consumer redress under §13(b) is virtually an article of faith. The FTC has become accustomed to have, annually, substantial consumer redress recoveries. Now it’s a big part of the agency’s identity. Where this is beginning to cause difficult problems: does it make it difficult to settle cases? We’ve seen a steady but significant escalation in the amount of consumer redress and the scope of the substantive terms of the orders. This is cause for concern in the defense bar. Remedy being litigated in the Pom case (under submission so can’t comment)—provisions there are also in the settlements discussed—number of clinical studies, coordination with FDA. Being incorporated in large settlements with nationwide companies.
His concern: the numbers on the table have a tendency to escalate. Are we approaching a breaking point, a point at which it is not feasible to settle? Courts may be skeptical about FTC positions—case on debt collection down in Texas where the judge looked at deceptiveness differently than the FTC did, and doesn’t necessarily give deference. If the settlement posture results in more litigation, then the agency may face limitations.
We could also see closer scrutiny of what equitable remedies mean. There are limiting principles in equitable practice. Maybe we need equitable tracing of particular property. This means more work for the agency. Warning: the fortress of these cases is not impregnable.
Next line of attack: no court has adequately explained what “proper case” means in the statute. In a proper case, agency may seek permanent injunction. Some defendants have tried to say it has to be limited to straight fraud cases, because there’s a wisp of legislative history, but most courts have found the defendants who made that argument to be fraudsters. Can only get narrower because this is the broadest interpretation on behalf of the FTC it could be.
Need to come to grips with fact we’re in broadest class action environment ever. If FTC issues a press release, there will be a class action filed. This raises the question: does the FTC need to be in the redress business at all? FTC shouldn’t pile on. Recent cases do involve parallel litigation, and the settlements are often worked out in parallel.
More litigation will not be in the end rosy for the FTC since so much is open to challenge/pushback.
Me: I’m the only one who doesn’t need a disclaimer to avoid the faintest possibility of misleadingness about representing the views of the Commission.
The focus on the overall system is really helpful—feedback loops and counterpressures.
Broad range of actors regulated: internet sweeps to major brands; major brands can sometimes behave badly, as the big banks have most recently shown, so we shouldn’t necessarily limit penalties to the fly-by-night operations. Trust-based economy we’ve been fortunate to live in for the past 80 years, but may be breaking down. “Long-term greedy” v. short-term greedy. George Akerlof: market for lemons problem.
Think of courts as always existing in implicit contrast other methods of enforcement: As a defendant, there is always a reason to argue for some other form of enforcement as being the one that ought to apply. Class actions: increasing barriers to multistate, certification, etc.; criticisms of plaintiffs’ lawyers’ recoveries (not an issue with the FTC!). Interagency Working Group on advertising to children; there are those on the defense side who say that simply issuing a report recommending that advertisers adhere to guidelines violates the First Amendment rights of advertisers. I didn’t say this right live: regulation will be under threat anyway, even if the FTC doesn’t use 13(b) aggressively. It could, like the SEC of late, not bring cases because it might lose; this is not a strategy for effectiveness either.
More generally, these disputes implicate another big question: does a regulatory choice about what constitutes deceptiveness, or fraud, have to be retail or wholesale? Pom Wonderful is a good example of this question. Last week’s tobacco decision: the 6th Circuit said that it was unconstitutional to determine that colors and visuals distracted consumers from the warnings about and dangers of tobacco. But this is a position the FTC and the FDA have long taken: that at least in particular ads, ad design can misleadingly distract from required disclosures. This seems like a reasonable position; does it become less reasonable when it is made wholesale? Are there different kinds of “wholesale” determinations—that is, is it different to say that color can distract than to say that color does distract?
Glynn: after asking is the defendant liable and is it material, should ask whether the conduct is fraudulent before going for §13(b). In Singer, the 9th Circuit was interested in the issue of implying redress authority consistent with the statutory scheme. This hasn’t been an issue until recently; the Commission’s §13(b) cases have been against dishonest/fraudulent conduct. Nervousness in defense bar comes from fact that FTC is willing to act against anything that violates §5 under §13(b) if they don’t need Commission expertise. But there’s a lot of conduct that is deceptive without being dishonest/fraudulent. If you’re going to merge §5 standard with §13(b), you’re really saying that the Congress that granted §19 authority was doing a ridiculous act because there’s no need for §19.
Feeling in defense bar that it’s getting harder to settle. You compare the worst that can happen in litigation to the settlement being offered. The difference is shrinking in a lot of cases. More defendants are going to take their chances. The criminal justice system is a plea bargain system; so is the FTC. If the plea bargain system falls apart because you ask for a life sentence for everything, that may not carry out the commission’s responsibilities.
Hippsley: the issue of how to settle with the FTC and whether or not the FTC is seeking rational amounts is different from the issue of which forum the FTC chooses. You see in the case examples that there still are different types of cases; FTC doesn’t always seek redress. The sense that it’s difficult to settle for less than disgorgement is probably accurate.
Muris: Reebok is not traditional—traditional remedy is to get all the money back. If Reebok is a fraud case, then the FTC did a miserable job, because they got $25 million back. It was more of a traditional substantiation case, and the FTC has changed its standards. Not suggesting that Reebok would be ok under traditional standards, but the FTC now seems to be saying is that in the new kind of redress case, we’re not trying to get all the money back, but there’s some premium ascribed to the ad, whereas traditionally the products were either worthless or completely out of proportion. These are completely different than traditional substantiation cases. It will bedevil the commission if you have to subtract the reasonable value of the product and just give the premium back.
Hippsley: with Reebok, that’s a settlement; when we settle, we choose a rational number. (1) The FTC would say that the campaign was premised on a deceptive claim: the fraud was in the selling and it doesn’t matter if the shoe had value. (2) Another way to look at it is to look at litigated cases. Once you establish liability and are calculating redress/disgorgement, we do have cases that have attributed value to the product and it hasn’t undone the whole thing: a rare coin case where the coins were substantially overvalued; we took the real value and the premium, and the 8th Circuit upheld that. That doesn’t stop us from going after full value when the product was worthless to the consumers who purchased it.
Muris: if you took less than 10 cents on the dollar in Reebok, what you’re saying is that we could get the full amount, and that’s a hard argument to make to a judge. Prediction: will instead argue for a premium, and that’s different.
Glynn: Freeze orders—directing defendants not to withdraw funds. And FTC has also told the bank to surrender property to the FTC within a certain number of days after the seizure order is served. But orders are generally just binding on defendants and those in active concert/participation with them. But assuming a financial institution isn’t in active concert with them—maybe holding money as security for a loan or something like that—can they really be bound? Thinks it’s null & void to tell bank what to do.
Hippsley: Traditionally, we serve the banks, and banks on notice of order can’t allow defendants to drain their accounts or they’ll then be in concert. Federal court can also assert jurisdiction over the res. Turnover should be to the court, not to the FTC. If the bank does have a claim against the defendants, or the credit card company, it can intervene and sometimes does.