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.
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