Dead Men Tell No Tales . . . and They Don’t Violate the FTC Act, Either

Earlier this year, we blogged on an interesting case out of the District of Delaware, FTC v. Shire ViroPharma, No. 17-cv-00131 (D. Del. Feb. 7, 2017), which called into question the FTC’s authority to litigate pursuant to section 13(b) of the FTC Act (15 U.S.C. § 53(b)).  The ViroPharma case is currently on appeal to the Third Circuit, with briefing completed and pending oral argument.

Meanwhile, the FTC is facing a ViroPharma problem. Courts are re-examining their historical reliance on the Commission’s assertions that, pursuant to section 13(b), a defendant “is violating, or is about to violate” a law enforced by the FTC, and instead are more carefully evaluating whether the FTC has properly pleaded its claim under the FTC Act.

On Monday, the U.S. District Court for the Northern District of Georgia vacated its own previous denial of a motion to dismiss in FTC v. Hornbeam Special Situations, No. 17-cv-3094 (N.D. Ga. Oct. 15, 2018). Citing ViroPharma, the court in Hornbeam found that the FTC must satisfy federal pleading standards for a case brought pursuant to the FTC Act section 13(b) by adequately alleging that each defendant is “about to” violate the law – more than a “mere likelihood of resuming the offending conduct” – and called on the FTC to amend its pleading accordingly.

As an initial matter, the Hornbeam court determined that the language of section 13(b) “creates a precondition to the FTC’s statutory authorization to bring suit . . . .” such that the FTC “may only sue when it has a ‘reason to believe’ that a violation of law is occurring or about to occur . . . .” While the Commission’s decision to bring suit may be “committed to agency discretion” for purposes of the Administrative Procedure Act, the FTC must still meet Fed. R. Civ. P. 8 pleading requirements to be entitled to relief. Rule 8 requires that a complaint “plead[] factual content that allows the court to draw the reasonable inference” that the plaintiff is entitled to relief. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

The court further reasoned that it would be odd to simply defer to the FTC with respect to whether the requirements of section 13(b) have been met, given that the FTC’s complaint was based on conduct that ceased long ago. Importantly, the court noted that “[s]ince filing, two Defendants have died,” and it “strains credulity to blindly accept that the dead men are violating (or about to violate) any laws.” The court also rejected the FTC’s argument that the standard for “about to violate” should be whether misconduct in question is “likely to recur” – analogous to the showing required to establish that a request for injunctive relief is not moot. Instead, it found that the plain meaning of “about to” implies “imminence, as if the offending action could be resumed with little delay.” This is so, the court held, despite the fact that once the FTC has adequately pleaded a claim under section 13(b), it is only required to demonstrate a likelihood of recurrence to justify injunctive relief.

The Hornbeam court lamented past judicial rulings that allowed section 13(b) to expand beyond its statutory language, noting that section 13(b)

[I]s not, on its face, a broad and sweeping avenue of relief, certainly not as broad as it has become through generous interpretation. It is simply an injunctive remedy, a stop-gap to discontinue ongoing or threatening conduct violative of the laws the FTC enforces. . . . If applying the plain language means that the showing to get into the courthouse is greater than the one required once the FTC is inside . . . that is fine because that is what the language demands.

Following its substantive holding, the court went on to skewer at length “the ubiquitous holding of the courts of appeals that equitable relief under [§ 13(b)] other than injunctions is available.” It noted that additional equitable remedies such as disgorgment are “not supported by the plain text of the statute, but ha[ve] been read into it by well-meaning judicial efforts to effect the ‘purpose’ of the statute.” The court specifically noted that, while section 13(b) by its language does not specifically permit other forms of equitable relief, another provision of the FTC Act does: Section 19 (15 U.S.C. § 57b). By pursuing equitable relief almost exclusively under section 13(b) rather than section 19, the FTC has effectively written section 19 out of the statute in an effort to avoid that section’s 3-year statute of limitations.

While admitting itself bound to the higher authority of the circuit court rulings permitting disgorgement and restitution under 13(b), the Hornbeam court advised that “meta-textual pontifications seem good in the short run, but a long journey on even a narrowly wrong heading can be ruinous.” Thus, the court committed itself to preventing “further deterioration of this statutory scheme.”

Given this further attack on the FTC’s authority, and following on the heels of ViroPharma, an eventual appeal of the court’s holding in Hornbeam seems inevitable. If the FTC’s actions in ViroPharma are any indication, the Commission may choose to stand on its existing pleading in Hornbeam and allow the court to issue an order of dismissal that can be appealed to the Eleventh Circuit.