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Third Circuit Affirms Limit on FTC's Authority to Sue in Federal Court

Client Alert

Authors: Robin P. Sumner, Lindsay D. Breedlove and Janine P. Yaniak

3/01/2019
Third Circuit Affirms Limit on FTC's Authority to Sue in Federal Court

A unanimous Third Circuit panel recently held that Section 13(b) of the Fair Trade Commission Act (FTC Act) — which provides a mechanism for the FTC to proceed directly to federal court to enjoin allegedly unlawful conduct that is currently occurring or about to occur — does not permit the FTC to pursue injunctive or equitable monetary relief for past conduct only. On that basis, the court affirmed dismissal of the FTC’s claims that Shire ViroPharma, Inc. delayed the availability of generic Vancocin by submitting various filings to the FDA and federal courts — conduct that allegedly occurred from 2006 to 2012, five years before the FTC sued.

Key takeaways from the case:

  • The FTC can no longer make vague allegations that past conduct is reasonably likely to recur in order to seek equitable monetary relief for that past conduct, but rather must plausibly allege that the defendant “is violating or is about to violate” a law enforced by the FTC to get in the courthouse door.

  • The risk of FTC scrutiny for past conduct has not disappeared, however. Section 5 of the FTC Act still allows the agency to pursue (1) administrative remedies against alleged violators, which can yield cease and desist orders and fines for their violation, and (2) civil actions to obtain mandatory injunctions and recover equitable monetary relief for knowing violations of competition laws, even if those violations occurred only in the past.

Contrasting Sections 5 and 13(b) of the FTC Act

As the Third Circuit explained, “[t]he FTC has multiple instruments in its toolbox to combat unfair methods of competition.” Section 5 of the FTC Act authorizes administrative proceedings to prevent and remedy “unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a). If the FTC has “reason to believe” that a violation has occurred, the FTC may issue an administrative complaint setting forth its charges against the alleged wrongdoer. This complaint may yield a consent agreement or, if the respondent contests the charges, a trial-type proceeding before an administrative law judge (ALJ), who will issue an initial decision recommending either entry of a cease and desist order or dismissal.

Either party can appeal the ALJ’s decision to the full Commission, which receives briefs, holds oral argument, and issues a final decision and order. The Commission’s order is then appealable to the federal circuit court. 15 U.S.C. § 45(c). Section 5 also provides for limited monetary remedies, namely civil penalties of no more than $10,000 per violation of a cease and desist order, which is recoverable in a civil action brought by the U.S. Attorney General,  15 U.S.C. § 45(l), and mandatory injunctive and equitable monetary relief of no more than $10,000 per knowing violation of a rule “respecting unfair or deceptive practices,” 15 U.S.C. § 45(m)(1)(A).

By contrast, Section 13(b) of the FTC Act provides that the FTC can seek immediate relief in federal district court if the FTC seeks to stop conduct that it “has reason to believe” is occurring or is about to occur. As part of Section 13(b) suits, the FTC frequently also seeks equitable monetary relief for past conduct. Simply put, the FTC has used Section 13(b) to get to court more quickly and seek monetary relief without first needing to prove that the defendant violated any cease and desist order or knowingly engaged in unlawful conduct.

FTC v. Shire ViroPharma, Inc.

The FTC filed suit against Shire in 2017 seeking a permanent injunction under Section 13(b) and “other equitable relief the Court finds necessary, including restitution or disgorgement, to redress and prevent recurrence of” Shire’s allegedly unlawful conduct. Despite the FTC’s injunctive relief request, the supposed wrongdoing occurred between 2006 and 2012. The FTC nevertheless argued that “there is a cognizable danger” that Shire will “engage in similar conduct” in the future, as it allegedly had the incentive and opportunity to do so. In particular, the FTC explained that Shire still markets and develops drug products (namely Cinryze) for commercial sale in the United States and argued that Section 13(b) can be satisfied by showing “a past violation and a reasonable likelihood of recurrent future conduct” — the common law standard for an award of injunctive relief. The district court granted Shire’s motion to dismiss, ruling that the FTC failed to plead sufficient facts to show that Shire “is violating, or is about to violate” the law; the mere incentive and opportunity to engage in similar future conduct did not suffice.

The Third Circuit assumed, without deciding, that the FTC can pursue equitable monetary relief as a standalone claim under Section 13(b), provided that its claim meets the remainder of Section 13(b)’s requirements. Affirming the lower court’s dismissal, the court found that the FTC’s claim in this case did not meet those requirements because it described only past conduct. More specifically, the Third Circuit rejected the FTC’s attempt to use the typical injunctive relief standard rather than the standard expressly provided by the language of Section 13(b).

The court found that Section 13(b) is “unambiguous; it prohibits existing or impending conduct.” It does not extend to “long-past conduct” without some evidence that the defendant is committing or about to commit another violation. For this reason, it is not sufficient to show “a reasonable likelihood” of a future violation. As further support for this interpretation, the Third Circuit considered Congress’s intent in adding Section 13(b) to the FTC Act, which was to provide the FTC with a means to quickly enjoin illegal conduct pending completion of the administrative hearings. “[T]he provision was not designed to address hypothetical conduct or the mere suspicion that such conduct may yet occur.”

Given Section 13(b)’s clear language and intent, the Third Circuit found that the FTC’s vague allegations of potential future conduct were insufficient because they failed to plausibly suggest an imminent violation of any law enforced by the FTC, especially in light of the five-year lapse between Shire’s supposedly anticompetitive conduct and the FTC’s suit. The mere fact that Shire continues to market another branded pharmaceutical drug in the United States was not sufficient to show that Shire is “about to violate” any law. While the panel did not precisely define the pleading required for Section 13(b), it found the FTC’s allegations relating to incentive and opportunity “woefully inadequate.”

The panel clarified that, when the FTC seeks to address purely past conduct, as it did here, it must proceed under the Section 5 administrative process. Because Section 5 provides relief for past violations, the panel dismissed the agency’s concerns that wrongdoers can immunize themselves from FTC action. In practice, however, the FTC’s administrative proceedings are notoriously “slow-moving” and rely on court enforcement of any issued orders before monetary relief is available. In addition, to secure monetary equitable relief for past conduct, the FTC must prove willful conduct under Section 5.

Implications of Third Circuit Decision

This Third Circuit opinion is a significant victory for potential targets of FTC scrutiny whose allegedly problematic conduct occurred entirely in the past. The victory is especially important because the FTC enforces the substantive antitrust laws directly through the FTC Act, generally relieving the agency of the burden to prove that the defendant’s conduct proximately caused an antitrust injury. Compared to private plaintiff suits, therefore, FTC actions can be particularly difficult to defend.

The recent decision does not, however, leave the FTC unable to police anticompetitive activities. Rather, the FTC still has a range of enforcement powers, including the full scope of Section 13, if the agency can meet the “is” or “is about to” requirement, and Section 5, which has real teeth for the most egregious conduct. Moreover, although the impact of this decision cannot be predicted with any certainty, it may simply prompt the agency to file more suits sooner under Section 13(b).

Robin P. Sumner and Lindsay D. Breedlove are partners in Pepper Hamilton’s Health Sciences Department, a team of 110 attorneys who collaborate across disciplines to solve complex legal challenges confronting clients throughout the health sciences spectrum. Janine P. Yaniak is an associate in the Health Sciences Department.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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