FTC_Man_Controlling_TradeThe Federal Trade Commission (FTC) has long asserted broad authority to sue businesses for engaging in unfair or deceptive acts or practices.  But a recent federal court decision (Federal Trade Commission v. Shrire Viropharma Inc.) calls that authority into serious question.  If upheld on appeal, the decision could lead to major changes in the way FTC carries out its enforcement responsibilities.

The decision focused on § 13(b) of the Federal Trade Commission Act (FTCA).  That statute authorizes FTC to seek injunctive relief in federal court against anyone who “is violating, or is about to violate” a law enforced by FTC.  FTC has long contended that § 13(b) also authorizes actions against entities based on past violations, even in the absence of evidence that the entity “is about to” commit new violations.  A Delaware federal district judge’s rejection of that contention has thrown a monkey wrench into FTC’s enforcement apparatus.

FTC Challenges a Brand-Name Drug Company

The issue of § 13(b)’s scope arises in connection with an FTC enforcement action against Shire ViroPharma Inc. (ViroPharma), a brand-name pharmaceutical company.  For many years, ViroPharma derived much of its income from sales of the antibiotic Vancocin.  Between 2006 and 2012, ViroPharma filed numerous lawsuits and FDA “Citizen Petitions that challenged applications for authority to market generic versions of Vancocin.”  FTC filed a federal court lawsuit against ViroPharma in 2017 under § 13(b), alleging that ViroPharma had knowingly filed frivolous petitions, i.e. it engaged in “sham” petitioning.  FTC sought a permanent injunction against similar future misconduct as well as equitable monetary relief—restitution for consumers who paid excessive drug prices and disgorgement of ill-gotten gains.

In March 2018, the district court dismissed the complaint for lack of jurisdiction.  It held that FTC’s complaint had not adequately alleged that ViroPharma was “about to violate” the FTC Act, noting that ViroPharma ceased its petitioning in 2012 and that marketing of generic versions of Vancocin began years ago.  It also rejected FTC’s contention that § 13(b) authorizes lawsuits even in the absence of allegations that the defendant “is violating, or is about to violate” the law.  Although the district court granted FTC leave to amend its complaint, FTC chose not to exercise that option and instead has appealed to the U.S. Court of Appeals for the Third Circuit.

FTC Lawsuits: A Power Granted in 1973

For many years, federal-court lawsuits filed under § 13(b) have been a principal means by which FTC has exercised its enforcement authority.  So it is surprising that there is remarkably little case law regarding the scope of the Commission’s authority to file such suits.

Congress adopted § 13(b) in 1973 as an amendment to the FTC Act, which was initially enacted in 1914.  Before 1973, FTC enforcement activity was largely confined to its cumbersome administrative adjudication proceedings.  Congress perceived a major problem with such proceedings: FTC had no means of bringing an immediate halt to unfair or deceptive practices, with the result that such practices might continue during the multiple years it took to complete the typical administrative adjudication.  Section 13(b) addressed that problem by permitting the FTC to go into federal court to obtain a preliminary injunction against the practices until the Commission could issue a final order in its administrative adjudication.

Congress included two provisos at the end of § 13(b).  FTC cites the second of the two provisos in support of its contention that it may file suit under § 13(b) even in the absence of evidence that an entity is “about to violate” a law enforced by FTC:

Provided, however, That if a[n administrative complaint] complaint is not filed within such period (not exceeding 20 days) as may be specified by the court after issuance of the temporary restraining order or preliminary injunction, the order or injunction shall be dissolved by the court and be of no further force and effect.  Provided further that in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction.

The Commission argues that the permanent-injunction proviso is an independent source of FTC litigating authority, an argument rejected by the district court.

FTC’s Appeal and the Permanent-Injunction Proviso

The Third Circuit may not need to address the meaning of § 13(b)’s second proviso.  It may determine that FTC’s complaint adequately alleged that there is reason to believe that ViroPharma “is about to” repeat its allegedly unfair practices, in which case the court could reverse the district court without reaching the second-proviso issue.  But that outcome is unlikely, particularly because changes in the law make it far less likely that the filing of multiple FDA Citizen Petitions could delay FDA approval of generic drugs.  Indeed, if FTC really believed that it could adequately allege a likelihood that ViroPharma would repeat its past conduct, FTC almost certainly would have accepted the district court’s invitation to file an amended complaint.

In rejecting the Commission’s interpretation of § 13(b)’s permanent-injunction proviso, the district court concluded that the proviso’s authorization to “seek” permanent injunctions “in proper cases” was limited to those lawsuits that FTC was authorized to file by the language appearing earlier in § 13(b)—i.e., suits filed in response to evidence that an entity “is violating, or is about to violate” the law.  The court stated that FTC’s argument that the permanent-injunction proviso was an independent source of litigating authority was precluded by the plain language of § 13(b), its structure, and its legislative history.

FTC argued alternatively that even if § 13(b) does not authorize it to sue for injunctive relief in the absence of credible allegations that the defendant is “about to violate” the law, § 13(b) still entitles it to file suit for other forms of relief, such as restitution and disgorgement.  The district court dismissed that argument in a single footnote.  As the district court pointed out, if (as it had already held) § 13(b) authorizes suits only when FTC credibly alleges that the defendant “is violating, or is about to violate” the law, then FTC has no more of an “independent” right to file a suit for restitution or disgorgement than it has to file suit for a permanent injunction.  Most federal appeals courts have upheld FTC’s right to seek restitution and disgorgement in § 13(b) actions, but none has held that an FTC action for such remedies is permissible even if FTC cannot credibly allege a likelihood of imminent future violations.

Possible Ramifications

The Third Circuit has docketed the appeal and has directed FTC to file its opening brief by June 5.  Briefing is likely to be completed this year, with a decision in 2019.  Whether § 13(b)’s permanent-injunction proviso should be given the broad interpretation FTC seeks is an issue of first impression in the Third Circuit.  If the appeals court rejects that interpretation, FTC will still be left with very broad enforcement authority; it will simply be required to bring a larger percentage of its enforcement proceedings as administrative adjudications.

And that would be a welcome development.  A principal complaint of regulated entities is that FTC litigation often fails to provide clear guidance about what the FTC Act requires of them.  Many defendants agree to immediate settlement of FTC lawsuits, with the result that there are very few definitive judicial pronouncements about precisely what conduct is prohibited by FTC Act.  If FTC were forced to proceed more frequently by means of administrative adjudications, the findings issued at the conclusion of such proceedings would provide badly needed guidance.

Also published by Forbes.com on WLF’s contributor page.