John E. Villafranco is a partner in the Advertising and Marketing group of Kelley Drye & Warren LLP with over three decades of experience defending businesses in Federal Trade Commission investigations and litigation. Andrea deLorimier is an associate in the Advertising and Marketing group of Kelley Drye & Warren LLP.
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Executive Summary
In contemplating the creation of the Federal Trade Commission, President Woodrow Wilson declared that the era of “antagonism between business and government is over” and described an agency that would serve as an advisor to businesses regarding anti-competitive conduct. In line with this vision, Congress signed the Federal Trade Commission Act of 1914, granting the newly formed FTC broad substantive authority to define anti-competitive practices, but only one way to enforce that authority: an administrative cease-and-desist order that businesses could effectively violate without penalty.
Since then, the FTC—along with its substantive regulatory and enforcement authority—has evolved and expanded significantly. The FTC can now seek consumer redress, impose penalties for order violations, and create rules that provide a path for monetary relief. Moreover, in the past 20 to 30 years, the FTC has increasingly resolved disputes not through cease-and-desist orders but through consent order agreements obtained either administratively or judicially, which allow businesses to settle the FTC’s charges without admitting liability.
There are many reasons why a company might sign a consent order: to avoid the potentially negative publicity associated with litigating against the FTC, to evade a costly and prolonged lawsuit, or to combat internal disruptions to its operations, among other reasons. But settling with the Commission comes with its own costs. Consent orders contain several prescriptive and proscriptive requirements, such as provisions requiring monetary payment, injunctive relief barring the allegedly unlawful conduct, supplemental relief prohibiting conduct different from (but related to) the unlawful conduct (i.e., fencing-in relief), and other affirmative obligations, including customer notice, recordkeeping, and compliance reporting provisions. Complying with such provisions is often expensive, time consuming, and resource intensive.
From 1914 to 1995, FTC consent orders—whether entered administratively by the Commission or judicially by federal courts—had no expiration dates, remaining in effect indefinitely. In 1995, however, the FTC announced via policy statement that its administrative orders would no longer last in perpetuity and would instead “sunset” after 20 years, while federal court orders would continue to permanently bind companies.
Although this policy shift was a step in the right direction, 20-year and indefinite order terms are simply not sensible or desirable. Specifically, long-term orders are (i) incongruous with the FTC’s evolution, resulting in order terms that are not necessary to deter recidivism; (ii) inconsistent with, and far longer than, the order terms used by other federal agencies; (iii) unduly burdensome in today’s competitive environment; and (iv) a hindrance to innovation. The FTC’s lengthy order terms are exacerbated by the unworkable processes for early termination or modification of administrative and federal court orders, which few companies have been willing or able to successfully pursue. Thus, businesses under FTC order are often saddled with onerous and antiquated requirements, with little to no meaningful recourse.
This Working Paper explains why the FTC should depart from its 20-year sunset policy for administrative orders and reconsider its practice of seeking perpetual orders in federal court. In revising these policies and practices, we propose three approaches for the Commission to consider, each designed to better balance consumer welfare with the need to support legitimate, innovative business activity.
First, the Commission could consider adopting a flexible approach that allows for different sunset terms based on the specific factual and legal circumstances of each case. Through such an approach, the FTC could weigh the pro-competitive and pro-consumer benefits of a particular expiration term against any countervailing considerations.
Second, in the alternative the Commission should consider adopting a five-year sunset policy. Such an approach would, among other things, bring the FTC closer to other federal agencies on the issue of order termination, better align with the current pace of technological innovation and consumer expectations, and benefit the marketplace by providing clear expectations to stakeholders.
Third, the FTC could consider adopting a ten-year sunset policy that also permits parties to negotiate shorter termination periods for certain order provisions as the facts and law warrant. This approach offers the flexibility to extend the effective dates of certain provisions while allowing others to lapse, particularly where requirements are highly prescriptive and burdensome, or where technological advancements, evolving business practices, or shifting consumer expectations render them obsolete.
Any of these three approaches should also be coupled with an adjusted order modification and termination process that allows businesses demonstrably committed to compliance (e.g., where an independent compliance monitor has certified a company’s compliance), to petition for modification or early termination if certain criteria are met.
Section I of this Working Paper discusses the history of the FTC and its orders. Section II explains why the FTC’s current approach to order termination is not workable and needs reform. Section III recommends that the Commission adopt a new approach to order sunsetting and revise its termination and modification procedures, outlining potential frameworks for these proposed changes.
Click here to download a PDF of this Executive Summary.
Click the here to download a PDF of the full Working Paper.