The FTC and FDA May Face New Hurdles in Injunction Actions

The FTC and FDA May Face New Hurdles in Injunction Actions

The FTC and FDA May Face New Hurdles in Injunction Actions Posted: 12 Dec 2018 09:43 PM PST By Jennifer M. Thomas & John R. Fleder — On December 11, 2018, the authors of this blog post attended the oral argument in Federal Trade Commission v. Shire ViroPharma, Inc., No. 18-1807 (3d Cir. filed Apr. 12, 2018).  We have previously blogged about the case here, here, and here. In a nutshell, Shire examines the FTC’s statutory authority to bring suit in federal court seeking injunctive and equitable relief where the alleged statutory violations at issue have long since ceased. Section 13(b) of the Federal Trade Commission Act (“FTC Act”) (15 U.S.C. § 53(b)) gives the FTC authority to file a case only when the FTC has reason to believe that a defendant “is violating” or “is about to violate” the FTC Act. Although it is often hard to predict the outcome of an appeal after hearing the questions and comments of the three-judge court, in this case the Court’s questions and comments suggested that odds are leaning heavily against the FTC winning.  If the FTC does lose, the question will then be how severe an effect the Court’s ruling will have on other FTC enforcement cases. And this is not the only recent court case that poses significant litigation concerns for the FTC.  Two other recent court rulings suggest that courts are revisiting the FTC’s authority to seek equitable relief (including restitution and disgorgement) under the FTC Act § 13(b).  These rulings also may raise an issue that our firm opined on fifteen years ago, namely whether FDA has the authority to seek equitable remedies when it pursues injunctive relief in court. What Will an FTC Loss in Shire Mean for FTC Act Enforcement? The questions presented to the Third Circuit panel (Smith, J., McKee, J., and Fisher, J.) in Shire centered on what legal standard the FTC must meet in order to adequately allege reason to believe that a defendant “is violating, or is about to violate” the FTC Act under Section 13(b), and whether the FTC met its burden in this case. The judges’ questioning at oral argument strongly suggested that the answer to the latter question will be “no.” The answer to the former question is less clear. The FTC’s primary argument in Shire is that the “about to violate” language must be analogized to the standard applied for injunctive relief under other statutes, which would only require the FTC to adequately plead that an alleged violation was reasonably likely to recur. The FTC cited the Third Circuit case of SEC v. Bonastia, 614 F.2d 908 (3d Cir. 1980) for the factors used to determine likelihood of recurrence – factors that do not include a temporal element. The panel appeared to reject the FTC’s proposed standard, with at least Judges Smith and McKee indicating their belief that some temporal consideration must be involved in a determination of whether someone is “about to violate” the law. Chief Judge Smith, in particular, emphasized that the plain language “about to” seems to reflect a degree of imminence. The Third Circuit Court’s emphasis on the relatively extreme facts of the Shire case – a five-year delay between the alleged violative conduct and initiation of the FTC’s suit, and no allegations of future circumstances in which Shire could be expected to repeat the alleged misconduct – suggest that the court could simply hold that the FTC had failed to adequately plead even a reasonable likelihood of recurrence and leave the matter there. However, the FTC’s position that the “likelihood of recurrence” includes no explicit consideration of timing may make it difficult for the Court to rule under that standard without altering it to include a temporal factor. Assuming that the Court does rule against the FTC with respect to the applicable legal standard under Section 13(b), of course the Commission may seek rehearing or rehearing en banc, and may ultimately seek Supreme Court review. Moreover, a loss in the Third Circuit would still permit the FTC to seek a different result in any state other than New Jersey, Pennsylvania, and Delaware (in those three states, the FTC will have to follow an adverse Third Circuit ruling unless and until it is overturned by the Supreme Court). Still, an ultimate loss for the FTC on this issue, particularly if the Court’s reasoning is adopted by courts outside the Third Circuit, would likely result in a longer process to resolve many FTC Act violations. As Shire’s counsel pointed out at oral argument, the FTC clearly has authority to bring an administrative action for violations of the FTC Act without any statutorily imposed temporal limitation (See 15 U.S.C. § 45(b); 16 C.F.R. Part 3). However, the Commission cannot obtain consumer redress through an administrative proceeding. To obtain recompense for consumers in consumer protection cases, the FTC would have to bring and successfully complete an administrative case, overcome a court challenge to a final order, and then file and win a court case seeking equitable relief pursuant to 15 U.S.C. § 57b. Even that process is inapplicable in “competition” cases such as Shire, because 15 U.S.C. § 57b is focused on consumer protection cases. This means that, practically speaking, in a case of harm to consumers where the FTC cannot make a showing of “imminent” future violation, the FTC may well be unable to provide relief to affected consumers. The delay associated with pursuing an administrative cease and desist order is one of the reasons that the FTC has filed hundreds if not thousands of cases where the FTC bypasses the administrative process and goes straight to court seeking an injunction.  In consumer protection cases, the FTC seeks relief such as restitution and disgorgement of profits in most such cases.  In many cases, the FTC also seeks and obtains “emergency” relief such as a total freeze of the defendants’ assets. All of this authority would be in jeopardy if the FTC cannot seek and obtain such relief at all, or only after a long administrative process and later court case. Of course, even if the FTC loses this case, it can collaborate with other government agencies with consumer protection and antitrust authorities, including the U.S. Department of Justice and State Attorneys General. Such coordination takes additional time, as well as the balancing of agency investigative and enforcement resources. Additionally, the FTC would lose its independence to bring these actions without needing to go through another federal or state agency — the FTC has been fiercely fighting to obtain and retain independent litigating authority for almost fifty years. Does Shire Affect the FTC’s (and FDA’s) Pursuit of Equitable Remedies? In Shire, the FTC’s brief argued in the alternative that even if the FTC had not adequately alleged a likelihood of recurring violations, the FTC should nevertheless be permitted to go forward with its claim for restitution to consumers who presumably overpaid for one of Shire/ViroPharma’s drugs.  Shire’s brief countered that the FTC failed to adequately plead the statutory prerequisites to bring suit under Section 13(b), thus, the Commission had no right to alternatively seek monetary relief. Shire also noted the Supreme Court’s 2017 ruling in Kokesh v. SEC, 137 S. Ct. 1635, that cast doubt upon agencies’ authority to seek equitable remedies not expressly referenced by the applicable statute. This week’s oral argument did not address the question of alternative equitable remedies.  Thus, it is quite possible that the Court will simply rule that the entire case must be dismissed because it was brought too late, without reaching the question of whether the FTC has the right under Section 13(b) to seek restitution and other equitable relief such as disgorgement of profits. However, in many respects, the issue of the FTC’s right to obtain equitable remedies in a Section 13(b) suit is of greater importance to the FTC than the standard for determining whether the FTC has satisfactorily alleged that it has reason to believe that the defendant is about to violate the FTC Act.  That issue is largely a timing question, and the FTC usually brings suit much closer to the violative events than it did in Shire.  In contrast, if the courts definitively rule that the FTC has no authority to seek equitable relief in Section 13(b) cases, that result would severely damage most of the FTC’s consumer protection 13(b) cases, where the Commission typically seeks such remedies. The question is one of statutory interpretation:  Does Section 13(b) authorize the FTC to seek all forms of equitable relief assuming the court has power to grant any relief at all?  The statute itself specifically authorizes a court to issue a temporary restraining order, a preliminary injunction, or a permanent injunction, but is silent on other forms of equitable relief.  Although the FTC has been successful in arguing to many courts that once a court has jurisdiction over a case seeking injunctive relief, that court has the authority to award equitable relief such as asset freezes, the payment of restitution, and/or the payment of disgorgement of profits, this previously established authority is now being reexamined by the courts. Aside from the Third Circuit in Shire, other courts have recently looked at the FTC Act and questioned the FTC’s authority to seek and obtain equitable relief not expressly referenced by Section 13(b). FTC v. Hornbeam Special Situations, an October 2018 decision in the Northern District of Georgia, is a similar case we have blogged about.  More recent is the December 3, 2018 Ninth Circuit ruling in FTC v. AMG Capital Mgmt., LLC.  There, the court ruled in favor of the FTC’s pursuit of equitable remedies: The court conceded that defendant’s argument regarding the FTC’s lack of statutory authority “has some force but it is foreclosed by our precedent.”  However, one Ninth Circuit judge (O’Scannlain) also filed a concurring opinion arguing that the Ninth Circuit’s earlier rulings authorizing the FTC to obtain equitable remedies under Section 13(b), while binding, were “no longer tenable.”  Judge O’Scannlain’s opinion suggested that the Ninth Circuit should hear the case en banc to reconsider its precedent on the issue.  He specifically noted that a separate provision of the FTC Act (15 U.S.C. § 57b), applicable in different circumstances, expressly authorizes alternative equitable relief in certain consumer protection cases, while Section 13(b) is tellingly silent on those remedies. Although the ultimate disposition of the AMG Capital case is not yet clear, Judge O’Scannlain’s concurring opinion should give the FTC reason to worry. In light of the developing case law, FDA may also need to be more circumspect in seeking equitable relief when it (through the Department of Justice) files an injunction action under 21 U.S.C. § 332.  That provision authorizes courts to “restrain violations” of the Federal Food, Drug, and Cosmetic Act, but is silent on the court awarding equitable relief as part of the injunction.  The issue of FDA’s authority to seek restitution or disgorgement in a Section 332 action was hotly debated fifteen years ago, when our firm argued in a law review article that FDA lacks this authority.  See Jeffrey N. Gibbs and John R. Fleder, Can FDA Seek Restitution or Disgorgement?, 58(2) Food & Drug L.J. 129 (2003).  FDA disagreed, and in several subsequent court rulings FDA’s position was adopted.  See United States v. Kaminski, 501 F.3d 655, 670 (6th Cir. 2007); United States v. Rx Depot, Inc., 438 F.3d 1052, 1063 (10th Cir. 2006); United States v. Lane Labs-USA, Inc., 427 F.3d 219, 236 (3d Cir. 2005).  FDA has also successfully received such equitable relief via consent decrees.  See, e.g., FDA: Michigan Heart-Lung Bypass Machine Manufacturer (disgorgement of $35 million, E.D. Mich. 2011, link); Bristol-Myers Squibb to Pay More than $515 Million to Resolve Allegations of Illegal Drug Marketing and Pricing (disgorgement of over $25 million, D. Mass. 2007, link). Nevertheless, FDA’s authority to obtain equitable remedies in an injunction suit may now be in as much in jeopardy as the authority of the FTC. We will continue to monitor this area of developing case law, and keep readers informed.