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March 1, 2019

Third Circuit Limits FTC Enforcement Toolkit, But Do Not Forget About the States


The Third Circuit's recent decision in FTC v. Shire ViroPharma, Inc.1 severely limits a significant tool in the FTC's antitrust and consumer protection enforcement toolbox by holding that the agency may not bring a federal court action for injunctive and monetary relief unless the challenged conduct is existing or impending. In practical terms, the decision renders the FTC powerless in the Third Circuit2 to seek restitution or disgorgement of profits for conduct that occurred wholly in the past where the FTC lacks a specific basis to claim that the defendant is "about to violate" the law again.

Absent reversal by the Third Circuit en banc, or Supreme Court review, the FTC cannot meet this threshold requirement for a Section 13(b) action by pleading "likelihood of recurrence"—the traditional equitable standard for obtaining injunctive relief. Notwithstanding this development for FTC enforcement, state and local governments (e.g., in California) are expected to continue to seek injunctive and monetary relief under state law for alleged past unfair and deceptive conduct.

I. Statutory Civil Enforcement Framework

Under Section 5 of the FTC Act, the FTC has antitrust authority to prevent unfair competition (i.e., anticompetitive conduct) and consumer protection authority to prevent unfair or deceptive acts or practices. The FTC has more than one avenue for challenging conduct that violates Section 5. The agency may bring an enforcement action through its administrative procedure under Section 5 of the FTC Act. The FTC likewise may bring a civil suit in federal court under Section 13(b) of the Act for a preliminary or permanent injunction "[w]henever the [FTC] has reason to believe . . . that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the" FTC.3It also can pursue both avenues simultaneously.

From the agency's perspective, a Section 13(b) action in federal court has certain advantages over the administrative process. While Section 13(b) does not expressly say so, courts have held that equitable monetary relief, including restitution, disgorgement of profits, and rescission of contracts, is available to the FTC under Section 13(b).4As a result, the FTC can obtain certain monetary relief under Section 13(b) that is not available through its administrative procedure. A cease-and-desist order resulting from the administrative process can be enforced only through a separate action in federal court for injunctive relief and "limited"5 civil penalties of $42,530 per violation (or $42,530 per day for continuing violations).6 In contrast, the FTC routinely seeks disgorgement of tens of millions of dollars in Section 13(b) consumer protection and antitrust actions. Also, because Section 13(b) expressly permits the FTC to obtain a preliminary injunction in federal court, the FTC can use this enforcement tool to challenge and potentially stop unlawful conduct much more quickly than it can through the administrative process.

The agency's use of Section 13(b) as an enforcement tool has evolved over recent decades. When adopted, Section 13(b) was expected to be used to halt mergers and acquisitions temporarily while the FTC completed its administrative process.7 The provision initially was used in this way, but in the 1980s, the FTC expanded its use to seek equitable monetary relief in consumer protection cases. Over the years, the FTC has successfully used its Section 13(b) authority to challenge conduct in, among other industries, debt collection,8 mortgage loan modification services,9 and weight loss aids.10

Until recently, the FTC's use of Section 13(b) to seek monetary remedies in antitrust cases was relatively rare.11 In 2003, the FTC issued a Policy Statement on Monetary Equitable Remedies in Competition Cases (MER Statement) stating that the agency did not view disgorgement as a "routine" remedy for antitrust cases and vowed to "continue to rely primarily on more familiar, prospective remedies, and seek disgorgement and restitution in exceptional cases."12 The FTC withdrew the MER Statement in July 2012. It stated that its objective was to do away with "an overly restrictive view of the Commission's options for equitable remedies," and that the agency no longer believed disgorgement and restitution should apply only in "exceptional" antitrust cases.13 Thereafter, the FTC filed (or amended) several complaints, mostly against the pharmaceutical industry, seeking disgorgement or restitution under Section 13(b).14 It remains to be seen how aggressively the current Commission will seek monetary relief in antitrust conduct cases.

II. FTC v. Shire ViroPharma, Inc.

A. The FTC's Allegations

The FTC's case against Shire Viropharma is one of several recent antitrust cases targeting the pharmaceutical industry that the agency filed in federal court seeking monetary relief. The FTC alleged that Shire used the FDA's "citizen petition" procedure to improperly delay generic competition and extend its alleged monopoly in the market for Vancocin capsules, an oral antibiotic used to treat a certain gastrointestinal infection. The FTC claimed that Shire submitted multiple, baseless filings to the FDA from March 2006 to April 2012 in an effort to convince the FDA to require generic applicants to conduct more time-consuming and costlier in vivo clinical endpoint studies, which allegedly delayed the FDA's process for approving applications to sell generic Vancocin. The FTC further claimed that the FDA rejected the citizen petition in April 2012 on the grounds that "Shire's scientific challenges . . . 'lacked merit' and 'were unsupported.'"15

In February 2017, the FTC filed suit in federal court seeking a permanent injunction and equitable monetary relief under Section 13(b) and claiming that Shire's allegedly meritless FDA filings harmed consumers and competition by delaying generic competition.16 The complaint alleged that "there is a cognizable danger" that Shire will "engage in similar conduct causing future harm to competition and consumers."17In support of this allegation, the FTC claimed that Shire knew that its filings would "enrich it at the expense of consumers," and that Shire "had the incentive" and "opportunity to engage in similar conduct in the future" because it "marketed and developed drug products."18 The US District Court for the District of Delaware granted Shire's motion to dismiss. The court found that the FTC failed to plead that Shire "is violating or is about to violate" the law for a claim under Section 13(b) of the FTC Act.19

B. The Third Circuit's Holding

On appeal, a three-judge panel for the Third Circuit affirmed the district court's ruling. The appellate court held that Section 13(b)'s requirement that "the FTC have reason to believe a wrongdoer 'is violating' or 'is about to violate' the law" means that the challenged conduct must be "existing or impending."20 As the court summarized: "Simply put, Section 13(b) does not permit the FTC to bring a claim based on long-past conduct without some evidence that the defendant 'is' committing or 'is about to' commit another violation."21 The court reasoned that the statute's plain language, structure, and history compelled this result. The court found that the "provision was not designed to address hypothetical conduct or the mere suspicion that such conduct may yet occur" and the statute was not "meant to duplicate Section 5 [of the FTC Act], which already prohibits past conduct."22 The court further stated that the FTC's allegations concerning Shire's "incentive and opportunity to continue to engage in similar conduct in the future" were too vague and did not plausibly suggest that Shire is "about to violate" the law.23

The FTC argued that the common law standard for obtaining injunctive relief—i.e., that there exists some cognizable danger of recurrent violation—is a lower standard that should control whether a Section 13(b) action is appropriate. The court, finding no support in the case law for a more relaxed interpretation, observed that "the 'about to violate' and 'likelihood of recurrence' standards can coexist" and that the FTC had not met the threshold standard in this case.24 The court also rejected the FTC's argument that interpretation of the securities laws, which contain similar language, supports the FTC's reading of Section 13(b). It found that the structure of the securities laws is not analogous and that the unambiguous nature of Section 13(b) obviates the need to review similarly worded statutes to interpret it.25 Finally, the court rejected the FTC's argument that Section 13(b) should be construed broadly to effectuate its remedial purpose.26 As the court put it: 'is' or 'is about to violate' means what it says—the FTC must make a showing that a defendant is violating or is about to violate the law."

III. Takeaways

The Decision May Limit the FTC's Enforcement Toolkit

The Third Circuit's Shire decision gives defendants facing a Section 13(b) action a powerful potential defense and limits the FTC's array of enforcement tools in both antitrust and consumer protection cases. While Shire is an antitrust conduct case, its holding applies equally to consumer protection cases brought pursuant to Section 13(b).27

As the FTC explained to the Third Circuit, those facing investigations now may attempt to avoid the prospect of restitution or disgorgement by ceasing their conduct immediately at the outset of an investigation.28 For those who find themselves under investigation, it is reasonable to expect that FTC staff will increase their focus on attempting to establish the potential for a recurring violation in order to meet the Third Circuit's pleading standard for a Section 13(b) action.

It should be noted that, for consumer protection cases, the FTC also has other enforcement tools at its disposal that could see a resurgence after Shire. Under Section 19 of the FTC Act, the FTC can seek consumer redress for violations of Commission rules or for conduct that is subject of a final cease-and-desist order "which a reasonable man would have known under the circumstances was dishonest or fraudulent."29 Consumer redress includes "rescission or reformation of contracts, the refund of money or return of property, [and] the payment of damages" but not "exemplary or punitive damages." 30 While Section 19 applies to past conduct, it does not provide for injunctive relief.31

Increased Focus on State-Based Liability

Notwithstanding the limitations to the scope of FTC authority provided in Shire, potential liability for past conduct under state laws still must be considered. For example, California prosecutors frequently pursue civil penalties for past unlawful conduct under California's Unfair Competition Law and False Advertising Law.32 With this in mind, it is reasonable to expect that the FTC may also seek to partner with (or support) multi-state enforcement actions.

© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1.  -- F.3d --, 2019 WL 908577 (3d Cir. Feb. 25, 2019).

  2. This is noteworthy because many of the FTC’s actions seeking disgorgement have been against pharmaceutical companies, many of which are headquartered in the Third Circuit—Pennsylvania, New Jersey, and Delaware.

  3. 15 U.S.C. § 53(b) (emphasis added).

  4. See, e.g.FTC v. Cephalon, Inc., 100 F. Supp. 3d 433, 437 (E.D. Pa. 2015) ("The FTC counters that courts have uniformly concluded that Section 13(b) grants district courts authority to order monetary equitable relief. The weight of precedent supports this position."); FTC v. Commerce Planet, Inc., 815 F.3d 593, 599 (9th Cir. 2016) (noting that "district courts have the power to order payment of restitution under § 13(b) of the FTC Actand affirming an award of restitutionary relief for overbilling consumers of web services).

  5. Shire, 2019 WL 908577, at *6.

  6. 15 U.S.C. § 45(l); FTC, Adjustments to Civil Penalty Amounts, 84 Fed. Reg. 3980-01 (Feb. 14, 2019).

  7. See, e.g., Stephen Calkins, An Enforcement Official's Reflections on Antitrust Class Actions, 39 Ariz. L. Rev. 413, 432 (1997).

  8. See, e.g.FTC v. Moses, 913 F.3d 297, 309-310 (2d Cir. 2019).

  9.  See, e.g.FTC v. Washington Data Res., 856 F. Supp. 2d 1247, 1278 (M.D. Fla. 2012), aff'd sub nom. FTC. v. Washington Data Res., Inc., 704 F.3d 1323 (11th Cir. 2013).

  10. See, e.g.FTC v. Bronson Partners, LLC, 654 F.3d 359, 366-67 (2d Cir. 2011).

  11. See Antitrust Modernization Comm'n, Report and Recommendations at 286 (2007) ("In only eleven antitrust cases in the past twenty-six years, however, has the FTC sought equitable monetary remedies").

  12. FTC, Policy Statement on Monetary Equitable Remedies in Competition Cases, 68 Fed. Reg. 45820-03 (Aug. 4, 2003).

  13. FTC, Statement of the CommissionWithdrawal of the Commission's Policy Statement on Monetary Equitable Remedies in Competition Cases (July 31, 2012).

  14. For example, the FTC settled one pharmaceutical "reverse payment" antitrust case requiring the defendant to pay $1.2 billion into settlement fund to benefit claimants. Press Release, FTC, FTC Settlement of Cephalon Pay for Delay Case Ensures $1.2 Billion in Ill-Gotten Gains Relinquished; Refunds Will Go to Purchasers Affected by Anticompetitive Acts (May 28, 2018).

  15. Shire, 2019 WL 908577, at *2-3 (quoting complaint).

  16. Id. at *3-4.

  17. Id. at *4 (quoting complaint).

  18. Id. (quoting complaint).

  19. Id. (quoting district court).

  20. Id. at *7 (quoting Section 13(b)).

  21. Id. (quoting Section 13(b)).

  22. Id.

  23. Id. at*10-11.

  24. Id. at *7-8.

  25. Id. at *8.

  26. Id. at *9.

  27. In fact, at least one district court sided against the FTC on its interpretation of Section 13(b) in a consumer protection case. See FTC v. Hornbeam Special Situations, LLC, No. 1:17-CV-3094-TCB, 2018 WL 6254580, at *4 (N.D. Ga. Oct. 15, 2018) (favorably citing the district court in FTC v. Shire ViroPharma, Inc., No. 17-131-RGA, 2018 WL 1401329 (D. Del. Mar. 20, 2018)).

  28. Shire, 2019 WL 908577, at *9.

  29. 15 U.S.C. § 57b.

  30. Id. § 57b(b).

  31. The FTC can also seek civil penalties of $42,530 per violation for conduct determined to be unfair or deceptive in a prior litigated cease-and-desist order where an entity that was not a party to the original action has "actual knowledge that such act or practice is unfair or deceptive and is unlawful." Id. § 45(m). To establish actual knowledge, the FTC often sends a copy or synopsis of the prior cease-and-desist order to relevant industry participants.

  32. See, e.g.People v., 12 Cal. Rptr. 65, 85-88 (Cal. Ct. App. 2017).