The FTC’s Bureau of Consumer Protection routinely goes into federal district court seeking redress or disgorgement in cases of alleged fraud and deception.  The folks in the FTC’s Bureau of Competition recently indicated that they may want to start more regularly seeking such relief.  One interesting question raised by all of this is: Can the FTC really do this?

For the first sixty or so years of its existence, the FTC primarily challenged conduct through administrative litigation conducted within the FTC before an Administrative Law Judge seeking a cease and desist order, rather than in federal court.  After administrative litigation was concluded, the FTC could file a Section 19 action in federal court seeking redress for consumers upon a showing that the conduct was such that a reasonable man would have known it was dishonest or fraudulent. The FTC did have the authority to go into federal court to stop false advertising for food, drugs, devices, or cosmetics. 

In 1973, The Trans-Alaska Pipeline Act became law, and that statute not only changed the landscape of Alaska but also the landscape for those being sued by the FTC.  The Pipeline Act also added Section 13(b) to the FTC Act.  The first proviso of Section 13(b) authorized the FTC to seek a preliminary injunction in federal court to enjoin allegedly unlawful conduct pending completion of an FTC administrative proceeding.  This is the provision on which the FTC relies when it seeks to stop a merger before it is consummated.  The second proviso of Section 13(b) authorized the FTC to seek a permanent injunction.  The second proviso says nothing about redress or disgorgement.

Beginning in the early 1980s, however, the FTC began to make aggressive use of the second proviso in consumer protection cases.  The FTC started to use Section 13(b) not only to seek permanent injunctions regarding conduct but also to obtain equitable monetary relief (redress and disgorgement) and preliminary injunctions that included asset freezes and the appointment of receivers. While the statute only authorizes the FTC to seek, or a court to issue, a permanent injunction, the FTC has sought and courts have found that the provision carries with it the full range of equitable remedies available to a court, including the power to grant consumer redress and to compel the disgorgement of profits.  The FTC has further argued that it was entitled to ask a court to freeze defendants’ assets or to appoint a receiver over defendants’ businesses so as to preserve the court’s ability to grant full and effective final relief.  Courts have rejected arguments that these remedies are beyond the statutory grant or sound in law rather than equity so that defendants are entitled to a jury trial.

The FTC’s Bureau of Competition, up to now, has been less vigorous in its use of Section 13(b) to seek disgorgement.  Indeed, the FTC has only sought disgorgement in three cases: Mylan, Perrigo, and Lundbeck.   However, based on a July 31, 2012 announcement, that appears to be about to change.

In 2003, the FTC issued a Policy Statement on Monetary Equitable Remedies in Competition Cases. In the Policy Statement, the FTC stated that disgorgement would only be sought in “exceptional cases.” The FTC outlined three factors that it would consider in determining whether to seek disgorgement: (1) whether the underlying violation is “clear”; (2) whether there is a reasonable basis to calculate the remedial payment; and (3) whether remedies in other civil or criminal litigation are likely to accomplish fully the purposes of the antitrust laws.  

In July 2012, the FTC announced that it was withdrawing the Policy Statement.  The FTC stated that the Policy Statement created an overly restrictive view of the Commission’s options for equitable remedies.  The Commission pointed to the first and third factors as imposing constraints on the Commission’s ability to obtain disgorgement not based on case law.  Going forward, the FTC stated that in deciding whether to seek disgorgement it would be guided by existing law and the application of its prosecutorial discretion.  The agency did state that it would not seek disgorgement for conduct alleged not to violate the antitrust laws, but only violated Section 5 of the FTC Act.

Why did the FTC do this? The FTC pointed to the increased burden the Supreme Court has placed on private plaintiffs and new legal thinking about the increased use of disgorgement.  At least one Commissioner, however, was not convinced.  Commissioner Maureen Ohlhausen dissented, observing that there had been no showing that the agency had not sought disgorgement specifically because of the Policy Statement and that there should have been an opportunity for public notice and comment before this change in Commission policy.

What next?  One suspects that there are one or more matters that the FTC has in mind for use of the disgorgement tool.  Given the importance that the Commission places on pharmaceutical “pay for delay” cases, that certainly is one area where disgorgement might be sought. We’ll have to wait to see whether redress remains in the FTC’s closet or starts to be worn regularly.