Industry, Members of Congress Take Action on FTC Process

By: Michelle Cohen

As the Federal Trade Commission (“FTC”) continues to flex its consumer protection muscles by bringing numerous administrative lawsuits, industry and members of Congress are questioning whether there is a level playing field that allows companies to properly defend themselves against FTC charges.  Or, as some say, does the FTC have the “home court advantage” in its role as investigator and prosecutor, armed with very broad authority under Section 5 of the FTC Act –leaving many companies to decide simply to settle rather than face the Goliath FTC.  However, some companies have been bucking that trend recently and challenging the FTC’s authority (particularly in the area of regulating data security and FTC officials’ impartiality.

As background, the FTC may begin an enforcement action if it has “reason” to believe that the FTC Act is being or has been violated. Section 5(a) of the FTC Act prohibits “unfair or deceptive acts or practices in or affecting commerce.”  The FTC also enforces several other consumer protection statutes, including the Fair Credit Reporting Act, the Do-Not-Call Implementation Act of 2003, and the Children’s Online Privacy Protection Act.

Under Section 5(b) of the FTC Act, the FTC can challenge “unfair or deceptive acts or practices” or violations of certain other laws (such as those listed above) in an administrative adjudication. The way this works is the FTC issues a complaint putting forth its charges.  Many companies faced with such complaints inevitably settle with the FTC, rather than endure an administrative trial.  Those companies that contest the charges face a trial-type proceeding before an FTC administrative law judge.  FTC staff counsel “prosecute” the complaint.  The administrative law judge later issues an initial decision. Either party can appeal the initial decision to the full FTC for review.

Many observers, including the American Bar Association, have criticized this situation — where the FTC acts as both prosecutor and judge — as inherently unfair. After the FTC’s decision, the respondent organization (or individual)may appeal to a federal court of appeals. However, at this point, an extensive record has been made and this assumes an organization or individual has the resources to devote to a federal appeal. (In addition, the FTC can also bring consumer protection enforcement directly in court rather than through administrative litigation).

The FTC’s winning record in these administrative proceedings has many observers questioning the process and the FTC’s potential impartiality.  House antitrust chairman Spencer Bachus (R-Ala.) called out the FTC’s apparent lack of impartiality and fairness, stating “ a company might wonder whether it is worth putting up a defense at all.”

Just a couple weeks ago, however, medical testing company LabMD went on the offense and sought the disqualification of an FTC Commissioner. Facing an administrative proceeding relating to its alleged failure to secure patient information data, LabMD moved to disqualify Commissioner Julie Brill from consideration of its case.  LabMD claimed that the Commissioner made numerous statements at industry conferences prejudging its ongoing litigation. Specifically, LabMD claimed Brill stated LabMD that had violated the law, rather than indicating that LabMD was under investigation or in litigation.  The FTC opposed the disqualification. However, Commissioner Brill voluntarily recused herself from the case on Christmas Eve to avoid “undue distraction” from the administrative litigation.

As the FTC litigates in several key areas – data privacy, financial services, credit repair, telemarketing – we expect administrative litigation will increase in 2014. While some companies will continue to settle to avoid continued litigation expenses and possible further detrimental outcomes, we think others will take the LabMD route and seek relief when they believe the processes are not transparent or the FTC is exceeding its authority.