Court Rules FTC Cannot Use Administrative Process to Adjudicate Deceptive Advertising Claims

Earlier this year, the U.S. Court of Appeals for the Fifth Circuit held in Intuit, Inc. v. FTC that the FTC may not use its internal administrative process to adjudicate deceptive advertising claims under Section 5 of the FTC Act, and that it must pursue such claims in federal court.  In doing so, the court vacated a cease-and-desist order against Intuit.

By way of background, the FTC initiated a deceptive advertising action against Intuit relating to its TurboTax “Free Edition.”  The FTC initiated an administrative proceeding that resulted in a finding that the advertisements were misleading.  A twenty-year cease-and-desist order was subsequently imposed.  Intuit appealed the decision to the Fifth Circuit Court of Appeals.

According to Intuit, the U.S. Constitution prohibits the FTC from circumventing the judicial process and imposing penalties via administrative hearings.  It further argued that the FTC’s administrative adjudication violated Article III of the Constitution by adjudicating “private rights.”  The FTC argued, in turn, that its deception standard was different than common law fraud and need not be adjudicated in federal court.  Ultimately, the court concluded that FTC deceptive advertising claims are similar to traditional common law fraud.  It held that the administrative adjudication of deceptive advertising claims by the Federal Trade Commission violates the constitutional separation of powers that grants exclusive judicial authority to Article III courts.

What is the practical implication of the Fifth Circuit’s holding that the FTC must argue its deceptive advertising claims in federal court and not in front of an in-house administrative law judge?  For starters, it raises questions regarding the ability of the FTC to issue deceptive advertising-related administrative cease-and-desist orders under the FTC Act.  Going forward, the FTC may very well prioritize federal litigation over administrative adjudication.  The agency may also continue efforts to persuade Congress to restore the FTC’s ability to obtain monetary relief in federal court for false advertising claims.

According to the Fifth Circuit the FTC now has no ability to bring an administrative action for deceptive advertising and a subsequent action under Section 19 of the FTC Act and, consequently, has no ability to obtain monetary relief for violations of Section 5 of the FTC Act.  While this ruling is only binding within the Fifth Circuit, it is anticipated that respondents will attempt to invoke the decision in other circuits and to expand its applicability to other theories of liability under Section 5 of the FTC Act.

Companies facing an FTC federal court matter or an administrative proceeding involving deception claims should contact an experienced FTC defense lawyer to evaluate strategic defense considerations and options.

Richard B. Newman is a digital advertising practices attorney at Hinch Newman LLP. 

Informational purposes only. Not legal advice. May be considered attorney advertising.