FTC Enforcement Power Being Put to the Test

The Federal Trade Commission has appealed to the U.S. Court of Appeals for the Third Circuit the dismissal by the Delaware U.S. District Court of the agency’s complaint against Shire ViroPharma Inc.  The FTC previously charged Shire with violating Section 5(a) of the FTC Act by engaging in an unfair method of competition with respect to an antibiotic drug.

The District Court’s opinion drew a lot of attention, particularly because it ruled that the FTC failed to meet a procedural pre-requisite for permanent injunctive relief because the alleged conduct occurred in the past.  In doing so, the court rejected the FTC’s argument that the appropriate pleading standard should be whether the wrongful conduct was “likely to recur,” and opined that the FTC’s ability to seek a permanent injunction is dependent upon establishing the existence of a reason to believe that a defendant is violating, or is about to violate, a law enforced by the FTC.

The court held that the allegations in FTC’s complaint failed to plead facts sufficient to support a reasonable inference that ViroPharma was “about to violate” a law enforceable by the FTC.  The FTC argued that ViroPharma would engage in the alleged abuses of FDA processes in the future with respect to the forthcoming drug.  However, the Commission failed to include that allegation in its complaint, which merely suggested that “there is a cognizable danger that ViroPharma will engage in similar conduct” and that “ViroPharma has the incentive and opportunity to continue to engage in similar conduct in the future.”

The court held that such conclusory allegations failed to plausibly suggest that ViroPharma “is about to violate” the law.

The court granted ViroPharma’s motion to dismiss but gave the FTC leave to amend its complaint.  In doing so, the court noted that in order to satisfy Section 13(b) of the FTC Act, the agency should amend its complaint to allege that FTC has reason to believe ViroPharma “is violating, or is about to violate” a law that FTC enforces, “which is a prerequisite to the FTC’s ability to bring suit in the first place.”

The court did not outright reject the idea that ViroPharma’s activity may have constituted a violation of federal antitrust laws.  Rather, it suggested that, in order to survive a motion to dismiss, the FTC must “plead facts allowing for a reasonable inference that ViroPharma ‘is about to violate’ a law enforced by the FTC” in more than a mere conclusory fashion.

The ruling immediately resulted in speculation concerning whether the FTC would amend is complaint or appeal.  The decision speaks volumes about whether the FTC feels that it could adequately allege a likelihood that ViroPharma would repeat its past conduct. It also speaks volumes with respect to the significance of the lower court’s ruling.

If upheld on appeal, there may be significant changes in FTC enforcement strategies.

Despite repeated challenges by defendants the majority of federal appeals courts have upheld the FTC’s right to seek restitution and disgorgement in § 13(b) actions.  None, however, have held that an FTC enforcement action for such remedies is permissible even if the agency fails to credibly allege that future violations are imminent.

The District Court ruling has already been cited by defendants in a number of pending enforcement actions.

Richard B. Newman is an Internet marketing compliance and regulatory defense attorney at Hinch Newman LLP focusing on advertising and digital media matters. His practice includes conducting legal compliance reviews of advertising campaigns, representing clients in investigations and enforcement actions brought by the Federal Trade Commission and state Attorneys General, commercial litigation, advising clients on promotional marketing programs, and negotiating and drafting legal agreements.  

ADVERTISING MATERIAL. These materials are provided for informational purposes only and are not to be considered legal advice, nor do they create a lawyer-client relationship. No person should act or rely on any information in this article without seeking the advice of an attorney. Information on previous case results does not guarantee a similar future result. Hinch Newman LLP | 40 Wall St., 35thFloor, New York, NY 10005 | (212) 756-8777.

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