Third Circuit Hands the FTC a Stunning Loss

February 26, 2019By Jennifer M. Thomas

They could have taken a middle ground, given the unique facts of FTC v. Shire ViroPharma — but instead the Third Circuit went whole hog with a decision that, if it stands, could set the FTC’s litigation authority back decades. In this case, bad facts made for very bad case law from the FTC’s perspective.

Those who have been following our coverage of the Shire case know that it involves Shire’s filing numerous allegedly “sham” citizen petitions to FDA, and lawsuits against FDA, all to allegedly keep generic versions of the company’s Vancocin drug off the market. The FTC sued Shire in the U.S. District Court for the District of Delaware in 2017, alleging that the company’s actions were anticompetitive in violation of the FTC Act.

As it does in most cases involving either antitrust violations or false or misleading advertising, the FTC brought suit pursuant to section 13(b) of the FTC Act (15 U.S.C. § 53(b)), which gives the FTC authority to file a case when it has “reason to believe” that a defendant “is violating” or “is about to violate” any provision of law enforced by the FTC. The FTC typically brings such cases in federal court pursuant to § 13(b) in lieu of an administrative proceeding under FTC Act § 5 (which authorizes the FTC to issue an administrative complaint whenever it “has reason to believe that any [entity] has been or is using any unfair method of competition or unfair or deceptive act or practice in or affecting commerce . . .”). However, the FTC rarely brings such cases in federal court fully five years after the violative conduct at issue has ceased, as it did in Shire. Not only had Shire ceased its allegedly violative conduct in 2012, it had divested itself of the drug in question well before the FTC sued in 2017.

The FTC often prefers litigating cases in federal court when the potential for monetary relief is significant, because the process for obtaining such relief is much more onerous in an administrative proceeding (if it is available at all). In consumer protection cases, following an administrative proceeding in which it obtains a cease and desist order the FTC must go to federal court to either (1) seek penalties for any violation of the order (15 U.S.C. § 45(b)), or (2) seek penalties or other equitable relief based on a showing that “the act or practice to which the cease and desist order relates is one which a reasonable man would have known under the circumstances was dishonest or fraudulent” (15 U.S.C. § 57b). The latter option, Section 57b, is not even available in antitrust cases, where the FTC is limited to seeking penalties for violations of an existing cease and desist order obtained through the administrative process.

Despite the clear benefits to the FTC of bringing suit in the first instance in federal court, the Commission would have been much better off staying “home” in Shire. Instead, the FTC took a strong position before the Third Circuit, arguing that Section 13(b): (1) is not jurisdictional, (2) reflects a “likelihood of recurrence” standard for “about to violate” that includes no temporal element, and (3) leaves the determination of whether a violation was “likely to recur” entirely in the FTC’s discretion based on whether the Commission had “reason to believe” recurrence was likely. The FTC lost on all but the first issue (the Court agreed that the “about to violate” requirement was not jurisdictional), and gained some very unhelpful judicial language in the bargain.

In rejecting the FTC’s arguments, the Third Circuit Court harked back to the legislative purpose of § 13(b), which was to halt unfair and deceptive practices while an administrative case was pending. It strongly suggested that § 13(b) should only be used in that context, reasoning that “Section 13(b) thus empowers the FTC to speedily address ongoing or impending illegal conduct, rather than wait for an administrative proceeding to conclude.” Slip Op. at 21. The Court found that the statutory text “ is violating, or is about to violate” clearly and unambiguously foreclosed the FTC’s interpretation. Importantly, while the Court largely ruled from the statutory text itself, it did describe the “about to” standard as addressing “impending conduct,” (Slip Op. at 21, 23), and conclude that Section 13 was not “meant to duplicate Section 5, which already prohibits past conduct.” Id. at 24. These descriptions suggest a very high bar for application of Section 13(b) to conduct that has ceased (even if it ceased much more recently than 5 years ago). And the Court outright rejected the FTC’s policy argument that application of the “likelihood of recurrence” standard was necessary to prevent “the wrongdoer” from avoiding “an injunction by voluntarily ceasing its illegal conduct,” (Slip Op. at 25, 31) – again, the Court directed the FTC to Section 5(b)’s administrative proceeding for “past violations.” Id. at 31.

In dicta that is likely to haunt both the FTC and FDA in future litigation, the Third Circuit also questioned whether the FTC’s belated suit against Shire based on the company’s FDA citizen petitions had “the potential to discourage lawful petitioning activity by interested citizens – activity that is protected by the First Amendment.” Slip Op. at 36. The Court suggested that “the FTC be mindful of such First Amendment concerns.” Id.

What will the FTC do now? As we mentioned in our last post on this case, the FTC could seek rehearing or rehearing en banc from the Third Circuit, and may ultimately seek Supreme Court review. However, the Commission may well determine that pursuing a rehearing or petition for certiorari would amount to throwing good money after bad given the bad facts of the Shire case. The Third Circuit loss still permits the FTC to seek a different result in any state other than New Jersey, Pennsylvania, or Delaware. The FTC could also seek legislative intervention, to provide the FTC with (1) additional authority to impose additional civil money penalties in administrative proceedings, (2) additional litigation authority, and/or (3) additional rulemaking authority, so that the FTC can better take advantage of its authority to file civil actions for “knowing violations of rules respecting unfair or deceptive acts or practices” (Slip Op. at 20-21) (currently, the FTC must overcome additional procedural hurdles — beyond those found in the Administrative Procedure Act — to issue rules defining specific unfair or deceptive acts or practices (see 15 U.S.C. § 57a)). Such proposals have already been a topic of discussion in Congress, amongst the FTC Commissioners, and amongst FTC-watchers in the data privacy context — perhaps the Shire case will provide further impetus and spur legislative action. Short of action by Congress, if the Shire decision stands and other Circuits agree with the Third, the FTC will face a more complicated path to obtaining monetary relief in cases involving past conduct.