In a novel interpretation of the Federal Trade Commission (FTC) Act, the U.S. District Court for the District of Delaware recently held in FTC v. Shire ViroPharma that the FTC had failed to plead the facts necessary to invoke its authority to sue for permanent injunction in federal court because it did not allege an ongoing or imminent violation of the FTC Act. This ruling could broadly impact the FTC’s authority to litigate cases in federal court for past violations of the FTC Act and prevent the FTC from seeking permanent injunctive relief in federal court unless the defendant is currently violating, or is about to violate, the act.

Factual Background

The FTC had brought suit against Shire for anti-competitive use of the U.S. Food and Drug Administration’s (FDA’s) citizen petition process to delay generic competition. The FTC alleged that the company exploited the FDA’s petition process to an extraordinary degree, submitting more than 46 regulatory and court filings. The company’s attempts to delay competition were ultimately unsuccessful, as Shire lost its legal challenges to the FDA, and the company was no longer engaged in the practice at the time the FTC’s complaint was filed. Nevertheless, the FTC’s complaint alleged that Shire had succeeded in delaying generic entry at great cost to consumers and demanded relief.

Legal Background

Section 13(b) of the FTC Act sets forth the FTC’s authority to sue for injunctive relief as follows:

(b) Whenever the Commission has reason to believe –

(1) that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the Federal Trade Commission, and

(2) that the enjoining thereof pending the issuance of a complaint by the Commission and until such complaint is dismissed by the Commission or set aside by the court on review, or until the order of the Commission made thereon has become final, would be in the interest of the public–

the Commission by any of its attorneys designated by it for such purpose may bring suit in a district court of the United States to enjoin any such act or practice. Upon a proper showing that, weighing the equities and considering the Commission’s likelihood of ultimate success, such action would be in the public interest, and after notice to the defendant, a temporary restraining order or a preliminary injunction may be granted without bond: Provided, however, That if a complaint is not filed within such period (not exceeding 20 days) as may be specified by the court after issuance of the temporary restraining order or preliminary injunction, the order or injunction shall be dissolved by the court and be of no further force and effect: Provided further, That in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction.¹

Under the first proviso of Section 13(b), whenever the FTC has reason to believe that any party “is violating, or is about to violate” a provision of law enforced by the commission, the commission may ask the district court to enjoin the allegedly unlawful conduct, pending completion of an FTC administrative proceeding to determine whether the conduct is unlawful. Under the second proviso of Section 13(b) (the final sentence), “in proper cases,” the commission may seek, and the court may grant, a permanent injunction, whether or not an administrative proceeding is underway.

Historically, the second proviso has been viewed as a separate grant of authority for the FTC to litigate its case in the first instance in federal court, regardless of whether the requirements in Sections (b)(1) and (2) are satisfied. As such, since the 1980s, most consumer protection enforcement has been conducted directly in court under Section 13(b) rather than by means of administrative adjudication. Judicial enforcement is seen as preferable because, in such a suit, the court may award both injunctive relief and monetary equitable relief in one step. Moreover, a judicial injunction becomes effective immediately, while a commission cease-and-desist order takes effect only 60 days after service.

In FTC v. Shire ViroPharma, the Delaware District Court relied on principals of statutory interpretation to reject the currently accepted view and accept Shire’s argument that the statutory language authorizes the FTC to “bring suit” only upon satisfying the conditions of (b)(1), and after which it “may seek” either preliminary or permanent injunctive relief. Thus, the court held that, to seek permanent injunctive relief in federal court, the FTC must allege that the defendant “is violating, or is about to violate” a law enforced by the FTC.

This holding is similar to that of the District Court for the Western District of Washington in FTC v. Amazon in 2016. There, the court granted Amazon’s motion for partial summary judgment and held that while past violations of the FTC Act do not justify the imposition of a permanent injunction, the court may consider past conduct in determining the likelihood of a future, recurring violation. The court stated that permanent injunctions may be awarded in cases where defendants engaged in continuous, fraudulent practices, even when the conduct has ceased by the time the suit was brought. The only potential ongoing violation alleged in Amazon, however, was that Amazon customers were still being billed for in-app purchases under $1 without authorization on First Generation Kindle devices, which had not been sold since August 2012 and no longer received software updates. The court found that this fact alone did not represent a cognizable danger of a recurrent violation, and injunctive relief was therefore not warranted. Though the court in Shire did not directly rely on Amazon to reach its finding, both cases rely on similar analyses of the likelihood of a future violation and may pave the way for other jurisdictions to adopt similar approaches.

Implications

The district court gave the FTC leave to amend its complaint in an effort to survive dismissal, but the FTC has chosen to stand on its original complaint and pursue an appeal by the U.S. Court of Appeals for the Third Circuit. The FTC’s decision to appeal speaks to the significance of the lower court’s ruling—the FTC will risk abandoning its case in district court to prevent the district court’s underlying statutory interpretation from standing. If the district court’s statutory interpretation is accepted more broadly, it would hamper the FTC’s ability to prevail in suits in certain federal jurisdictions for past violations of the FTC Act, unless it can allege a current or imminent future violation. This means that companies would be able to force the FTC to adjudicate matters administratively if the FTC seeks injunctive relief, and the company has ceased the allegedly unlawful conduct. Given the FTC’s preference for bringing enforcement actions in federal court, rather than administratively, it is clear why the agency is aggressively fighting this precedent.

¹ 5 U.S.C. § 53(b)