The Federal Trade Commission (FTC) is the nation’s chief consumer protection agency. In fulfilling its “dual mission to protect consumers and promote competition,” the FTC conducts targeted investigations focused on all types of consumer fraud and unfair and anti-competitive market practices, and it administers and enforces no less than 70 federal statutes.
The FTC is extremely active in its enforcement efforts. Each month, the agency initiates dozens of enforcement actions—some involving administrative proceedings, and some involving civil or criminal charges. The targets of its enforcement efforts range from large, publicly-traded corporations accused of anti-trust violations to small businesses that are suspected of engaging in efforts to mislead or defraud consumers.
Facing an FTC Investigation
Regardless of a company’s size, and regardless of the nature of the allegations against it, facing an FTC investigation is not a matter to be taken lightly. Investigations can lead to a broad range of charges, with penalties ranging from injunctive relief and civil monetary penalties (CMP) to criminal fines and imprisonment. Receiving a civil investigative demand (CID) or subpoena is many companies’ first indication that they are being targeted. However, by the time the FTC makes the decision to issue a CID or subpoena, it has usually already gathered a substantial body of evidence, and it is necessary to respond promptly and strategically in order to avoid unnecessary consequences.
1. CIDs vs. Subpoenas
Civil investigative demands and subpoenas are very different investigative tools. While subpoenas tend to raise more alarm, the reality is that the Federal Trade Commission has much more discretion and authority when issuing CIDs, and it can use CIDs to collect extraordinary amounts of data with only very limited judicial oversight.
A CID is considered a form of administrative subpoena. Only a handful of federal agencies have been granted the authority to issue CIDs, of which the FTC is one. As an “administrative” tool, the FTC can issue a CID directly—unlike issuing a judicial subpoena, which requires court approval (the FTC also has the authority to require compliance with “Commission-issued” subpoenas, which fall somewhere in between CIDs and judicial subpoenas).
Subpoenas can serve many of the same purposes as CIDs, and the FTC strategically uses subpoenas in appropriate circumstances. With regard to both CIDs and subpoenas, non-compliance can lead to formal enforcement action and the possibility of being held in contempt. Additionally, withholding or misrepresenting information in response to an FTC CID or subpoena can lead to criminal charges under 18 U.S.C. Section 1001.
In short, while CIDs and subpoenas are very different investigative tools, both require the same measured and tactful approach. While there are grounds for challenging CIDS and judicial subpoenas during a Federal Trade Commission investigations, these grounds are limited. FTC regulations require targets to “meet and confer” with agency personnel prior to filing a motion to quash; and, generally speaking, the most that can be achieved is to limit the scope of the demand based on relevance or information already being in the FTC’s possession.
2. Understanding the Allegations
When responding to a CID or subpoena, it is essential to have a clear understanding of the allegations that are at issue in the FTC’s investigation. Not only will this inform any potential relevance-based challenges, but it will also allow for informed decisions to be made throughout the response process.
Due to the breadth of the FTC’s enforcement authority, the agency’s investigations can target an extremely broad range of allegations—many of which will require entirely distinct and unique defense strategies. For example, examples of potential allegations in FTC investigations include (but are by no means limited to):
- False or misleading advertising claims (i.e. claiming or implying that a product has a certain quality or characteristic that it does not)
- Unsubstantiated advertising claims (i.e. making scientific claims of effectiveness without conducting a scientific study)
- Failing to implement adequate consumer data security and privacy protocols
- Unlawful telephone or Internet marketing practices
- Consumer credit, finance, or investment fraud
- Hoarding and price gouging
- Identity theft
- Anti-competitive mergers and acquisitions
- Price fixing, horizontal pricing restraints, and other antitrust violations
- Reporting and disclosure violations
3. Internally Assessing Risks
Once the scope of the FTC’s investigation has been determined, then the next step in defending against the inquiry is to conduct an internal assessment. What (if anything) is the FTC going to find? This is an answer you need to know, and you need to know it before the FTC has the opportunity to make an independent decision regarding potential liability without your involvement.
Generally, the process of conducting an internal risk assessment can be undertaken in conjunction with collecting files and records in response to an FTC subpoena or CID. In fact, as a practical matter, it will often be necessary to conduct these two tasks in tandem. However, there are additional steps involved in conducting an internal risk assessment as well. For example, it may be necessary to interview certain personnel, and it may be necessary to review files or records that fall outside of the scope of the FTC’s demand. In any case, the internal risk assessment should be overseen by outside legal counsel, as this will not only prevent bias and ensure that the assessment is sufficiently comprehensive, but it will also ensure that the assessment is protected by the attorney-client privilege.
4. Keeping the Investigation Administrative or Civil
Knowing the scope of, and risks implicated by, the FTC’s investigation, efforts to defend against the investigation can begin. A key aspect of defending against an FTC investigation involves keeping the investigation either administrative or civil in nature. Administrative FTC proceedings generally involve the least risk (although administrative penalties can still be substantial); and, in judicial cases, avoiding criminal charges ensures that prison time is off of the table.
Initiating a criminal investigation also opens up more options for the FTC, and it presents the risk of being forced to respond to grand jury subpoenas and providing grand jury testimony in an effort to fend off an indictment. By taking a proactive approach during the investigative process, this can often be avoided, and this should generally be a priority.
5. Fending Off Federal Charges
Regardless of the nature of a Federal Trade Commission investigation, avoiding charges allows the target of the investigation to retain control over the outcome. In many cases – including cases involving serious and substantial allegations – it will be possible to negotiate a pre-charge resolution that serves to protect the target entity against business-threatening liability. However, negotiating with the FTC requires a careful and strategic approach, and it requires due consideration for the potential implications of voluntarily disclosing (or withholding) information when communicating with federal agents.
Defending Against FTC Lawsuits
In some cases, it will not be possible to avoid a Federal Trade Commission lawsuit; and, in some cases, settling the FTC’s allegations will not be in the target’s best interests. When an FTC investigation leads to charges, this requires a shift in the targeted entity’s defense strategy as well.
Here, too, the nature of the FTC’s enforcement efforts matters. Defending against administrative charges is very different from executing a defense in federal district court proceedings; and, of course, defending against civil and criminal charges are different matters entirely.
“Defending against an FTC lawsuit requires careful consideration of several different factors. It is imperative to have a clear understanding of the allegations at hand, and it is equally important to tailor the company’s defense strategy to the specific nature of the proceedings. While litigation involving the FTC can present substantial risk exposure, there are often many defenses available to companies targeted by the FTC as well.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
Due to the scope of the FTC’s enforcement authority, as a practical matter, FTC defense will often involve demonstrating that the agency’s allegations are misguided. This differs from many other types of federal litigation, where the focus is generally on demonstrating that prosecutors are unable to meet their burden of proof (although this will be a viable and necessary FTC defense strategy as well). For example, in a case involving alleged anti-competitive mergers and acquisitions, the FTC will generally have all of the evidence it needs to build a successful case. As a result, rather than attempting to poke holes, it will be necessary to affirmatively demonstrate that the transaction complies with federal law.
With that said, similar to voluntarily disclosing information during a Federal Trade Commission investigation, presenting an “innocence” defense in response to an FTC lawsuit presents unique risks and challenges as well. As a result, it is necessary to meticulously prepare a well-thought-out defense strategy, and the Federal Trade Commission defense must be presented in such a way that it does not increase the risk of liability if it ultimately proves unsuccessful.
In all cases, facing a Federal Trade Commission lawsuit or investigation requires a strategic, methodical, and proactive defense. This is true regardless of the substance of the allegations at issue, and it is true regardless of whether the inquiry is administrative, civil, or criminal in nature. For companies that are facing FTC scrutiny, it is important to engage experienced federal defense counsel promptly, and to immediately begin making informed decisions with the company’s overall best interests in mind.