Earlier this year, a federal judge in Delaware dealt a blow to Federal Trade Commission jurisdiction when it partially dismissed a lawsuit it filed alleging violation of antitrust laws.  The dismissal drew attention, in large part, because the court ruled 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.

A federal judge in Georgia has now similarly ruled on the ability of the FTC to challenge past conduct (FTC v. Hornbeam Special Services).

Defendants filed a motion to dismiss for lack of subject-matter jurisdiction, arguing that the FTC had not pleaded adequate facts to invoke § 53(b), such that the court lacked jurisdiction under § 53(b). In doing so, defendants argued that § 53(b) is designed to remedy only future, rather than past, misconduct, and to the extent the FTC is basing its claims for relief on past misconduct, it must show that defendants are violating, or about to violate, the law.

The court ordered supplemental briefing on whether it should reconsider its previous holding that § 53(b)’s “reason to believe” element was unreviewable on a 12(b)(6) motion to dismiss.

Upon reconsideration, the court opined that many of the FTC’s claims against defendants were based largely on long-ceased misconduct.  It considered that the FTC sought to invoke § 53(b) to obtain injunctive and other equitable remedies for defendants’ alleged deceptive marketing practices.

On the issue of what standard the FTC must aver to when it predicates “reason to believe” that a violation of law is occurring or about to occur, the court stated that “it is axiomatic that to survive a Rule 12(b)(6) motion, the pleader must “set forth ‘well-pleaded facts . . . permitting the court to infer more than the mere possibility of misconduct.”  Thus, according to the court, “in order to obtain the relief provided under § 53(b), the FTC must demonstrate by more than conclusory allegations that it has a reason to believe that the laws entrusted to its enforcement are being or about to be violated.”

The court rejected the FTC’s argument that no court has imposed any such requirement in any other case involving § 53(b).  In doing so, the court stated that “that may be true, but it is persuasive only in that it is an argument from silence, a silence for which there are several plausible explanations.  The silence may be as much a result of the parties’ failure to raise the issue as it is an indication that no such requirement exists.  It could also be that the FTC’s ‘reason to believe’ was not in dispute in the cited cases. Here, however, the parties have raised the issue and brought the FTC’s ‘reason to believe’ into dispute.”

The court also considered that two of the defendants had died since the complaint was filed and that “it strains credulity to blindly accept that the dead men are violating (or about to violate) any laws.”

Having determined that the FTC must make factual averments regarding its “reason to believe,”  the court then considered that the FTC’s “reason to believe” is a distinct statutory standard from the injunction inquiry.

The FTC’s case targeted defendants’ past conduct.  Yet “the FTC is proceeding under § 53(b) on the theory that, based on defendants’ past conduct, they are ‘about to’ violate the law.”  The court opined that it must therefore determine what “about to” means and whether the FTC has satisfied the court that, based on its averments, it is plausible that the defendants are about to violate the law.

The FTC argued that “about to” means that that the misconduct is likely to recur (i.e., the same showing required to establish that injunctive relief would not be moot).  The court disagreed, finding that such an interpretation is inconsistent with the plain language of § 53(b) and that the phrase “evokes imminence, as if the offending action could be resumed with little delay.”

Interestingly, the court also stated that “Section 53(b) is not, on its face, a broad and sweeping avenue of relief, certainly not as broad as it has become through generous interpretation.  It is simply an injunctive remedy, a stop-gap to discontinue ongoing or threatening conduct violative of the laws the FTC enforces. It is a discrete authorization for the FTC to invoke the federal courts to assist it in the enforcement of its statutory mandates.  If applying the plain language means that the showing to get into the courthouse is greater than the one required once the FTC is inside, narrowing § 53(b)’s scope, that is fine because that is what the language demands.”

The Hornbeam court was not bashful about discussing statutory limits on agencies’ authority, stating the need to “carefully scrutinize an agency’s suggested interpretations of its mandates and which have the effect of expanding its authority beyond the statutory bounds,” or about stating that “it is the court’s responsibility to blow the whistle and call the out of bounds.”

The court gave the FTC an opportunity to amend its complaint.  Query whether it will do so, or seek an appeal.

Takeaway:  When the FTC attempts to bring suit under § 53(b), it must adequately plead that it has a reason to believe that each of the defendants is violating or is about to violate the law.  When the FTC’s reason to believe is predicated upon past conduct, it must show that a defendant is “about to” violate the law—requiring more than mere likelihood of resuming the offending conduct—in order to state a claim.