The Essential Guide to FTC Compliance, Investigations, and Enforcement

The Essential Guide to FTC Compliance, Investigations, and Enforcement

By Kronenberger Rosenfeld, LLP

Federal Lawsuits

Federal lawsuits are conducted before a district court judge or magistrate according to traditional federal court rules. For example, federal lawsuits include the filing of a complaint and response to a complaint, discovery between the parties and with third parties, and potential settlement of the claims in the form of a final stipulated judgment. As in any lawsuit, the defendants have a range of defenses available to them.

One important hallmark of a federal case is that, for the most part, all filings in the lawsuit are publically available and searchable through the federal courts’ PACER and ECF online dockets and filing systems. This means that if you are a defendant in a federal enforcement action, details about the FTC’s allegations against you are available to anyone, including the press and your acquaintances. Even after the case is resolved, the case filings remain accessible online. Of course, as a government agency, non-public records of the FTC, with the exception of any records still associated with ongoing investigations, can be obtained through a Freedom of Information Act, or “FOIA” request. However, FOIA requests take months to process, as opposed to the few seconds required for a PACER search.

Thus, federal lawsuits implicate publicity and reputational concerns and can be expensive to defend. Accordingly, defendants involved in federal lawsuits should immediately consult with experienced legal counsel to determine strategy and next steps.

What's at Stake

A federal lawsuit is a serious matter and involves questions of monetary remedies (i.e., money the defendant is required to pay) as well as injunctive relief (i.e., things the defendant is required to do or is barred from doing). But lawsuits can take a toll on defendants that exceeds the ultimate judgment, as addressed below.

Remedies

The FTC has historically asserted its rights to obtain a wide variety of remedies through federal litigation. Specifically, the FTC regularly seeks temporary, preliminary, and permanent injunctions, restitution, consumer redress, and civil penalties (either for violating a final cease-and-desist order or other FTC order, or under certain statutes). However, defendants should review whether each requested remedy is appropriate in a given case. For example, the FTC’s authority to obtain civil penalties is limited in certain cases.

When federal cases settle, the FTC settlement agreements are typically in the form of a stipulated final court order and injunction, with provisions regarding prohibited conduct, requirements to periodically report to the FTC, record keeping requirements, monetary relief payable to the FTC, and retention of court jurisdiction for at least fifteen or twenty years. Such consent orders are often stricter than the underlying legal requirements. Thus, as a penalty for not complying with the law, the defendant is held to an even higher standard moving forward.

Consumer Harm

One of the most controversial tactics of the FTC is to seek a monetary amount from defendants that equates to the full amount of “consumer harm.” Consumer harm is generally that total amount paid by consumers as a result of the defendants’ allegedly deceptive acts or practices. This argument is generally supported by Section 5 of the FTC Act and case law as a form of equitable-type relief. The reason this frequent position of the FTC is controversial is that the FTC does not subtract business expenses incurred by a defendant when calculating consumer harm. Thus, for example, if a defendant generated $10 million in sales based on allegedly deceptive marketing, but only kept $750,000 after paying for expenses like inventory and marketing fees, the FTC will still demand that the defendant pay $10 million to the FTC as “consumer harm.”

The FTC considers the extent of any consumer harm in deciding whether to file a federal action or an administrative action, in addition to deciding whether to seek civil penalties and/or consumer redress.

Criminal v. Civil

FTC actions are civil in nature, not criminal. This means that, while the FTC can seek large sums of money and a permanent injunction in an enforcement action, it cannot put you in jail or on probation, and you will not have a criminal record as a result of the enforcement action. However, the FTC has a Criminal Liaison Unit that assists prosecutors in criminal cases, including regarding criminal consumer fraud. For example, the FTC may work with or refer cases to the U.S. Department of Justice, federal and state criminal law enforcers, and other federal agencies, such as the U.S. Treasury. FTC cases may run parallel to criminal proceedings and make similar claims. Usually, when criminal and civil cases are proceeding at the same time, the FTC’s enforcement action will be stayed (i.e., paused) until the criminal action is resolved, because criminal defendants have a right to a speedy trial, while civil defendants do not. Although uncommon, it is not difficult for the same actions that violated the FTC Act (e.g., deceptive advertising) to be reasserted as a crime (e.g., mail fraud). Cases that may overlap include matters involving mortgage and debt relief services, health products, sweepstakes, telemarketing, cases that involve misrepresentations to banks and other financial institutions, and other cases. In addition, the FTC may seek a judicial finding of contempt for violations of court orders, which may have criminal implications.

Reputation

A federal lawsuit usually involves public filings and can negatively impact a company’s business. Compounding this factor is the FTC’s practice of issuing a negative press release about the defendants with each case it files, as discussed more fully below. For this reason, one factor in considering whether to settle is whether the defendants want to try to reach a settlement of the case to avoid ongoing publicity. Importantly, a federal lawsuit or other action by the FTC does not bar other investigations or lawsuits, including by Attorneys Generals, other government agencies, or private plaintiffs. Thus, engaging in a protracted fight with the FTC may result in the FTC referring the case to other government agencies as new facts are discovered.

Initial Proceedings

Pleadings

A federal lawsuit is initiated by the filing of a written complaint, which outlines the basic factual allegations, the basis for jurisdiction, and the causes of action against the defendants. A defendant typically has 21 days, unless an extension or waiver is granted, to respond to the complaint. Types of responses by defendants include motions (for example, to dismiss a complaint for lack of personal jurisdiction over a foreign defendant) or an answer, which responds to each of the allegations in the complaint. Litigating against the FTC is complicated and different from other federal litigation, so fighting the FTC without counsel who are experienced in litigating against the FTC is rarely a wise choice.

Sealing of the Record

Court filings are generally a matter of public record. However, where confidential information is involved, parties can seek to seal the record or parts of it. For example, if a party has sensitive trade secret information that is pertinent to the case, it may try to seal the record so that the information does not become publicly known. Generally, courts will balance the competing interests of the public’s right to access and the party’s right to keep judicial records private; and a party seeking to seal judicial records should be prepared to demonstrate “compelling reasons” supported by factual findings justifying sealing of records. In addition or as an alternative, parties may consider a stipulation or motion for a protective order to safeguard certain information.

While uncommon in civil cases as a whole, it is common for the FTC to initially file the complaint under seal to prevent the defendants from learning it has been filed. As is explained below, it is common for the FTC to file an application for a TRO at the same time it files the complaint. Federal law allows a TRO application to be filed ex parte—that is, without notice to the defendant—if the party filing the application can show that the element of surprise is necessary to ensure the defendant doesn’t dispose of or conceal the assets at issue, or if the defendant is likely to take other irreparable action if it learns of the TRO application. Thus, the complaint, the TRO application, and the entire case is temporarily sealed until after the TRO has been issued and the defendant’s assets seized or frozen.

TROs and Asset Freezes

One of the most powerful weapons the FTC can wield is the TRO containing an “asset freeze.” A TRO and asset freeze can completely shut a company down, and freeze all of the assets of the company and its key executives. Section 13(b) of the FTC Act, 15 U.S.C. §53(b), authorizes the FTC to seek temporary restraining orders (TROs) and preliminary injunctions after sufficient notice if the agency has reason to believe (1) that a person or entity is violating or is about to violate a law enforced by the FTC; and (2) the TRO or preliminary injunction is in the public interest. Courts have broadly held that TROs and preliminary injunctions are “relief necessary to accomplish complete justice,” which often includes freezing of company and even individual assets so that funds will be available to compensate defrauded consumers. An asset freeze, which is a provision in a TRO or preliminary injunction, will prevent the company or even individuals from dissipating assets, based on the stated goal of preserving funds to compensate defrauded consumers. Importantly, courts often grant asset freezes within days or weeks of filing an action, thus severely limiting business operations and payment of defense costs. In fact, where assets are at risk of being dissipated, the FTC may file a complaint and TRO application with the court, under seal, without the defendants having any idea that the FTC has filed a lawsuit against them. Furthermore, FTC requests for asset freezes are subject to a significantly more lenient standard than in private litigation, as courts have found that the FTC need not show irreparable harm. Under §13(b), a court must only (1) determine the likelihood that the FTC will ultimately succeed on the merits; and (2) balance the equities. Under the first prong, the FTC must make a “prima facie showing of illegality” to the Court. Under the second prong involving balancing the equities, the goal of the protection of the public receives overwhelming weight, and some courts routinely rule that the FTC wins in this balancing test.

If the court grants the FTC’s request for a TRO and asset freeze, then the Court will set a hearing, usually in two or three weeks, to determine whether the TRO should be converted to a preliminary injunction, which will be in place for the duration of the lawsuit.

If a business is facing a potential FTC asset freeze, it is essential that the business consult with an experienced FTC defense attorney, due to the high stakes for the business.

Receivorship and Seizure

As part of requests to freeze assets, the FTC will sometimes also request that a receiver be appointed to review and seize assets pending or after litigation. A receiver is an individual or firm that is appointed by the court and acts as an agent of the court in taking custody and possession of assets at issue, potentially liquidating assets, conducting a review of assets, and collecting financial information. For example, a receiver may enter a business, seize all the files, take over supervision of employees, seize bank accounts, run the business as appropriate or even liquidate it. Additionally, the FTC may try seek control and/or seize assets from third parties that are not defendants to the litigation if the FTC believes that those third parties are in possession of funds traced to money paid by consumers as a result of deceptive trade practices. For example, a receiver may seize reserve funds held by merchant banks, seize funds held with Amazon, and drain any bank accounts held by the defendants. The FTC may also seek an order requiring defendants to repatriate any foreign assets back to the United States in order to preserve those assets for potential return to consumers. For example, the FTC may ask the judge to order defendants to transfer all funds held in foreign bank accounts back to the United States.

Press Releases

The FTC often issues press releases regarding filed cases, settlements, and judgments on its website, which usually link to copies of filed federal complaints and other court documents. Public information about federal lawsuits is also available on PACER, the government's repository of documents filed in federal courts nationwide. From the perspective of businesses, the press releases from the FTC are highly inflammatory and, in the opinion of many FTC defendants, harmful to the reputation of the defendants for years into the future. Even if defendants settle with the FTC, the initial press release from the filing of the complaint, and the press release about the settlement, will be republished by major news outlets and available on the internet for years. The best way to mitigate against the reputational harm of an FTC press release is to negotiate the best possible settlement terms with the FTC.

Initial Disclosures

Pursuant to Federal Rule of Civil Procedure, parties in a federal case must identify and make certain initial discovery disclosures. Such disclosures are typically due before the court’s first case management conference, which is an initial hearing that the court may set through a scheduling order. More specifically, the parties must identify a list of “witnesses,” a list of “documents” relevant to the litigation, and either a “damages computation” (for plaintiffs) or any insurance information (for defendants). As part of the initial discovery process, the parties must also confer and discuss initial issues in the case and usually file a joint discovery plan or other statement according to each court’s local rules and any specific judge’s orders.

In FTC cases, defendants are also often required to make additional disclosures at the outset of the case. Usually, these requirements are part of a TRO or preliminary injunction, and may include immediate disclosure of defendant’s advertising and business affiliates, certain financial information by each defendant, and statements of consent by the defendants that their financial institutions may share account and other information with the receiver and/or the FTC. The stated purpose of most of these initial disclosure requirements is to allow the FTC to identify assets that need to be frozen, or to allow a receiver to transfer certain assets of the defendants into a receivership.

Notice to Employees and Business Associates

Another common requirement of the TRO is that each defendant provide a copy of the TRO to its employees, business associates (including advertising affiliates/ad networks), and other vendors, and thereafter provide the FTC with written notice that it has done so. The effect of this requirement is two-fold. First, the FTC is provided with a list of the defendant’s business associates, employees, and marketing affiliates, which it can use for discovery purposes. Second, to the extent the business associates did not learn of the enforcement action through industry gossip or the FTC’s press release, they are informed when they receive the notice. Upon receiving the notice, business associates tend to act quickly to terminate their relationship with the defendant and otherwise distance themselves, resulting in additional ostracization of the defendant.

Preliminary Injunctions

Another powerful weapon that the FTC often uses, or threatens to use, is the preliminary injunction. Instead of seeking an immediate TRO in a case, which may convert to a preliminary injunction in a matter of weeks after a hearing, the FTC can wait for a period of weeks or even months before filing a motion for a preliminary injunction. The FTC often asks defendants to voluntarily agree to enter a preliminary injunction, to avoid the time and expense for both parties in litigating the motion. If the parties cannot come to an agreement on an injunction, the FTC will file its motion, followed by formal notice to the defendants of the motion, under Federal Rule of Civil Procedure 65(a). Potentially, the FTC may seek a temporary restraining order and/or asset freeze, as outlined above, and then set a date and provide notice for a preliminary injunction hearing. Rule 65(a) also allows a court to consolidate a trial on the merits with a preliminary injunction hearing, which defendants may want to oppose if they need more time to prepare their defense. A preliminary injunction seeks to prohibit or sometimes mandate certain conduct pending the litigation, which may last for years. Just like a TRO, a preliminary injunction can contain an asset freeze, request for the appointment of a receiver, and other provisions that may threaten to shut down the business of a defendant.

In many FTC lawsuits, whether or not to oppose the preliminary injunction is one of the most important decisions in the case. The statistics are largely in the FTC’s favor, as most preliminary injunctions motions in FTC lawsuits are granted, and the instances where a judge has denied preliminary injunction motions are few. It can be quite expensive to oppose a preliminary injunction, and sometimes the testimony of expert witnesses and forensic accountants—persons who usually do not appear in litigation until summary judgment or trial—is required. However, even a partial win on a preliminary injunction motion can be critical for framing settlement discussions in the defendant’s favor. For example, the judge may exclude certain businesses or assets from the preliminary injunction, thus putting the FTC’s prospects of a full recovery of alleged consumer harm in question.

Of course, there are cases where it does not make sense to dedicate significant time or resources to opposing the preliminary injunction, such as when the defendant is already in settlement negotiations with the FTC, when the amount of alleged consumer harm is low, or when the defendant lacks the funds to file a meaningful opposition. In such situations, the defendant will often stipulate to the preliminary injunction without admitting any fault.

For these reasons, parties facing a potential preliminary injunction should consult with counsel about whether and how to file a written opposition and assert arguments at any hearing, or, alternatively, how to enter a negotiated stipulation on a preliminary injunction with the FTC.

Legal Counsel and Defense Costs

Lawsuits in federal court are a serious matter that typically require retention of experienced FTC defense attorneys. This may be difficult if there is an asset freeze or limited funds. However, if there is an asset freeze, counsel may be able to obtain a carve-out for the payment of legal fees and/or living expenses of the defendants. Attorneys can also work with their clients on creating an estimated litigation budget and strategy plan so that clients generally have an idea about projected defense costs. Importantly, litigation with the FTC involves specialized knowledge about FTC litigation and settlement practices, which are especially important when the future of a business, and the personal assets of the defendants, are at risk.

Discovery

Discovery is the process by which parties obtain evidence for the case. There are various forms of discovery in a federal lawsuit, including written requests (interrogatories and requests for admission) to the other party, requests for production of documents or other tangible things, and notices to depose a party. Discovery may also include subpoenas to third parties to obtain documents and/or oral testimony. Attorneys prepare discovery documents and take depositions, in addition to asserting written objections, preparing any necessary discovery motions, and preparing for and defending clients’ depositions.

One of the most critical components of discovery, which must be put in place long before an enforcement action is filed, is preservation of evidence. Many times, defendants believe the FTC’s allegations of their misconduct are exaggerated—such as when the FTC’s entire complaint is based on a screenshot of a webpage that did not receive much traffic. Problems arise, however, when the defendant did not preserve adequate records of its webpages, advertisements, or sales such that it can disprove the FTC’s allegations with the required level of certainty.

Settlement

In most cases, the FTC is open to settlement as a way to preserve time and resources. In fact, the FTC’s Operating Manual states that the FTC’s policy is to secure an effective order by consent if feasible, and only by litigation “if necessary.” Often, settlement discussions begin before a complaint is even filed or shortly thereafter. Unlike private litigation, cases involving settlement agreements with the FTC will often be public and available through the FTC website, as noted above. The FTC will also review whether defendants comply with settlement agreements and may file a motion for contempt if defendants are in violation of a final settlement order.

There usually are no private settlement agreements with the FTC. Instead, the terms of settlement agreements are embodied in final court orders, signed by the judge. So the words, “settlement with the FTC,” in this guide refer to the negotiations and finalization of a final court order, which a judge will sign.

Negotiations

Experienced counsel are essential for effective negotiating with the FTC, for drafting and reviewing written terms so they are the most favorable for defendants, and for ensuring that any settlement discussions remain confidential and are used only for the purpose of settlement. Experienced FTC defense lawyers are also essential in advising whether certain terms are standard (and thus not likely to be negotiated by the FTC) or whether there is room for bargaining (such as on monetary amounts where inability to pay is shown, and in a variety of other areas).

Monetary Settlement

Settlements with the FTC often include a monetary settlement amount paid by defendants, which is characterized as restitution, redress, or civil penalties. As explained above in the Consumer Harm section, the FTC usually seeks to settle at an amount equal to “consumer harm,” which does not include deductions for costs incurred. Thus, consumer harm amounts are often much higher than defendants could ever pay.

In the event that a defendant cannot pay a settlement because a defendant’s total business and personal assets are lower than the amount of consumer harm, the FTC may accept the payment of an amount lower than the full consumer harm number. In these situations, the FTC will request that defendants complete detailed business and personal financial statements, listing all liquid and non-liquid assets. Thereafter, the FTC would require a payment of all of defendants’ assets, with the difference between the amount of defendants’ assets and the full consumer harm being “suspended.” The suspended amount would never be due and payable, unless the FTC discovers that the defendants lied and failed to disclose assets on their financial disclosure statements.

The amounts of monetary settlements in FTC cases, both in cases where defendants can pay and when they do not have the ability to pay the full amount of consumer harm, varies widely depending on the claims. Importantly, experienced counsel are essential in minimizing what defendants actually pay to the government.

Non-monetary Settlement Provisions

Settlements with the FTC will also include non-monetary provisions. Common terms include findings of fact and definitions, which should be carefully reviewed by counsel, as the specific defined terms can make a crucial difference in the scope of a settlement and resulting court order. Other common non-monetary provisions include:

  • Specific prohibitions on false statements related to the FTC claims contained in the complaint, along with specific substantiation requirements for these claims. For example, the FTC may require randomized, double-blind, and placebo-controlled testing, conducted by qualified researchers, as substantiation supporting any weight loss claims in marketing.
  • General prohibitions on all marketing claims regarding broad sectors, without competent and reliable scientific evidence that substantiates that the marketing statements are true. For example, the FTC may require this sort of substantiation for any marketing claims about the benefits, safety, performance, or efficacy of anti-aging products.
  • An order to preserve all documents related to clinical studies, testing, or other substantiation for any marketing claims.
  • Prohibitions on specific business activity or business methods. For example, the FTC can prohibit a defendant from any negative option offers to consumers.
  • Prohibitions on a wide variety of activity that is already unlawful under the FTC Act, thereby making most violations of the FTC Act also violations of the final court order.
  • Prohibitions on engaging in affiliate marketing without a) having ad networks and affiliates provide their full contact information to a defendant; b) providing each ad network and affiliate a copy of the final FTC order and obtaining their agreement to comply with the order; and c) reviewing marketing materials of affiliates prior to the affiliate engaging in the marketing of defendant’s products.
  • An order to cooperate with the FTC in future investigations.
  • Requirements that defendants serve the final order on all owners, directors, and employees of defendant.
  • A requirement to respond to written requests of the FTC for information on defendant’s current business activity.
  • A variety of other requirements relating to the specific allegations in the case.

While some settlement provisions offered by the FTC are non-negotiable, many provisions may indeed be negotiable. Experienced counsel is highly recommended for negotiating settlements with the FTC.

Collection and Liquidation of Assets

As explained above, if defendants do not have the ability to pay the full amount of “consumer harm,” the FTC may ask the defendants to complete detailed financial schedules of all of their assets. Thereafter, the FTC and defendants negotiate about what defendants may keep and what assets will be collected and liquidated at the time of settlement. Importantly, the FTC often demands that defendants liquidate most of their major assets if they cannot pay the full consumer harm amount, including watches, cars, jewelry, and houses. In addition, the FTC will review whether any funds or other assets were improperly transferred or hidden to avoid payment to the FTC. There are some assets with may be kept by defendants in a negotiation with the FTC, which is why experienced counsel is so important in these negotiations.

Reporting Requirements

Orders after FTC settlements will often have one or more reporting requirements. Some reporting requirements include:

  • A requirement to provide a compliance report after one year identifying all of defendant’s business and contact information.
  • A requirement to notify the FTC of any change of address, change in corporate structure (i.e., any mergers or sales of the defendant’s companies or related subsidiaries, parents, and potentially affiliates), or change in business activities of a defendant for 20 years.
  • An order to keep a list of business records (for example, accounting, payroll, vendor records) for a specific period of time, over the course of 20 years.
  • A requirement to keep records for a number of years to show compliance with the order (for example, copies of advertisements for five years after a false advertising case) and provide copies of requested documents to the FTC shortly after an FTC request (for example, within 14 days).

Some reporting requirements are negotiable, depending on the allegations of the case and the overall dynamic of the negotiations.

Contempt

Where there is a violation of a final court order and injunction in an FTC case, even one that was entered through a settlement agreement, the FTC may initiate court proceedings alleging contempt of court, which is a quasi-criminal matter involving potential fines and even imprisonment. While contempt proceedings require certain formalities and are not commonplace, the FTC has sought a finding of contempt in many cases over the years. Importantly, federal court rules not only bind the defendant parties to the terms within a final order and injunction (violation of which can result in contempt), but the defendant’s agents, employees, and others that have notice of the final order and act in active concert or participation, may also be held in contempt. In contempt proceedings, the stakes are high, given the potential for fines and imprisonment. Thus, after entering a final court order with the FTC, defendants should develop clear policies for all defendant’s agents and employees to ensure compliance with the final order and avoid potential contempt proceedings.

Trial and Appeal

The FTC always tries to settle cases, and if a defendant fails to make an appearance in court, the FTC will obtain a default judgment. After the litigation starts, the FTC will eventually move for summary judgment against a defendant. However, if a case is not resolved with a settlement, default judgment, or summary judgment, the FTC will conduct a traditional trial in front of a federal judge on all the claims. The FTC must follow the federal rules of civil procedure and the federal rules of evidence for any trial it conducts in federal district courts around the country. Upon a final judgment, either side may appeal the judgment to a federal Circuit Court.

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