New Emphasis on Rule-Based Enforcement
For decades leading up to the Supreme Court’s AMG decision, most lower courts indulged the FTC’s expansive interpretation of Section 13(b) of the FTC Act. Although that provision only empowers the FTC to obtain temporary restraining orders or “permanent injunction[s],” the agency read these two words to authorize imposition of broad equitable monetary relief (including disgorgement and restitution) against parties found to have violated antitrust or consumer protection standards enforced by the FTC. To say that the FTC leaned heavily on that authority would be an understatement. In the six years before AMG was decided, the FTC used Section 13(b) as a vehicle to collect over $11.2 billion dollars, much of that obtained through voluntary settlements. The FTC’s authority to obtain such relief was seemingly so inviolate that many companies made the calculated decision to negotiate large-dollar settlements rather than face potentially larger-dollar judgments in court. Then suddenly poof! The illusive power went away.
Sticking with the evolutionary metaphor, it was as if a catastrophic meteor slammed into FTC headquarters that day in June 2021, and the dust has yet to settle. One thing is clear: there will not be a quick legislative fix. Initial attempts to rally congressional support for rebooting the FTC’s lost monetary relief authority faltered and there are no apparent signs of revival. Legislative solutions being unavailing, the agency has pursued various other paths to reposition itself and utilize its remaining arsenal of remedies. As discussed below, one workaround has involved an increased reliance on administrative litigation as a predicate for seeking monetary relief in federal court under a different provision of the FTC Act—a process the Supreme Court in AMG rightly labeled as “cumbersome.” But another somewhat less cumbersome path for the FTC to obtain monetary relief from parties subject to its oversight involves rules—that is, formally promulgated rules (or statutes given the same legal effect as rules) the FTC is empowered to enforce—and AMG did nothing to limit the FTC’s authority in this regard. Examples of FTC-enforced rules include the rule implementing the Children’s Online Privacy Protection Act (COPPA), the Telemarketing Sales Rule, and the Restore Online Shoppers Confidence Act (ROSCA).
Section 5(m)(1)(A) of the FTC Act allows the agency, through a federal court action, to obtain civil penalties for violations of most FTC-enforced rules where the defendant committed the rule violation “with actual knowledge . . . that such act is unfair or deceptive and is prohibited by such rule,” or where such knowledge can be “fairly implied on the basis of objective circumstances.” The maximum amount the FTC can seek in civil penalties adjusts annually but is currently $50,120 per violation.
Even at levels far below the maximum, monetary exposure tied to civil penalties can be significant in rule-based FTC enforcement actions. For instance, in the case of a large technology company with millions of users or subscribers, in a rule-violation case the FTC typically would argue that each relevant consumer account or transaction involves a separate discrete violation and, depending on the theory and facts, the FTC may assert that individual users or consumers were impacted by multiple separate violations. Where there is a “continuing” violation of an FTC rule, the FTC Act provides that civil penalties may be calculated on a per-day basis—although whether and when this may serve to cap civil penalty exposure remains unclear from the limited case law applying that provision.
Many FTC consumer protection cases involve conduct that is alleged to be deceptive or unfair in violation of the FTC Act and alleged to violate one or more FTC rules. Pre-AMG, in such cases the FTC typically did not prioritize civil penalties, as Section 13(b) provided the easiest path to obtaining a large-dollar settlement or judgment. Section 13(b) was interpreted to allow the FTC to prove certain conduct unfair or deceptive and claim very large amounts in equitable monetary relief in one federal court action—often basing such relief on total revenues earned by the defendant, without any offset for the value of the products or services that were sold. By comparison, proving rule violations and reaching comparable dollar amounts in civil penalties can be more complicated. Each rule has its own proof requirements, and as discussed in another recent article, there are often ambiguities in those terms, which can make the FTC’s burden of proof more challenging and give rise to defenses. Moreover, when the FTC brings an action seeking civil penalties it has a statutory obligation to refer the matter to the DOJ, giving the DOJ the option to take the lead in bringing the case for the government, even when the claims are settled and never litigated. Such referrals can involve ceding control of the action to the DOJ, which the FTC may be loath to do. But when the FTC relied solely upon Section 13(b) as its authority for obtaining monetary settlements, this complication was removed.
These factors in the past influenced the FTC’s case selection, the most attractive cases often being ones where persuasive arguments could be made about high levels of monetizable injury, regardless of the number of potential rule violations. But with Section 13(b) no longer being a viable means for obtaining monetary relief, civil penalties have become a key focus, and it appears the FTC is now prioritizing cases where the volume of potential rule violations may be quite substantial.
The attraction of rule-violation cases to the FTC extends beyond the availability of civil penalties. Section 19(a)(1) of the FTC Act also allows the agency, in a federal court action, to seek broad forms of redress, including damages, for “injury to consumers . . . resulting from the rule violation.” In the pre-AMG environment where Section 13(b) reigned supreme, this provision was seldom invoked. But now it provides the closest analogue to the types of monetary relief formerly available through Section 13(b), albeit predicated upon proof of rule violations and subject to other injury and causation showings.
Rule violations are now where the money is. And this helps explain why the FTC, beyond enforcing existing rules with increased vigor, is also working feverishly to promulgate new rules. Under Chair Khan’s leadership, the FTC has embarked upon a spree of new and wide-ranging rulemaking activities, not only on consumer protection issues (the focus of most existing rules) but also in the competition arena. For example, in the past year the FTC announced that it is exploring rules to limit junk fees both in the auto industry and more generally. In August 2022, the agency provided notice of a significant proposed rulemaking cracking down on commercial surveillance and lax data security. In May 2023, the FTC proposed expanding the Health Breach Notification Rule. Another new proposed FTC rule would revamp and expand the Commission’s existing rule on so-called “negative option” marketing practices. And yet another recently proposed rule would ban marketers from using deceptive review and endorsement practices, such as publication of fake reviews, suppression of negative reviews, and payment in exchange for positive reviews.
Most notably, earlier this year the FTC proposed an expansive new competition rule that would broadly prevent employers from entering into non-compete clauses with workers and require that existing non-competes be rescinded—a rule the FTC estimates could affect 30 million employer-employee relationships. If the FTC adopts such a rule, it is certain to be the subject of numerous court challenges. More generally, as the FTC ramps up its rulemaking activity and shifts to heavier reliance on rule-based enforcement, litigation over FTC rules and related enforcement may become the new normal.
Increased Reliance on Administrative Litigation
Where the FTC seeks to challenge conduct that does not involve a rule violation (or violation of a prior FTC order), it no longer has the ability to go directly to federal court and seek monetary relief of any kind. But there is a more circuitous path.
As explained in AMG, Section 19 of the FTC Act authorizes the Commission to seek consumer redress in federal court for unfair or deceptive acts or practices for conduct that violates a prior cease and desist order, provided the defendant had cause to know its conduct was “dishonest or fraudulent.” This is the process for obtaining monetary relief that AMG described as “cumbersome,” and indeed it is. Depending how one counts, it involves three or four steps. The FTC first must file a complaint before an FTC administrative law judge (ALJ) seeking a cease-and-desist order. The ALJ’s initial decision is then “appealed” to the Commission, which issues its own decision. Any Commission decision issuing a cease-and-desist order would then be appealable to a federal appeals court. Only if the FTC prevails on the appeal would the agency then be permitted to file a federal court action under Section 19 seeking monetary relief.
It’s no wonder, prior to AMG, that the FTC almost never invoked this process, opting for the streamlined one-step process then available through Section 13(b). What is perhaps more surprising (given the time and resources involved) is that the Commission post-AMG is bringing cases like this, which will take years to litigate to conclusion if not settled in the interim. This is a sign of how limited the FTC’s options are. But in truth, the FTC must bring cases like this if it hopes to continue obtaining significant monetary settlements from companies charged with unfair or deceptive practices that do not involve rule violations. For such matters, the threat to commence a multi-phase, multi-year litigation potentially culminating in a Section 19 federal court action for monetary relief is the closest thing the FTC now has to the Section 13(b) weapon the FTC has lost.
Further indicating that the FTC intends to avail itself more often of this previously dormant remedial path, the Commission very recently announced proposed changes to its Rules of Practice that would, among other things, technically eliminate any “appeal” of ALJ decisions to the Commission, making ALJ decisions more akin to “recommendations.” What remains to be seen is how Axon may impact this.
The FTC’s administrative litigation process has long been criticized. One federal judge described the FTC’s process as a “legal version of the Thunderdome in which the FTC has rigged the rules to emerge as the victor every time.” As a former Commissioner years ago put it, the process effectively makes the FTC “investigator, prosecutor, judge, and jury.” Axon involved two consolidated cases—one arising from an FTC administrative litigation, and another arising from an administrative litigation before the Securities and Exchange Commission (SEC). The respondents in both matters claimed that the agencies’ ALJs are insufficiently accountable to executive oversight, violating separation-of-powers principles. To the extent it involved the FTC, the question before the Supreme Court in Axon was a narrow one: namely, whether constitutional challenges to the FTC’s structure and administrative litigation framework may be heard in the first instance by federal district judges as opposed to the Commission itself, to which the Court answered “yes.” Narrow though the question may have been, Justice Kagan, who wrote for the unanimous Court, rightly observed that the underlying substantive challenges “are fundamental, even existential.” Among other things, the Court held that such constitutional questions are “outside the [FTC’s] expertise,” adding: “The Commission knows a good deal about competition policy, but nothing special about the separation of powers.”
Just as the underlying substance of these constitutional questions was beyond the scope of the Axon decision, they are beyond the scope of this article. What is clear, however, is that the FTC’s in-house litigation process is now under the microscope, and federal court constitutional challenges facilitated by Axon already have begun. Thus, at the very moment that the Commission is moving to place heavier reliance upon this aspect of its enforcement program, the continued viability of that process is an open question—yet another indication of what a dynamic time this is in the agency’s evolution.
Indeed, as this article was being finalized for publication, the Supreme Court announced that in the 2023-24 term it will hear a case that squarely presents the question of whether the SEC’s reliance upon agency-employed ALJs to resolve disputed claims against private parties violates the Constitution. Given the close overlap between the SEC’s and FTC’s approaches to administrative litigation, the Court’s decision in that case could have wide-ranging impacts on the FTC as well.
Exploration of the Outer Limits of FTC Statutory Authority
Stepping in when she did, Lina Khan’s tenure as FTC Chair might have been largely defined by efforts to navigate around AMG, but her ambitions are far greater. She is a leading voice behind what some have labeled as a “Neo-Brandeisian Revolution,” which posits that the FTC in modern times has been an abysmal failure. One prescription for that perceived problem is to free the agency from constraints that might keep it from “employing all the tools available to the FTC.” As Chair Khan stated not long after assuming her new role: “There has been a bit of a missed opportunity, especially over the last few decades, to take full advantage of the institutional tools that Congress granted the agency.” Chair Khan came to liberate the FTC, and for better or worse it seems she has.
In Chair Khan’s view, part of what has been holding the FTC back has been the agency’s own prior policy statements and guidelines. In September 2021, months after arriving at the FTC, Chair Khan, joined by the two other Democratic Commissioners, announced that the FTC was withdrawing its approval for the 2020 Vertical Merger Guidelines, expressing the view that the Guidelines were “flawed,” particularly in how they accounted for potential efficiencies from vertical transactions. Since then, the Commission has taken prominent action to challenge two vertical mergers, and more challenges may follow.
Meanwhile, the antitrust bar has been anxiously awaiting the issuance of widely anticipated new DOJ/FTC merger guidelines. As this article went to press, the FTC and DOJ jointly released their proposed updates to the Merger Guidelines and solicited public comments on the proposals. In announcing the long-awaited updates, Chair Khan stated: “With these draft Merger Guidelines, we are updating our enforcement manual to reflect the realities of how firms do business in the modern economy. Informed by thousands of public comments—spanning healthcare workers, farmers, patient advocates, musicians, and entrepreneurs—these guidelines contain critical updates while ensuring fidelity to the mandate Congress has given us and the legal precedent on the books.” Further signaling the agencies’ clear departure from the approach of enforcing antitrust laws with a singular focus on consumer welfare, the press release announcing the updates emphasized that the “[p]roposed guidelines would address the many ways mergers can weaken competition, harming consumers, workers, and businesses.”
The Khan Commission’s prompt withdrawal of the Vertical Merger Guidelines was notable, but even more notable was Chair Khan’s withdrawal of the FTC’s 2015 Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act (2015 Policy Statement). Chair Khan was sworn in on June 15, 2021. Less than three weeks later, on July 1, 2021, she led the Commission’s new Democratic majority in rescinding the 2015 Policy Statement—which had been adopted under a previous Democratic Chair with support from one of the then two sitting Republican Commissioners. The 2015 Policy Statement outlined principles governing when and under what circumstances the FTC would exercise its authority to bring “standalone” actions under Section 5 of the FTC Act challenging “unfair methods of competition.” In line with modern consensus thinking of both Republican and Democratic FTC leaders (at least as of that time), the 2015 Policy Statement signaled that any use of the FTC’s powers in this regard would be “guided by the public policy underlying the antitrust laws, namely, the promotion of consumer welfare,” and would be consistent with the “spirit” of the Sherman and Clayton Acts. In revoking the 2015 Policy Statement, Chair Khan and her colleagues sent a clear signal that “tethering Section 5 to the Sherman and Clayton Acts” was in effect an abdication of the FTC’s unique institutional role as an administrative agency with the power to adjudicate cases ranging well beyond the limits of established antitrust law. This was followed, in November 2022, by issuance of a new Section Policy Statement, which embodies a vision for using Section 5 in ways that “may depart from prior precedent based on the provisions of the Sherman and Clayton Acts.”
How exactly the Commission intends to use this broadly conceived authority remains to be seen, although the 2022 Policy Statement provides some clues. In a “non-exhaustive” list of examples of how it might see to invoke Section 5, the FTC references these practices, among others:
- mergers or acquisitions that may not violate the Clayton or Sherman Acts but might nonetheless “have [a] tendency to ripen into violations of the antitrust laws”;
- a “series” of mergers, acquisitions, or joint ventures, none of which “individually” violate the antitrust laws, but that “tend to bring about the harms that the antitrust laws were designed to prevent”;
- acquisitions “of a potential or nascent competitor that may tend to lessen current or future competition”;
- uses of “market power in one market to gain a competitive advantage in an adjacent market”; and
- loyalty rebates, tying, bundling, and exclusive dealing arrangements that are beyond the reach of established antitrust standards, but again “have the tendency to ripen into violations of the antitrust laws.”
This is a bold enforcement agenda, and it is emblematic of how quickly and significantly the FTC, under present leadership, is evolving in new directions. As with other developments in the FTC’s enforcement approaches, the courts will also likely play a role here.
Change is inevitable and does not always occur in a standard or predictable fashion. There are intervals in time when evolutionary patterns can be sped up. As relates to the FTC, we may be living through such a moment now. There are different catalysts at work placing pressure on the agency to reposition itself in varied ways. Some of that change emanates from within the agency, and some externally, creating actions and reactions. Like an organism fighting to survive and thrive in a disrupted environment, the FTC is in the process of remaking itself, it seems, and it will be interesting to discover what lies ahead when the current dynamic period gives way to some form of new equilibrium.