Federal Trade Commission Investigations and Enforcement Actions
Rome LLP has significant experience in helping businesses to respond to regulatory investigations and enforcement actions by the Federal Trade Commission, as well as state Attorneys General. The Federal Trade Commission (FTC) is the federal regulatory agency responsible for enforcing consumer protection laws designed to prevent fraud, deception, and unfair business practices, while each state has its own Attorney General (AG) that is responsible for enforcing similar state laws at the state level. While this page is devoted to discussing our experience in handling FTC matters, many of the same considerations apply when dealing with AGs.
The FTC administers a wide range of laws and regulations and has enforcement and administrative responsibilities under more than 70 statutes, including the FTC Act, which primarily defines the Commission’s powers and duties. Section 5 of the FTC Act governs unfair and deceptive acts and practices and, of all the statutes administered by the FTC, is the primary authority relied upon by the FTC in the majority of matters we handle in advising and defending online advertisers and other businesses in connection with CIDs and FTC enforcement actions.
Civil Investigative Demands
The FTC may initiate a prelawsuit investigation into unfair and deceptive business practices in one of two ways: informally via a voluntary request or access letter, or formallly via a Civil Investigative Demand (CID). While an access device is a voluntary process, failing to respond to an access letter will invariably result in the issuance of a CID, which is a compulsory process, and will also invite additional scrutiny by the FTC. While many of the same concerns apply, we will devote the rest of our discussion here primarily to CIDs, which tend to be preferred by the FTC over access letters in this context.
Pursuant to section 20(c) of the FTC Act, 15 U.S.C. 57(b)-1(c), the FTC may issue a Civil Investigative Demand (CID) to “any person” the Commission has reason to believe has documents, tangible things, or information relevant to unfair and deceptive practices in or affecting commerce. A CID may require a recipient to produce such documentary material for inspection and copying, answer in writing written interrogatories, give oral testimony, or furnish any combination of such material, answers or testimony.
Should a recipient fail to comply with a CID, the FTC may file a motion to enforce the CID in federal district court, which may result in fines (and even criminal charges) against a recipient that fails to comply. A deficient or otherwise non-compliant response may also lead the FTC to refocus or expand its investigation, and/or initiate a regulatory enforcement action sooner rather than later where the recipient is a target of the investigation.
Thus, if you receive a CID, you should take it very seriously and contact us immediately so that we can help you understand your obligations, along with the potential implications to you and your business; and develop a comprehensive response plan and potential defense strategy. The obligations imposed by a CID may be onerous, and the FTC will prescribe a specific protocol about how to produce documents. Moreover, you will have to certify the accuracy and completeness of your responses and production. Thus, you need to make sure all this is handled properly, on a timely basis.
How to Respond to a Civil Investigative Demand
Rome LLP will immediately review and analyze the CID to determine the best course of action to ensure that you comply with your legal obligations while protecting you and your business to the maximum extent possible.
Keep in mind that assembling responsive documents may implicate hundreds of thousands of records, and will often require careful coordination with IT specialists and electronic discovery vendors to identify appropriate data sources, ensure the proper recovery of Electronically Stored Information (ESI), compile and evaluate the potential universe of responsive documents, and facilitate a streamlined production.
In this respect, it is important to understand that ESI may encompass all interim, draft, and final versions of email, voicemail, text messages, chats (Skype, Telegram, Signal, WhatsApp, etc.), and all other electronic communications, databases spreadsheets, word processing documents, CRMs, Internet usage, telephone, and network access logs, websites and web pages, and all similar data that is stored on, utilized or transmitted via a computer or computer network. ESI may also include metadata, which is information about a particular record or data set which describes how, when and by whom it was collected, created, accessed, modified, and how it is formatted. Thus, a CID can be extremely invasive.
FTC Civil Investigative Demand Negotiations
Depending on the scope of the CID, Rome LLP may meet and confer with the FTC to clarify or limit the scope of certain requests, obtain an extension of the compliance deadline, or stagger production to streamline the process. In appropriate cases, we may also consider filing a motion to quash or limit the CID on the grounds that the requests are not reasonably relevant, uncertain or indefinite, or beyond the FTC’s authority, or that the CID itself is procedurally deficient.
Unlike moving to quash a subpoena in traditional civil litigation, however, a motion to quash or limit a CID must be filed directly with the FTC rather than in a court of law; it must be filed within 20 days of the CID being served or, if the response date is less than 20 days after service, prior to the response date—after meeting and conferring with the FTC; and the Commission itself will decide the motion. Thus, in most cases, a successful motion to limit or quash will be followed by the FTC issuing a new CID, which cures the challenged deficiencies.
Review and Analysis of the CID
Based on our experience in this area of the law, our review and analysis of the CID will often enable us to determine whether the FTC views you as a likley target of the investigation, or simply as a likely source of information relevant to an investigation. Of course, this determination may influence the formulation of our response and defense strategy.
Where the CID calls for the production documents, we will endeavor to protect your trade secrets by designating appropriate documents as confidential, and preserving available objections. We may also request a return of the documents upon FTC’s completion of its review to facilitate our ability to defend you later in the process, particularly in cases where we determine that you are a likely target of the FTC’s investigation.
Where the CID calls for oral testimony, you will generally need to physically appear for examination before an FTC investigator in an FTC field office on the date and time set forth in the CID, and testify under penalty of perjury. We will accompany you to the examination and challenge objectionable questions and lines of inquiry to protect you. For example, we may object to the form of certain questions as leading, confusing or compound to keep your testimony clear and concise, and help ensure a clean record. We may also raise important privilege objections, such as the attorney-client privilege (to ensure that you do not reveal and waive protected communications between us regarding the investigation), and the Fifth Amendment (so that you do not incriminate yourself criminally).
CID Legal ObligationsCritically, from the date you receive a CID, you are under a legal obligation to preserve all documents and information reasonably related to the subject matter of the CID and the FTC’s inquiry. That means that all hardware and storage media containing responsive ESI should be preserved, regardless of whether duplicates of the information exist on other hardware, systems, or platforms. No new software programs should be loaded, and no defragmentation or data compression programs should be run on any platform that may contain ESI subject to the litigation hold. You and your company’s officers, directors and employees will also need to ensure the preservation of any and all relevant items in your possession, custody or control, including necessary and appropriate steps to suspend routine back-up, storage, or destruction polices to the extent they may destroy potentially relevant information.
FTC Enforcement Actions
Unfortunately, a CID may be a prelude to an enforcement action by the FTC.
Upon completing its investigation, the FTC may recommend the commencement of an enforcement action against you and your business, either in federal court or as an administrative action. Alternatively, the FTC may send you a private closing letter requesting informal corrections, or simply closing the matter altogether. Don’t expect a quick decision here as it often takes one year or more from the commencement of an investigation for the FTC to make this determination. If the FTC decides the conduct at issue implicates criminal concerns, the FTC may also refer the matter to the Department of Justice for potential criminal proceedings. This occurs most commonly in situations involving wire fraud, bank fraud, and related crimes.
By retaining experienced counsel early on in the process to handle the CID response, however, the fact of their involvement and engagement with the FTC may help to promote an early resolution or mitigate some of the hardships (such as avoiding an asset freeze) that might otherwise be imposed in case the FTC decides to proceed against you in federal court.
That being said, should the FTC file suit against you in federal court, the FTC has a broad range of remedies at its disposal.
What Remedies Does the FTC Pursue?
To begin with, the FTC may seek injunctive relief in the form of a Temporary Restraining Order (TRO), Preliminary Injunction (PI), and/or Permanent Injunction. A TRO/PI may prohibit you from engaging in certain conduct, require you to take certain actions, and may even freeze you and your company’s assets pending resolution of the action; and a permanent injunction may impose certain conditions upon, or otherwise restrict your ability to engage in, particular business practices or do business in a particular industry; and may even ban you for life from engaging in, or assisting others to engage in, certain conduct.
In some cases, the FTC may seek the appointment of a receiver, which is a person appointed by the Court as custodian of an entity’s property, finances, general assets, and/or business operations. A receiver may take control of a company’s files and assets, supervise its employees, collect and review financial information, and direct the activities of the company as it deems appropriate, including but not limited to liquidating the company’s assets.
The FTC may also seek monetary remedies in the form of restitution, consumer redress, and, in some cases, civil penalties. The monetary amount sought by the FTC as restitution is often calculated as the full amount of “consumer harm,” which the FTC generally measures as the total amount paid by consumers without any deduction for business expenses incurred by the defendant. What does this look like? Say a defendant generates $30 million in sales which the FTC attributes to deceptive practices but retains only $3 million after paying advertising, inventory, and fulfillment costs. The FTC will pursue the gross number (i.e. $30 million) rather than the net profit number from the defendant as the measure of the so-called “consumer harm.”
Notably, a company’s owners and officers may also be personally liable under the FTC Act, because a corporation does not shield decision-makers from deceptive business practices claims.
Moreover, FTC enforcement actions are matters of public record. The FTC issues press releases and maintains a publicly searchable list of all enforcement matters. And, once filed in federal court, the complaint, motions, and all similar litigation documents are generally available for download online via the Public Access to Court Electronic Records (PACER) system and will appear in Google searches. Thus, an FTC enforcement action also provokes grave reputational harm to defendants.
It may take several years for an FTC enforcement action to run its course in federal court. Yet the FTC is generally open to exploring settlement as a way to preserve time and resources, and its stated policy is to achieve its enforcement objectives by a consent order if feasible, and by litigation only “if necessary.” Settlement discussions may begin even before a complaint is filed.
Thus, it should come as no surprise that most defendants choose to settle with the FTC—often early on in the process. Unlike most settlement agreements we encounter in civil litigation, a settlement with the FTC takes the form of a Stipulated Order for Permanent Injunction and Monetary Relief, which is a Court Order issued by a federal district court judge that in most cases (i) prohibits the defendant from engaging in, or assisting or facilitating others from engaging in, enumerated activities; (ii) imposes conditions, restrictions and limitations on the defendant’s ability to engage in enumerated activites; (iii) imposes a monetary judgment against the defendant, and a partial suspension of the judgment conditioned upon the truthfulness, accuracy and completeness of the defendant’s financial disclosures and compliance with the rest of the prohibitions, restrictions and requirements provided for in the order; (iv) requires the defendant to provide annual reports to the FTC regarding its compliance with the order for a period of 10 or more years; (v) imposes recordkeeping requirements on the defendant; and (vi) allows the FTC to monitor the defendant’s compliance with the order by requesting additional compliance reports and/or interviewing defendants’ regarding their compliance at any time.
Self-evidently, the stakes are extremely high in these matters. That is why you need experienced counsel like Rome LLP to vigorously defend your interests and negotiate the best resolution possible on your behalf.