LABMD, Inc. v. Federal Trade Commission

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 16-16270
________________________
Agency No. 9357
LABMD, INC.,
Petitioner,
versus
FEDERAL TRADE COMMISSION,
Respondent.
________________________
Petition for Review of a Decision of the
Federal Trade Commission
________________________
(June 6, 2018)
Before TJOFLAT and WILSON, Circuit Judges, and ROBRENO, * District Judge.
TJOFLAT, Circuit Judge:
*
Honorable Eduardo C. Robreno, United States District Judge for the Eastern District of
Pennsylvania, sitting by designation.
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This is an enforcement action brought by the Federal Trade Commission
(“FTC” or “Commission”) against LabMD, Inc., alleging that LabMD’s data-
security program was inadequate and thus constituted an “unfair act or practice”
under Section 5(a) of the Federal Trade Commission Act (the “FTC Act” or
“Act”), 15 U.S.C. § 45(a).1 Following a trial before an administrative law judge
(“ALJ”), the Commission issued a cease and desist order directing LabMD to
create and implement a variety of protective measures. LabMD petitions this
Court to vacate the order, arguing that the order is unenforceable because it does
not direct LabMD to cease committing an unfair act or practice within the meaning
of Section 5(a). We agree and accordingly vacate the order. 2
I.
A.
LabMD is a now-defunct medical laboratory that previously conducted
diagnostic testing for cancer. 3 It used medical specimen samples, along with
relevant patient information, to provide physicians with diagnoses. Given the
nature of its work, LabMD was subject to data-security regulations issued under
1
Section 5(a) declares unlawful “[u]nfair methods of competition in or affecting
commerce, and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C.
§ 45(a)(1). It empowers and directs the Commission “to prevent persons, partnerships, or
corporations . . . from using unfair methods of competition in or affecting commerce and unfair
or deceptive acts or practices in or affecting commerce.” Id. § 45(a)(2).
2
See 15 U.S.C. § 45(c).
3
LabMD is no longer in operation but still exists as a company and continues to secure
its computers and the patient data stored within them.
2
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the Health Insurance Portability and Accountability Act of 1996, known
colloquially as HIPAA. LabMD employed a data-security program in an effort to
comply with those regulations.4
Sometime in 2005, contrary to LabMD policy, a peer-to-peer file-sharing
application called LimeWire was installed on a computer used by LabMD’s billing
manager.5 LimeWire is an application commonly used for sharing and
downloading music and videos over the Internet. It connects to the “Gnutella”
network, which during the relevant period had two to five million people logged in
at any given time. Those using LimeWire and connected to the Gnutella network
can browse directories and download files that other users on the network
designate for sharing. The billing manager designated the contents of the “My
Documents” folder on her computer for sharing, exposing the contents to the other
users. Between July 2007 and May 2008, this folder contained a 1,718-page file
(the “1718 File”) with the personal information of 9,300 consumers, including
names, dates of birth, social security numbers, laboratory test codes, and, for some,
health insurance company names, addresses, and policy numbers.
In February 2008, Tiversa Holding Corporation, an entity specializing in
data security, used LimeWire to download the 1718 File. Tiversa began contacting
4
LabMD’s program included “a compliance program, training, firewalls, network
monitoring, password controls, access controls, antivirus, and security-related inspections.”
5
The record is not clear on the point but we assume that the billing manager installed the
peer-to-peer application on her workstation computer.
3
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LabMD months later, offering to sell its remediation services to LabMD. 6 LabMD
refused Tiversa’s services and removed LimeWire from the billing manager’s
computer. Tiversa’s solicitations stopped in July 2008, after LabMD instructed
Tiversa to direct any further communications to LabMD’s lawyer. In 2009,
Tiversa arranged for the delivery of the 1718 File to the FTC. 7
B.
In August 2013, the Commission, following an extensive investigation,
issued an administrative complaint against LabMD and assigned an ALJ to the
6
As described by the ALJ who initially presided over this case,
[Tiversa’s] efforts included representing to LabMD that the 1718 File had been
found on a peer-to-peer network and sending LabMD a Tiversa Incident Response
Services Agreement describing Tiversa’s proposed fee schedule, payment terms,
and services that would be provided. These contacts continued from mid-May
through mid-July 2008. In these communications, Tiversa represented that
Tiversa had “continued to see individuals [on peer-to-peer networks] searching
for and downloading copies” of the 1718 File. . . .
Tiversa’s representations in its communications with LabMD that the 1718 File
was being searched for on peer-to-peer networks, and that the 1718 File had
spread across peer-to-peer networks, were not true. These assertions were the
“usual sales pitch” to encourage the purchase of remediation services from
Tiversa. . . .
Tiversa did, however, share a copy of the 1718 File with a Dartmouth College professor, who in
February 2009 published an article about data security in the healthcare industry. Tiversa was a
“research partner” for the article, meaning it searched for and provided the professor with
relevant files to analyze. The professor did not share the 1718 File or its contents with anyone.
7
Tiversa’s CEO and the FTC offered testimony at a 2007 congressional hearing
regarding peer-to-peer file-sharing technology. About two months after the hearing, the FTC
and Tiversa began communicating. The FTC wanted Tiversa to provide it with information
regarding companies’ data-security practices. Tiversa, though, did not want a formal request for
information—such as a Civil Investigative Demand (“CID”)—to be issued directly to it because
it had been in talks about its possible acquisition by a third party. Tiversa thus created an entity
called “The Privacy Institute” so that a CID could be issued without directly implicating Tiversa.
The FTC issued a CID to The Privacy Institute in 2009 and The Privacy Institute provided the
FTC with the 1718 File.
4
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case. The complaint alleged that LabMD had committed an “unfair act or
practice” prohibited by Section 5(a) by “engag[ing] in a number of practices that,
taken together, failed to provide reasonable and appropriate security for personal
information on its computer networks.” Rather than allege specific acts or
practices that LabMD engaged in, however, the FTC’s complaint set forth a
number of data-security measures that LabMD failed to perform. 8 LabMD
8
The FTC’s complaint alleged that LabMD
(a) did not develop, implement, or maintain a comprehensive information
security program to protect consumers’ personal information. Thus, for
example, employees were allowed to send emails with such information to
their personal email accounts without using readily available measures to
protect the information from unauthorized disclosure;
(b) did not use readily available measures to identify commonly known or
reasonably foreseeable security risks and vulnerabilities on its networks. By
not using measures such as penetration tests, for example, respondent could
not adequately assess the extent of the risks and vulnerabilities of its
networks;
(c) did not use adequate measures to prevent employees from accessing personal
information not needed to perform their jobs;
(d) did not adequately train employees to safeguard personal information;
(e) did not require employees, or other users with remote access to the networks,
to use common authentication-related security measures, such as periodically
changing passwords, prohibiting the use of the same password across
applications and programs, or using two-factor authentication;
(f) did not maintain and update operating systems of computers and other
devices on its networks. For example, on some computers respondent used
operating systems that were unsupported by the vendor, making it unlikely
that the systems would be updated to address newly discovered
vulnerabilities; and
(g) did not employ readily available measures to prevent or detect unauthorized
access to personal information on its computer networks. For example,
respondent did not use appropriate measures to prevent employees from
installing on computers applications or materials that were not needed to
perform their jobs or adequately maintain or review records of activity on its
5
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answered the complaint, denying it had engaged in the conduct alleged and
asserting several affirmative defenses, among them that the Commission lacked
authority under Section 5 of the Act to regulate its handling of the personal
information in its computer networks.
After answering the FTC’s complaint, LabMD filed a motion to dismiss it
for failure to state a case cognizable under Section 5. The motion essentially
replicated the assertions in LabMD’s answer. Under the FTC’s Rules of Practice,
the Commission, rather than the ALJ, ruled on the motion to dismiss. The
Commission denied the motion, concluding that it had authority under Section 5(a)
to prosecute the charge of unfairness asserted in its complaint. LabMD, Inc., 2014-
1 Trade Cases P 78784 (F.T.C.) (Jan. 16, 2014).
Following discovery, LabMD filed a motion for summary judgment,
presenting arguments similar to those made in support of its motion to dismiss. As
before, the motion was submitted to the Commission to decide. It denied the
motion on the ground that there were genuine factual disputes relating to LabMD’s
liability “for engaging in unfair acts or practices in violation of Section 5(a),”
necessitating an evidentiary hearing. LabMD, Inc., 2014-1 Trade Cases P 78785
networks. As a result, respondent did not detect the installation or use of an
unauthorized file sharing application on its networks.
6
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(F.T.C.), at *1 (May 19, 2014) (quotations omitted). An evidentiary hearing was
held before the ALJ in July 2015.9
After considering the parties’ submissions, the ALJ dismissed the FTC’s
complaint, concluding that the FTC failed to prove that LabMD had committed
unfair acts or practices in neglecting to provide adequate security for the personal
information lodged in its computer networks. Namely, the FTC failed to prove that
LabMD’s “alleged failure to employ reasonable data security . . . caused or is
likely to cause substantial injury to consumers,” as required by Section 5(n) of the
Act, 15 U.S.C. § 45(n). 10 Because there was no substantial injury or likelihood
thereof, there could be no unfair act or practice.
The FTC appealed the ALJ’s decision, which under 16 C.F.R. § 3.52
brought the decision before the full Commission for review. In July 2016,
reviewing the ALJ’s findings of fact and conclusions of law de novo, see id. § 3.54,
the FTC reversed the ALJ’s decision.
The FTC first found that LabMD “failed to implement reasonable security
measures to protect the sensitive consumer information on its computer network.”
Therefore, LabMD’s “data security practices were unfair under Section 5.” In
9
Prior to the hearing, LabMD amended its answer and once again unsuccessfully moved
to dismiss the FTC’s complaint. Nothing in the answer or the motion is pertinent here.
10
Section 5(n) states, as a prerequisite for an act or practice to be unfair, “[T]he act or
practice [1] causes or is likely to cause substantial injury to consumers [2] which is not
reasonably avoidable by consumers themselves and [3] not outweighed by countervailing
benefits to consumers or to competition.”
7
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particular, LabMD failed to adequately secure its computer network, employ
suitable risk-assessment tools, provide data-security training to its employees, and
adequately restrict and monitor the computer practices of those using its network.
Because of these deficiencies, the Commission continued, LimeWire was able to
be installed on the LabMD billing manager’s computer, and Tiversa was ultimately
able to download the 1718 File. The Commission then held that, contrary to the
ALJ’s decision, the evidence showed that Section 5(n)’s “substantial injury” prong
was met in two ways: the unauthorized disclosure of the 1718 File itself caused
intangible privacy harm, and the mere exposure of the 1718 File on LimeWire was
likely to cause substantial injury. The FTC went on to conclude that Section 5(n)’s
other requirements were also met.11
Next, the Commission addressed and rejected LabMD’s arguments that
Section 5(a)’s “unfairness” standard—which, according to the Commission, is a
reasonableness standard—is void for vagueness and that the Commission failed to
provide fair notice of what data-security practices were adequate under Section
5(a). The FTC then entered an order vacating the ALJ’s decision and enjoining
LabMD to install a data-security program that comported with the FTC’s standard
of reasonableness. See generally Appendix. The order is to terminate on either
July 28, 2036, or twenty years “from the most recent date that the [FTC] files a
11
See supra note 10.
8
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complaint . . . in federal court alleging any violation of the order, whichever comes
later.” Id. at 6.
C.
LabMD petitioned this Court to review the FTC’s decision. LabMD then
moved to stay enforcement of the FTC’s cease and desist order pending review,
arguing that compliance with the order was unfeasible given LabMD’s defunct
status and de minimis assets. After an FTC response urging against the stay, we
granted LabMD’s motion. LabMD, Inc. v. FTC, 678 F. App’x 816 (11th Cir.
2016).
II.
Now, LabMD argues that the Commission’s cease and desist order is
unenforceable because the order does not direct it to cease committing an unfair
“act or practice” within the meaning of Section 5(a).12 We review the FTC’s legal
conclusions de novo but give “some deference to [its] informed judgment that a
particular commercial practice is to be condemned as ‘unfair.’” FTC v. Ind. Fed’n
of Dentists, 476 U.S. 447, 454, 106 S. Ct. 2009, 2016 (1986). We review the
FTC’s findings of facts under the “substantial evidence” standard, McWane, Inc. v.
FTC, 783 F.3d 814, 824 (11th Cir. 2015), which requires “more than a mere
12
LabMD’s brief asserts several grounds for setting aside the FTC’s order. The only
issue we address is the enforceability of the FTC’s order.
9
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scintilla” of evidence “but less than a preponderance,” Dyer v. Barnhart, 395 F.3d
1206, 1210 (11th Cir. 2005).
A.
Section 5(a) of the FTC Act authorizes the FTC to protect consumers by
“prevent[ing] persons, partnerships, or corporations . . . from using unfair . . . acts
or practices in or affecting commerce.” The Act does not define the term “unfair.”
The provision’s history, however, elucidates the term’s meaning.
The FTC Act, passed in 1914, created the FTC and gave it power to prohibit
“unfair methods of competition.” 13 Rather than list “the particular practices to
which [unfairness] was intended to apply,” Congress “intentionally left
development of the term ‘unfair’ to the Commission” through case-by-case
litigation 14—though, at the time of the FTC Act’s inception, the FTC’s primary
mission was understood to be the enforcement of antitrust law. 15 In 1938, the Act
was amended to provide that the FTC had authority to prohibit “unfair . . . acts or
practices.”16 This amendment sought to clarify that the FTC’s authority applied
13
See Marc Winerman, The Origins of the FTC: Concentration, Cooperation, Control,
and Competition, 71 Antitrust L.J. 1, 2–6 (2003).
14
FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 239–40, 92 S. Ct. 898, 903 (1972);
Atl. Ref. Co. v. FTC, 381 U.S. 357, 367, 85 S. Ct. 1498, 1505 (1965); see S. Rep. No. 63-597, at
13 (1914); H.R. Rep. No. 63-1142, at 19 (1914).
15
See generally Winerman, supra note 13.
16
Id. at 96.
10
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not only to competitors but, importantly, also to consumers. 17 Hence, the FTC
possesses “unfairness authority” to prohibit and prosecute unfair acts or practices
harmful to consumers.
In 1964, the FTC set forth three factors to consider in deciding whether to
wield its unfairness authority. The FTC was to consider whether an act or practice
(1) caused consumers, competitors, or other businesses substantial injury; (2)
offended public policy as established by statute, the common law, or otherwise;
and (3) was immoral, unethical, or unscrupulous.18 The Supreme Court cited these
factors with apparent approval in dicta in the 1972 case FTC v. Sperry &
Hutchinson, 405 U.S. 233, 244 n.5, 92 S. Ct. 898, 905 n.5 (1972).
“Emboldened” by Sperry & Hutchinson’s dicta, “the Commission set forth
to test the limits of the unfairness doctrine.” 19 This effort peaked in a 1978 attempt
to “use unfairness to ban all advertising directed to children on the grounds that it
was ‘immoral, unscrupulous, and unethical’ and based on generalized public
policies to protect children.”20 Congress and much of the public disapproved.21
17
FTC v. Colgate-Palmolive Co., 380 U.S. 374, 384, 85 S. Ct. 1035, 1042 (1965); H.R.
Rep. No. 75-1613, at 3 (1937).
18
Unfair or Deceptive Advertising and Labeling of Cigarettes in Relation to the Health
Hazards of Smoking, Statement of Basis and Purpose, 29 Fed. Reg. 8324, 8355 (July 2, 1964).
19
J. Howard Beales, The FTC’s Use of Unfairness Authority: Its Rise, Fall, and
Resurrection, FTC (May 30, 2003), https://www.ftc.gov/public-statements/2003/05/ftcs-use-
unfairness-authority-its-rise-fall-and-resurrection.
20
Id.
11
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Congressional backlash included refusing to fund the FTC, thus shutting it down
for several days, and passing legislation that prevented the FTC from using its
unfairness authority to promulgate rules that restrict children’s advertising.22
Following this episode, the Commission wrote a unanimous letter to two
senators in 198023 placing gloss on the three 1964 unfairness factors that were
recognized in Sperry & Hutchinson. As to the first factor, consumer injury, the
FTC laid out a separate three-part test defining a qualifying injury. These
consumer-injury factors would later be codified in Section 5(n). The FTC stated
that to warrant a finding of unfairness, an injury “[1] must be substantial; [2] it
must not be outweighed by any countervailing benefits to consumers or
competition that the practice produces; and [3] it must be an injury that consumers
themselves could not reasonably have avoided.”
As to the second 1964 unfairness factor, public policy, the FTC specified
that the policies relied upon “should be clear and well-established”—that is,
“declared or embodied in formal sources such as statutes, judicial decisions, or the
Constitution as interpreted by the courts, rather than being ascertained from the
21
See, e.g., The FTC as National Nanny, Wash. Post (Mar. 1, 1978),
https://www.washingtonpost.com/archive/politics/1978/03/01/the-ftc-as-national-
nanny/69f778f5-8407-4df0-b0e9-7f1f8e826b3b/?utm_term=.015de8e7203d.
22
Beales, supra note 19 (citing FTC Improvements Act of 1980, Pub. L. No. 96-252,
§ 14, 94 Stat. 388); see 15 U.S.C. § 57a(h).
23
FTC Policy Statement on Unfairness, FTC (Dec. 17, 1980), available at
https://www.ftc.gov/public-statements/1980/12/ftc-policy-statement-unfairness.
12
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general sense of the national values.” Put another way, an act or practice’s
“unfairness” must be grounded in statute, judicial decisions—i.e., the common
law—or the Constitution. An act or practice that causes substantial injury but
lacks such grounding is not unfair within Section 5(a)’s meaning. 24 Finally, the
FTC stated that it was nixing the third 1964 unfairness factor—whether a practice
is immoral, unethical, or unscrupulous—because it was “largely duplicative” of the
first two. Thus, an “unfair” act or practice is one which meets the consumer-injury
factors listed above and is grounded in well-established legal policy.
B.
Here, the FTC’s complaint alleges that LimeWire was installed on the
computer used by LabMD’s billing manager. This installation was contrary to
company policy. 25 The complaint then alleges that LimeWire’s installation caused
the 1718 File, which consisted of consumers’ personal information, to be exposed.
The 1718 File’s exposure caused consumers injury by infringing upon their right of
privacy. Thus, the complaint alleges that LimeWire was installed in defiance of
24
Section 5(n) now states, with regard to public policy, “In determining whether an act or
practice is unfair, the Commission may consider established public policies as evidence to be
considered with all other evidence. Such public policy considerations may not serve as a
primary basis for such determination.” We do not take this ambiguous statement to mean that
the Commission may bring suit purely on the basis of substantial consumer injury. The act or
practice alleged to have caused the injury must still be unfair under a well-established legal
standard, whether grounded in statute, the common law, or the Constitution.
25
The FTC’s complaint does not state that LimeWire was installed contrary to company
policy. But the complaint implies as much in that it does not allege that LabMD’s policy
allowed the installation. Further, undisputed evidence in the record indicates that LimeWire was
installed contrary to LabMD policy.
13
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LabMD policy and caused the alleged consumer injury. Had the complaint
stopped there, a narrowly drawn and easily enforceable order might have followed,
commanding LabMD to eliminate the possibility that employees could install
unauthorized programs on their computers.
But the complaint continues past this single allegation of wrongdoing,
adding that LimeWire’s installation was not the only conduct that caused the 1718
File to be exposed. It also alleges broadly that LabMD “engaged in a number of
practices that, taken together, failed to provide reasonable and appropriate security
for personal information on its computer networks.” The complaint then provides
a litany of security measures that LabMD failed to employ, each setting out in
general terms a deficiency in LabMD’s data-security protocol.26 Because LabMD
failed to employ these measures, the Commission’s theory goes, LimeWire was
able to be installed on the billing manager’s computer. LabMD’s policy forbidding
employees from installing programs like LimeWire was insufficient.
The FTC’s complaint, therefore, uses LimeWire’s installation, and the 1718
File’s exposure, as an entry point to broadly allege that LabMD’s data-security
operations are deficient as a whole. Aside from the installation of LimeWire on a
company computer, the complaint alleges no specific unfair acts or practices
engaged in by LabMD. Rather, it was LabMD’s multiple, unspecified failures to
26
See supra note 8.
14
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act in creating and operating its data-security program that amounted to an unfair
act or practice.27 Given the breadth of these failures, the Commission attached to
its complaint a proposed order which would regulate all aspects of LabMD’s data-
security program—sweeping prophylactic measures to collectively reduce the
possibility of employees installing unauthorized programs on their computers and
thus exposing consumer information. The proposed cease and desist order, which
is identical in all relevant respects to the order the FTC ultimately issued, identifies
no specific unfair acts or practices from which LabMD must abstain and instead
requires LabMD to implement and maintain a data-security program “reasonably
designed” to the Commission’s satisfaction. See generally Appendix.
27
After outlining LabMD’s shortcomings in data security, namely those items listed in
note 8, supra, the FTC’s complaint states in paragraph 22 that LabMD’s
failure to employ reasonable and appropriate measures to prevent unauthorized
access to personal information, including dates of birth, SSNs, medical test codes,
and health information, caused, or is likely to cause, substantial injury to
consumers that is not offset by countervailing benefits to consumers or
competition and is not reasonably avoidable by consumers. This practice was,
and is, an unfair act or practice.
(Emphasis added). Oddly, paragraph 23 of the complaint states that the “acts and practices of
[LabMD] as alleged in this complaint constitute unfair acts or practices in or affecting
commerce in violation of Section 5(a).” (Emphasis added). Thus, paragraph 22 seems to
conceive of all of LabMD’s data-security deficiencies as culminating in a single unfair act or
practice, and paragraph 23, though unspecific and perhaps boilerplate, suggests that there were
multiple unfair acts or practices. Paragraph 22 better encapsulates the FTC’s theory, as the
complaint in preceding paragraphs lays out a number of deficiencies that, “taken together,”
constitute unreasonable data security. Further, the Commission’s cease and desist order states,
“[T]he Commission has concluded that LabMD’s data security practices were unreasonable and
constitute an unfair act or practice that violates Section 5.” (Emphasis added). See Appendix at
1.
15
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The decision on which the FTC based its final cease and desist order exhibits
more of the same. The FTC found that LabMD “failed to implement reasonable
security measures to protect the sensitive consumer information on its computer
network” and that the failure caused substantial consumer injury. In effect, the
decision held that LabMD’s failure to act in various ways to protect consumer data
rendered its entire data-security operation an unfair act or practice. The broad
cease and desist order now at issue, according to the Commission, was therefore
justified.
* * *
The first question LabMD’s petition for review presents is whether
LabMD’s failure to implement and maintain a reasonably designed data-security
program constituted an unfair act or practice within the ambit of Section 5(a). The
FTC declared that it did because such failure caused substantial injury to
consumers’ right of privacy, and it issued a cease and desist order to avoid further
injury.
The Commission must find the standards of unfairness it enforces in “clear
and well-established” policies that are expressed in the Constitution, statutes, or the
common law. 28 The Commission’s decision in this case does not explicitly cite the
source of the standard of unfairness it used in holding that LabMD’s failure to
28
FTC Policy Statement on Unfairness, supra note 23.
16
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implement and maintain a reasonably designed data-security program constituted
an unfair act or practice. It is apparent to us, though, that the source is the common
law of negligence. According to the Restatement (Second) of Torts § 281 (Am.
Law Inst. 1965), Statement of the Elements of a Cause of Action for Negligence,
[an] actor is liable for an invasion of an interest of another, if:
(a) the interest invaded is protected against unintentional invasion,
and
(b) the conduct of the actor is negligent with respect to the other,
or a class of persons within which [the other] is included, and
(c) the actor’s conduct is a legal cause of the invasion, and
(d) the other has not so conducted himself as to disable himself
from bringing an action for such invasion.
The gist of the Commission’s complaint and its decision is this: The
consumers’ right of privacy is protected against unintentional invasion. LabMD
unintentionally invaded their right, and its deficient data-security program was a
legal cause. Section 5(a) empowers the Commission to “prevent persons,
partnerships, or corporations . . . from using unfair . . . acts or practices.” The law
of negligence, the Commission’s action implies, is a source that provides standards
for determining whether an act or practice is unfair, so a person, partnership, or
corporation that negligently infringes a consumer interest protected against
unintentional invasion may be held accountable under Section 5(a). We will
assume arguendo that the Commission is correct and that LabMD’s negligent
17
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failure to design and maintain a reasonable data-security program invaded
consumers’ right of privacy and thus constituted an unfair act or practice.
The second question LabMD’s petition for review presents is whether the
Commission’s cease and desist order, founded upon LabMD’s general negligent
failure to act, is enforceable. We answer this question in the negative. We
illustrate why by first laying out the FTC Act’s enforcement and remedial schemes
and then by demonstrating the problems that enforcing the order would pose.
III.
The FTC carries out its Section 5(a) mission to prevent unfair acts or
practices in two ways: formal rulemaking and case-by-case litigation.
The Commission is authorized under 15 U.S.C. § 57a to prescribe rules
“which define with specificity” unfair acts or practices within the meaning of
Section 5(a). Once a rule takes effect, it becomes in essence an addendum to
Section 5(a)’s phrase “unfair . . . acts or practices”; the rule puts the public on
notice that a particular act or practice is unfair. The FTC enforces its rules in the
federal district courts. Under 15 U.S.C. § 45(m)(1)(A), 29 the Commission may
29
This provision states,
The Commission may commence a civil action to recover a civil penalty in a
district court of the United States against any person, partnership, or corporation
which violates any rule under this subchapter respecting unfair or deceptive acts
or practices . . . with actual knowledge or knowledge fairly implied on the basis of
objective circumstances that such act is unfair or deceptive and is prohibited by
18
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bring an action to recover a civil penalty against any person, partnership or
corporation that knowingly violates a rule. 30 This case does not involve the
enforcement of an FTC-promulgated rule.
What is involved here is the FTC’s establishment of an unfair act or practice
through litigation. Because Congress thought impossible the task of legislating a
comprehensive list of unfair acts or practices, it authorized the Commission to
establish unfair acts or practices through case-by-case litigation. In the litigation
context, once an act or practice is adjudged to be unfair, the act or practice
becomes in effect—like an FTC-promulgated rule—an addendum to Section 5(a).
The FTC Act provides two forums for such litigation. The Commission may
choose to prosecute its claim that an act or practice is unfair before an ALJ, with
appellate review before the full Commission and then in a federal court of appeals.
See 15 U.S.C. § 45(b), (c); 16 C.F.R. § 3.1 et seq. Or, under Section 13(b) of the
Act, 15 U.S.C. § 53(b), it may prosecute its claim before a federal district judge,
with appellate review also in a federal court of appeals.
such rule. In such action, such person, partnership, or corporation shall be liable
for a civil penalty of not more than $10,000 for each violation.
15 U.S.C. § 45(m)(1)(A). As explained in note 39, infra, the Commission has increased the
penalty amount to $41,484 per violation.
30
The Commission may also bring a suit in federal district court or a state court of
competent jurisdiction to obtain relief in the form of consumer redress. 15 U.S.C. § 57b.
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Assume a factual scenario in which the Commission believes a certain act or
practice is unfair. It should not matter which of the two forums the Commission
chooses to prosecute its claim. The result should be the same. As we explain
below, the ALJ and the district judge use materially identical procedural rules in
processing the case to judgment31 and both apply the same substantive law to the
facts. Further, putting any venue differences aside, the same court of appeals
reviews their decisions.
A.
We consider the Commission’s first option, litigation before an ALJ. The
Commission issues an administrative complaint against a party it has reason to
believe is engaging in an unfair act or practice and seeks a cease and desist order.
16 C.F.R. § 3.13. The Commission prosecutes the complaint before an ALJ whom
it designates, in accordance with its Rules of Practice. Id. § 3.1 et seq. Under
these Rules, the complaint must provide, among other things, “[a] clear and
concise factual statement sufficient to inform each respondent with reasonable
definiteness of the type of acts or practices alleged to be in violation of the law.”
31
See FTC, Operating Manual Chapter 10.7, available at
https://www.ftc.gov/sites/default/files/attachments/ftc-administrative-staff-
manuals/ch10administrativelitigation.pdf (stating that “many [of the Commission’s] adjudicative
rules are derived from the Federal Rules of Civil Procedure”); see also Stephanie W. Kanwit,
Federal Trade Commission § 8:1 (2017) (noting that the Commission “has held over the years
that the [Federal Rules of Civil Procedure] can provide an analytical framework for the
disposition of related issues” (quotations omitted)).
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Id. § 3.11. If the respondent files a motion to dismiss the complaint, the motion is
referred to the Commission for a ruling. 32 If the motion is denied, the respondent
files an answer. From that point on, the proceedings before the ALJ resemble the
proceedings in an action for injunctive relief in federal district court. If the ALJ
finds that the respondent has been engaging in the unfair act or practice alleged and
will likely continue doing so, the ALJ enters a cease and desist order enjoining the
respondent from engaging in the unfair conduct.33 If not, the ALJ dismisses the
Commission’s complaint.34 Either way, the ALJ’s decision is appealable to the
FTC, id. § 3.52, and the FTC’s decision is in turn reviewable in a federal court of
appeals, 15 U.S.C. § 45(c).
Suppose the Commission chooses the second option, litigation before a
federal district judge under Section 13(b). If the Commission has reason to believe
a party is engaging in an unfair act or practice, it seeks an injunction by filing in
district court a complaint that sets forth “well-pleaded facts . . . permit[ting] the
court to infer more than the mere possibility of misconduct.” Ashcroft v. Iqbal,
556 U.S. 662, 679, 129 S. Ct. 1937, 1950 (2009) (citing Fed. R. Civ. P. 8(a)(2)).
32
The Commission may, in its discretion, refer the motion back to the ALJ for a ruling.
16 C.F.R. § 3.22.
33
The ALJ’s decision must set out findings of fact and conclusions of law, 16 C.F.R.
§ 3.51(c), just like a district judge must do pursuant to Federal Rule of Civil Procedure 52(a)
following a bench trial.
34
As a whole, this administrative procedure, set out in the FTC’s Rules of Practice,
effectively supersedes 15 U.S.C. § 45(b), the FTC Act provision governing Commission
proceedings.
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Although the case is tried pursuant to the Federal Rules of Civil Procedure, not the
FTC Rules of Practice, it is handled essentially as it would be before the ALJ. If
the district judge finds that the defendant has been engaging in the unfair act or
practice alleged and will likely continue doing so, the judge enjoins the defendant
from engaging in such conduct. Whatever the court’s decision, it is reviewable in
the court of appeals.
Assume the result is the same in both litigation forums. The ALJ enters a
cease and desist order; the district court issues an injunction. Appellate review
would reach the same result regardless of the trial forum (assuming that venue is
laid in the same court of appeals). 35 Assume further that both coercive orders are
affirmed by the court of appeals. The cease and desist order and the injunction
address the same behavior and contain the same command: discontinue engaging
in a specific unfair act or practice.
35
There are a couple of subtle differences in how cease and desist orders and injunctions
are reviewed. First, an appellate court reviews a district court’s findings of fact for clear error
and those of the FTC under the “substantial evidence” standard. McWane, Inc., 783 F.3d at 824;
Dyer, 395 F.3d at 1210. In practice, however, these two standards make little or no difference in
terms of outcome. See Dickinson v. Zurko, 527 U.S. 150, 162–63, 119 S. Ct. 1816, 1823 (1999)
(“The court/agency [substantial-evidence] standard, as we have said, is somewhat less strict than
the court/court [clearly erroneous] standard. But the difference is a subtle one—so fine that
(apart from the present case) we have failed to uncover a single instance in which a reviewing
court conceded that use of one standard rather than the other would in fact have produced a
different outcome.”). Further, although both the FTC’s and a district court’s conclusions of law
are reviewed de novo, appellate courts give “some deference to the Commission’s informed
judgment that a particular commercial practice is to be condemned as ‘unfair.’” Ind. Fed’n of
Dentists, 476 U.S. at 454, 106 S. Ct. at 2016.
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With the cease and desist order or the injunction in hand, the Commission
may proceed in two ways against a party who violates its terms. 36 The
Commission may seek the imposition of either a civil penalty or civil-contempt
sanction.37 We explain below the procedures the Commission invokes in pursuing
these respective remedies.
B.
1.
Under Section 5(l), 15 U.S.C. § 45(l), the Commission may bring a civil-
penalty action in district court should the respondent violate a final cease and desist
order. 38 The Commission’s complaint would allege that the defendant is subject to
an existing cease and desist order and has violated its terms. For each separate
36
We note that with respect to violations of final cease and desist orders, the Commission
may also bring a 15 U.S.C. § 57b action as described in note 30, supra.
37
The two remedies are similar in nature. Indeed, not long after Section 5’s civil-penalty
scheme was implemented, the Commissioner of the FTC described civil penalties as “an
additional remedy to that formerly employed of invoking the inherent power of the courts to
punish for contempt anyone who violated a court order directing compliance with an order of the
Commission.” See Hon. R. E. Freer, Commissioner, Federal Trade Commission, Address before
the Annual Convention of the Proprietary Association (May 17, 1938).
38
A cease and desist order is made final pursuant to the conditions set forth in 15 U.S.C.
§ 45(g). Section 5(l) directs the Commission to call upon the United States Attorney General to
commence a civil-penalty action against the respondent. The Commission can bring the action
itself, however, in accordance with the criteria in 15 U.S.C. § 56(a).
Section 5(m)(1)(B) of the Act, 15 U.S.C. § 45(m)(1)(B), authorizes the Commission to
file suit against a nonrespondent who “with actual knowledge” engages in the “act or practice”
declared a violation of Section 5(a) and enjoined via a cease and desist order entered in a
previous administrative adjudication. The previous adjudication, however, is afforded no
collateral estoppel effect against the defendant. That is, the defendant can challenge the factual
predicate for the cease and desist order and the ultimate determination that the facts found in the
previous adjudication constituted an unfair act or practice. See id. § 45(m)(2).
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violation of the order—or, in the case of a continuing violation, for each day in
violation—the district court may impose a penalty of up to $41,484.39 Id. Section
5(l) also empowers the district court to grant an injunction if the Commission
proves that the violation is likely to continue and an injunction is necessary to
enforce the order.
If the Commission has obtained an injunction in district court requiring the
defendant to discontinue an unfair act or practice, it may invoke the district court’s
civil-contempt power should the defendant disobey. Rather than filing a
complaint, as in a Section 5(l) action, the Commission simply moves the district
court for an order requiring the defendant to show cause why it should not be held
in contempt for engaging in conduct the injunction specifically enjoined. If the
court is satisfied that the conduct is forbidden, it issues a show cause order. Then,
if at the show cause hearing the Commission establishes by clear and convincing
proof that the defendant engaged in the forbidden conduct and that the defendant
“had the ability to comply” with the injunctive provision at issue, McGregor v.
Chierico, 206 F.3d 1378, 1383 (11th Cir. 2000), the court may adjudicate the
defendant in civil contempt and impose appropriate sanctions.
39
Sections 5(l) and 5(m)(1)(B) set the maximum penalty at $10,000, but the Commission
may adjust this figure for inflation under 16 C.F.R. § 1.98. Hence the current $41,484 figure,
which “appl[ies] only to penalties assessed after January 22, 2018” but “includ[es] those
penalties whose associated violation predated January 22, 2018.” Id.
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2.
The concept of specificity is crucial to both modes of enforcement. We start
with civil penalties for violations of cease and desist orders. Nothing in the FTC
Act addresses what content must go into a cease and desist order. The FTC Rule
of Practice governing Commission complaints, however, states that a complaint
must contain “[a] clear and concise factual statement sufficient to inform each
respondent with reasonable definiteness of the type of acts or practices alleged to
be in violation of the law.” 16 C.F.R § 3.11. It follows that the remedy the
complaint seeks must comport with this requirement of reasonable definiteness.
Moreover, given the severity of the civil penalties a district court may impose for
the violation of a cease and desist order, the order’s prohibitions must be stated
with clarity and precision. The United States Supreme Court emphasized this point
in FTC v. Colgate-Palmolive Co., stating,
[T]his Court has . . . warned that an order’s prohibitions should be
clear and precise in order that they may be understood by those
against whom they are directed, and that [t]he severity of possible
penalties prescribed . . . for violations of orders which have become
final underlines the necessity for fashioning orders which are, at the
outset, sufficiently clear and precise to avoid raising serious questions
as to their meaning and application.
380 U.S. 374, 392, 85 S. Ct. 1035, 1046 (1965) (quotations and citations omitted).
The imposition of penalties upon a party for violating an imprecise cease and desist
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order—up to $41,484 per violation or day in violation—may constitute a denial of
due process.40
Specificity is equally important in the fashioning and enforcement of an
injunction consequent to an action brought in district court under Section 13(b).
Federal Rule of Civil Procedure 65(d)(1) requires that an injunctive order state the
reasons for its coercive provisions, state the provisions “specifically,” and describe
the acts restrained or required “in reasonable detail.” The Supreme Court has
stated that Rule 65(d)(1)’s “specificity provisions . . . are no mere technical
requirements. The Rule was designed to prevent uncertainty and confusion on the
part of those faced with injunctive orders, and to avoid the possible founding of a
contempt citation on a decree too vague to be understood.” Schmidt v. Lessard,
414 U.S. 473, 476, 94 S. Ct. 713, 715 (1974). Indeed, “[t]he most fundamental
postulates of our legal order forbid the imposition of a penalty for disobeying a
command that defies comprehension.” Int’l Longshoremen’s Ass’n, Local 1291 v.
Phila. Marine Trade Ass’n, 389 U.S. 64, 76, 88 S. Ct. 201, 208 (1967). Being held
in contempt and sanctioned pursuant to an insufficiently specific injunction is
40
See BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 574 & n.22, 116 S. Ct. 1589, 1598 &
n.22 (1996) (“Elementary notions of fairness enshrined in our constitutional jurisprudence dictate
that a person receive fair notice . . . of the conduct that will subject him to punishment . . . .
[T]he basic protection against judgments without notice afforded by the Due Process Clause is
implicated by civil penalties.” (citation, quotations, and emphasis omitted)); see also Sessions v.
Dimaya, 584 U.S. —, 138 S. Ct. 1204, 1228–29 (2018) (Gorsuch, J., concurring) (suggesting that
the severity of a civil penalty corresponds with the degree of fair notice of unlawful conduct that
must be accorded to the defendant).
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therefore a denial of due process. See id. (reversing a civil-contempt judgment
founded upon an order too vague to be understood).
In sum, the prohibitions contained in cease and desist orders and injunctions
must be specific. Otherwise, they may be unenforceable. Both coercive orders are
also governed by the same standard of specificity, as the stakes involved for a
violation are the same—severe penalties or sanctions.
C.
In the case at hand, the cease and desist order contains no prohibitions. It
does not instruct LabMD to stop committing a specific act or practice. Rather, it
commands LabMD to overhaul and replace its data-security program to meet an
indeterminable standard of reasonableness. This command is unenforceable. Its
unenforceability is made clear if we imagine what would take place if the
Commission sought the order’s enforcement. As we have explained, the standards
a district court would apply are essentially the same whether it is entertaining the
Commission’s action for the imposition of a penalty or the Commission’s motion
for an order requiring the enjoined defendant to show cause why it should not be
adjudicated in contempt. For ease of discussion, we posit a scenario in which the
Commission obtained the coercive order it entered in this case from a district court,
and now seeks to enforce the order.
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The Commission moves the district court for an order requiring LabMD to
show cause why it should not be held in contempt for violating the following
injunctive provision:
[T]he respondent shall . . . establish and implement, and thereafter
maintain, a comprehensive information security program that is
reasonably designed to protect the security, confidentiality, and
integrity of personal information collected from or about consumers
. . . . Such program . . . shall contain administrative, technical, and
physical safeguards appropriate to respondent’s size and complexity,
the nature and scope of respondent’s activities, and the sensitivity of
the personal information collected from or about consumers . . . .[41]
See Appendix at 2. The Commission’s motion alleges that LabMD’s program
failed to implement “x” and is therefore not “reasonably designed.” The court
concludes that the Commission’s alleged failure is within the provision’s language
and orders LabMD to show cause why it should not be held in contempt.
At the show cause hearing, LabMD calls an expert who testifies that the
data-security program LabMD implemented complies with the injunctive provision
at issue. The expert testifies that “x” is not a necessary component of a reasonably
designed data-security program. The Commission, in response, calls an expert
who disagrees. At this point, the district court undertakes to determine which of
the two equally qualified experts correctly read the injunctive provision. Nothing
in the provision, however, indicates which expert is correct. The provision
41
Following this provision in the Commission’s cease and desist order are five equally
vague items which must be included in LabMD’s data-security program. See Appendix at 2–3.
These items suffer the same enforceability problems discussed below.
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contains no mention of “x” and is devoid of any meaningful standard informing the
court of what constitutes a “reasonably designed” data-security program. 42 The
court therefore has no choice but to conclude that the Commission has not
proven—and indeed cannot prove—LabMD’s alleged violation by clear and
convincing evidence. See McGregor, 206 F.3d at 1383.43
If the court held otherwise and ordered LabMD to implement “x,” the court
would have effectively modified the injunction at a show cause hearing. This
would open the door to future modifications, all improperly made at show cause
hearings. 44 Pretend that LabMD implemented “x” pursuant to the court’s order,
but the FTC, which is continually monitoring LabMD’s compliance with the
court’s injunction, finds that “x” failed to bring the system up to the FTC’s
conception of reasonableness. So, the FTC again moves the district court for an
order to show cause. This time, its motion alleges that LabMD failed to implement
“y,” another item the Commission thinks necessary to any reasonable data-security
42
Further, the order’s other provisions, mentioned in note 41, supra, also fail to state with
specificity the actions LabMD must take to bring its program into compliance with the order.
43
See also FTC v. Trudeau, 579 F.3d 754, 763 (7th Cir. 2009) (“To succeed on a
contempt petition, the FTC must demonstrate by clear and convincing evidence that the
respondent has violated the express and unequivocal command of a court order.” (quotations
omitted)).
44
The purpose of a show cause hearing is to determine whether the alleged contemner
has violated the injunctive provision as it stands. If the party holding the injunction wishes to
modify the provision, the party must move the district court to effect the modification. Implicit
in Federal Rule of Civil Procedure 65 is the notion that before the modification can be made, the
adverse party must be provided notice of the proposed modification and an opportunity to be
heard.
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program. Does the court side with the Commission, modify the injunction, and
order the implementation of “y”? Suppose “y” fails. Does another show cause
hearing result in a third modification requiring the implementation of “z”?
The practical effect of repeatedly modifying the injunction at show cause
hearings is that the district court is put in the position of managing LabMD’s
business in accordance with the Commission’s wishes. It would be as if the
Commission was LabMD’s chief executive officer and the court was its operating
officer. It is self-evident that this micromanaging is beyond the scope of court
oversight contemplated by injunction law.
This all serves to show that an injunction identical to the FTC cease and
desist order at issue would be unenforceable under a district court’s contempt
power. Because the standards governing the coercive enforcement of injunctions
and cease and desist orders are the same, it follows that the Commission’s cease
and desist order is itself unenforceable.
IV.
In sum, assuming arguendo that LabMD’s negligent failure to implement
and maintain a reasonable data-security program constituted an unfair act or
practice under Section 5(a), the Commission’s cease and desist order is nonetheless
unenforceable. It does not enjoin a specific act or practice. Instead, it mandates a
complete overhaul of LabMD’s data-security program and says precious little
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about how this is to be accomplished. Moreover, it effectually charges the district
court with managing the overhaul. This is a scheme Congress could not have
envisioned. We therefore grant LabMD’s petition for review and vacate the
Commission’s order.
SO ORDERED.
31