Alerts and Updates
Third Circuit Curtails FTC's Authority to Seek Injunctions and Restitution in Federal Court
March 1, 2019
The unanimous panel’s decision could severely limit the types of cases that the FTC can bring in federal court in the future.
The Federal Trade Commission (FTC) suffered a significant appellate loss on February 25, 2019, before the United States Court of Appeals for the Third Circuit. In FTC v. Shire ViroPharma, Inc., the Third Circuit held that the FTC cannot seek an injunction and restitution against a company in federal court over alleged past anti-competitive conduct absent an allegation that the company is violating or is about to violate the law again. The unanimous panel’s decision, affirming the opinion of Judge Richard Andrews of the United States District Court for the District of Delaware, could severely limit the types of cases that the FTC can bring in federal court in the future.
The FTC’s Enforcement Authority
The Federal Trade Commission Act, signed into law by President Woodrow Wilson in 1914, created the FTC. Section 5 of the FTC Act empowers the FTC to police “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.” The FTC enforces Section 5 primarily by bringing actions before an FTC administrative law judge. Because the original FTC Act did not permit the agency to prevent anti-competitive conduct during the pendency of administrative proceedings—which are notoriously slow-moving—Congress amended the FTC Act in 1973 by adding Section 13(b). That section authorizes the FTC to seek preliminary injunctive relief in federal court to prevent anti-competitive conduct while the full merits of the case are tried in administrative proceedings. The FTC may seek such preliminary or permanent injunctive relief when it has “reason to believe” that the defendant “is violating or is about to violate any provision of law enforced by the FTC.” The phrase “is violating or is about to violate” was the key issue in FTC v. Shire.
The FTC’s Lawsuit Against Shire
Shire ViroPharma manufactured and marketed the drug Vancocin, which treats, among other things, colitis. The FTC claimed that Shire had engaged in anti-competitive activity by successfully delaying competition from generic versions of Vancocin through allegedly meritless filings with the FDA that were designed to slow down approval of Vancocin bioequivalents. However, the FTC waited to bring its lawsuit alleging anticompetitive behavior until five years after the conduct occurred, and after Shire had divested its Vancocin business. The FTC brought its claims in the District of Delaware, under Section 13(b) of the FTC Act, seeking a permanent injunction and restitution.
Shire moved to dismiss the FTC’s lawsuit, arguing that because it waited until five years postconduct to file its lawsuit, the FTC lacked authority to seek an injunction under Section 13(b). The District Court granted Shire’s motion, holding that the FTC had not adequately pled that Shire was violating or was about to violate the law. The FTC appealed to the Third Circuit, arguing that Shire was “about to violate” the law, because it was perfectly positioned to engage in a similar pattern of petitioning activity with respect to a new “blockbuster drug” called Cinryze.
The Third Circuit Decision
The Third Circuit disagreed with the FTC and affirmed the District Court’s decision. Chief Judge D. Brooks Smith, writing for the unanimous panel, wrote that Section 13(b) is unambiguous and the plain reading of the statute “prohibits existing or impending conduct.” “Simply put,” the court stated, “Section 13(b) does not permit the FTC to bring a claim based on long-past conduct without some evidence that the defendant ‘is’ committing or ‘is about to’ commit another violation.” Section 13(b) was “not designed to address hypothetical conduct” and was not meant to “duplicate Section 5, which already prohibits past conduct.”
The court noted that the FTC never initiated Section 5 administrative proceedings against Shire and stated that “[t]he FTC’s understandable preference for litigating under Section 13(b), rather than in an administrative proceeding, does not justify its expansion of the statutory language. If the FTC wants to recover for a past violation… it must use Section 5(b).”
Following the decision, the FTC issued a statement that “[t]he Commission regrets the court’s decision and is considering its options,” which include review by the full Third Circuit bench or a petition to the U.S. Supreme Court.
The Third Circuit’s decision could have a significant impact on FTC enforcement generally, and particularly on enforcement involving the pharmaceutical industry. Both the District Court and the Court of Appeals soundly rejected overreaching by the FTC in attempting to assert that incentives and opportunities to violate the law provide a basis for alleging that a company is about to violate the law. As a result, the FTC may be less inclined to bring future enforcement actions in federal court, and in particular in the Third Circuit, which includes Pennsylvania, Delaware and New Jersey. Because many pharmaceutical companies are based in those states, courts in the Third Circuit have frequently served as the venue of choice for such actions by the FTC.
Duane Morris will continue to monitor the impact of the Shire decision and FTC enforcement trends. Before engaging in conduct that might invite antitrust scrutiny, companies—in particular pharmaceutical companies—should seek experienced antitrust counsel to advise them on the potential enforcement risks associated with that conduct.
For Further Information
If you have any questions about this Alert, please contact Christopher H. Casey, Sean P. McConnell, Sarah O'Laughlin Kulik, any of the attorneys in our Antitrust and Competition Group or the attorney in the firm with whom you are regularly in contact.
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