With one eye on the U.S. Supreme Court, which is being asked to confirm that the FTC has authority to seek monetary relief under Section 13(b) in AMG Capital Management, LLC v. Federal Trade Commission, and the other eye on Congress which may or may not pass legislation authorizing monetary relief under Section 13(b), there has been very little said about what we might expect if neither were to occur. What if the Court finds that 13(b) does not provide this authorization and Congress does not act? How might the FTC seek consumer redress against entities alleged to have engaged in unfair or deceptive advertising practices in district court? One answer is Section 19 of the FTC Act. So then, what can we expect if Section 19 becomes the FTC’s best path forward?
Under Section 19 of the FTC Act, the FTC can pursue consumer redress for alleged unfair or deceptive practices, but first must file administratively for an order directing the target of the investigation to cease and desist from the allegedly unfair or deceptive practices and, if the order is challenged, go through several rounds of review—first by the Commission and then by the United States Court of Appeals. Only after the Commission’s order becomes final can the FTC commence the Section 19 action in district court for consumer redress. That action, of course, is still subject to the typical federal appellate process—which can make a Section 19 action an extremely time-consuming process.
F.T.C. v. Figgie International, Inc. provides an example of how Section 19 would work, as well as its limitations. In Figgie, the FTC obtained a cease and desist order under Section 5 ordering Figgie to cease and desist from engaging in the unfair or deceptive practices it used to market its Vanguard heat detector products. According to the FTC, “[t]he crux of Figgie’s message was that heat detectors could be relied on as life-saving fire warning devices, and that the best protection for one’s home is a combination of four or five heat detectors to one smoke detector.”
Following the administrative proceeding, the Administrative Law Judge concluded that every one of Figgie’s promotional materials “‘clearly conveys’ the claim that Vanguard heat detectors provide the necessary warning to allow safe escape from a residential fire.” The promotional materials also discussed the National Fire Prevention Association (“NFPA”) standards “‘in such a way as to leave the reader with a distinct impression that [the NFPA] regards both smoke detectors and heat detectors as equally effective.’” However, while the NFPA previously recommended using both smoke and heat detectors as part of a household fire warning system, after fire prevention experts conducted a series of tests that illustrated the limitations of heat detectors, the NFPA revised its standards to require only that smoke detectors (not heat detectors) be installed on each level of the home and outside each bedroom.
After an administrative trial, the ALJ found that Figgie knew of the changes in the NFPA standards and the limitations of heat detectors prior to making the challenged representations. The ALJ found that Figgie’s representations were “misleading and deceptive in the absence of an explanation of the limits of heat detectors and the comparative superiority of smoke detectors.” On appeal, the Commission upheld most of the ALJ’s findings and conclusions, but changed the disclaimer required on Figgie’s heat detectors. The rest of the Commission’s cease and desist order “closely tracked the ALJ’s order” and prohibited Figgie from representing that heat detectors provide the necessary warning to permit safe escape from most residential fires, that combining heat detectors and smoke detectors provide greater warning than smoke detectors alone, and that Figgie may not misrepresent the capabilities of heat detectors to provide warning that would permit people to escape from residential fires.
After the cease and desist order became final (following an appeal to the Fourth Circuit Court of Appeals), the FTC filed an action pursuant to Section 19 in U.S. District Court for the Central District of California seeking consumer redress. The FTC was awarded summary judgment by the district court, which found Figgie engaged in dishonest or fraudulent practices and awarded millions of dollars in consumer redress.
Of note, prior to summary judgment the district court granted the FTC’s “motion to deem ‘conclusive’” the list of 42 findings from the administrative proceeding. That is because in a Section 19 proceeding, the Commission’s findings of material fact in support of a cease and desist order “shall be conclusive.” On appeal, the Ninth Circuit noted that [t]he Commission’s findings, and those of the administrative law judge which the Commission adopted, are accordingly treated as established facts for purposes of this decision.” Thus, to the extent that a district court’s findings deviate from the findings of the Commission, “the Commission’s findings control.”
The Ninth Circuit decision noted that “liability for past conduct would be imposed on Figgie if a reasonable person would have known in the circumstances that it was dishonest or fraudulent for Figgie to use the practices it did to sell heat detectors.” In rejecting Figgie’s argument that actual knowledge was required, the Court noted that “Congress unambiguously referred the district court to the statement of mind of a hypothetical reasonable person, not the knowledge of the defendant. The standard is objective, not subjective.”
Moreover, while the Ninth Circuit stated that “Section 19 liability must not be a rubber stamp of Section 5 liability,” it held that “[w]hen the findings of the Commission in respect to defendant’s practices are such that a reasonable person would know that the defendant’s practices were dishonest or fraudulent, the district [court] need not engage in further fact finding other than to make the ultimate determination that a reasonable person would know.” The Figgie action, it held, was such a case, because it found there is “ample evidence in the Commission’s findings to satisfy a court that a reasonable person with Figgie’s access to the scientific data establishing the relative inferiority of heat detectors would have known that Figgie’s vigorous misrepresentations on their behalf were dishonest and fraudulent.”
And while the ALJ acknowledged “a debate among fire professionals” concerning the tenability limits of heat detectors, the Ninth Circuit relied on findings that “[a] consensus among experts, well supported by careful testing, established that smoke detectors almost always provide earlier warning than heat detectors, and Figgie had no basis for doubting the truth of the consensus, yet Figgie marketed its heat detectors in a manner designed to mislead consumers about this critical information.” Hence, the conduct was deemed dishonest or fraudulent.
As Figgie demonstrates, the ALJ’s findings of fact almost certainly will be conclusive and, if appealed to the Commission, they are likely to be adopted. The Commission, after all, is the entity that authorized the issuance of the administrative complaint that precipitated the Section 19 action in the first place. All of this underscores how important it is to contest any underlying facts that may ultimately be considered to bear on whether the challenged conduct was dishonest or fraudulent.
Figgie seems to suggest a plausible alternative, if things don’t break the Commission’s way in AMG Capital Management. If that is the case, then why haven’t we seen more Section 19(b) cases over the years? One answer is undoubtedly the success of the Section 13(b) program. Why engage in administrative litigation, without the possibility of consumer redress absent a showing of dishonest and fraudulent conduct? This has undoubtedly led to the ALJ becoming a version of the Maytag repairman, with relatively few cases to manage.
But it is not just the money, it is the requirement that the Commission establish that the conduct was dishonest and fraudulent – no small task – and timing too. Section 19 cases, as they have historically been conducted, take a very long time. Consider that the FTC issued its administrative complaint against Figgie in May 1983, the ALJ issued his findings of facts in October 1984, and the decision was appealed to the full Commission and substantially adopted in April 1986. Figgie then appealed the Commission’s Order to the U.S. Court of Appeals for the Fourth Circuit, where it was ultimately upheld in 1987. By the time that the Ninth Circuit issued its decision on appeal from the Section 19 district court action and the petition for certiorari to the Supreme Court was denied in early 1994, more than a decade had passed since the issuance of the FTC’s administrative complaint.