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Paul Zimmerman

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A “Reason to Believe” the FTC Is Quite Unhappy

In a complete turnabout, a Northern District Court in Georgia recently reversed itself and dealt a significant blow to the Federal Trade Commission, limiting its capacity to state claims against defendants for consumer fraud. In FTC vs. Hornbeam Special Situations, LLC, the court held that the Commission could no longer seek to punish bad actors based solely on past behavior. Instead, currently existing or threatened violations of the FTC Act must be alleged for the FTC to bring a successful action against any defendant accused of bilking consumers.

In making its determination, the court rejected the FTC’s argument that discount club marketers were likely to deceive customers in the future based solely upon misconduct that they ceased long ago. The court’s holding follows section 53(b) of the FTC Act, which was designed to remedy impending transgressions, not those in the rear view mirror. For its part, the FTC maintained that prior wrongdoing by the defendants was likely to recur, a position that the court concluded was inconsistent with “the plain language" of section 53(b), which states:

“Whenever the Commission has reason to believe (1) that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the Federal Trade Commission . . . the Commission by any of its attorneys . . . may bring suit in a district court of the United States to enjoin any such act or practice.” (Emphasis added.)

Until now, the FTC has been given wide berth to exercise its authority to punish accused fraudsters based on past conduct, though the Hornbeam case certainly curtails the Commission’s power to do so. Which begs the question, if courts are no longer required to defer to the FTC’s loose interpretation of the “reason to believe” (read: likely to recur) standard, what must the Commission allege to satisfy claims pursuant to section 53(b) going forward?

Broadly, to pass muster under section 53(b), the FTC must demonstrate “by more than conclusory allegations” that the laws entrusted to its enforcement are currently being or about to be violated, this according to the court in Hornbeam. More specifically, the Commission is required to plead that such a violation is "more likely than not” happening or is imminent.

The takeaway:  While the Hornbeam decision may not be binding outside the Northern District of Georgia, it is a significant brake on the far-reaching powers of the FTC to regulate and prosecute alleged deceptive consumer transactions. The bottom line, according to this court, is that the Commission cannot reach back into the past to base a section 53(b) action on conduct that has already occurred. Also significant about the case is its delineation between section 53(b), which governs current and future alleged misconduct, and section 57(b) that applies to wrongdoing in the past. This distinction is critical because, unlike Section 53(b), which has no statute of limitations, actions based upon Section 57(b) of the FTC Act must be brought within a three-year statutory period. 

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.