POM Wonderful LLC recently received a setback in its longstanding dispute with the Federal Trade Commission. On Sept. 30, 2012, U.S. District Judge Richard Roberts in the District of Columbia dismissed the juice maker’s declaratory judgment action against the FTC. The judge’s ruling, though, does not put an end to the POM-FTC battle, which is still on appeal in a related administrative proceeding.
POM filed suit in federal district court in September 2010, in anticipation of an impending FTC administrative action. The company challenged what it perceived as agency overreaching, in violation of its First and Fifth Amendment rights, and in violation of the Administrative Procedure Act. The basis of POM’s complaint was the FTC’s use of consent orders with two other companies (Nestle U.S.A. and Iovate Health Systems, Inc.) to establish new and more stringent advertising standards for medical and health claims.
When the FTC waved these consent orders in front of POM (in an apparent attempt to pressure the company into agreeing to tougher standards like Nestle and Iovate), POM responded by thumbing its nose and filing suit in federal court. POM contended that the FTC failed to adhere to the requirements of administrative law that, in order to modify advertising standards, the agency must go through a notice-and-rulemaking process. The FTC subsequently filed its administrative action against the company for alleged failures to adhere to the more stringent standards.
In large part because of the significant overlap of issues between POM’s action in U.S. district court and the FTC’s administrative action, Judge Roberts dismissed the district court case. The judge noted that judicial efficiency militated towards having the dispute play out in the administrative case only: “While the administrative proceeding is not identical to POM’s current action, that forum is ‘perfectly capable’ of determining whether the proposed order exceeds the bounds of the FTC Act, violates the First and Fifth Amendments, and seeks to abrogate the FDA’s power,” he wrote. Other factors in the judge’s holding were (1) that granting declaratory relief would have required the resolution of an anticipatory defense and (2) that POM’s district court action appeared to be filed in part to secure tactical leverage.
As we wrote earlier this year, the administrative law judge already ruled on the parties’ dispute in May. POM touted that ruling largely as a victory because the judge rejected the enhanced advertising standards at issue. However, the FTC and POM appealed the decision before the full commission (POM appealed because the judge still found POM liable under separate standards). Oral arguments in the appeal were held in August, and the outcome of the appeal is still pending.
We find it interesting – and somewhat encouraging for advertisers who are concerned about agency overreaching – that neither the district court action nor the administrative proceeding have rejected on the merits POM’s challenge to the FTC’s use of settlement agreements to effect enhanced standards. Any company that has come under the regulatory microscope can appreciate the tremendous pressure companies face to cooperate with an agency just to get out of hot water – at almost any cost. POM’s bold stance may eventually have the result of reminding regulators to follow the rules set forth for them by the principles of administrative law.
On June 21, 2012, in FCC v. Fox Television Stations Inc., the U.S. Supreme Court struck down the Federal Communications Commission’s effort to apply its indecency standard to brief broadcasts of nudity and “fleeting expletives.” But the Court relied not on the First Amendment’s free-speech guarantees but rather on the Fifth Amendment’s due process clause.
The Court held that Fox and ABC were not given fair advance notice that their broadcasts, which occurred prior to the announcement of the new indecency policy, were covered. This retroactive application violated their due process rights.
Broadcasters were hoping for a much broader First Amendment ruling that would have permanently hamstrung efforts by the agency to police indecency on the air. Instead, although a $1.4 million fine against ABC and its affiliates and a declaration by the FCC that Fox could be fined as well were both overturned, the agency remains free to create new indecency policies and case law under 18 USC 1464, which bans the broadcast of any” obscene, indecent, or profane language.”
In ABC’s case, the transgression was showing a seven-second shot of an actress’s buttocks and the side of her breast on NYPD Blue in 2003, and in Fox’s case, it was some isolated indecent words uttered by Cher and Nicole Richie on awards shows.
Prior FCC policy stressed the difference between isolated indecent material (which was not punished) and repeated broadcasts (which resulted in enforcement action). The Court held that Fox and ABC did not have sufficient notice that these brief moments, which occurred before the new policy went into effect, could be targeted.
The U.S. government tried to argue that a 1960 statement by the FCC gave ABC notice that broadcasting a nude body part could be contrary to the prohibition on indecency. The Supreme Court said “no dice,” as FCC had in other, later decisions declined to find brief moments of nudity actionable. If the FCC is going to fine ABC and its affiliates $1.24 million, it had better provide clear, fair notice of its indecency policies.
Since the case doesn’t affect the enforceability of the FCC’s current standard, as applied to current (rather than past) broadcasts, however, broadcasters still live in fear of the possibility of big fines levied against them for a couple of obscenities or a few seconds of nudity.
We agree with longtime public interest advocate Andrew Schwartzman, who said of this ruling, “The decision quite correctly faults the FCC for its failure to give effective guidance to broadcasters. It is, however, unfortunate that the justices ducked the core 1st Amendment issues. The resulting uncertainty will continue to chill artistic expression.”
The courts can certainly review challenges to the FCC’s indecency standards, and related issues will continue to come before the courts, including the issue of whether the current indecency standard violates the First Amendment rights of broadcasters and whether any changes the FCC may make will survive First Amendment scrutiny.
Meanwhile, with this case resolved, the FCC can finally move forward with a backlog of indecency complaints pending before it. FCC Commissioner Robert M. McDowell said in response to the Supreme Court ruling that there are now nearly 1.5 million such complaints, involving 9,700 television broadcasts, and that “as a matter of good governance, it is now time for the FCC to get back to work so that we can process the backlog of pending indecency complaints.”
Pomegranate juice maker POM Wonderful has declared victory against the FTC . . . in spite of an administrative law judge’s ruling that upholds many claims in the agency’s complaint. But the California company has good reason to celebrate: certain FTC standards, the ones that POM cried foul on, were rejected by the court.
The epic battle between POM Wonderful and the FTC began roughly two years ago during an agency investigation of the company for false advertising. The FTC had approached POM with a proposed requirement of enhanced advertising standards for medical and health claims. These would have required the company to seek FDA approval before making certain claims; the standards would also have required more stringent research requirements for substantiation of such claims.
To support these new standards, the FTC showed POM consent orders it had recently entered into with Nestle U.S.A. and Iovate Health Systems, Inc. That’s when POM cried foul. It saw the FTC’s moves – shifting and enhancing standards through consent orders with other companies, as opposed to traditional notice and hearing procedures – as a major overstepping and defiance of the rulemaking process. The company took its complaint to court, filing a lawsuit in U.S. District Court for D.C. against the FTC for violating its First and Fifth Amendment rights. The FTC within two weeks issued its administrative complaint against POM for false advertising.
Now, two years later, after a voluminous hearing record in the administrative proceeding, the administrative law judge in the FTC’s action has issued an opinion upholding certain false advertising allegations in the FTC’s complaint – based on implied as opposed to express claims – but also siding with POM on the company’s major issues of contention. (Note that POM’s action in the U.S. District Court appears to still be pending as of May 23, 2012.)
POM is touting victory based on rulings by the judge that (1) any FDA pre-approval requirement “would constitute unnecessary overreaching” and that (2) more stringent double-blind, randomized, placebo-controlled studies were not necessary. It appears that these rulings effectively put the kibosh on the FTC’s sliding scale of regulation through settlement agreements … at least in this instance.
An important holding from the court that POM has cited in its press release is that “[t]he greater weight of the persuasive expert testimony in this case leads to the conclusion that where the product is absolutely safe, like POM Products, and where the claim or advertisement does not suggest that the product be used as a substitute for conventional medical care or treatment, then it is appropriate to favor disclosure.”
The court thus addressed some of POM’s concerns over a chilling effect on free speech that could have resulted from the FTC’s attempts to require FDA preapproval for certain health claims. This is a concern we had identified in an earlier post on the matter. While many articles published on the judge’s opinion to date have been headlining POM’s losses, the more important aspect may be the judge’s findings in favor of the company.
There may be a legal hurdle or two for the Consumer Financial Protection Board to jump after the recess appointment of agency director Richard Cordray (the House Judiciary Committee held a hearing on the matter on February 15). But the consumer protection agency created under the Dodd-Frank Wall Street Reform Act of 2010 is pressing forward with its initiatives. Not too surprisingly, several recently proposed initiatives from the agency would stretch the agency’s authority into areas that extend beyond the industries targeted in the Dodd-Frank Act.
The day after the House Judiciary Committee debated the constitutionality of Cordray’s appointment (it doesn’t appear that the hearing was much more than some Republican caterwauling for the record), the CFPB released news of its first major regulatory proposal: to bring consumer credit reporting agencies and debt collection services under its scrutiny.
Those who are vaguely familiar with Dodd-Frank may be aware that the legislation gives the CFPB oversight of specific nonbank markets for (1) nonbank mortgage companies, (2) payday lenders, and (3) private student lenders. These are popular and understandable targets for probes of predatory lending practices. Headlining these industries as needing increased oversight is part of what made the legislation popular and easier for Congress to pass. So where do credit reporting agencies and debt collectors fit under the regulatory scheme? Quite simply, the Dodd-Frank Act also provides for CFPB oversight of other nonbank financial companies that are “larger participants of a market for other consumer financial products or services.”
Oversight of “larger participants”? What on earth does that mean? Congress doesn’t appear to have given clear guidance on what it meant by “larger participants,” leaving the term to the agency to define. As certain as the law of gravity is the law of bureaucratic power: What is not confined (by legislative delineation) necessarily will expand.
Don’t assume that the Dodd-Frank Act’s vagueness concerning what the CFPB would oversee was … well, an oversight. Congress often provides a broad policy concept and then delegates to administrative agencies the power to run with their interpretation and execution of that concept. Hence the impossibly cumbersome Code of Federal Regulations. Even so, however, the breadth of the power delegated to the new consumer protection agency is a bit much.
To the CFPB’s immense credit, it has published at least two requests for public comment to help it define “larger participants” and included an article on the agency’s blog regarding the matter. Indeed, the CFPB seems to be doing a pretty good job of explaining its steps and initiatives and of providing a user-friendly forum to keep the public apprised of their actions. And it is not entirely the agency’s fault that it is obeying the laws of bureaucratic power reach – it would be unnatural for the agency to try to constrict its authority.
What we should glean from the CFPB’s latest proposal, though, is that the CFPB will be running with its power and companies that provide any kind of consumer finance product must be aware of the possibility of government scrutiny.
A federal judge in the U.S. District Court for the District of Columbia agreed earlier this month to fast-track a lawsuit by a privacy group against the Federal Trade Commission, arguing that the FTC has failed to enforce the terms of a settlement agreement it reached with Google last year after the FTC accused Google of violating privacy regulations in the launch of Google Buzz.
Last year, Google and the FTC agreed on a settlement stemming from allegations that Google violated its own privacy promises to consumers when it launched its social network, Google Buzz. That investigation began with a complaint filed by the Electronic Privacy Information Center (EPIC), the same group that is the plaintiff in this current case. EPIC is not suing Google and was not a party to the settlement reached between Google and the FTC. At the time of the settlement, the FTC said it “bars the company from future privacy misrepresentations, requires it to implement a comprehensive privacy program and calls for regular, independent privacy audits for the next 20 years.”
On February 17, the FTC filed a memorandum in opposition to the EPIC suit and a motion to dismiss it. The agency asserted that EPIC has no legal ground for its attempt to compel it to enforce the settlement and that the lawsuit “seeks to deprive the Commission of the discretion to exercise its enforcement authority.”
Earlier this week, more than 30 state attorneys general wrote to Google CEO Larry Page saying that the new Google policy forces consumers to allow information to be shared across several forums without the ability to opt out or choose their preferences for how their personal information is used. The letter also points out that Google has become known as a company that put a premium on the offering users choice in the use of their information, but now that information is being “held hostage.”
EPIC alleged in its complaint that Google has misrepresented its intention to use combined data for behavioral advertising. EPIC also alleges that the agreement gives the FTC the power to stop Google from making the planned privacy changes and that Google’s new policy requires the users’ consent. A key issue in the protests against the new policy had been that account holders will not be able to opt out of it.
A key issue in this case will be whether EPIC, a non-party to the agreement, can force the FTC to take action against Google. EPIC did not bring this action under the Federal Trade Commission Act, which is the source of the vast majority of FTC enforcement actions. Instead, this suit was brought under a section of the Administrative Procedures Act allowing challenges to agency action that is “unlawfully withheld.”
There may be strong precedent against EPIC in this case. The Supreme Court stated in 1985 in Heckler v. Chaney that “an agency decision not to enforce often involves a complicated balancing of a number of factors which are peculiarly within its expertise . . . The agency is far better equipped that the courts to deal with the many variable involved in the proper ordering of its priorities.”
Although EPIC brings an interesting argument, it is not likely to prevail. However, with the ability of Google to unilaterally enforce its privacy changes against users and Congress and the FTC failing to take action to protect consumers, it becomes unclear who will stand up to protect privacy interests of consumers. We will continue to follow any new developments in this case.
Is there a way to hold a government agency like the Federal Trade Commission (FTC) accountable for the cost to businesses of what a company says are abrupt and systemic changes in regulatory standards? POM Wonderful LLC, a Los Angeles-based juice company, is trying to do just that by suing the FTC in District Court.
The FTC is reportedly investigating POM for alleged false advertising but hasn’t filed a complaint against the company. POM claims in its own lawsuit, filed in U.S. District Court in the District of Columbia, that the agency is already inventing new deceptive-advertising law on its own – without going through the required rule-making procedures — and is getting ready to enforce it against POM.
Specifically, POM says the FTC is now requiring that advertisers obtain prior approval by the Food and Drug Administration before making claims that a product treats or prevents disease and that they must have two well-controlled studies before making non-disease claims.
POM alleges that the FTC has put out these new, obligatory advertising standards for the entire food industry not by going through formal rule-making that would give the industry a chance to have input, but simply by publishing consent orders that it entered into with Nestle U.S.A. and Iovate Health Sciences, Inc. POM says the FTC gave POM copies of these consent orders and told POM that these standards now have the force of law and delineate the “new definition of deception.” POM says this action flies in the face of 20 years of FTC rules and regulations on food advertising.
POM alleges that the FTC is violating POM’s First Amendment rights to engage in truthful speech and is damaging POM’s good will and brand identification as a healthy juice company. Another notable argument that POM makes is a claim of due process deprivation in violation of the Fifth Amendment. The company alleges that the FTC’s actions have disrupted its business and devalued the “tens of millions of dollars” invested in research that was conducted in accordance with the FTC’s prior standards.
POM makes valid points. Companies ought to be able to reasonably rely on government standards so that they can decide how to allocate their resources. website tech info That is why federal agencies are required to undertake formal rule-making procedures and to allow businesses time to respond to proposed rules and, if necessary, to modify their practices in advance of the rules’ implementation.
But regulators sometimes see such procedures as tedious and time-consuming. Hence the common practice of many agencies of making changes on the fly through settlement agreements with investigated companies. As POM alleges was done by the FTC, an agency may settle out with a company by requiring that company to implement more stringent measures. Since the agreement is private and between two parties, that document may contain any measure the two parties agree upon – whether or not common practice and whether or not more stringent than current regulatory standards. One of the wrinkles in agencies’ use of such settlement agreements, though, is that these agreements often impact more than just the parties to the agreement.
The parties to the consent decree win (sort of) in that they keep the agency at bay. The agency wins in that it expeditiously (and extrajudiciously) gets to tighten its reins on companies subject to its regulations. But outside companies – which have diligently and reasonably relied on published regulations – may find themselves at a significant loss.