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The FTC and LabMD’s Legal Battle Gets Personal: First Amendment Claims Against FTC Lawyers Survive

The Federal Trade Commission’s (FTC) sprawling and contentious legal battle with now-defunct medical testing company LabMD recently took an unusual turn when a federal court allowed LabMD (and its former CEO) to proceed with claims against two of the three FTC attorneys who handled the agency's investigation and prosecution of LabMD.

Understanding this decision to allow LabMD to proceed with a so-called Bivens action—a claim against federal officials in their individual capacities for violating a person’s constitutional rights—requires some background on LabMD’s allegations relating to the FTC’s investigation of and enforcement action against the company.

In 2010, the FTC sued LabMD, alleging that the company’s data security was unreasonable and amounted to a violation of Section 5 of the FTC Act.  The FTC relied upon information provided by Tiversa, a third-party data security company, to support its claims.  In its countersuit against the FTC, LabMD alleges that the Tiversa information was downloaded from a LabMD computer by Tiversa through a peer-to-peer filing sharing application in violation of state and federal law.  In an effort to get LabMD to use Tiversa’s data remediation services, according to LabMD’s court filings, Tiversa falsely told LabMD that other third parties had also downloaded this file—which contained patient information.  When LabMD ultimately refused to use Tiversa’s services, FTC purportedly moved LabMD to the top of the list of companies that it wanted to sanction, according to the court filings.

But LabMD’s allegations don’t end with this alleged retaliation by the FTC.  In its Bivens action, the company also claims that the FTC acted in bad faith because it knew or should have known that Tiversa’s statements about LabMD were false and that Tiversa had documents that disproved its own statements.  LabMD alleges that the FTC—through the individual attorneys named in its Bivens complaint—and Tiversa set up a shell company, The Privacy Institute, for the purpose of providing materials responsive to the FTC’s civil investigative demand.  This ensured that only documents that supported Tiversa’s allegations were introduced in the case, the complaint charges.

The Bivens action also includes allegations that the FTC specifically targeted LabMD’s former CEO for statements he made to the press and in a book he published about what he perceived to be the unreasonableness of the FTC’s investigation.  Specifically, the FTC subpoenaed all documents related the former CEO’s book, including all drafts and source materials.  LabMD claims that the FTC ultimately brought an enforcement action against the company for refusing to sign a consent/settlement order and for criticizing the government.

In its complaint, LabMD brought claims under the First, Fourth, and Fifth Amendments as well as a claim for civil conspiracy against three FTC attorneys.  The United States District Court for the District of Columbia granted the defendants’ motion to dismiss most of these claims.  The Court found that LabMD had alleged no facts to support a Fourth Amendment claim.  LabMD’s procedural due process claim under the Fifth Amendment failed because LabMD had not alleged that it was deprived of process, and its substantive due process claim was deficient because LabMD’s allegations were not so egregious that they shocked the conscience.  The Court dismissed the civil conspiracy claim because LabMD had not alleged facts showing that there was an agreement among the defendants to deprive LabMD of its constitutional rights.

But the Court allowed LabMD’s First Amendment claim to go forward against two of the three FTC attorneys.  Key to the Court’s holding was the close proximity in time between the former CEO’s criticisms of the FTC attorneys and the initiation of the enforcement action against LabMD.  The Court denied defendants’ motion that certain defendants were protected by absolute and qualified immunity without prejudice to renewal, which leaves open the possibility that the issue will be re-visited based upon a more fully developed factual record. 

We will report back with future developments.