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Understanding the Link Between FTC Civil Investigative Demands and Class Action Risk

By Spodek Law Group | January 24, 2024
(Last Updated On: January 24, 2024)

Understanding the Link Between FTC Civil Investigative Demands and Class Action Risk

The Federal Trade Commission (FTC) frequently issues civil investigative demands (CIDs) to companies as part of investigations into potential consumer protection or antitrust violations. These information requests are similar to subpoenas and are legally enforceable in court.

Receipt of an FTC CID signals that a company’s practices have drawn scrutiny that could eventually spur further regulatory action or even class action lawsuits. Thus, CIDs can indicate heightened legal and financial risks.

What is an FTC Civil Investigative Demand (CID)?

A CID is an administrative subpoena that compels the production of documents, data, testimony, and other information from a company[1]. It empowers the FTC to gather evidence during investigations into unfair or deceptive trade practices, antitrust issues, and more.

The FTC does not need court approval to issue CIDs. It can deploy them at its discretion before initiating any formal legal proceedings[2].

CIDs typically seek vast amounts of information related to a company’s internal records, communications, organizational structure, and business relationships. Recipients usually have tight deadlines for compliance, often just weeks or months.

Why Do Companies Receive FTC CIDs?

There are several reasons why a firm might get served with an FTC CID:

  • Consumer Complaints: If the FTC’s consumer complaint database shows a pattern of grievances with a company’s products or services, it may trigger a CID to investigate further.
  • Industry Investigations: The FTC sometimes conducts broad inquiries into entire industries where consumer protection issues seem likely. All companies in a given sector may receive CIDs requesting information.
  • Mergers & Acquisitions: The FTC reviews many major M&A deals for potential antitrust concerns. Companies involved often get CIDs seeking details on pricing, market share, close competitors, barriers to entry, and more.
  • Referrals: Other government agencies like the Consumer Financial Protection Bureau (CFPB) sometimes refer cases to the FTC if they suspect violations of FTC Act consumer protection laws. This can prompt FTC information requests.
  • Tips: Inside informants like employees or former employees may approach the FTC with concerns about deceptive marketing, anti-competitive conduct, or other issues. Their tips could trigger an investigation and CIDs.

What Types of Violations Do FTC Investigations Target?

FTC probes focus on enforcing key consumer protection and antitrust laws. Some areas they commonly investigate using CIDs include:

  • Deceptive or misleading advertising/marketing
  • Bogus health claims about foods, drugs, or supplements
  • Fraudulent business opportunities
  • Identity theft
  • Data security lapses
  • Unfair billing practices
  • Anti-competitive mergers
  • Monopolistic conduct
  • Price fixing schemes

Responding Effectively to CIDs

Handling FTC investigations and responding to CIDs properly is critical for companies. Here are some key steps:

  • Seek experienced legal counsel: Complex FTC matters require sophisticated attorneys well-versed in consumer protection and antitrust laws. They can strategize responses that avoid self-incrimination.
  • Meet with FTC staff: Schedule a conference to understand the probe’s scope and exactly what information the CID seeks. FTC lawyers may then refine requests to reduce undue burdens.
  • Request extensions if needed: While the FTC expects timely responses, it may grant reasonable deadline extensions to ease compliance strains on businesses.
  • Assert privileges carefully: Withhold privileged documents only after careful review, as improper claims of privilege could draw sanctions or court-ordered compliance.
  • Use the appeals process: Parties can petition to limit or quash a CID if they have valid grounds like attorney-client privilege, trade secrets protections, or undue burdens. But the bar is high for succeeding.

CIDs Indicate Elevated Class Action Risk

The fallout from an FTC investigation can be extensive. Beyond huge fines and business restrictions imposed by regulators, companies also face increased class action litigation risks after getting hit with a CID.

Plaintiffs’ attorneys closely monitor FTC activities for opportunities to file follow-on lawsuits on related consumer issues. For instance, if an FTC deception probe into a pharmaceutical company becomes public knowledge, plaintiff lawyers may leverage the FTC’s allegations when bringing false advertising class actions.

And merely receiving an FTC CID acts as a red flag that a company’s practices have raised government scrutiny. Plaintiff attorneys are even more likely to pursue class litigation in situations where practices have drawn regulatory attention.

Key Reasons CIDs Elevate Class Action Risks

There are several key factors that make class action lawsuits more likely after companies get an FTC CID:

  1. Indicates Consumer Harm: The fact that the FTC has issued a CID implies their investigators already have some information pointing to consumer protection violations. This signals that customers may have experienced real harm, strengthening the underpinnings for a class action.
  2. Compels Evidence Disclosures: CIDs require producing sensitive information to regulators. If the FTC then uses any of this evidence in an eventual lawsuit, it becomes public record for plaintiff lawyers to incorporate into their own complaints.
  3. Creates Negative Publicity: Merely disclosing an FTC investigation publicly can seriously damage a company’s reputation. Plaintiffs’ attorneys jump on situations where negative publicity may make class members more inclined to participate.
  4. Pressures Settlements: Facing an FTC probe places major strains on target companies. The prospect of also battling class litigation on similar issues compounds pressures to settle cases. Plaintiff lawyers often leverage this dynamic to extract generous settlements.

Key Steps to Mitigate Risks

While challenging, proactive strategies can help curb class action risks tied to FTC investigations:

  • Carefully Comply with the CID: Respond openly and avoid overly asserting privileges or resisting production. Obstruction draws further FTC scrutiny and public attention.
  • Seek Confidentiality: Ask the FTC not to disclose sensitive information and to give notice before filing public complaints. This may reduce publicity sparks for follow-on litigation.
  • Address Root Causes: Cure any practices that prompted the FTC inquiry immediately, even if denying wrongdoing. Fixing issues shows good faith and defeats class action claims.
  • Explore Early Settlement: Settling quickly with the FTC before class attorneys get deeply involved may limit risks and publicity. But ensure settlement terms don’t amount to admitting liability.

In summary, getting an FTC CID could open the floodgates for class action lawsuits. It pays to engage experienced counsel to interface with the FTC while also developing mitigation strategies preemptively to limit follow-on litigation risks.

References

  1. What is a Civil Investigative Demand (CID)?
  2. 15 U.S. Code § 57b–1 – Civil investigative demands
  3. So You Received a CID: FAQs for Small Businesses
  4. The FTC takes its subpoenas and CIDs seriously – and you should, too
  5. Consumer Class Actions
  6. Inflection Points and Class Action Litigation
  7. What Are the Risks of Joining a Class Action Lawsuit?
  8. What are the Risks of Joining Class Action Lawsuit?

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