Case: 16-16270       Date Filed: 06/06/2018      Page: 1 of 31


                                                                                 [PUBLISH]

                 IN THE UNITED STATES COURT OF APPEALS

                           FOR THE ELEVENTH CIRCUIT
                             ________________________

                                    No. 16-16270
                              ________________________

                                     Agency No. 9357


LABMD, INC.,

                                                                                   Petitioner,

versus

FEDERAL TRADE COMMISSION,

                                                                                Respondent.

                              ________________________

                        Petition for Review of a Decision of the
                               Federal Trade Commission
                              ________________________

                                       (June 6, 2018)

Before TJOFLAT and WILSON, Circuit Judges, and ROBRENO, * District Judge.

TJOFLAT, Circuit Judge:




         *
        Honorable Eduardo C. Robreno, United States District Judge for the Eastern District of
Pennsylvania, sitting by designation.
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       This is an enforcement action brought by the Federal Trade Commission

(“FTC” or “Commission”) against LabMD, Inc., alleging that LabMD’s data-

security program was inadequate and thus constituted an “unfair act or practice”

under Section 5(a) of the Federal Trade Commission Act (the “FTC Act” or

“Act”), 15 U.S.C. § 45(a).1 Following a trial before an administrative law judge

(“ALJ”), the Commission issued a cease and desist order directing LabMD to

create and implement a variety of protective measures. LabMD petitions this

Court to vacate the order, arguing that the order is unenforceable because it does

not direct LabMD to cease committing an unfair act or practice within the meaning

of Section 5(a). We agree and accordingly vacate the order. 2

                                               I.

                                               A.

       LabMD is a now-defunct medical laboratory that previously conducted

diagnostic testing for cancer. 3 It used medical specimen samples, along with

relevant patient information, to provide physicians with diagnoses. Given the

nature of its work, LabMD was subject to data-security regulations issued under

       1
         Section 5(a) declares unlawful “[u]nfair methods of competition in or affecting
commerce, and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C.
§ 45(a)(1). It empowers and directs the Commission “to prevent persons, partnerships, or
corporations . . . from using unfair methods of competition in or affecting commerce and unfair
or deceptive acts or practices in or affecting commerce.” 

       2
           See 15 U.S.C. § 45(c).
       3
        LabMD is no longer in operation but still exists as a company and continues to secure
its computers and the patient data stored within them.
                                               2
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the Health Insurance Portability and Accountability Act of 1996, known

colloquially as HIPAA. LabMD employed a data-security program in an effort to

comply with those regulations.4

       Sometime in 2005, contrary to LabMD policy, a peer-to-peer file-sharing

application called LimeWire was installed on a computer used by LabMD’s billing

manager.5 LimeWire is an application commonly used for sharing and

downloading music and videos over the Internet. It connects to the “Gnutella”

network, which during the relevant period had two to five million people logged in

at any given time. Those using LimeWire and connected to the Gnutella network

can browse directories and download files that other users on the network

designate for sharing. The billing manager designated the contents of the “My

Documents” folder on her computer for sharing, exposing the contents to the other

users. Between July 2007 and May 2008, this folder contained a 1,718-page file

(the “1718 File”) with the personal information of 9,300 consumers, including

names, dates of birth, social security numbers, laboratory test codes, and, for some,

health insurance company names, addresses, and policy numbers.

       In February 2008, Tiversa Holding Corporation, an entity specializing in

data security, used LimeWire to download the 1718 File. Tiversa began contacting

       4
        LabMD’s program included “a compliance program, training, firewalls, network
monitoring, password controls, access controls, antivirus, and security-related inspections.”
       5
         The record is not clear on the point but we assume that the billing manager installed the
peer-to-peer application on her workstation computer.
                                                3
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LabMD months later, offering to sell its remediation services to LabMD. 6 LabMD

refused Tiversa’s services and removed LimeWire from the billing manager’s

computer. Tiversa’s solicitations stopped in July 2008, after LabMD instructed

Tiversa to direct any further communications to LabMD’s lawyer. In 2009,

Tiversa arranged for the delivery of the 1718 File to the FTC. 7

                                                 B.

       In August 2013, the Commission, following an extensive investigation,

issued an administrative complaint against LabMD and assigned an ALJ to the

       6
           As described by the ALJ who initially presided over this case,
       [Tiversa’s] efforts included representing to LabMD that the 1718 File had been
       found on a peer-to-peer network and sending LabMD a Tiversa Incident Response
       Services Agreement describing Tiversa’s proposed fee schedule, payment terms,
       and services that would be provided. These contacts continued from mid-May
       through mid-July 2008. In these communications, Tiversa represented that
       Tiversa had “continued to see individuals [on peer-to-peer networks] searching
       for and downloading copies” of the 1718 File. . . .
       Tiversa’s representations in its communications with LabMD that the 1718 File
       was being searched for on peer-to-peer networks, and that the 1718 File had
       spread across peer-to-peer networks, were not true. These assertions were the
       “usual sales pitch” to encourage the purchase of remediation services from
       Tiversa. . . .
Tiversa did, however, share a copy of the 1718 File with a Dartmouth College professor, who in
February 2009 published an article about data security in the healthcare industry. Tiversa was a
“research partner” for the article, meaning it searched for and provided the professor with
relevant files to analyze. The professor did not share the 1718 File or its contents with anyone.
       7
         Tiversa’s CEO and the FTC offered testimony at a 2007 congressional hearing
regarding peer-to-peer file-sharing technology. About two months after the hearing, the FTC
and Tiversa began communicating. The FTC wanted Tiversa to provide it with information
regarding companies’ data-security practices. Tiversa, though, did not want a formal request for
information—such as a Civil Investigative Demand (“CID”)—to be issued directly to it because
it had been in talks about its possible acquisition by a third party. Tiversa thus created an entity
called “The Privacy Institute” so that a CID could be issued without directly implicating Tiversa.
The FTC issued a CID to The Privacy Institute in 2009 and The Privacy Institute provided the
FTC with the 1718 File.
                                                  4
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case. The complaint alleged that LabMD had committed an “unfair act or

practice” prohibited by Section 5(a) by “engag[ing] in a number of practices that,

taken together, failed to provide reasonable and appropriate security for personal

information on its computer networks.” Rather than allege specific acts or

practices that LabMD engaged in, however, the FTC’s complaint set forth a

number of data-security measures that LabMD failed to perform. 8 LabMD


      8
          The FTC’s complaint alleged that LabMD
      (a) did not develop, implement, or maintain a comprehensive information
          security program to protect consumers’ personal information. Thus, for
          example, employees were allowed to send emails with such information to
          their personal email accounts without using readily available measures to
          protect the information from unauthorized disclosure;
      (b) did not use readily available measures to identify commonly known or
          reasonably foreseeable security risks and vulnerabilities on its networks. By
          not using measures such as penetration tests, for example, respondent could
          not adequately assess the extent of the risks and vulnerabilities of its
          networks;
      (c) did not use adequate measures to prevent employees from accessing personal
          information not needed to perform their jobs;
      (d) did not adequately train employees to safeguard personal information;
      (e) did not require employees, or other users with remote access to the networks,
          to use common authentication-related security measures, such as periodically
          changing passwords, prohibiting the use of the same password across
          applications and programs, or using two-factor authentication;
      (f) did not maintain and update operating systems of computers and other
          devices on its networks. For example, on some computers respondent used
          operating systems that were unsupported by the vendor, making it unlikely
          that the systems would be updated to address newly discovered
          vulnerabilities; and
      (g) did not employ readily available measures to prevent or detect unauthorized
          access to personal information on its computer networks. For example,
          respondent did not use appropriate measures to prevent employees from
          installing on computers applications or materials that were not needed to
          perform their jobs or adequately maintain or review records of activity on its
                                              5
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answered the complaint, denying it had engaged in the conduct alleged and

asserting several affirmative defenses, among them that the Commission lacked

authority under Section 5 of the Act to regulate its handling of the personal

information in its computer networks.

      After answering the FTC’s complaint, LabMD filed a motion to dismiss it

for failure to state a case cognizable under Section 5. The motion essentially

replicated the assertions in LabMD’s answer. Under the FTC’s Rules of Practice,

the Commission, rather than the ALJ, ruled on the motion to dismiss. The

Commission denied the motion, concluding that it had authority under Section 5(a)

to prosecute the charge of unfairness asserted in its complaint. LabMD, Inc., 2014-

1 Trade Cases P 78784 (F.T.C.) (Jan. 16, 2014).

      Following discovery, LabMD filed a motion for summary judgment,

presenting arguments similar to those made in support of its motion to dismiss. As

before, the motion was submitted to the Commission to decide. It denied the

motion on the ground that there were genuine factual disputes relating to LabMD’s

liability “for engaging in unfair acts or practices in violation of Section 5(a),”

necessitating an evidentiary hearing. LabMD, Inc., 2014-1 Trade Cases P 78785




          networks. As a result, respondent did not detect the installation or use of an
          unauthorized file sharing application on its networks.
                                              6
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(F.T.C.), at *1 (May 19, 2014) (quotations omitted). An evidentiary hearing was

held before the ALJ in July 2015.9

       After considering the parties’ submissions, the ALJ dismissed the FTC’s

complaint, concluding that the FTC failed to prove that LabMD had committed

unfair acts or practices in neglecting to provide adequate security for the personal

information lodged in its computer networks. Namely, the FTC failed to prove that

LabMD’s “alleged failure to employ reasonable data security . . . caused or is

likely to cause substantial injury to consumers,” as required by Section 5(n) of the

Act, 15 U.S.C. § 45(n). 10 Because there was no substantial injury or likelihood

thereof, there could be no unfair act or practice.

        The FTC appealed the ALJ’s decision, which under 16 C.F.R. § 3.52

brought the decision before the full Commission for review. In July 2016,

reviewing the ALJ’s findings of fact and conclusions of law de novo, see 

the FTC reversed the ALJ’s decision.

       The FTC first found that LabMD “failed to implement reasonable security

measures to protect the sensitive consumer information on its computer network.”

Therefore, LabMD’s “data security practices were unfair under Section 5.” In

       9
         Prior to the hearing, LabMD amended its answer and once again unsuccessfully moved
to dismiss the FTC’s complaint. Nothing in the answer or the motion is pertinent here.
       10
          Section 5(n) states, as a prerequisite for an act or practice to be unfair, “[T]he act or
practice [1] causes or is likely to cause substantial injury to consumers [2] which is not
reasonably avoidable by consumers themselves and [3] not outweighed by countervailing
benefits to consumers or to competition.”
                                                   7
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particular, LabMD failed to adequately secure its computer network, employ

suitable risk-assessment tools, provide data-security training to its employees, and

adequately restrict and monitor the computer practices of those using its network.

Because of these deficiencies, the Commission continued, LimeWire was able to

be installed on the LabMD billing manager’s computer, and Tiversa was ultimately

able to download the 1718 File. The Commission then held that, contrary to the

ALJ’s decision, the evidence showed that Section 5(n)’s “substantial injury” prong

was met in two ways: the unauthorized disclosure of the 1718 File itself caused

intangible privacy harm, and the mere exposure of the 1718 File on LimeWire was

likely to cause substantial injury. The FTC went on to conclude that Section 5(n)’s

other requirements were also met.11

      Next, the Commission addressed and rejected LabMD’s arguments that

Section 5(a)’s “unfairness” standard—which, according to the Commission, is a

reasonableness standard—is void for vagueness and that the Commission failed to

provide fair notice of what data-security practices were adequate under Section

5(a). The FTC then entered an order vacating the ALJ’s decision and enjoining

LabMD to install a data-security program that comported with the FTC’s standard

of reasonableness. See generally Appendix. The order is to terminate on either

July 28, 2036, or twenty years “from the most recent date that the [FTC] files a


      11
           See supra note 10.
                                           8
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complaint . . . in federal court alleging any violation of the order, whichever comes

later.” 

                                              C.

       LabMD petitioned this Court to review the FTC’s decision. LabMD then

moved to stay enforcement of the FTC’s cease and desist order pending review,

arguing that compliance with the order was unfeasible given LabMD’s defunct

status and de minimis assets. After an FTC response urging against the stay, we

granted LabMD’s motion. LabMD, Inc. v. FTC, 678 F. App’x 816 (11th Cir.

2016).

                                              II.

       Now, LabMD argues that the Commission’s cease and desist order is

unenforceable because the order does not direct it to cease committing an unfair

“act or practice” within the meaning of Section 5(a).12 We review the FTC’s legal

conclusions de novo but give “some deference to [its] informed judgment that a

particular commercial practice is to be condemned as ‘unfair.’” FTC v. Ind. Fed’n

of Dentists, 

, 454, 

, 2016 (1986). We review the

FTC’s findings of facts under the “substantial evidence” standard, McWane, Inc. v.

FTC, 

, 824 (11th Cir. 2015), which requires “more than a mere



       12
          LabMD’s brief asserts several grounds for setting aside the FTC’s order. The only
issue we address is the enforceability of the FTC’s order.
                                               9
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scintilla” of evidence “but less than a preponderance,” Dyer v. Barnhart, 

, 1210 (11th Cir. 2005).

                                               A.

       Section 5(a) of the FTC Act authorizes the FTC to protect consumers by

“prevent[ing] persons, partnerships, or corporations . . . from using unfair . . . acts

or practices in or affecting commerce.” The Act does not define the term “unfair.”

The provision’s history, however, elucidates the term’s meaning.

       The FTC Act, passed in 1914, created the FTC and gave it power to prohibit

“unfair methods of competition.” 13 Rather than list “the particular practices to

which [unfairness] was intended to apply,” Congress “intentionally left

development of the term ‘unfair’ to the Commission” through case-by-case

litigation 14—though, at the time of the FTC Act’s inception, the FTC’s primary

mission was understood to be the enforcement of antitrust law. 15 In 1938, the Act

was amended to provide that the FTC had authority to prohibit “unfair . . . acts or

practices.”16 This amendment sought to clarify that the FTC’s authority applied




       13
        See Marc Winerman, The Origins of the FTC: Concentration, Cooperation, Control,
and Competition, 71 Antitrust L.J. 1, 2–6 (2003).
       14
           FTC v. Sperry & Hutchinson Co., 

, 239–40, 

, 903 (1972);
Atl. Ref. Co. v. FTC, 

, 367, 

, 1505 (1965); see S. Rep. No. 63-597, at
13 (1914); H.R. Rep. No. 63-1142, at 19 (1914).
       15
            See generally Winerman, supra note 13.
       16
            

                                               10
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not only to competitors but, importantly, also to consumers. 17 Hence, the FTC

possesses “unfairness authority” to prohibit and prosecute unfair acts or practices

harmful to consumers.

       In 1964, the FTC set forth three factors to consider in deciding whether to

wield its unfairness authority. The FTC was to consider whether an act or practice

(1) caused consumers, competitors, or other businesses substantial injury; (2)

offended public policy as established by statute, the common law, or otherwise;

and (3) was immoral, unethical, or unscrupulous.18 The Supreme Court cited these

factors with apparent approval in dicta in the 1972 case FTC v. Sperry &

Hutchinson, 

, 244 n.5, 

, 905 n.5 (1972).

       “Emboldened” by Sperry & Hutchinson’s dicta, “the Commission set forth

to test the limits of the unfairness doctrine.” 19 This effort peaked in a 1978 attempt

to “use unfairness to ban all advertising directed to children on the grounds that it

was ‘immoral, unscrupulous, and unethical’ and based on generalized public

policies to protect children.”20 Congress and much of the public disapproved.21



       17
         FTC v. Colgate-Palmolive Co., 

, 384, 

, 1042 (1965); H.R.
Rep. No. 75-1613, at 3 (1937).
       18
         Unfair or Deceptive Advertising and Labeling of Cigarettes in Relation to the Health
Hazards of Smoking, Statement of Basis and Purpose, 29 Fed. Reg. 8324, 8355 (July 2, 1964).
       19
          J. Howard Beales, The FTC’s Use of Unfairness Authority: Its Rise, Fall, and
Resurrection, FTC (May 30, 2003), https://www.ftc.gov/public-statements/2003/05/ftcs-use-
unfairness-authority-its-rise-fall-and-resurrection.
       20
            

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Congressional backlash included refusing to fund the FTC, thus shutting it down

for several days, and passing legislation that prevented the FTC from using its

unfairness authority to promulgate rules that restrict children’s advertising.22

       Following this episode, the Commission wrote a unanimous letter to two

senators in 198023 placing gloss on the three 1964 unfairness factors that were

recognized in Sperry & Hutchinson. As to the first factor, consumer injury, the

FTC laid out a separate three-part test defining a qualifying injury. These

consumer-injury factors would later be codified in Section 5(n). The FTC stated

that to warrant a finding of unfairness, an injury “[1] must be substantial; [2] it

must not be outweighed by any countervailing benefits to consumers or

competition that the practice produces; and [3] it must be an injury that consumers

themselves could not reasonably have avoided.”

       As to the second 1964 unfairness factor, public policy, the FTC specified

that the policies relied upon “should be clear and well-established”—that is,

“declared or embodied in formal sources such as statutes, judicial decisions, or the

Constitution as interpreted by the courts, rather than being ascertained from the


       21
          See, e.g., The FTC as National Nanny, Wash. Post (Mar. 1, 1978),
https://www.washingtonpost.com/archive/politics/1978/03/01/the-ftc-as-national-
nanny/69f778f5-8407-4df0-b0e9-7f1f8e826b3b/?utm_term=.015de8e7203d.
       22
          Beales, supra note 19 (citing FTC Improvements Act of 1980, Pub. L. No. 96-252,
§ 14, 94 Stat. 388); see 15 U.S.C. § 57a(h).
       23
          FTC Policy Statement on Unfairness, FTC (Dec. 17, 1980), available at
https://www.ftc.gov/public-statements/1980/12/ftc-policy-statement-unfairness.
                                              12
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general sense of the national values.” Put another way, an act or practice’s

“unfairness” must be grounded in statute, judicial decisions—i.e., the common

law—or the Constitution. An act or practice that causes substantial injury but

lacks such grounding is not unfair within Section 5(a)’s meaning. 24 Finally, the

FTC stated that it was nixing the third 1964 unfairness factor—whether a practice

is immoral, unethical, or unscrupulous—because it was “largely duplicative” of the

first two. Thus, an “unfair” act or practice is one which meets the consumer-injury

factors listed above and is grounded in well-established legal policy.

                                                B.

       Here, the FTC’s complaint alleges that LimeWire was installed on the

computer used by LabMD’s billing manager. This installation was contrary to

company policy. 25 The complaint then alleges that LimeWire’s installation caused

the 1718 File, which consisted of consumers’ personal information, to be exposed.

The 1718 File’s exposure caused consumers injury by infringing upon their right of

privacy. Thus, the complaint alleges that LimeWire was installed in defiance of

       24
           Section 5(n) now states, with regard to public policy, “In determining whether an act or
practice is unfair, the Commission may consider established public policies as evidence to be
considered with all other evidence. Such public policy considerations may not serve as a
primary basis for such determination.” We do not take this ambiguous statement to mean that
the Commission may bring suit purely on the basis of substantial consumer injury. The act or
practice alleged to have caused the injury must still be unfair under a well-established legal
standard, whether grounded in statute, the common law, or the Constitution.
       25
           The FTC’s complaint does not state that LimeWire was installed contrary to company
policy. But the complaint implies as much in that it does not allege that LabMD’s policy
allowed the installation. Further, undisputed evidence in the record indicates that LimeWire was
installed contrary to LabMD policy.
                                                13
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LabMD policy and caused the alleged consumer injury. Had the complaint

stopped there, a narrowly drawn and easily enforceable order might have followed,

commanding LabMD to eliminate the possibility that employees could install

unauthorized programs on their computers.

      But the complaint continues past this single allegation of wrongdoing,

adding that LimeWire’s installation was not the only conduct that caused the 1718

File to be exposed. It also alleges broadly that LabMD “engaged in a number of

practices that, taken together, failed to provide reasonable and appropriate security

for personal information on its computer networks.” The complaint then provides

a litany of security measures that LabMD failed to employ, each setting out in

general terms a deficiency in LabMD’s data-security protocol.26 Because LabMD

failed to employ these measures, the Commission’s theory goes, LimeWire was

able to be installed on the billing manager’s computer. LabMD’s policy forbidding

employees from installing programs like LimeWire was insufficient.

      The FTC’s complaint, therefore, uses LimeWire’s installation, and the 1718

File’s exposure, as an entry point to broadly allege that LabMD’s data-security

operations are deficient as a whole. Aside from the installation of LimeWire on a

company computer, the complaint alleges no specific unfair acts or practices

engaged in by LabMD. Rather, it was LabMD’s multiple, unspecified failures to


      26
           See supra note 8.
                                          14
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act in creating and operating its data-security program that amounted to an unfair

act or practice.27 Given the breadth of these failures, the Commission attached to

its complaint a proposed order which would regulate all aspects of LabMD’s data-

security program—sweeping prophylactic measures to collectively reduce the

possibility of employees installing unauthorized programs on their computers and

thus exposing consumer information. The proposed cease and desist order, which

is identical in all relevant respects to the order the FTC ultimately issued, identifies

no specific unfair acts or practices from which LabMD must abstain and instead

requires LabMD to implement and maintain a data-security program “reasonably

designed” to the Commission’s satisfaction. See generally Appendix.




       27
          After outlining LabMD’s shortcomings in data security, namely those items listed in
note 

, the FTC’s complaint states in paragraph 22 that LabMD’s
       failure to employ reasonable and appropriate measures to prevent unauthorized
       access to personal information, including dates of birth, SSNs, medical test codes,
       and health information, caused, or is likely to cause, substantial injury to
       consumers that is not offset by countervailing benefits to consumers or
       competition and is not reasonably avoidable by consumers. This practice was,
       and is, an unfair act or practice.
(Emphasis added). Oddly, paragraph 23 of the complaint states that the “acts and practices of
[LabMD] as alleged in this complaint constitute unfair acts or practices in or affecting
commerce in violation of Section 5(a).” (Emphasis added). Thus, paragraph 22 seems to
conceive of all of LabMD’s data-security deficiencies as culminating in a single unfair act or
practice, and paragraph 23, though unspecific and perhaps boilerplate, suggests that there were
multiple unfair acts or practices. Paragraph 22 better encapsulates the FTC’s theory, as the
complaint in preceding paragraphs lays out a number of deficiencies that, “taken together,”
constitute unreasonable data security. Further, the Commission’s cease and desist order states,
“[T]he Commission has concluded that LabMD’s data security practices were unreasonable and
constitute an unfair act or practice that violates Section 5.” (Emphasis added). See Appendix at
1.
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       The decision on which the FTC based its final cease and desist order exhibits

more of the same. The FTC found that LabMD “failed to implement reasonable

security measures to protect the sensitive consumer information on its computer

network” and that the failure caused substantial consumer injury. In effect, the

decision held that LabMD’s failure to act in various ways to protect consumer data

rendered its entire data-security operation an unfair act or practice. The broad

cease and desist order now at issue, according to the Commission, was therefore

justified.

                                  *             *                *

       The first question LabMD’s petition for review presents is whether

LabMD’s failure to implement and maintain a reasonably designed data-security

program constituted an unfair act or practice within the ambit of Section 5(a). The

FTC declared that it did because such failure caused substantial injury to

consumers’ right of privacy, and it issued a cease and desist order to avoid further

injury.

       The Commission must find the standards of unfairness it enforces in “clear

and well-established” policies that are expressed in the Constitution, statutes, or the

common law. 28 The Commission’s decision in this case does not explicitly cite the

source of the standard of unfairness it used in holding that LabMD’s failure to


       28
            FTC Policy Statement on Unfairness, supra note 23.
                                               16
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implement and maintain a reasonably designed data-security program constituted

an unfair act or practice. It is apparent to us, though, that the source is the common

law of negligence. According to the Restatement (Second) of Torts § 281 (Am.

Law Inst. 1965), Statement of the Elements of a Cause of Action for Negligence,

      [an] actor is liable for an invasion of an interest of another, if:
          (a) the interest invaded is protected against unintentional invasion,
              and
          (b) the conduct of the actor is negligent with respect to the other,
              or a class of persons within which [the other] is included, and
          (c) the actor’s conduct is a legal cause of the invasion, and
          (d) the other has not so conducted himself as to disable himself
              from bringing an action for such invasion.

      The gist of the Commission’s complaint and its decision is this: The

consumers’ right of privacy is protected against unintentional invasion. LabMD

unintentionally invaded their right, and its deficient data-security program was a

legal cause. Section 5(a) empowers the Commission to “prevent persons,

partnerships, or corporations . . . from using unfair . . . acts or practices.” The law

of negligence, the Commission’s action implies, is a source that provides standards

for determining whether an act or practice is unfair, so a person, partnership, or

corporation that negligently infringes a consumer interest protected against

unintentional invasion may be held accountable under Section 5(a). We will

assume arguendo that the Commission is correct and that LabMD’s negligent



                                           17
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failure to design and maintain a reasonable data-security program invaded

consumers’ right of privacy and thus constituted an unfair act or practice.

      The second question LabMD’s petition for review presents is whether the

Commission’s cease and desist order, founded upon LabMD’s general negligent

failure to act, is enforceable. We answer this question in the negative. We

illustrate why by first laying out the FTC Act’s enforcement and remedial schemes

and then by demonstrating the problems that enforcing the order would pose.

                                              III.

      The FTC carries out its Section 5(a) mission to prevent unfair acts or

practices in two ways: formal rulemaking and case-by-case litigation.

      The Commission is authorized under 15 U.S.C. § 57a to prescribe rules

“which define with specificity” unfair acts or practices within the meaning of

Section 5(a). Once a rule takes effect, it becomes in essence an addendum to

Section 5(a)’s phrase “unfair . . . acts or practices”; the rule puts the public on

notice that a particular act or practice is unfair. The FTC enforces its rules in the

federal district courts. Under 15 U.S.C. § 45(m)(1)(A), 29 the Commission may



      29
           This provision states,
      The Commission may commence a civil action to recover a civil penalty in a
      district court of the United States against any person, partnership, or corporation
      which violates any rule under this subchapter respecting unfair or deceptive acts
      or practices . . . with actual knowledge or knowledge fairly implied on the basis of
      objective circumstances that such act is unfair or deceptive and is prohibited by
                                              18
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bring an action to recover a civil penalty against any person, partnership or

corporation that knowingly violates a rule. 30 This case does not involve the

enforcement of an FTC-promulgated rule.

       What is involved here is the FTC’s establishment of an unfair act or practice

through litigation. Because Congress thought impossible the task of legislating a

comprehensive list of unfair acts or practices, it authorized the Commission to

establish unfair acts or practices through case-by-case litigation. In the litigation

context, once an act or practice is adjudged to be unfair, the act or practice

becomes in effect—like an FTC-promulgated rule—an addendum to Section 5(a).

       The FTC Act provides two forums for such litigation. The Commission may

choose to prosecute its claim that an act or practice is unfair before an ALJ, with

appellate review before the full Commission and then in a federal court of appeals.

See 15 U.S.C. § 45(b), (c); 16 C.F.R. § 3.1 et seq. Or, under Section 13(b) of the

Act, 15 U.S.C. § 53(b), it may prosecute its claim before a federal district judge,

with appellate review also in a federal court of appeals.




       such rule. In such action, such person, partnership, or corporation shall be liable
       for a civil penalty of not more than $10,000 for each violation.
15 U.S.C. § 45(m)(1)(A). As explained in note 39, infra, the Commission has increased the
penalty amount to $41,484 per violation.
       30
        The Commission may also bring a suit in federal district court or a state court of
competent jurisdiction to obtain relief in the form of consumer redress. 15 U.S.C. § 57b.
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       Assume a factual scenario in which the Commission believes a certain act or

practice is unfair. It should not matter which of the two forums the Commission

chooses to prosecute its claim. The result should be the same. As we explain

below, the ALJ and the district judge use materially identical procedural rules in

processing the case to judgment31 and both apply the same substantive law to the

facts. Further, putting any venue differences aside, the same court of appeals

reviews their decisions.

                                              A.

       We consider the Commission’s first option, litigation before an ALJ. The

Commission issues an administrative complaint against a party it has reason to

believe is engaging in an unfair act or practice and seeks a cease and desist order.

16 C.F.R. § 3.13. The Commission prosecutes the complaint before an ALJ whom

it designates, in accordance with its Rules of Practice. 

et seq. Under

these Rules, the complaint must provide, among other things, “[a] clear and

concise factual statement sufficient to inform each respondent with reasonable

definiteness of the type of acts or practices alleged to be in violation of the law.”



       31
           See FTC, Operating Manual Chapter 10.7, available at
https://www.ftc.gov/sites/default/files/attachments/ftc-administrative-staff-
manuals/ch10administrativelitigation.pdf (stating that “many [of the Commission’s] adjudicative
rules are derived from the Federal Rules of Civil Procedure”); see also Stephanie W. Kanwit,
Federal Trade Commission § 8:1 (2017) (noting that the Commission “has held over the years
that the [Federal Rules of Civil Procedure] can provide an analytical framework for the
disposition of related issues” (quotations omitted)).
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1. If the respondent files a motion to dismiss the complaint, the motion is

referred to the Commission for a ruling. 32 If the motion is denied, the respondent

files an answer. From that point on, the proceedings before the ALJ resemble the

proceedings in an action for injunctive relief in federal district court. If the ALJ

finds that the respondent has been engaging in the unfair act or practice alleged and

will likely continue doing so, the ALJ enters a cease and desist order enjoining the

respondent from engaging in the unfair conduct.33 If not, the ALJ dismisses the

Commission’s complaint.34 Either way, the ALJ’s decision is appealable to the

FTC, 

and the FTC’s decision is in turn reviewable in a federal court of

appeals, 15 U.S.C. § 45(c).

       Suppose the Commission chooses the second option, litigation before a

federal district judge under Section 13(b). If the Commission has reason to believe

a party is engaging in an unfair act or practice, it seeks an injunction by filing in

district court a complaint that sets forth “well-pleaded facts . . . permit[ting] the

court to infer more than the mere possibility of misconduct.” Ashcroft v. Iqbal,

, 679, 

, 1950 (2009) (citing Fed. R. Civ. P. 8(a)(2)).

       32
         The Commission may, in its discretion, refer the motion back to the ALJ for a ruling.
16 C.F.R. § 3.22.
       33
          The ALJ’s decision must set out findings of fact and conclusions of law, 16 C.F.R.
§ 3.51(c), just like a district judge must do pursuant to Federal Rule of Civil Procedure 52(a)
following a bench trial.
       34
          As a whole, this administrative procedure, set out in the FTC’s Rules of Practice,
effectively supersedes 15 U.S.C. § 45(b), the FTC Act provision governing Commission
proceedings.
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Although the case is tried pursuant to the Federal Rules of Civil Procedure, not the

FTC Rules of Practice, it is handled essentially as it would be before the ALJ. If

the district judge finds that the defendant has been engaging in the unfair act or

practice alleged and will likely continue doing so, the judge enjoins the defendant

from engaging in such conduct. Whatever the court’s decision, it is reviewable in

the court of appeals.

       Assume the result is the same in both litigation forums. The ALJ enters a

cease and desist order; the district court issues an injunction. Appellate review

would reach the same result regardless of the trial forum (assuming that venue is

laid in the same court of appeals). 35 Assume further that both coercive orders are

affirmed by the court of appeals. The cease and desist order and the injunction

address the same behavior and contain the same command: discontinue engaging

in a specific unfair act or practice.




       35
          There are a couple of subtle differences in how cease and desist orders and injunctions
are reviewed. First, an appellate court reviews a district court’s findings of fact for clear error
and those of the FTC under the “substantial evidence” standard. McWane, 

;

. In practice, however, these two standards make little or no difference in
terms of outcome. See Dickinson v. Zurko, 

, 162–63, 

, 1823 (1999)
(“The court/agency [substantial-evidence] standard, as we have said, is somewhat less strict than
the court/court [clearly erroneous] standard. But the difference is a subtle one—so fine that
(apart from the present case) we have failed to uncover a single instance in which a reviewing
court conceded that use of one standard rather than the other would in fact have produced a
different outcome.”). Further, although both the FTC’s and a district court’s conclusions of law
are reviewed de novo, appellate courts give “some deference to the Commission’s informed
judgment that a particular commercial practice is to be condemned as ‘unfair.’” Ind. Fed’n of

, 106 S. Ct. at 2016.
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       With the cease and desist order or the injunction in hand, the Commission

may proceed in two ways against a party who violates its terms. 36 The

Commission may seek the imposition of either a civil penalty or civil-contempt

sanction.37 We explain below the procedures the Commission invokes in pursuing

these respective remedies.

                                                B.

                                                 1.

       Under Section 5(l), 15 U.S.C. § 45(l), the Commission may bring a civil-

penalty action in district court should the respondent violate a final cease and desist

order. 38 The Commission’s complaint would allege that the defendant is subject to

an existing cease and desist order and has violated its terms. For each separate

       36
         We note that with respect to violations of final cease and desist orders, the Commission
may also bring a 15 U.S.C. § 57b action as described in note 

.
       37
          The two remedies are similar in nature. Indeed, not long after Section 5’s civil-penalty
scheme was implemented, the Commissioner of the FTC described civil penalties as “an
additional remedy to that formerly employed of invoking the inherent power of the courts to
punish for contempt anyone who violated a court order directing compliance with an order of the
Commission.” See Hon. R. E. Freer, Commissioner, Federal Trade Commission, Address before
the Annual Convention of the Proprietary Association (May 17, 1938).
       38
           A cease and desist order is made final pursuant to the conditions set forth in 15 U.S.C.
§ 45(g). Section 5(l) directs the Commission to call upon the United States Attorney General to
commence a civil-penalty action against the respondent. The Commission can bring the action
itself, however, in accordance with the criteria in 15 U.S.C. § 56(a).
         Section 5(m)(1)(B) of the Act, 15 U.S.C. § 45(m)(1)(B), authorizes the Commission to
file suit against a nonrespondent who “with actual knowledge” engages in the “act or practice”
declared a violation of Section 5(a) and enjoined via a cease and desist order entered in a
previous administrative adjudication. The previous adjudication, however, is afforded no
collateral estoppel effect against the defendant. That is, the defendant can challenge the factual
predicate for the cease and desist order and the ultimate determination that the facts found in the
previous adjudication constituted an unfair act or practice. See 

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violation of the order—or, in the case of a continuing violation, for each day in

violation—the district court may impose a penalty of up to $41,484.39 

also empowers the district court to grant an injunction if the Commission

proves that the violation is likely to continue and an injunction is necessary to

enforce the order.

       If the Commission has obtained an injunction in district court requiring the

defendant to discontinue an unfair act or practice, it may invoke the district court’s

civil-contempt power should the defendant disobey. Rather than filing a

complaint, as in a Section 5(l) action, the Commission simply moves the district

court for an order requiring the defendant to show cause why it should not be held

in contempt for engaging in conduct the injunction specifically enjoined. If the

court is satisfied that the conduct is forbidden, it issues a show cause order. Then,

if at the show cause hearing the Commission establishes by clear and convincing

proof that the defendant engaged in the forbidden conduct and that the defendant

“had the ability to comply” with the injunctive provision at issue, McGregor v.

Chierico, 

, 1383 (11th Cir. 2000), the court may adjudicate the

defendant in civil contempt and impose appropriate sanctions.



       39
          Sections 5(l) and 5(m)(1)(B) set the maximum penalty at $10,000, but the Commission
may adjust this figure for inflation under 16 C.F.R. § 1.98. Hence the current $41,484 figure,
which “appl[ies] only to penalties assessed after January 22, 2018” but “includ[es] those
penalties whose associated violation predated January 22, 2018.” 

16-16270     Date Filed: 06/06/2018   Page: 25 of 31


                                          2.

      The concept of specificity is crucial to both modes of enforcement. We start

with civil penalties for violations of cease and desist orders. Nothing in the FTC

Act addresses what content must go into a cease and desist order. The FTC Rule

of Practice governing Commission complaints, however, states that a complaint

must contain “[a] clear and concise factual statement sufficient to inform each

respondent with reasonable definiteness of the type of acts or practices alleged to

be in violation of the law.” 16 C.F.R § 3.11. It follows that the remedy the

complaint seeks must comport with this requirement of reasonable definiteness.

Moreover, given the severity of the civil penalties a district court may impose for

the violation of a cease and desist order, the order’s prohibitions must be stated

with clarity and precision. The United States Supreme Court emphasized this point

in FTC v. Colgate-Palmolive Co., stating,

      [T]his Court has . . . warned that an order’s prohibitions should be
      clear and precise in order that they may be understood by those
      against whom they are directed, and that [t]he severity of possible
      penalties prescribed . . . for violations of orders which have become
      final underlines the necessity for fashioning orders which are, at the
      outset, sufficiently clear and precise to avoid raising serious questions
      as to their meaning and application.

, 392, 

, 1046 (1965) (quotations and citations omitted).

The imposition of penalties upon a party for violating an imprecise cease and desist




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order—up to $41,484 per violation or day in violation—may constitute a denial of

due process.40

       Specificity is equally important in the fashioning and enforcement of an

injunction consequent to an action brought in district court under Section 13(b).

Federal Rule of Civil Procedure 65(d)(1) requires that an injunctive order state the

reasons for its coercive provisions, state the provisions “specifically,” and describe

the acts restrained or required “in reasonable detail.” The Supreme Court has

stated that Rule 65(d)(1)’s “specificity provisions . . . are no mere technical

requirements. The Rule was designed to prevent uncertainty and confusion on the

part of those faced with injunctive orders, and to avoid the possible founding of a

contempt citation on a decree too vague to be understood.” Schmidt v. Lessard,

, 476, 

, 715 (1974). Indeed, “[t]he most fundamental

postulates of our legal order forbid the imposition of a penalty for disobeying a

command that defies comprehension.” Int’l Longshoremen’s Ass’n, Local 1291 v.

Phila. Marine Trade Ass’n, 

, 76, 

, 208 (1967). Being held

in contempt and sanctioned pursuant to an insufficiently specific injunction is


       40
           See BMW of N. Am., Inc. v. Gore, 

, 574 & n.22, 

, 1598 &
n.22 (1996) (“Elementary notions of fairness enshrined in our constitutional jurisprudence dictate
that a person receive fair notice . . . of the conduct that will subject him to punishment . . . .
[T]he basic protection against judgments without notice afforded by the Due Process Clause is
implicated by civil penalties.” (citation, quotations, and emphasis omitted)); see also Sessions v.
Dimaya, 584 U.S. —, 

, 1228–29 (2018) (Gorsuch, J., concurring) (suggesting that
the severity of a civil penalty corresponds with the degree of fair notice of unlawful conduct that
must be accorded to the defendant).
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therefore a denial of due process. See 

civil-contempt judgment

founded upon an order too vague to be understood).

      In sum, the prohibitions contained in cease and desist orders and injunctions

must be specific. Otherwise, they may be unenforceable. Both coercive orders are

also governed by the same standard of specificity, as the stakes involved for a

violation are the same—severe penalties or sanctions.

                                          C.

      In the case at hand, the cease and desist order contains no prohibitions. It

does not instruct LabMD to stop committing a specific act or practice. Rather, it

commands LabMD to overhaul and replace its data-security program to meet an

indeterminable standard of reasonableness. This command is unenforceable. Its

unenforceability is made clear if we imagine what would take place if the

Commission sought the order’s enforcement. As we have explained, the standards

a district court would apply are essentially the same whether it is entertaining the

Commission’s action for the imposition of a penalty or the Commission’s motion

for an order requiring the enjoined defendant to show cause why it should not be

adjudicated in contempt. For ease of discussion, we posit a scenario in which the

Commission obtained the coercive order it entered in this case from a district court,

and now seeks to enforce the order.




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       The Commission moves the district court for an order requiring LabMD to

show cause why it should not be held in contempt for violating the following

injunctive provision:

       [T]he respondent shall . . . establish and implement, and thereafter
       maintain, a comprehensive information security program that is
       reasonably designed to protect the security, confidentiality, and
       integrity of personal information collected from or about consumers
       . . . . Such program . . . shall contain administrative, technical, and
       physical safeguards appropriate to respondent’s size and complexity,
       the nature and scope of respondent’s activities, and the sensitivity of
       the personal information collected from or about consumers . . . .[41]

See Appendix at 2. The Commission’s motion alleges that LabMD’s program

failed to implement “x” and is therefore not “reasonably designed.” The court

concludes that the Commission’s alleged failure is within the provision’s language

and orders LabMD to show cause why it should not be held in contempt.

       At the show cause hearing, LabMD calls an expert who testifies that the

data-security program LabMD implemented complies with the injunctive provision

at issue. The expert testifies that “x” is not a necessary component of a reasonably

designed data-security program. The Commission, in response, calls an expert

who disagrees. At this point, the district court undertakes to determine which of

the two equally qualified experts correctly read the injunctive provision. Nothing

in the provision, however, indicates which expert is correct. The provision

       41
         Following this provision in the Commission’s cease and desist order are five equally
vague items which must be included in LabMD’s data-security program. See Appendix at 2–3.
These items suffer the same enforceability problems discussed below.
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contains no mention of “x” and is devoid of any meaningful standard informing the

court of what constitutes a “reasonably designed” data-security program. 42 The

court therefore has no choice but to conclude that the Commission has not

proven—and indeed cannot prove—LabMD’s alleged violation by clear and

convincing evidence. See 

.43

       If the court held otherwise and ordered LabMD to implement “x,” the court

would have effectively modified the injunction at a show cause hearing. This

would open the door to future modifications, all improperly made at show cause

hearings. 44 Pretend that LabMD implemented “x” pursuant to the court’s order,

but the FTC, which is continually monitoring LabMD’s compliance with the

court’s injunction, finds that “x” failed to bring the system up to the FTC’s

conception of reasonableness. So, the FTC again moves the district court for an

order to show cause. This time, its motion alleges that LabMD failed to implement

“y,” another item the Commission thinks necessary to any reasonable data-security


       42
           Further, the order’s other provisions, mentioned in note 

, also fail to state with
specificity the actions LabMD must take to bring its program into compliance with the order.
       43
          See also FTC v. Trudeau, 

, 763 (7th Cir. 2009) (“To succeed on a
contempt petition, the FTC must demonstrate by clear and convincing evidence that the
respondent has violated the express and unequivocal command of a court order.” (quotations
omitted)).
       44
          The purpose of a show cause hearing is to determine whether the alleged contemner
has violated the injunctive provision as it stands. If the party holding the injunction wishes to
modify the provision, the party must move the district court to effect the modification. Implicit
in Federal Rule of Civil Procedure 65 is the notion that before the modification can be made, the
adverse party must be provided notice of the proposed modification and an opportunity to be
heard.
                                                 29
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program. Does the court side with the Commission, modify the injunction, and

order the implementation of “y”? Suppose “y” fails. Does another show cause

hearing result in a third modification requiring the implementation of “z”?

      The practical effect of repeatedly modifying the injunction at show cause

hearings is that the district court is put in the position of managing LabMD’s

business in accordance with the Commission’s wishes. It would be as if the

Commission was LabMD’s chief executive officer and the court was its operating

officer. It is self-evident that this micromanaging is beyond the scope of court

oversight contemplated by injunction law.

      This all serves to show that an injunction identical to the FTC cease and

desist order at issue would be unenforceable under a district court’s contempt

power. Because the standards governing the coercive enforcement of injunctions

and cease and desist orders are the same, it follows that the Commission’s cease

and desist order is itself unenforceable.

                                            IV.

      In sum, assuming arguendo that LabMD’s negligent failure to implement

and maintain a reasonable data-security program constituted an unfair act or

practice under Section 5(a), the Commission’s cease and desist order is nonetheless

unenforceable. It does not enjoin a specific act or practice. Instead, it mandates a

complete overhaul of LabMD’s data-security program and says precious little

                                            30
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about how this is to be accomplished. Moreover, it effectually charges the district

court with managing the overhaul. This is a scheme Congress could not have

envisioned. We therefore grant LabMD’s petition for review and vacate the

Commission’s order.

      SO ORDERED.




                                         31