FTC Tackles ‘Intimidating’ Threat of Lawsuits Against Staff

By Alexei Alexis, Bloomberg BNA

The threat of personal liability claims against Federal Trade Commission staff, historically a rare concern, has suddenly become a real problem for the agency.

Two FTC attorneys, Alain Sheer and Ruth Yodaiken, face litigation connected to their work on a 2013 data security enforcement action against the now-defunct medical testing company LabMD Inc. Unlike similar suits filed against federal employees in the past, this one has survived a government motion to dismiss, which means the two defendants could find themselves personally liable for damages.

The FTC recently took action to rectify that problem, unveiling July 5 new liability protections for employees sued for job-related activities. In the event that a judge orders monetary damages, the new policy allows the FTC to pay them.

The policy is intended to resolve legal uncertainty — the kind that can “intimidate” staff, the FTC said. The agency’s effectiveness as a competition and consumer protection law enforcer is at stake, according to a Federal Register notice announcing the policy.

The Justice Department, on behalf of the FTC, has filed an appeal with the U.S. District Court for the District of Columbia, where the case is being heard.

Lawsuits against federal employees in their personal capacities have proliferated since the Supreme Court’s 1971 decision in Bivens v. Six Unknown Named Agents of the Federal Bureau of Narcotics, according to the FTC. Under that ruling, personal damage awards against federal workers are permitted when, in the course of their employment, they are found to have violated an individual’s constitutional rights. The 1988 Federal Employees Liability Reform and Tort Compensation Act protects federal workers from personal tort claims, but it doesn’t apply to suits alleging violations of the Constitution or federal laws.

Litigation against government attorneys could have a chilling effect on agency enforcement efforts, according to Alicia Batts, an antitrust partner at Squire Patton Boggs LLP.

“The FTC joins a number of other federal agencies that were already providing protections for their enforcement staff,” she told Bloomberg BNA.
The problem hasn’t been a major concern at the agency until now, said Batts, who served as an attorney adviser to former FTC Commissioner Mozelle Thompson, a Democrat.

LabMD President Michael Daugherty told Bloomberg BNA that FTC enforcement staff escalated the intensity of their data security investigation of his company and ultimately recommended an enforcement proceeding in retaliation for his public criticism of the agency.

In a March ruling, D.C. District Judge Tanya Chutkan partially rejected the government’s motion to dismiss, finding that Daugherty “plausibly” stated First Amendment claims for which he may seek monetary damages against Sheer and Yodaiken.

Chutkan has at least partially granted motions to dismiss in three other cases alleging constitutional violations, according to Bloomberg Law’s Litigation Analytics.

Chutkan dismissed charges against a third defendant, Carl Settlemyer, finding a lack of evidence to support a First Amendment claim against him. The judge also dismissed claims that Daugherty’s Fourth and Fifth Amendment rights were violated by FTC staff.

The FTC didn’t mention the LabMD case when it rolled out its new liability protection policy, but Daugherty said he believes there’s an obvious connection. “We’re hard pressed to believe this isn’t about us,” he said.

FTC spokesman Peter Kaplan declined to comment on the matter.

Daugherty blames the defendants for destroying his business.

LabMD’s medical operations have been suspended, but the company maintains patient records and continues to provide them to physicians, according to Jim Hawkins, Daugherty’s attorney, who has his own law firm in Georgia.

Hawkins said it’s difficult to find a similar suit against employees at the FTC or any agency that has survived a motion to dismiss. “The fact that we were able to bust through the government’s qualified immunity defense was obviously of great concern for people at the FTC,” he said.

Daugherty is separately challenging the FTC’s data security action in a case pending before the U.S. Court of Appeals for the Eleventh Circuit.

Under its new policy, the FTC is authorized — but not required — to pay damage awards on behalf of agency employees who are sued for their work, provided that it’s in the interest of the commission. A final rule was issued without comment on July 5 and went into effect the same day.

Daugherty said he’s not overly concerned about how the policy might impact his suit against Sheer and Yodaiken. “This only affects who ends up paying,” he said. “It’s basically a glorified employee benefit.”

The FTC policy applies to any actions pending against FTC employees as of the effective date. Any amount paid under the policy to either to indemnify an employee or settle a personal damage claim will depend on the availability of FTC funds, the agency said.

“Uncertainty regarding what conduct may lead to a personal liability claim resulting in a monetary judgment tends to intimidate employees, stifle creativity and initiative, and limit decisive action,” the agency said.

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