Steps to defend against the FTC, the SEC or another federal agency - Business Litigation Legal Blogs Posted by Gary Green - Lawyers.com

Steps to defend against the FTC, the SEC or another federal agency

Courts too often are not presented with a vigorous defense when the FTC, SEC or other regulatory agency swoops in with a request for a TRO, freeze of assets and a preliminary injunction. As a result, the war is often won by the governmental agency before the defendant even draws its gun to shoot back. This is unfortunate because if more lawyers knew of the legal standards the government must meet before becoming entitled to the extraordinary relief the agencies are often awarded, they might be able to convince a trial judge to unfreeze bank accounts and to force the agencies to prove the allegations in the papers.

1. Judges may not make final findings of fact at a preliminary injunction hearing
Often, the lawyers for the government will file impressive looking pleadings with hearsay affidavits and statements from consumers or supposed expert witnesses to support Draconian relief from the outset via a TRO and then a truncated preliminary injunction proceeding. In many cases, findings of fact are made before there had been an adequate trial on the merits of the hearsay allegations. Yet, at the preliminary injunction stage, it is inappropriate for the court to make the equivalent of a final judgment on the merits. Univ. of Texas v. Camenisch, 451 U.S. 390, 395 (1981); see also Indus. Bank of Washington v. Tobriner, 405 F.2d 1321, 1324 (D.C. Cir. 1968) (stating “[t]o the extent that the findings and conclusions of the District Judge purported to settle finally the questions of law and fact raised by the complaint, those findings and conclusions went beyond the determination the judge was called upon to make [at the preliminary injunction stage]”). Therefore, the defendant in such an action should exercise its right to test in court, the veracity and meaning of the hearsay declarations on which the agencies often depend.

In other words, while it might be appropriate for a judge to opine tentatively that it is likely the agency would prove critical facts, unless the court holds a fair evidentiary hearing on those facts, the judge may not rule in a way that implies there was actual, admissible evidence to support the court’s finding. In PharMethod, Inc. v. Caserta, the defendant appealed a preliminary injunction order enjoining him from competing with his former employer. 382 F. App’x 214, 215 (3d Cir. 2010). The district court found that the defendant violated the restrictive covenant contained in the defendant’s employment agreement with the plaintiff. Id. at 217 n.3. The Third Circuit found that the District Court inappropriately determined that the defendant breached the restrictive covenant because the district court should not have addressed the merits of the case at the preliminary injunction hearing; it should have only addressed the likelihood of the merits. Id. The defendant should therefore press for a full hearing, and seek to challenge the hearsay evidence in the agency’s moving papers.

2. If the District Court issues a mandatory preliminary injunction that provides permanent relief that cannot be undone (such as an asset freeze), the agency must meet a high standard of proof
In the typical case, the FTC or SEC will seek an asset freeze to put the defendant out of business at the beginning of the case. This tactic essentially removes any incentive for the defendant to fight since even if it wins, its business will still be crippled or destroyed. Therefore, an asset freeze or similar relief the government seeks has the real effect of causing a permanent change in the defendant’s operations, not a mere preservation of the status quo.

There are two kinds of preliminary injunctions: One kind is designed to just preserve the status quo of the parties until a trial on the merits can be held. Camenisch, 451 U.S. at 395; Anderson v. Davila, 125 F.3d 148, 156 (3d Cir. 1997); Tom Doherty Assocs., Inc. v. Saban Entm’t, Inc., 60 F.3d 27, 34 (2d Cir. 1995). However, in contrast, the other kind is a mandatory injunction that commands a positive act thereby altering the status quo. Tom Doherty Assocs., 60 F.3d at 34; see also Bennington Foods LLC v. St. Croix Renaissance Grp. LLP, 528 F.3d 176 (3d Cir. 2008) (citing with approval Tom Doherty Assocs., 60 F.3d at 33-34). Mandatory injunctions are extraordinary relief, and should only be granted sparingly. Trinity Indus., Inc. v. Chicago Bridge & Iron Co., 735 F.3d 131, 139 (3d Cir. 2013); Tri-Realty Co. v. Ursinus College, No. 11-5885, 2013 WL 5298469 at *12 (E.D. Pa. Sept. 19, 2013). Moreover, when a request is made for a mandatory injunction that seeks to alter the status quo, the courts have said the burden on the moving party is heavier, and it must demonstrate with evidence that its “right to relief must be indisputably clear.” Trinity Indus., Inc., 735 F.3d at 139. Therefore, the moving party must demonstrate more than just a likelihood of success on the merits—the moving party must show a clear or substantial showing that they will succeed on the merits. See id.; Tom Doherty Assocs., 60 F.3d at 34 (stating “a mandatory injunction should issue ‘only upon a clear showing that the moving party is entitled to the relief requested, or where extreme or very serious damage will result from a denial of preliminary relief. . . . The ‘clear’ or ‘substantial’ showing requirement—the variation in the language does not reflect a variation in meaning—thus alters the traditional formula by requiring that the movant demonstrate a greater likelihood of success.”).

When faced with the threat of an Order that will ruin the business, the defendant should press its right to insist that the governmental agency show that relief is indisputably clear—that likelihood of success on the merits is clear, not just that the agency is likely to ultimately succeed on the merits. See Trinity Indus., Inc., 735 F.3d at 139; Tom Doherty Assocs., 60 F.3d at 34. Indeed, when an injunction will provide what essentially is final relief that cannot be undone, a heightened standard of success on the merits must be proven at the preliminary injunction hearing. Tom Doherty Assocs., 60 F.3d at 34-35.; Tri-Realty Co., No. 11-5885, 2013 WL 5298469 at *12. See also, Ciba-Geigy Corp. v. Bolar Pharm. Co., 747 F.2d 844, 850 (3d Cir. 1984) (stating that in deciding whether to issue a permanent injunction, the court must first determine if the party actually met its burden actually succeeding on the merits).

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Gary Green

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Gary Green

Licensed since 1972

Member at firm Sidkoff, Pincus & Green, P.C.

AWARDS

AV Preeminent
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