Late last week, the FTC announced that it had approved final amendments to Commission Rule 1.98. Rule 1.98 adjusts the maximum civil penalty for violations of the 16 provisions of the law the FTC enforces. The final amendments were approved in accordance with the requirements of the Federal Civil Penalties Inflation Adjustment Act of 2015. The Inflation Adjustment Act instructs federal “agencies to implement a “catch-up” inflation adjustment based on a prescribed formula [created by Congress].” The increased maximum civil penalty amounts will go into to effect on August 1, 2016.
Increases in Maximum Civil Penalty Amounts are Substantial in Some Cases
Even though required, the maximum civil penalty increase for certain violations represent a substantial departure from previous amounts. In fact, in certain cases, the FTC’s approved increases represent a 250% increase over the previous amount.
The following increases have been approved for the various maximum civil penalty amounts:
- Section 7A(g)(1) of the Clayton Act, 15 U.S.C. 18a(g)(1) (premerger filing notification violations under the Hart-Scott-Rodino (HSR) Improvements Act)—Increase from $16,000 to $40,000;
- Section 11(l) of the Clayton Act, 15 U.S.C. 21(l) (violations of cease and desist orders issued under Clayton Act section 11(b))—Increase from $8,500 to $21,250;
- Section 5(l) of the FTC Act, 15 U.S.C. 45(l) (violations of final Commission orders issued under section 5(b) of the FTC Act)—Increase from $16,000 to $40,000;
- Section 5(m)(1)(A) of the FTC Act, 15 U.S.C. 45(m)(1)(A) (unfair or deceptive acts or practices)—Increase from $16,000 to $40,000;
- Section 5(m)(1)(B) of the FTC Act, 15 U.S.C. 45(m)(1)(B) (unfair or deceptive acts or practices)—Increase from $16,000 to $40,000;
- Section 10 of the FTC Act, 15 U.S.C. 50 (failure to file required reports)— Increase from $210 to $525;
- Section 5 of the Webb-Pomerene (Export Trade) Act, 15 U.S.C. 65 (failure by associations engaged solely in export trade to file required statements)— Increase from $210 to $525;
- Section 6(b) of the Wool Products Labeling Act, 15 U.S.C. 68d(b) (failure by wool manufacturers to maintain required records)—Increase from $210 to $525;
- Section 3(e) of the Fur Products Labeling Act, 15 U.S.C. 69a(e)(failure to maintain required records regarding fur products)—Increase from $210 to $525;
- Section 8(d)(2) of the Fur Products Labeling Act, 15 U.S.C. 69f(d)(2) (failure to maintain required records regarding fur products)—Increase from $210 to $525;
- Section 333(a) of the Energy Policy and Conservation Act, 42 U.S.C. 6303(a) (knowing violations of EPCA § 332, including labeling violations)—Increase from $210 to $433;
- Section 525(a) of the Energy Policy and Conservation Act, 42 U.S.C. 6395(a) (recycled oil labeling violations)— Increase from $8,500 to $21,250;
- Section 525(b) of the Energy Policy and Conservation Act, 42 U.S.C. 6395(b) (willful violations of recycled oil labeling requirements)—Increase from $16,000 to $40,000;
- Section 621(a)(2) of the Fair Credit Reporting Act, 15 U.S.C. 1681s(a)(2) (knowing violations of the Fair Credit Reporting Act)—Increase from $3,500 to $3,756;
- Section 1115(a) of the Medicare Prescription Drug Improvement and Modernization Act of 2003, Public Law 108–173, 21 U.S.C. 355 note (failure to comply with filing requirements)— Increase from $12,100 to $14,142; and
- Section 814(a) of the Energy Independence and Security Act of 2007, 42 U.S.C. 17304 (violations of prohibitions on market manipulation and provision of false information to federal agencies)—Increase from $1,100,000 to $1,138,330.
Major Increases to Maximum Civil Penalty for HSR Violations
One of the more significant increases set forth above is the $16,000 to $40,000 per day fine for premerger notification violations in conjunction with the Hart-Scott-Rodino Act (“HSR”). The $24,000 increase represents a 150% over the previous $16,000 maximum civil penalty amount. However, what makes this increase even more significant is that violations of the HSR are assessed on a per day basis. To put this substantial increase in perspective, a company failing to comply for 30 days with HSR premerger filing requirements would have previously faced a $480,000 fine; however, a company who now commits the same violations will face a $1.2 million fine.
The premerger notification program proscribed by the HSR consists of highly technical rules that mergers of certain size thresholds must meet. The FTC has traditionally employed a “one free bite at the apple” approach to violations of the premerger notification requirements. This means that the FTC will likely not seek civil penalties against a company for failure to file as long as that person self-reports the violation, makes a corrective filing, is a first time violator, and details the circumstances demonstrating that the failure to file was inadvertent.
Even still, the FTC and Department of Justice (“DOJ”), which share enforcement jurisdiction, have brought more than 50 enforcement actions in relation to failures to comply with the premerger notification requirements since the passing of the HSR in 1976. In most circumstances, the civil penalty imposed for premerger notification violations is a fraction of the maximum penalty provided by law.
Examples of FTC and DOJ enforcement actions for failure to file violations include Biglari Holdings agreeing in 2012 to pay a $850,000 civil penalty to settle charges that it violated premerger notification requirements in connection with acquisitions of voting securities in 2011 and Smithfield Foods agreeing in 2004 to pay a $2 million civil penalty to settle charges that it failed to comply with premerger reporting requirements for acquisitions of voting securities that occurred in 1998 and 1999.
FTC and DOJ settlements for “gun jumping” activities in violation of the HSR premerger waiting period requirements have been larger. For example, Gemstar-TV Guide agreed in 2003 to pay a record $5.67 million civil penalty to settle charges that Gemstar and TV Guide, prior to their July 2000 merger, had violated the waiting period requirements by certain conduct, including agreeing to stop competing for customers, agreeing on prices and terms to be offered, and jointly managing certain parts of their businesses.
Increase in Maximum Civil Penalty for Violating FTC Final Order Adopted
The other notable increases in maximum civil penalty amounts apply to violations of final FTC Orders and trade regulation rules that address unfair and deceptive acts and practices. Examples of FTC civil penalties for such violations include Toys “R” Us agreeing in 2011 to a $1.3 million civil penalty to settle charges that it violated a 1998 Order and Google agreeing in 2012 to pay a $22.5 million civil penalty to settle charges that it violated a 2011 Order.
FTC Reiterates Its Analysis on Imposing Civil Penalties
While the FTC has announced the above substantial increases to the maximum civil penalty amounts, the FTC has said, “When the Commission seeks civil penalties, it is mindful of the statutory criteria courts must apply when determining the amount of the civil penalty: “the degree of culpability, any history of prior such conduct, ability to pay, effect on ability to continue to do business, and such other matters as justice may require.”
Furthermore, the FTC noted that “Courts determining penalty amounts for violations of a final order under the FTC Act have similarly applied a multifactor test that looks at the good or bad faith of the respondent; the injury to the public; the respondent’s ability to pay; the desire to eliminate the benefits derived from the violations; and the necessity of vindicating the Commission’s authority. The Commission also has a civil penalty leniency program for small businesses that establishes criteria the Commission will consider when determining the propriety of a penalty waiver or reduction for small businesses that are not in compliance with the law.”
The FTC Now Wields a Stronger Civil Penalty Hammer, but Will It Use It?
Thus, even though the FTC has the authority to assess the substantial maximum civil penalties above, the FTC will not automatically assess those maximum fines against a given company, absent a finding of culpability, prior similar conduct, an ability to pay, and/or the effect the civil penalty will have on the company’s ability to continue business. Courts enforcing similar civil penalty amounts have proceeded along the same lines. However, companies targeted by the FTC should still be mindful of the larger civil penalty hammer the FTC now wields. But whether the FTC will use that hammer to its maximum remains to be seen.
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