Regime Uncertainty, pt 3: "you may be violating a law that doesn’t exist yet"

Pro Small Business | My Story

[...] My story began almost three and a half years ago, April 22, 2007, when Swish Marketing, a small (20 person) internet marketing company which I co-founded , received a CID (Civil Investigative Demand) from the FTC. Although the FTC regional office told us we were not the target of their investigation, the CID asked for every email, piece of computer code, and shred of data my company had ever generated. The FTC agents were investigating another company whose advertising we had posted on our web site. We dutifully began the careful task of gathering the requested data and sent it in to the FTC.

Months passed. Summer came and went. Then Fall. Finally, on December 22, nearly six months after we sent the last of the documents requested, we got an ominous email from our lawyer. The FTC investigation had “changed direction”: they were coming after us.

When I say “us”, I mean me. You see, the FTC‘s policy when they are doing an enforcement action against a large or publicly traded company is to go after the corporation- rarely individuals. But for small businesses, like mine, the FTC goes after individuals. In this case, the individual was me. The FTC was concerned with misleading advertising. I had nothing to do with the advertising, or the company whose product was being advertised. I was the VP of Products, head of engineering at my company with no responsibilities for advertising or marketing. [...]

Instead of going after the amount of money my company had actually generated from the allegedly-deceptive advertisements that appeared on our web sites, the FTC demanded a much greater amount, more than $6,000,000, which represented the entire amount consumers had spent on a product we weren’t even selling, and the proceeds from which we did not even receive. It didn’t seem to matter to the FTC that little of this money had actually been paid to Swish. In fact, the FTC had already settled with the Company that was selling the actual product, and its principal, for nothing. Not one penny. At this point, I began to suspect that the FTC was suing us not because we had done anything wrong, but for some other reason.

My suspicions were confirmed when I looked up the law the FTC said I had violated, a law that was vague and didn’t seem to have much to do with what the FTC was accusing me of. And it certainly did not say that the FTC was entitled to the amount of money it wanted. My lawyers explained that the amount the FTC was suing for was based not on laws that Congress had passed but seemed to be based on what judges had awarded in previous cases over the years.

Moreover, in our case, the FTC was now trying to go beyond what previous judges had awarded. What lay behind their actions seemed to be this: they were trying out a new legal theory. They wanted to establish a new principle – that a person who was in any way connected to the advertising at issue, no matter how trivial their involvement, was liable for the entire amount of all purchases of the product by consumers. I felt as if I had been struck by lightning. I was the sacrificial lamb. I had the rotten luck to be chosen, of all people, to be the test of their novel legal theory. [...]

I’m all for getting tough on deceptive advertising, including Internet fraudsters. But what seems terribly wrong is the FTC playing Goliath where they just outspend everyone they go after, regardless of whether there was any wrongdoing. Unfortunately, that appears to be the direction in which they’re going. David Vladeck, the new head of the Bureau of Consumer Protection (the person I met with), advocates pursuing test cases “even if the legal theory has not been accepted by the court prior to that time.” (see http://www.abanet.org/antitrust/at-source/10/04/Apr10-VladeckIntrvw4-14f.pdf) In other words, you may be violating a law that doesn’t exist yet. That is downright scary. The only thing the FTC is going to “prove” by “winning” these cases is that they can establish their new principles by bankrupting anybody but the very wealthiest Americans – the only people who could afford to take them on.

Rope.

Via Don Boudreaux, who calls it "George W. Bush’s Awesome Adventures in Laissez Faire."

(For the record, the link above is to a Google cache because the original has disappeared.)