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The State Never Apologizes

February 13, 2011

Tomorrow the Federal Trade Commission will publish a decision denying William Isely’s application for an award of attorney fees after he previously defeated the Commission’s effort to hold him liable for allegedly false advertising claims made on a foreign website. Isely, a retiree in his mid-80s, spent two years fighting false FTC charges that he participated in the website in question. As the FTC’s own judge found, Commission employees failed to conduct a proper investigation before charging Isely as a “participant” in the challenged website. Nevertheless, the same judge later found the FTC was “substantially justified” in prosecuting Isely based on its investigator’s shoddy work. Tomorrow’s decision affirms that finding, which in turn deprives Isely of his right to compensation for any part of the $130,000 he spent in legal fees and expenses.

Chairman Jon Leibowitz, who authored the decision on behalf of a unanimous Commission, said the fact the FTC’s case survived summary judgment and proceeded to trial meant that prosecuting Isely was “substantially justified” in the first place. Federal law does not require an agency to compensate victorious defendants if the government meets the “substantially justified” threshold. By Leibowitz’s precedent, that means no FTC defendant can ever recover damages against the Commission. Since the FTC appoints the trial judges in its proceedings and has appellate jurisdiction, there is no possibility of any defendant prevailing on summary judgment; even if an FTC judge granted such a motion, the commissioners themselves can overturn that decision and remand the case for trial. And by Leibowitz’s decree, every case that is tried on the merits is “substantially justified.”

Leibowitz’s defense of the Commission in this case is particularly illogical for two reasons. First, the Commission itself chose to end the litigation prematurely. The FTC judge assigned to the case ruled for Isely on the merits and recommended dismissing the complaint. FTC prosecutors, who work for the commissioners, would normally appeal an adverse decision to the commissioners, who have never voted against their own staff. In this case, the FTC took the unprecedented step of not appealing an adverse decision to themselves. That would seem to be an acknowledgment the commissioners lacked “substantial” justification.

Second, before the trial judge rejected Isely’s petition for attorney fees, the Commission actually made a settlement offer to Isely. It was only a small fraction of what he was entitled to under the law, but the mere fact the Commission extended the offer — which could only be done with the approval of senior management — undermines Leibowitz’s current position that the Commission had “substantial” justification.

(It’s also worth noting that the original case alleged Isely participated in the dissemination of false statements on a website. Since the judge held Isely wasn’t responsible for the website, the court never made any findings about whether or not the statements were false. The FTC accepted the judge’s decision as written. In other words, Leibowitz is now declaring the FTC was “substantially justified” in prosecuting Isely for making statements that were never legally declared false in the first place!)

The federal law allowing for attorney fees limits recovery to individual and corporate defendants under a certain net worth. Congress intended the law to encourage small businessmen to challenge unfair regulatory actions. The FTC’s decision in Isely’s case effectively nullifies this. Unless Isely, who is currently without counsel, is able to successfully appeal the Commission’s decision to the Fourth Circuit Court of Appeals in Richmond, Leibowitz’s precedent sends a clear signal that no small businessman has any hope of winning anything more than a Pyrrhic victory against the FTC: Even a person who prevails in litigation will face financial ruin to pay their attorney fees.

Even more disturbing, the FTC’s original pretext for prosecuting Isely — his name and address were used on a website without his consent — means that the FTC is still free to engage in the same sort of “shoot first, ask questions later” approach in the future. The FTC could have avoided prosecuting Isely in the first place by simply calling him to sort out the details of who owned the website. Instead they opted to prosecute and shift the burden onto him to prove he wasn’t responsible. Since there was a “factual dispute,” according to Leibowitz, the FTC wasn’t liable for attorney fees even after Isely met that burden. So now every American citizen is potentially facing financial ruin if their name or identity are used on any commercial website without their permission.

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