D.C. Circuit Gives FTC Broad Discovery Rights
In June 2009, the Federal Trade Commission (“FTC” or “the Commission”) authorized the staff to conduct an investigation to determine whether Church & Dwight was using exclusionary practices such as conditioning discounts or rebates to retailers on the percentage of shelf or display space dedicated to Trojan brand condoms and “other products” sold and distributed by Church & Dwight.
Church & Dwight sells 70% of the latex condoms sold in the United States, primarily under the “Trojan” brand name. In order to market its condoms, Church & Dwight offers retailers a discount based on the amount of shelf space they devote to its condoms. In addition to condoms, Church & Dwight also sells a variety of other consumer products, such as cat litter and toothpaste.
As part of its investigation, the Commission issued a subpoena requiring Church & Dwight to produce documents on its sale and distribution of condoms, accompanied by a civil investigative demand (“CID”) seeking information about cost, pricing, production and sales of its condoms in the U.S. and Canada. The subpoena provided that all responses shall be produced “…in complete form, unredacted unless privileged.” Church & Dwight turned over documents with information related to condom sales only with information about other products redacted, and the Company petitioned the Commission to limit or quash the subpoena and CID. The Commission denied the petition and sought enforcement of the subpoena in the district court.
The main dispute was whether the scope of the FTC’s inquiry extends to Church & Dwight’s products other than condoms. The district court found that that information to be “reasonably relevant” to the FTC’s investigation and not “unduly burdensome,” and granted the petition for enforcement.
On appeal to the United States Court of Appeals for the District of Columbia Circuit, Church & Dwight argued that (1) the district court did not interpret the scope of the resolution; (2) the district court failed to describe the materials sought in the subpoena and the CID; and (3) in determining relevancy, the district court required that the materials sought be plausibly, not reasonably, relevant to the Commission’s investigation (a lower threshold standard). Church & Dwight argued that in doing so, the district court departed from the legal standard in deciding whether the subpoena should be enforced. Furthermore, Church & Dwight argued that even if the district court had applied the correct standard of “reasonably relevant”, the disputed materials were not reasonably relevant to the investigation.
In its opinion, the Court of Appeals heavily addressed the first claim. The Court of Appeals asserted that the district court did not fail to interpret the resolution; it merely did not interpret the scope of the resolution as narrowly as Church & Dwight would have wanted. The Court of Appeals stated that “a district court must enforce a federal agency’s investigative subpoena if the information sought is ‘reasonably relevant’ or …‘not plainly incompetent or irrelevant to any lawful purpose of the agency’ and not ‘unduly burdensome’ to produce.” (quoting FTC v. Texaco, 555 F.2d 862, 876 n.29 (D.C. Cir. 1977)). Furthermore, according to the D.C. Circuit, “[T]he validity of Commission subpoenas is to be measured against the purposes stated in the resolution…” (quoting FTC v. Carter, 636 F.2d 781, 789 (D.C. Cir. 1980)). Relying on precedent, the D.C. Circuit stated that the boundary of the investigation may be defined quite generally, and that broadly stated resolutions are “not uncommon in the investigative process” (see Texaco, 555 F.2d at 874). The Commission argued that other products might play a role in Church & Dwight’s exclusionary practices, such as bundling and tying sales. The D.C. Circuit agreed that an investigation of bundling of rebates on condoms and other types of products in order to sustain a monopoly in the market for condoms is within the condemnation of the Sherman Act. See LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003). Church & Dwight argued that had the Commission sought to pursue a bundling theory, it would have specifically requested information on other products. The D.C. Circuit did not accept this argument, stating that the court “…does not require the Commission to seek in one document request all the information it might need in order successfully to establish a violation at trial” (at 8). The D.C. Circuit applied the Third Circuit decision in LePage’s Inc. v. 3M, reasoning that because Church & Dwight condoms and other products are sold in the Third Circuit, the Commission may lawfully investigate a violation of the law there. Accordingly, the court held that the FTC’s Resolution’s scope is lawful, and that it is lawful to investigate bundled discounts for condoms along with other products.
In response to the second claim, the D.C. Circuit rejected Church & Dwight’s assertion that the district court never described the materials sought in the subpoena, namely, information on the non-condom products that were redacted by the Company. The D.C. Circuit found that the district court did describe the disputed materials as “information from the documents [the Company] produce[d] regarding proprietary and confidential information on non-condom products…” FTC v. Church & Dwight Co., 747 F. Supp. 2d 3, 8 (D.D.C. 2010).
As for the third claim that the district court committed a legal and factual error in its finding of relevance, the D.C. Circuit refuted both arguments. Church & Dwight argued that Texaco demanded a “reasonable relevance” standard, while the district court applied mere “plausibility”, based on the district court’s statement that “[I]t is entirely plausible that information [concerning other products] appearing in the same document … would itself be relevant to the investigation.” The D.C. Circuit found that the correct legal standard, which states that the “requested materials … be reasonably relevant to the investigation…” is not inconsistent with the district court’s statement. With regard to the claim of factual error, the D.C. Circuit found Church & Dwight’s argument that Texaco requires the district court to independently review the information sought and “articulate the reasons underlying a finding of relevancy” to be erroneous, and as stated in Intervention Submission, it is Church & Dwight’s burden to show that information is irrelevant to a Commission investigation. Additionally, the D.C. Circuit found it obvious in the Commission’s Resolution that products other than condoms are relevant to the investigation, and it was not the district court’s responsibility to “belabor the obvious.”
In conclusion, all three of Church & Dwight’s claims failed before the Court of Appeals and the district court’s order granting enforcement of the Commission’s subpoena and CID was affirmed. The DC Circuit Court of Appeals deferred substantially to the Commission and the Commission’s expertise. Only in patently clear cases where the agency lacks the jurisdiction it seeks to assert is a Court of Appeals likely to rule against the FTC, particularly issues relating to discovery. This outcome serves as a warning to legal counsel representing companies that are the target of an antitrust investigation. The best way to deal with the government is not to quash a subpoena or a CID rather it is to negotiate with the investigative staff. Indeed, most CIDs are written in boilerplate form, with the expectation that the FTC’s staff attorneys will negotiate the scope with the target’s lawyers. In light of the D.C. Circuit’s decision, companies that are recipients of CIDs and their lawyers should cooperate with the staff as this is the most effective way to minimize the burden of a government investigation rather than to challenge the FTC in court.