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Daugherty v. Sheer

United States District Court, District of Columbia

March 31, 2017

MICHAEL J. DAUGHERTY, et al., Plaintiffs,
ALAIN H. SHEER, et al., Defendants.


          TANYA S. CHUTKAN United States District Judge

         Plaintiffs Michael Daugherty and LabMD, Inc. bring this Bivens action against Alain Sheer, Ruth Yodaiken, and Carl Settlemyer, individuals employed by the Federal Trade Commission (“FTC”), alleging that they are liable for violating, and conspiring to violate, Plaintiffs' First, Fourth, and Fifth Amendment rights. (Compl. ¶¶ 153-73). Defendants have moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). (ECF No. 13). For the reasons stated herein, Defendants' motion is GRANTED IN PART and DENIED IN PART.

         I. BACKGROUND

         The events of this case stretch from 2008 through the present. Throughout this time, Defendants Sheer, Yodaiken, and Settlemyer worked for the FTC and investigated Plaintiffs LabMD, Inc. and Daugherty, LabMD's sole owner and chief executive officer, for acts that potentially violated the FTC Act. (Compl. ¶ 1). In May 2008, LabMD was notified by Tiversa, a cybersecurity firm seeking to sell its services to Plaintiffs, that a 1, 718-page file containing the personal and confidential health information of approximately 9, 300 patients was available for anyone to download on a peer-to-peer file sharing network. (Id. ¶ 48). LabMD then investigated its own computers, located the peer-to-peer file sharing program on one of them, and deleted the program to prevent the ability for the file to be downloaded. (Id. ¶ 52).

         Plaintiffs allege that Defendants learned of the shared file in spring 2009 and “should have learned” at that time that LabMD was “the only source” of the file, meaning that the file had not been downloaded or “spread anywhere on any peer-to-peer network.” (Id. ¶¶ 68-72 (emphasis in original)). They further allege that, in retaliation for Plaintiffs' refusal to contract with Tiversa for data security services, Tiversa began to falsify data and create records showing that LabMD's file had spread and been downloaded by unknown individuals. (Id. ¶¶ 96-99). At some point during these events, the FTC began investigating LabMD's data security practices relating to this shared file, and Plaintiffs allege that Defendants knowingly accepted and used Tiversa's falsified records to assist their investigation. (Id.). Plaintiffs further allege that Defendants agreed with each other and with Tiversa that the firm would withhold from the FTC any exculpatory information about LabMD during their investigation. (Id. ¶ 100). Plaintiffs allege that in furtherance of this goal, Defendants worked with Tiversa to create a shell company to whom Tiversa would selectively give records and which the FTC would then subpoena for those records, thereby avoiding the risk that exculpatory information beneficial to Plaintiffs and harmful to Tiversa would be disclosed. (Id. ¶¶ 84-96, 104-05).

         In early 2012, Plaintiffs allege that Daugherty “began to warn the public about the FTC's abuses” through “the press and social media and through a book.” (Id. ¶ 127). Plaintiffs allege that Defendants escalated the intensity of their investigation, and ultimately recommended commencing an enforcement proceeding, in retaliation for this public criticism. In particular, Plaintiffs point to a September 7, 2012 interview Daugherty gave with an Atlanta newspaper, following which Defendants “ramped up” their investigation, and the July 2013 release of a trailer for Daugherty's book The Devil Inside the Beltway, followed three days later by Defendant Sheer's recommendation that an enforcement action be brought against LabMD. (Id. ¶¶ 127-32).

         The FTC filed its administrative complaint against LabMD in August 2013.[1] Over two years later, on November 19, 2015, an FTC administrative law judge issued an Initial Decision dismissing the complaint after concluding that LabMD had not engaged in unfair acts that were likely to cause substantial consumer injury under the FTC Act.[2] The next day, November 20, 2015, Plaintiffs filed their Complaint in this case. On July 29, 2016, the FTC issued an Opinion reversing the ALJ's decision and concluding that LabMD's data security practices constituted an unfair act within the meaning of the FTC Act.[3] Defendants have now moved to dismiss all claims in this case. (ECF No. 13).


         A. Federal Rule 12(b)(1)

         Federal courts are courts of limited jurisdiction and, as such, a district court “may not exercise jurisdiction absent a statutory basis.” Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 552 (2005); see also Fed. R. Civ. P. 12 (“If the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action.”). “Limits on subject-matter jurisdiction ‘keep the federal courts within the bounds the Constitution and Congress have prescribed, ' and those limits ‘must be policed by the courts on their own initiative.'” Watts v. SEC, 482 F.3d 501, 505 (D.C. Cir. 2007) (quoting Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 583 (1999)). Such limits are especially important in the agency review context, where “Congress is free to choose the court in which judicial review of agency decisions may occur.” Am. Petroleum Inst. v. SEC, 714 F.3d 1329, 1332 (D.C. Cir. 2013) (internal quotation marks omitted). The law presumes that “a cause lies outside [the court's] limited jurisdiction” unless the party asserting jurisdiction establishes otherwise. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). Thus, the plaintiff bears the burden of establishing jurisdiction by a preponderance of the evidence. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992); Shekoyan v. Sibley Int'l Corp., 217 F.Supp.2d 59, 63 (D.D.C. 2002).

         In evaluating a motion to dismiss under Rule 12(b)(1) for lack of subject matter jurisdiction, the court must “assume the truth of all material factual allegations in the complaint and ‘construe the complaint liberally, granting plaintiff the benefit of all inferences that can be derived from the facts alleged.'” Am. Nat'l Ins. Co. v. FDIC, 642 F.3d 1137, 1139 (D.C. Cir. 2011) (quoting Thomas v. Principi, 394 F.3d 970, 972 (D.C. Cir. 2005)). Nevertheless, “‘the court need not accept factual inferences drawn by plaintiffs if those inferences are not supported by facts alleged in the complaint, nor must the Court accept plaintiff's legal conclusions.'” Disner v. United States, 888 F.Supp.2d 83, 87 (D.D.C. 2012) (quoting Speelman v. United States, 461 F.Supp.2d 71, 73 (D.D.C. 2006)). Further, under Rule 12(b)(1), the court “is not limited to the allegations of the complaint, ” Hohri v. United States, 782 F.2d 227, 241 (D.C. Cir. 1986), vacated on other grounds, 482 U.S. 64 (1987), and “a court may consider such materials outside the pleadings as it deems appropriate to resolve the question [of] whether it has jurisdiction to hear the case, ” Scolaro v. D.C. Bd. of Elections & Ethics, 104 F.Supp.2d 18, 22 (D.D.C.2000) (citing Herbert v. Nat'l Acad. of Scis., 974 F.2d 192, 197 (D.C. Cir. 1992)).

         B. Federal Rule 12(b)(6)

         A motion to dismiss under Fed.R.Civ.P. 12(b)(6) for failure to state a claim tests the legal sufficiency of a complaint. Browning v. Clinton, 292 F.3d 235, 242 (D.C. Cir. 2002). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A claim is plausible when it alleges sufficient facts to permit the court to “draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. Thus, although a plaintiff may survive a Rule 12(b)(6) motion even where “recovery is very remote and unlikely, ” the facts alleged in the complaint “must be enough to raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-57 (2007) (internal quotation marks omitted). Evaluating a 12(b)(6) motion is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 679.


         A. Subject Matter Jurisdiction

         Defendants first argue that this court lacks subject matter jurisdiction to hear Plaintiffs' claims because those claims may be brought only before the FTC in the agency's administrative proceedings. The Supreme Court held in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994), that district courts lack jurisdiction to hear certain cases if “Congress has allocated initial review to an administrative body [and] such intent is ‘fairly discernible in the statutory scheme.'” Id. at 207 (quoting Block v. Cmty. Nutrition Inst., 467 U.S. 340, 351 (1984)). To determine whether Congress “intended to preclude initial judicial review, ” courts look to “the statute's language, structure, and purpose, its legislative history, and whether the claims can be afforded meaningful review.” Id. (internal citation omitted). The court must also consider “whether [a plaintiff's] claims are of the type Congress intended to be reviewed within this statutory structure.” Id. at 212. Central to this question is whether the claims are “wholly ‘collateral' to a statute's review provisions and outside the agency's expertise” and whether “a finding of preclusion could foreclose all meaningful judicial review.” Id. at 212-13 (quoting Heckler v. Ringer, 466 U.S. 602, 618 (1984)); see also Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 489 (2010) (restating Thunder Basin principles).

         1. Statutory Scheme

         The court first considers whether Congress's intent to require initial review of Plaintiffs' claims by the FTC is “fairly discernible in the statutory scheme.” Thunder Basin, 510 U.S. at 207. In the FTC Act, Congress directs the FTC to prevent persons, partnerships, or corporations “from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(2). Upon finding that there is “reason to believe” a corporation has engaged in conduct that violates the FTC Act, the FTC must issue a complaint upon such corporation and hold a hearing to review evidence of the alleged unlawful acts. 15 U.S.C. § 45(b). The charged entity has “the right to appear at the place and time so fixed and show cause why an order should not be entered by the [FTC] requiring [it] to cease and desist from the violation of the law so charged in said complaint.” Id. If the FTC concludes that the corporation engaged in unlawful acts, it has the authority to issue a cease-and-desist order, and if the charged party does not comply with the order, it may bring a civil action in U.S. district court seeking an injunction and recovery of civil penalties. 15 U.S.C. §§ 45(b), (1), (m). The corporation ordered to cease and desist its activities may obtain review from a U.S. Court of Appeals within sixty days. 15 U.S.C. § 45(c).

         This Circuit recently analyzed whether an analogous statutory scheme involving administrative enforcement by the U.S. Securities and Exchange Commission precluded jurisdiction for a constitutional challenge in district court. See Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. 2015). There, as here, the statute provided for a charged-or “aggrieved”-individual to seek review in a court of appeals following adjudication before the agency, and for the reviewing court to exercise “exclusive” jurisdiction to “affirm or modify and enforce or to set aside the order in whole or in part.” Id. at 16 (quoting 15 U.S.C. § 78y(a)(3)); see also 15 U.S.C. § 45(d) (identical language in FTC Act). After reviewing that statute's details regarding the appellate review of the agency's decisions, the Circuit concluded that it was “fairly discernible that Congress intended to deny [aggrieved respondents] an additional avenue of review in district court.” Jarkesy, 803 F.3d at 17 (quoting Elgin v. Dep't of Treasury, 132 S.Ct. 2126, 2134 (2012)) (alteration in Jarkesy). The statutory schemes for the FTC's and the SEC's proceedings are also similar to those of the Mine Safety and Health Administration considered by the Supreme Court in Thunder Basin. See Id. at 16 (comparing statutes).

         As in Jarkesy, Plaintiffs here “do not seriously dispute that Congress meant to channel most challenges to the [agency's] administrative proceedings through the statutory review scheme.” 803 F.3d at 17. Therefore, applying the Circuit's guidance in Jarkesy, the court finds that Congress intended to allocate initial review of at least some claims to the FTC.

         2. Wholly Collateral to the Agency's Review

         As in Jarkesy, Plaintiffs instead argue that their claims are not “of the type Congress intended to be reviewed within this statutory structure.” 803 F.3d at 17 (quoting Thunder Basin, 510 U.S. at 212). Addressing this argument requires the court to proceed to the next phase of the Thunder Basin framework-determining whether the claims are “wholly ‘collateral' to a statute's review provisions and outside the agency's expertise.” Thunder Basin, 510 U.S. at 212-13. In Heckler, the Supreme Court explained that a plaintiff's claims are not “collateral” if “at bottom” they are an attempt to reverse the agency's decisions. 466 U.S. at 614, 618. Similarly, in Elgin, the Court considered whether the plaintiffs' constitutional claims were merely “the vehicle by which they seek to reverse” the agency's decisions. 132 S.Ct. at 2139-40. Additionally, in Jarkesy, this Circuit concluded that the plaintiffs' constitutional challenges were not collateral because they were “inextricably intertwined with the conduct of the very enforcement proceeding that statute grants the [agency] the power to institute and resolve as an initial matter.” 803 F.3d at 23 (quoting Jarkesy v. SEC, 48 F.Supp.3d 32, 38 (D.D.C. 2014)). The Jarkesy court further stated that “[i]t is difficult to see how [the claims] can still be considered collateral to any Commission orders or rules from which review might be sought, since the ALJ and the Commission will, one way or another, rule on those claims and it will be the Commission's order that [the plaintiff] will appeal.” Id. (internal quotation omitted) (first alteration in original).

         Here, the parties disagree as to whether Plaintiffs' Bivens claims against individual FTC investigators are “inextricably intertwined” with their objections to the FTC's enforcement proceedings already raised directly before the FTC. In the court's view, Bivens claims pose a distinct question from the one addressed by the Circuit in Jarkesy because Plaintiffs' claims are inherently different from those that they may have-and did-bring before the FTC. Plaintiffs allege that specific FTC employees conspired to violate Plaintiffs' rights and caused monetary injury during the course of their investigation and enforcement proceeding. In order to seek redress for these injuries, Plaintiffs have brought their Bivens claims to this court because they simply were unable to do so before the agency. The remedy sought by Plaintiffs is not a reversal, or even reconsideration, of the FTC's decision, as the Supreme Court found dispositive in Elgin and Heckler. If Plaintiffs sought reversal or reconsideration, that remedy would clearly fall within the FTC's own jurisdiction, or within the court of appeal's “exclusive” jurisdiction upon review. See 15 U.S.C. § 45(b)-(d). However, the FTC Act does not authorize the agency to award monetary damages for, much less even consider, the allegedly tortious actions of agency employees committed during the investigation or enforcement proceeding. See 15 U.S.C. ยง 45(b) (providing FTC's sole authority to issue cease-and-desist ...

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