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Attorneys

Federal Regulatory Authority and Power of the Press Release

July 25 2014

By David Gabor

Among the unstated powers of the federal (and sometimes state) government that few litigation targets think about is the power of the press release. Prosecutors, whether at the agency level or above (for example, at the state Attorney General’s office or at the Federal Department of Justice), have a hidden tool in their arsenal. It is so simple that many persons and corporations often fail to take it into account in their defense strategy.

Federal regulatory agencies such as the SEC, FCC and FTC, as well as state agencies, have engaged in large-scale public relations campaigns that often seem to undermine the innocent until proven guilty ethos under which they as governmental actors, in particular, labor.

For example, in a recent action by the FTC, the agency conducted a sweep of various infomercial producers which it deemed to be producing false or misleading advertisements. Before even the first court hearing and, in fact, on the same day the complaint was issued, the FTC conducted a carefully-orchestrated press conference to tout their latest “pro consumer” lawsuit. The regulatory agencies usually come up with a fancy “handle” by which they identify their work. These lawsuits often have military-style monikers such as “Operation Clean Sweep,” or “Operation Restore Trust.”

In many cases, a regulatory agency will sue a number of targets, be they advertisers, hedge funds, banks, etc. all at once in coordinated actions. The trouble with this strategy is that while there may be several bad actors in the group, everyone is tarred with the same devastating brush. This is trial by the court of public opinion. The “sweep” is now invariably accompanied by a high-profile press conference, website release and press releases. To even the casual observer, it should be obvious that this strategy is aimed more at making the reputation of the individual agency enforcer than in actually doing justice. While some private plaintiffs like to use press releases as a litigation strategy (usually a bad one), this issue is far worse when the government is a party-plaintiff.

The reason is simple: the government has awesome powers that are far greater than the average civil litigant. It has the power of limitless resources, asset freezes on anyone who offers opposition, and can put a company out of business or can put an individual in jail. Adding a press release to the mix before guilt or liability is established is often tantamount to putting the target out of business without firing a shot.

A recent example is the SEC’s twelve year campaign against a small hedge fund called Wynnefield Capital. In that action, the government issued a press release aimed at, at a minimum, shaming the target and, at a maximum, putting it out of business. To that end, the SEC failed. After 12 hard-fought years of litigation and at a cost to the company of $12 million in legal fees, the company redeemed itself at a jury trial – it’s one of the very few companies to risk that costly strategy – and obtained a unanimous not guilty verdict. That hedge fund survived the initial trial by press release. See Wall Street Journal, “Refusing To Buckle To SEC Intimidation,” June 25, 2014 (Opinion Section).

Other companies are not so fortunate. In a recent article I published about a company that manufactured “buckyballs,” that company was targeted by a governmental agency which issued a familiar take-no-prisoners press release. Although that company tried to create its own website, called “Save Our Balls,” as an alternative P.R. strategy, the company did not survive. The pressures of large-scale litigation and an all-out federal legal assault were too great and the company had to close its doors and lay-off all its workers. Click here to see article.

Whether a government enforcer’s strategy in attacking advertising compliance or other elements of a company’s operations by press release/press conferences before liability is established is merely “overreach” or is a calculated method of obtaining unfair litigation advantage, is open to question. The bottom line is that this very real power of the government is increasingly used against advertisers (and others) and should be taken into account when planning a defense of a federal or state regulatory action.

David Gabor is a shareholder at Weintraub Tobin. David is a trial lawyer, but increasingly represents production companies, infomercial companies, direct response companies and multi-level marketing organizations as to both operational and compliance matters. In particular, David is focused on advertising and compliance issues, including FTC counseling and litigation, class actions, and multi-agency governmental compliance involving the marketing and sale (over multiple media platforms) of various products including educational and health-related products.