Last Friday, the FTC’s chief administrative-law judge dismissed the agency’s complaint. But it was too late. The reputational damage and expense of a six-year federal investigation forced LabMD to close last year.The anecdote has two larger implications, in my view. First, many people including myself have a sense that this kind of regulatory persecution is harming economic growth. But there are no good estimates of the total number of companies put out of business, jobs destroyed, investment made worthless by regulatory persecution, or, even harder, projects not started from fear of such persecution. For the moment, we can only collect anecdotes, which is why I pass this one on. But the measurement question is vital. Inequality is only a big policy issue because we have statistics on it.
...the commission opened an investigation into LabMD in January 2010. ...the FTC refused to detail LabMD’s data-security deficiencies.... Eventually, the FTC demanded that LabMD sign an onerous consent order admitting wrongdoing and agreeing to 20 years of compliance reporting.
Unlike many other companies in similar situations, however, LabMD refused to cave and in 2012 went public with the ordeal. In what appeared to be retaliation, the FTC sued LabMD in 2013, alleging that the company engaged in “unreasonable” data-security practices that amounted to an “unfair” trade practice.... FTC officials publicly attacked LabMD and imposed arduous demands on the doctors who used the company’s diagnostic services. In just one example, the FTC subpoenaed a Florida oncology lab to produce documents and appear for depositions before government lawyers—all at the doctors’ expense.
Yet after years of investigation and enforcement action, the FTC never produced a single patient or doctor who suffered or who alleged identity theft or harm because of LabMD’s data-security practices. The FTC never claimed that LabMD violated HIPAA regulations, and until 2014—four years after its investigation began—never offered any data-security standards with which LabMD failed to comply.
...the case illustrates the injustice of the federal system that allows agencies to cow companies into submission rather than seek a day in court. During its three years of pre-suit investigation against LabMD, the FTC demanded thousands of documents, confidential employee depositions and several meetings with management. LabMD—which at its apex employed 30 people—spent hundreds of thousands of dollars meeting demands. No federal court would ever allow such abusive tactics. But this isn’t federal court—it’s a federal agency.
Furthermore, the FTC is likely to simply disregard the 92-page decision—which weighed witness credibility and the law—and side with commission staff. That’s the still greater injustice: The FTC is not bound by administrative-law judge rulings. In fact, the agency has disregarded every adverse ruling over the past two decades, according to a February analysis by former FTC Commissioner Joshua Wright. Defendants’ only recourse is appealing in federal court, a fresh burden in legal fees.
That’s what happens when a federal agency serves as its own detective, prosecutor, judge, jury and executioner.
Second, note the pretty clear charge that the FTC retaliated against LabMD for challenging the FTC. In "The rule of law in the regulatory state" (pdf, blog version here; excerpt at the insider here) I started thinking about the political and free-speech implications of this kind of persecution.
With exceptions such as Lois Lerner at there IRS, the agencies are still first and foremost interested in protecting the agencies.
But it's easy enough these days to figure out who donates to what campaign, or who blogs about what. To imagine that this kind of persecution will not be used for partisan political purposes -- or that fear of such persecution will not drive company owners to make political friends, make abundant contributions, pay for expensive speeches, and so forth -- is to imagine that a plate full of cookies at a children's birthday party will stay untouched when mom and dad say eat your vegetables first. LabMD clearly needed a friend in high places to call and say "make this problem go away." Its successors will not make that mistake.