Spoliation and Failure to Disclose: What Gets Swept Under the Rug in FTC Investigations Lands in a Dangerous Pit

Once a company or individual learns they are a target of a Federal Trade Commission investigation, they need to quickly make a series of decisions, then take action.

After being notified that the FTC has begun an investigation, a company or individual must preserve potentially relevant documents and refrain from obstructing or impeding the investigation. It’s easy to lose focus on these basic requirements when caught up in the day-to-day demands of responding to an FTC investigation. Those demands typically require the marshalling of significant resources to identify, collect, review, and produce data, information, and documents going back several years. However, failing to address these issues can have draconian consequences, as highlighted by two recent cases.

Document Preservation

In FTC v. F&G International Group Holdings, LLC, the Southern District of Georgia granted summary judgment for the FTC where adverse inferences were applied after a finding of spoliation of evidence.

In that case, the defendants, sellers of home and building insulation, were notified of the FTC investigation on April 15, 2019 when the FTC issued requests for documents and information, instructing the defendants to “suspend any procedures for document destruction[.]” After the investigation, the FTC filed suit for violation of the FTC Act and sought discovery from the defendants and defendants’ customers as third parties. The customers produced communications with defendants that the defendants failed to produce to the FTC.  

The defendants admitted in a 30(b)(6) deposition that they:

• Did not have a document retention policy before the investigation
• Did not take any measures to preserve emails after learning of the investigation
• Actively deleted email inquiries from customers after the FTC filed its complaint and served discovery requests

Importantly, defendants admitted that “plenty of” customers asked about the advertising claims at issue, and defendants responded via email. After these facts were discovered, the FTC moved for sanctions.

The magistrate judge granted the FTC’s motion for sanctions, ordering that the defendants could not dispute the FTC’s evidence of the marketing claims made about the insulation and could not argue that they were unaware that consumers questioned the claims. The court also ruled that there were rebuttable presumptions that the owner of the company knew the claims about the insulation’s efficacy were false and unsubstantiated and that the destroyed emails were relevant and favorable to the FTC. Based on this discovery ruling, almost a year later, the district court granted the FTC summary judgment and entered judgment in its favor.

In 2015, Rule 37 of the Federal Rules of Civil Procedure was amended to spell out the required showing to obtain sanctions for the loss of electronically stored information (ESI). Rule 37(e) provides that, to issue sanctions for a failure to take reasonable steps to preserve ESI, a court must find that:

• The other party was prejudiced by the loss of the information,
• The party acted with intent to deprive another party of the information’s use in the litigation

Once this showing has been met, the court can issue sanctions “no greater than necessary to cure the prejudice,” including a presumption that the lost information was unfavorable to the non-preserving party, a jury instruction that the information was unfavorable, or outright dismissal or entry of default judgment.

The duty to preserve arises when litigation is reasonably anticipated. This raises the perennial question: When can a party reasonably anticipate litigation? In the FTC context, this is certainly triggered when one receives a CID or a request for information. Even if a company or individual is not the subject or target of an investigation, preserving relevant information sooner rather than later can help avoid any pitfalls were litigation to result.

When the Failure to Disclose Becomes Obstruction of Justice

Being under investigation by any government agency is serious, and even civil investigations can have criminal implications. Take, for example, the case of Uber’s former chief security officer, Joseph Sullivan. In August of 2020, the U.S. Attorney’s Office filed criminal charges in the Northern District of California for, among other things, obstructing proceedings before the FTC in violation of 18 U.S.C. § 1505. This October, the jury found Sullivan guilty on the obstruction charge and one other count in the superseding indictment.

The criminal charges resulted from Sullivan’s conduct in an FTC investigation, which was opened in 2015 after Uber disclosed to the FTC a 2014 data breach of approximately 50,000 consumers’ information. In the months that followed, the FTC issued Uber several CIDs that not only covered the 2014 incident, but also broadly investigated Uber’s data security practices. Sullivan, as chief security officer, was actively involved in preparing responses for the CID.

On November 14 and 15, 2016, Sullivan learned of another hacking. Instead of disclosing the information to the FTC, evidence shows he actively sought to conceal it from the FTC and even from the company’s general counsel.

The Sullivan case highlights the grave consequences that can result from failing to disclose material facts in response to an FTC CID or investigational hearing. It is important to scrutinize the scope of the requests, meet and confer with the FTC to negotiate limiting the scope of the requests, and regularly analyze whether supplemental disclosures need to be made in response to the requests.  

Failing to be diligent on these tasks can have severe repercussions.

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