Read the full story here: Atlanta Business Chronicle
“The FTC has clearly abrogated the law,” said Dan Epstein, executive director of Cause of Action. “From the initial action to the burdensome subpoenas, the FTC continues to exemplify the dangers of unbridled federal agency overreach into areas in which they have no authority.
“By filing this lawsuit, we are asking the court to stop FTC’s abuse of government power and to ensure LabMD’s case is decided fairly and objectively.”
Read the full story here: Bloomberg
Zucker is fighting back.
In a lawsuit he plans to file on Tuesday, Nov. 12, Zucker will ask the U.S. District Court of Maryland to block the CPSC from seeking damages against him personally. He notes that the agency hasn’t sought damages from other toy magnet sellers, who folded their companies ahead of recall proceedings, and that similar products are still on the market. The complaint, prepared by conservative advocacy group Cause of Action, alleges that the CPSC targeted Zucker for speaking out against the agency. It also says the CPSC violated Zucker’s rights to free speech and due process when it retaliated against him, setting a “chilling” precedent for other corporate executives who publicly disagree with the federal government.
“What you have here at a minimum is a shocking example of regulatory overreach and abuse of statutory power,” says Reed Rubinstein, a lawyer at Dinsmore & Shohl serving as counsel to Cause of Action. “At its most sinister, this is an example of government power being used to punish people who object to it.”
FOR IMMEDIATE RELEASE NOVEMBER 12, 2013
Media Contact:
Elise Flick
212-333-0275
epf@karvcommunications.com
Creator of Buckyballs® Sues Federal Government for Unprecedented Regulatory Overreach
Entrepreneur Craig Zucker Strikes Back Against Consumer Product Safety Commission for Egregious Abuse of Agency Power
WASHINGTON – Craig Zucker, co-founder of the company that created Buckyballs®, filed a lawsuit today against the Consumer Product Safety Commission (CPSC) for naming him personally liable in its $57 million case CPSC v. Maxfield and Oberton Holdings, LLC. et al. Maxfield and Oberton, the company that sold Buckyballs®, one of the world’s most popular adult desktoys, was sued by the CPSC to force a full product recall in July 2012 and, due to the action, driven out of business in December 2012. Although the products have never been proven to be defective and remain legal to sell today, the CPSC has now turned its sights on Zucker individually, grossly over-reaching its authority by naming him personally in its suit.
Zucker has retained government accountability group Cause of Action to push back against the CPSC by filing a complaint in the U.S. District Court of Maryland. This complaint states that the CPSC lacks jurisdiction to carry out this unprecedented action against Zucker, a former corporate officer at Maxfield and Oberton, and seeks an injunction to stop the CPSC’s abuse of power.
Last month, Zucker launched “United We Ball,” a campaign selling new products, such as Liberty Balls, to help raise funds for his ongoing legal battle, the effort of one individual to stand up for what’s right for American consumers, businesses, and individuals. The campaign has received media praise and an overwhelming amount of support from the public.
“For too long I have been a target of the CPSC and I am no longer willing to just take it,” said Zucker. “Despite over zealous regulators targeting me in the first place for speaking out, I am now taking legal action to defend myself against the CPSC’s egregious attempt at rewriting our cherished laws of limited liability. The success of United We Ball has given me the support base from consumers, lawmakers, and the media to take our fight to the next level. I will keep going until the case is won and ensure the CPSC can’t ever do this again to another individual.”
“The Commission has committed an unprecedented act by attempting to hold an individual entrepreneur liable for a recall that CPSC is seeking against a company that it forced out of business,” said Cause of Action Executive Director Dan Epstein. “At a minimum this action is an obvious overreach of the CPSC’s authority and at maximum it is an illegal abuse of power by persons within the Commission who seek to punish Mr. Zucker. Entrepreneurs in this country should not have to face a rogue federal agency that is merely making up the rules as they go along. The CPSC’s actions against Mr. Zucker are a very real threat to the liberty of every small business owner nationwide.”
The CPSC is arguing that Zucker is personally liable for the costs of the recall due to the Park Doctrine. The Park Doctrine, named for the 1975 Supreme Court case, United States v. Park, holds that in some circumstances, corporate officers can be individually liable for criminal violations committed by their corporate employers. However, under the Park Doctrine, former corporate officers have not been required to personally carry out civil remedial orders issued in response to the conduct of their former corporate employers. In this case, the corporate conduct was not illegal in the first place. Neither Maxfield and Oberton nor Zucker have committed any crimes or been accused of any criminal activity.
In addition to the lawsuit, Cause of Action is also filing Freedom of Information Act requests to discover the facts, factors and circumstances that led to the Commission’s extraordinary, unprecedented and illegal overreach against Zucker, as well as an Information Quality Act complaint with the CPSC to seek and obtain correction of false statements made by the Commission concerning Zucker, Maxfield and Oberton, and Buckyballs®. Copies of all filings can be found at www.UnitedWeBall.org/legal.
For more on contributing to Zucker’s legal defense and to purchase Liberty Balls, please visit www.UnitedWeBall.org.
# # #
About United We Ball
United We Ball is a campaign founded by Craig Zucker and his supporters created to sell new products and fight the legal battle of one individual against the government to stand up for what’s right for American consumers, businesses, and individuals. The ultimate goal of United We Ball is to prevent more overreaching bureaucratic lawsuits against job-creating entrepreneurs who speak out against selective justice and to fight to preserve principles of limited liability for responsible company officers and entrepreneurs. 100% of the profits from United We Ball will go towards the legal fees of defending CPSC v. Maxfield and Oberton Holdings, LLC, et al. The campaign web site can be found at www.UnitedWeBall.org
About Cause of Action:
Cause of Action is a nonprofit, nonpartisan organization that uses investigative, legal, and communications tools to educate the public on how government accountability and transparency protects taxpayer interests and economic opportunity. For more information, visit www.causeofaction.org.
To schedule an interview with Craig Zucker or for more information, contact Elise Flick, epf@karvcommunications.com, 212-333-0275
To schedule an interview with Cause of Action’s Executive Director Dan Epstein, contact Mary Beth Hutchins, 202-499-4232.
FOR IMMEDIATE RELEASE
CONTACT: Kevin Schmidt, 202-499-2414
kevin.schmidt@causeofaction.org
LabMD Files Motion for Protective Order to Quash FTC’s Burdensome and Oppressive Subpoenas
Already overstepping its enforcement authority, FTC issues 35 subpoenas for 23 simultaneous depositions
WASHINGTON – Cause of Action (CoA), a government accountability organization, filed a Motion for Protective Order before an Administrative Law Judge on behalf of LabMD seeking to quash 35 subpoenas served by the Federal Trade Commission (FTC) in a single day. The subpoenas are burdensome, oppressive and are consistent with the Commission’s plain goal of forcing LabMD into submission by exhausting the small Atlanta-based cancer diagnosis company’s resources.
CoA is defending LabMD against a complaint brought by the FTC based, in part, on allegations that a third party was able to obtain data from LabMD’s computers through the peer-to-peer (P2P) file sharing program LimeWire. The FTC has attacked LabMD without publishing any data-security regulations or standards and with the knowledge that LabMD’s data security practices are regulated by the Department of Health and Human Services (HHS). HHS has never suggested that LabMD has violated any patient information data-security regulations or requirements.
In September, CoA filed pleadings challenging the FTC’s statutory authority to regulate patient information data-security practices as “unfair acts or practices” under Section 5 of the FTC Act and denying the Commission’s claim that LabMD supposedly failed to provide reasonable and appropriate security for personal information on its computer networks.
“From the outset of the FTC’s investigation, the Commission has exerted authority it does not have to punish a business that has done nothing wrong,” said CoA Executive Director Dan Epstein. “CoA has taken up this fight because the Commission is abusing its power and destroying a small business, and it must be held accountable for demonstrations such as these burdensome subpoenas.”
“No court has ever said that Section 5 authorizes the FTC to regulate patient information data-security practices, or any other data-security practices, for that matter,” explained CoA Senior VP of Litigation Reed Rubinstein. “Despite the Commission’s repeated requests, Congress has refused to confer upon the FTC jurisdiction over such data-security cases. Therefore, in an end-run around both the courts and the Congress, the Commission illegally abuses and burdens individual businesses like LabMD.”
CoA asserts in LabMD’s Motion for Protective Order that essentially, the FTC is flexing its “muscles” in retaliation for LabMD’s [public criticism]. No other reason explains why the FTC would issue 35 subpoenas to obtain information it already has. Instead of venerably standing on the strength (or lack thereof) of its Complaint, the FTC, is utilizing the vast resources at its disposal to harass LabMD and its clients. It is demanding irrelevant, costly, unnecessary, and duplicative information in an attempt to crush LabMD and its viability as a business.
The FTC’s bullying tactics include:
Given the FTC’s lack of jurisdiction to even bring such a data-security action against LabMD, it makes it abusive practices all the more egregious:
The FTC complaint can be found here, CoA’s answer on behalf of LabMD can be found here, and the Motion for Protective Order can be found here.
About Cause of Action:
Cause of Action is a non-profit, nonpartisan government accountability organization that fights to protect economic opportunity when federal regulations, spending and cronyism threaten it. For more information, visit www.causeofaction.org.
About LabMD:
LabMD is a cancer detection facility that specializes in analysis and diagnosis of blood, urine, and tissue specimens for cancers, micro-organisms and tumor markers. You can find out more about their battle with the FTC here.
To schedule an interview with Cause of Action’s Executive Director Dan Epstein, contact Mary Beth Hutchins, 202-400-2721 or Kevin Schmidt, kevin.schmidt@causeofaction.org.
###
By HILARY STOUT
Over the last three weeks, more than 2,200 people have placed orders for $10-to-$40 sets of magnetic stacking balls, rising to the call of a saucy and irreverent social media campaign against a government regulatory agency.
The money from the sales of the so-called Liberty Balls goes to a legal-defense fund. At the crux of the battle is an arcane legal tussle that has caught the attention of a number of mainstream business organizations and free-market legal groups.
It involves an effort by the federal Consumer Product Safety Commission to recall Buckyballs, sets of tiny, powerfully magnetic stacking balls that the magazines Rolling Stone and People once ranked on their hot products lists.
Last year, the commission declared the balls a swallowing hazard to young children and filed an administrative action against the company that made the product, demanding it recall all Buckyballs, and a related product called Buckycubes, and refund consumers their money. The company, Maxfield & Oberton Holdings, challenged the action, saying labels on the packaging clearly warned that the product was unsafe for children.
But the fuss now has less to do with safety. After Maxfield & Oberton went out of business last December, citing the financial toll of the recall battle, lawyers for the product safety agency took the highly unusual step of adding the chief executive of the dissolved firm, Craig Zucker, as a respondent in the recall action, arguing that he controlled the company’s activities. Mr. Zucker and his lawyers say the move could ultimately make him personally responsible for the estimated recall costs of $57 million.
While the “responsible corporate officer” doctrine (also known as the Park doctrine) has been used frequently in criminal cases, allowing for prosecutions of individual company officers in cases asserting corporate wrongdoing, experts say its use is virtually unheard-of in an administrative action where no violations of law or regulations are claimed.
A spokesman for the product safety commission said the group had never used it in a recall action. He declined to say why it was used in this case.
“I think this case presents some important and troubling legal issues that really break new ground legally for the C.P.S.C.,” said Nancy A. Nord, who was the only commissioner to vote against filing the administrative action. Ms. Nord retired from the commission last weekend.
Three well-known business organizations — the National Association of Manufacturers, the National Retail Federation and the Retail Industry Leaders Association — banded together this summer to file a brief urging the administrative law judge reviewing the recall case to drop Mr. Zucker as a respondent.
The groups argue that holding an individual responsible for a widespread, expensive recall sets a disturbing example and runs counter to the business desire for limited liability. They contend that such risk would have a detrimental effect on entrepreneurism and openness in dealing with regulatory bodies.
“It really has a chilling effect on the kinds of things all of us were trying to do, which is involve corporate officers in these kinds of decisions — to decide if something should be reported and if there should be a recall,” said Lee Bishop, a lawyer for the manufacturers association, who helped draft the brief.
Conservative legal groups like Cause of Action, a nonprofit that targets what it considers governmental overreach, have been watching the proceedings with interest and weighing taking some action.
“This really punishes entrepreneurship and establishes a bad precedent for businesses working to create products for consumers,” said Daniel Z. Epstein, the group’s executive director. “It undermines the business community’s ability to rely upon the corporate form.”
Mr. Epstein once worked for a foundation run by Charles G. Koch, who, with his brother David, has funded numerous conservative and antigovernment or antiregulatory causes. He would not disclose the donors behind Cause of Action. The Washington Legal Foundation, which promotes pro-business and free-market positions, has weighed in with a background paper titled “C.P.S.C.’s Misuse of R.C.O. Doctrine Bodes Ill for C.E.O.’s and Consumers.”
The administrative law judge on the case has refused to drop Mr. Zucker’s name from the case. Last month, Mr. Zucker, 34, began the so-called “United We Ball” campaign on Facebook, Twitter and other outlets to raise money for his legal defense fund. The products for sale, called Liberty Balls, are bigger versions of Buckyballs — too big, he says, to be a swallowing risk. So far, he says, the campaign has raised more than $100,000.
“The Consumer Product Safety Act in the Congress is very clear that recalls cannot be conducted by individuals, so entrepreneurs can innovate and create products and don’t have to be in fear of personal bankruptcy and personal financial ruin in the case of a product defect,” Mr. Zucker said in an interview. He added: “But Buckyballs weren’t defective. The commission changed its mind. It said the product was lawful and changed its mind.”
The case is now in the hands of the administrative law judge. If he rules that the product does present a hazard and a recall is warranted, Mr. Zucker may appeal to the commissioners, who will then vote on what action to take.
Buckyballs were created by Mr. Zucker and Jake Bronstein, two friends who said they were down to their last $1,000 each when they invested it in the company. There was something strangely addictive about stacking the powerful little magnets into endless shapes, and the product took off. By 2011, sales reached $18 million. Mr. Bronstein has not been named in the case.
The company had a history of collaborating with the commission, including during a voluntary recall of the product in 2010 to change its warning labels. The original labels said the product was unsafe for people under 13, but after Congress passed a law changing the definition of a child to anyone under 14, the company worked with the commission to recall the product and replace the labels.
The product safety agency says it has reports of about 1,700 emergency room visits involving children who had ingested Buckyballs. The power of the magnet in some cases caused ripped intestines.
“The core issue for Consumer Product Safety Commission is we did not see progress on safety to children,” said Scott Wolfson, a spokesman for the agency. “The labels were not effective,” he said, explaining that many people did not keep the balls in the packaging so the labels were going unnoticed. “Children were getting access to this product,” he said.
After the company protested the recall, the commission approached retailers directly. At least six — including Barnes & Noble, Brookstone and Bed Bath & Beyond — initiated a voluntary recall and agreed to stop selling the product.
Buckyballs were also popular in Europe and elsewhere, including Canada and Australia, which have both initiated similar regulatory actions. The product had distributors in approximately 15 foreign countries, accounting for about 15 percent of sales, according to a spokeswoman for Mr. Zucker. When Maxfield & Oberton went out of business, sales to those distributors stopped as well.
Last week, the commission moved ahead with plans to outlaw these types of small powerful magnets from the marketplace, separate from the recall action. Five doctors testified about safety hazards in a hearing aimed at drafting a federal rule limiting the force and size of magnets for sale to the public.
http://www.nytimes.com/2013/11/01/business/buckyball-recall-stirs-a-wider-legal-campaign.html
FOR IMMEDIATE RELEASE CONTACT: Mary Beth Hutchins, 202-400-2721
September 19, 2013 Kevin Schmidt, 202-499-2414
LabMD Responds to FTC Complaint: Agency Lacks Enforcement Jurisdiction
Government Watchdog Group Says the Agency has no Section 5 Authority
WASHINGTON – Cause of Action (CoA), a government accountability organization, filed an answer to an aggressive and arbitrary enforcement action brought by the Federal Trade Commission (FTC) against LabMD, a small cancer diagnosis company.
CoA is defending LabMD against a complaint brought by the FTC in August, based, in part, on allegations that a third party was able to obtain data from LabMD’s computers through the peer-to-peer (P2P) file sharing program LimeWire. LabMD denies the FTC’s allegations of violations of Section 5 of the FTC Act as well as allegations that LabMD failed to provide reasonable and appropriate security for personal information on its computer networks. The filed answer also explains that the FTC may lack the statutory authority to regulate data-security practices as “unfair acts or practices” under Section 5.
“The FTC admitted in 2000 that it ‘lacks the authority to require firms to adopt information practice policies,’ and while they have wanted Congressional approval for that authority, Congress has said no,” explained Reed Rubinstein, Cause of Action’s senior vice president of litigation. “This is why we are asking the Administrative Law Judge to deny the Commission’s requested relief and dismiss the Complaint in its entirety.”
Cause of Action’s Executive Director, Dan Epstein explained, “Cause of Action is taking up this fight because the FTC’s attempt to exert authority that it does not have on a business that engaged in no wrongdoing is an abuse of agency authority that threatens American jobs.”
Key evidence of this lack of FTC authority includes:
CoA states in LabMD’s answer that “Section 5 of the FTC Act does not give the Commission the statutory authority to regulate the acts or practices alleged in the Complaint and therefore the Commission’s actions are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; contrary to constitutional right, power, privilege, or immunity; in excess of statutory jurisdiction, authority, or limitations, or short of statutory right; or without observance of procedure required by law.”
A hearing on the matter is scheduled for April 28, 2014 before Chief Administrative Law Judge Michael Chappell.
The FTC complaint can be found here and the answer filed by CoA can be found here.
About Cause of Action:
Cause of Action is a nonprofit, nonpartisan organization that uses investigative, legal, and communications tools to educate the public on how government accountability and transparency protects taxpayer interests and economic opportunity. For more information, visit www.causeofaction.org.
About LabMD:
LabMD is a cancer detection facility that specializes in analysis and diagnosis of blood, urine, and tissue specimens for cancers, micro-organisms and tumor markers. You can find out more about their battle with the FTC here.
To schedule an interview with Cause of Action’s Executive Director Dan Epstein, contact Mary Beth Hutchins, mary.beth.hutchins@causeofaction.org or Kevin Schmidt, kevin.schmidt@causeofaction.org.
###
Over the last decade, the Federal Trade Commission has settled nearly four dozen cases alleging that a failure to have “reasonable” data security constitutes an unfair or deceptive trade practice. The FTC has established no clear data security standards, and no court has ever ever ruled on the FTC’s assertions, but two pending litigations may finally finally allow the courts to rule on the legal validity of what the FTC calls its “common law of settlements” — and whether the agency can continue bringing such data security enforcement actions.
Join TechFreedom and Cause of Action for a livestreamed luncheon discussion on September 12 about these two cases and what they might mean for the future of consumer protection and competition regulation. We’ll hear from Mike Daugherty, founder of LabMD, a small cancer diagnostic lab based in Atlanta. Represented by Cause of Action, a non-profit dedicated to government transparency and accountability, LabMD is defending against the FTC complaint, which focuses on the fact that, in 2007, a government-funded surveillance program was able to access a file containing patient information on LabMD’s network through the Limewire filesharing program. Mike will preview his new book, The Devil Inside the Beltway: The Shocking Exposé of the US Government’s Surveillance and Overreach into Cybersecurity, Medicine and Small Business, due out September 17. (Hint: the “devil” is a broader regulatory mentality.)
Our panel of legal experts will discuss the unique aspects of the LabMD case, especially the FTC’s decision not to prosecute filesharing services like Limewire for unfair trade practices in configuring their software to trick users into sharing files unintentionally — a decision the FTC eventually reversed, but not until it finally brought an enforcement action against Frostwire in 2011 for the same unfair practice. The panel will also discuss the larger legal issues raised by the LabMD case, the FTC’s pending litigation with Wyndham Hotels, and other recent cases settled by the FTC. Is the FTC’s approach consistent with the rule of law? Could it be? Does it actually protect consumers? What should the courts and Congress do?
Space is limited so RSVP now if you plan to attend in person. A livestream of the event will be availablehere. You can follow the conversation on Twitter on the #LabMD hashtag.
When:
Thursday, September 12, 2013
12 p.m. (registration and coffee opens at 11:45, event and livestream at 12:15)
Where:
100 Maryland Ave NE
Washington D.C. 20002
Questions?
Email contact@techfreedom.org.
Read TechFreedom’s amicus brief in the recent Wyndham and POM Wonderful cases for more legal analysis of how the FTC’s extra-legal regulations.