LabMD May Struggle at 11th Circuit, Positioning Itself for Supreme Court, Lawyers Say

Long odds haven’t stopped LabMD thus far. After refusing to settle the FTC’s data security complaint against it, LabMD went to the district courts in D.C. and Atlanta with its case (WID May 20 p1). The case even convinced House Oversight Committee Chairman Darrell Issa, R-Calif., that the FTC might have mishandled evidence in the case, leading to a hearing, the dual investigations and the suspended ALJ hearings (WID July 25 p6).

With its appeal, LabMD, a medical testing facility, is leaning on two novel arguments on top of its well-trod line that the FTC can’t regulate healthcare data security and has not given fair notice of its data security expectations. Those two newer arguments -- regarding the First Amendment and federal court jurisdiction over administrative proceedings -- could position the case to go to the Supreme Court and potentially have far-reaching implications for administrative law, lawyers told us. Few expect the 11th Circuit to buy it. “It’s really an uphill battle,” said Zoë Wilhelm, a Drinker Biddle lawyer following the case.

In its briefing to the 11th Circuit, LabMD argued the appeals court has authority to rule before the ALJ proceedings are over because the conclusion is foregone -- the FTC always wins. “If you look at the stats, [the ALJ] is sort of a futile undertaking,” Rubinstein told us. FTC Commissioner Josh Wright and numerous lawmakers have echoed Rubinstein’s claims, arguing the FTC issues too few complaints and will simply overturn the rare ALJ ruling not in its favor (WID Nov 18 p2).

Absent an ALJ ruling, however, “it’s hard for a court to say that LabMD has a case to bring to them,” Wilhelm told us. Despite chastising the FTC handling of the case, the U.S. District Court in Atlanta essentially said the same thing when it dismissed LabMD’s case (WID May 14 p13). Rubinstein thinks the court erred. “It doesn’t make sense to deny judicial review in cases where the administrative agency has already determined the case.”

"The implications” of the appellate court siding with LabMD “are destabilizing toward what you think about administrative law,” said Gautam Hans, policy counsel at the Center for Democracy & Technology. Hans worried such a ruling could create “instability” among regulatory agencies. “A prudent judge would be very cautious about doing that,” he said.

LabMD also shoehorned a First Amendment argument into its brief. The FTC’s heavy-handed investigation and monitoring stifled LabMD CEO Michael Daugherty’s free speech rights, the company argued. “FTC staff’s decision to pursue an enforcement action three days after Mr. Daugherty announced his intention to write a book critical of their actions constitutes retaliation,” the briefing said. “It’s just not the norm,” Rubinstein told us.

Lawyers told us constitutional arguments make cases more appealing to appellate courts. “I think the reason they're focusing on the constitutional argument is to try and force the court to hear the case on merits,” Wilhelm said. Hans said the argument is “totally out there,” but is a savvy move to position the case for the Supreme Court, which has heavily favored First Amendment arguments in recent rulings. “They may find it somewhat persuasive,” he said.

With oral arguments set for the week of Dec. 8, LabMD’s case is on a timeline similar to another case challenging the FTC’s data security authority -- Wyndham v. FTC. Wyndham, a hotel chain, had a motion to dismiss refused at the district court level (WID April 9 p1) before turning to the 3rd U.S. Circuit Court of Appeals (WID July 16 p1).

Lawyers differed on the role a Wyndham ruling might have on the 11th Circuit decision. “In both cases, a core position of the companies is that their due process rights are being violated,” said Goodwin Procter data security lawyer Gerry Stegmaier. “And both are questioning the agency’s jurisdiction to even prosecute them in the first place.” Though Wyndham’s case has sat at the 3rd Circuit since July, suggesting its ruling might come first, the case is proceeding slowly -- Wyndham has until Oct. 5 to file its initial brief, Hans said.

Differences in the two cases will also decouple the two rulings, lawyers told us. LabMD, as a medical facility, is arguing it should be subject to Health Insurance Portability and Accountability Act data security standards, which the FTC does not oversee, Hans said. Additionally, since the FTC didn’t pursue Wyndham through the ALJ process, “there aren’t the same questions about whether the federal courts can hear the case,” Wilhelm said. “Because of that the merits of the case can actually be considered.”

But those merits are different enough that a ruling in Wyndham first would likely have minimal effect on LabMD, Wilhelm and others agreed. “I think the situations are significantly divergent that it would be hard for the 11th to point to what the 3rd did and use that to dispose of this case,” Rubinstein said.

Meanwhile, the ALJ waits while the House Oversight Committee and FTC inspector general conduct their due diligence. Issa’s office and FTC Acting Inspector General Kelly Tshibaka said they can’t comment on ongoing investigations. LabMD reports on the investigations to the ALJ every Wednesday, Rubinstein said. But for the past few months, the report has been the same: “There’s no change,” Rubinstein said. “At this point that’s all we know.” -- Cory Bennett (cbennett@warren-news.com)