Source: http://mbelr.org/confidential-compliance-herbalife-the-ftc-and-the-freedom-of-information-act/
Timestamp: 2019-08-17 13:47:44
Document Index: 110461852

Matched Legal Cases: ['§12', '§ 28', '§4', '§4', '§ 4', '§17', '§12']

Confidential Compliance: Herbalife, the FTC, and the Freedom of Information Act - Michigan Business & Entrepreneurial Law Review
Michigan Business & Entrepreneurial Law Review > Blog Articles > Confidential Compliance: Herbalife, the FTC, and the Freedom of Information Act
The Herbalife Saga
On October 30th, Herbalife Nutrition Ltd., a global nutrition company,1 will release its third quarter financial results for 2018 with the hope that the multi-level marketing company will continue its positive trend of strong market performance.2 Herbalife has beat earnings estimates for three straight quarters, and the company’s stock price has increased nearly 50% year-over-year.3 Also encouraging was the announcement in March 2018 by one of the company’s biggest adversaries, William Ackman, that his hedge fund Pershing Square Capital Management would divest from their short position in Herbalife stock ending a five-year bet that the company’s share-price would go to zero.4 It did not, and 2018 saw the value of Herbalife shares return to all-time highs.5
If share-price is your measuring rod, and undoubtedly for the company and Mr. Ackman it was, Herbalife was decidedly the winner in what at times it felt like a political campaign, and at other times a reality game show, where each contestant publicly, and often viciously, battled to win support from the voters (i.e. Investors).6 That Herbalife would come out on top was not always a sure thing. Perhaps the worst moment for Herbalife as a company during the saga happened in July 2016, when the Federal Trade Commission (FTC) filed a complaint against the company for deceptive business practices.7 The timing of the probe led to speculation that the investigation was spurred by Mr. Ackman’s campaign against the company. He alleged that the company was primarily an illegal pyramid scheme8 “where participants make more money from recruiting other people to the scheme than they do from selling the underlying product.”9 Concurrent with the filing of the complaint, Herbalife entered into a consent order with the FTC that included a $200 million penalty and an agreement to significantly restructure its business operations,10 but the order stopped short of declaring the company a pyramid scheme.11 The agreement also spells out ways in which the FTC will monitor the agreement including the use of an independent compliance auditor (ICA) to evaluate the company’s adherence to the order.12 A failure to comply could, according to Herbalife’s financial statements, “result in a material and adverse impact to the Company’s . . . financial condition.”13
In this sense, Mr. Ackman’s divestiture from his short position and the consent order with the FTC has not ended the drama surrounding Herbalife. But, the developments over the past year related to questions surrounding the company’s business practices have shifted the terrain where the company does battle against allegations of illicit conduct. Where the firm and its shareholders once took on detractors on cable news shows and saw its alleged deceptive practices laid bare in a public filing, it now enjoys relative confidentiality as the company attempts to comply with the consent order. Instead of a war of publicity, the consent order has focused the company’s advocacy to an audience of two: its ICA and the FTC.
Should Herbalife find this new dynamic desirable, the company can maintain the new status quo so long as it can convince its ICA and FTC that it has complied with the consent order. Still, some interested parties have attempted to pry additional information from the FTC through Freedom of Information Act (FOIA) requests. One such attempt by the law firm Bryan Cave used the FOIA to request any agency records concerning the ICA compliance reports.14 The agency partially disclosed a sixty-seven page report but relied on several exceptions to FOIA requests to significantly scale-back the amount of information revealed.15 The FTC’s response to this request demonstrates the degree to which exceptions to FOIA request can drastically limit the amount of information available to the public and ensure the confidentiality of the company involved.
FTC and FOIA
To obtain FTC records under FOIA, a party must submit a request to the Office of General Counsel and describe in reasonable detail the records sought.16 After a request is submitted, the FTC FOIA branch processes the request and assigns it to an “access officer”.17 This officer gathers the material and prepares an index listing those documents or categories of documents to which access is granted or denied.18 A memo is prepared and non-accessible material is preserved for inspection by the general counsel in case of appeal.19 Within the material provided, to the extent possible, the agency is expected to indicate the place in the record where information is withheld.20 Additionally, under the Obama administration, frequently requested documents (such Herbalife’s ICA reports) are accessible through the FTC website without filing an additional request.21
Not all documents obtained and held by the FTC are subject to FOIA requests.22 The test for whether a document is an agency record, and subject to FOIA disclosure, is determined by examining whether the agency created or obtained the record in the course of doing its work, and if the record is within the control of the agency where it resides.23 Possession alone by an agency does not per se establish a document is an agency record.24 Additionally, nine exemptions prevent FOIA disclosure if the records are:25
Classified as secret in the interest of national defense or foreign policy;
Concerning trade secrets and commercial or financial information obtained from a person that is privileged or confidential
Privileged interagency or intra-agency memoranda, except under certain circumstances;
Personnel and medical files, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy;
Investigatory records compiled for law enforcement purposes;
Contained in or related to certain examination, operating, or condition reports concerning financial institutions;
Geological and geophysical information and data.
Despite the long list of statutory exceptions, FTC regulations allow for the FTC general counsel to release records exempt from mandatory disclosure.26 Though a theoretical possibility, such a situation is unlikely because agencies are disincentivized from disclosing agency records if they can help it. Agencies may wish to avoid disclosure to cover up mistakes or in response to institutional pressures which value risk aversion and a culture of secrecy concerning when discussing agency matters with outsiders.27 The costs of withholding information are low considering the wide range of exceptions an agency can use to justify its decision.28 Further, a decision to disclose information could create precedent for future FOIA requests.29 Finally, because a decision on the validity of agency’s determination resides with a court, there is incentive for an agency to claim broad exemptions and allow the court to determine the proper bounds of the rule.30
The standard of review for an agency’s FOIA decision is de novo which give courts more latitude to question agency decisions.31 In practice, empirical studies demonstrate that de novo review is not in standard use and agency FOIA decisions are upheld at higher rates than those decisions subject to discretionary review.32 De novo review is a departure from the standard review process of agency fact-finding decisions described in the Administrative Procedures Act (APA) that requires judges to defer to most agency positions.33 FOIA is different.34 The idea that agencies bring to bear special expertise that underlies the rationale for agency deference under the APA is often not a critical factor in determining whether an agency should disclose a record.35 Still, courts uphold agency decisions in FOIA actions at a rate of 90% compared to a 60-70% affirmation rate across other decisions and standards of review.36
There are two avenues courts use to defer to agency discretion despite the clear mandate by Congress that FOIA decisions are subject to de novo review. The first is the use of judicially created deference doctrines often found in FOIA cases involving national security, federal law enforcement, and the deliberative process privilege.37 Second, procedural devices unique to FOIA often benefit the agency more so than the requester.38 A Vaughn Index (a device used by agencies to demonstrate that it has met the burden of proof to sustain the withholding of information or records),39 was in theory created to combat information asymmetries between agencies, judges, and plaintiffs, but in practice is often so boilerplate that it cannot effectively test an agency’s position and are often used by courts to justify denying plaintiffs additional discovery.40
FTC Response to FOIA Request
The FTC response to Bryan Cave’s FOIA request for the ICA report specified that the undisclosed portions of the document fell within one or more of three exemptions.41 The first, exemption three, exempts materials specifically exempted by other statutes.42 In this case, section 21(f) of the Federal Trade Commission Improvements Act exempts material that is received by the FTC in any law enforcement investigation whether compulsory or voluntary.43 The second, exemption four, covers requested information of the type that would customarily not be released to the public by the person from whom it was obtained.44 (Additionally, the agency notes that the type of information covered by exemption 4 is also prohibited from disclosure by section 6(f) of the FTC Act and thus exempt under exemption three as well).45 Lastly, the FTC cites exemption 7(A), which exempts records, compiled for a law enforcement purpose, to the extent that disclosure could “reasonably be expected to interfere with enforcement proceedings.” (§12:7 guidebook).46
Turning to the records provided by the FTC in response to the FOIA request: it is hard to glean new information from the compliance report beyond what can already be assumed by reading the consent order. Of the sixty-seven pages, thirty-nine pages were entirely withheld.47 Much of the remaining disclosed information consists of section headings and conclusory assertions of Herbalife’s compliance. For example, page twenty-four of the released report is entirely withheld apart from a section heading titled “D. Section I.D: Verification of Retail Sales And Preferred Customer Sales” and the first sentence which states that “Herbalife has implemented systems and procedures to comply with Section I.D.” The remaining information that may support this assertion is obscured by several blacked-bars.48 At other points, the report eludes to changes made without providing details. Section C. spans seventeen pages of the report and concerns the systems created by Herbalife to effectively collect and maintain profitable retail sales.49 Apart from the section heading and first sentence, the only other portion of the section disclosed is one sentence that states “to facilitate the new requirements [of the order], the Company developed several ways in which retail inventory receipts may be created and submitted to Herbalife.”50 No additional information from the section is provided.
The FTC response and disclosure of documents related to the Herbalife ICA FOIA request provide little information both as to the ICA report and with regards to the FTC’s own procedures for determining which portions of the requested record are exempt for which reason. If the requester wished to press the issue, he might attempt to force the FTC to produce a Vaughn Index in order to prepare an argument. Without a Vaughn Index, a requester will have troubles effectively formulating an argument to challenge an agency’s decision because he cannot know the specifics of the requested documents unless they are actually disclosed.51 Without these specifics, it is hard to know the basis on which an agency applies any particular exception.52 Though there is no set form, a proper Vaughn Index must be able to explain to a requester and trial judge why each withheld document is exempt from disclosure.53 A Vaugh Index may shed additional light on the FTC process, but a requester is not entitled to an index as part of an initial agency response to a request.54 The requirement of an index is typically only imposed after a motion for summary judgment is filed by a defendant to an action.55 Furthermore, a Vaughn Index is not always required if the agency can attest to the nature of the withheld information in some other way such as through a motion or affidavit56 Additionally, depending on what exemption is cited by the agency, a Vaugh Index may or may not be required at all, and courts will allow for exclusion of records on a generic basis.57 For exemption 7(A), cited by the FTC in Bryan Cave’s request, an agency need only establish that a document belongs to a category of information that, if disclosed, would interfere with enforcement proceedings.58 Because the exemption does not rely on specific subject matter, a Vaughn Index will not provide any additional information a court would need to review the adequacy of the agency’s procedures.59
It appears unlikely that, even if a requester challenged the FTC’s decision to withhold the majority of the ICA’s report on Herbalife’s compliance with the consent order, a court would rule against the agency. Despite de novo review, a plaintiff to an FOIA suit faces an uphill battle to compel agency disclosure because of agency disincentives and judicial deference to agency action. Where a particular report may be classified under a special exception, like 7(A), which limits the procedural options, like a Vaughn Index, specifically made available to help plaintiffs overcome information asymmetries, it is unlikely a plaintiff can force an agency to disclose how it made the determination with sufficient detail such that a plaintiff can challenge an agency’s decision and win in court. For Herbalife, this means the actions it takes to comply with the FTC consent order will most likely remain confidential.
About Us, HERBALIFE NUTRITION (Oct. 22, 2018, 6:00:00 PM), http://company.herbalife.com/. ↩
Press Release, Herbalife Nutrition, Herbalife Nutrition Ltd. Announces Third Quarter 2018 Earnings Release Date, Investor Call and Investor Day (Oct. 1, 2018), https://ir.herbalife.com/news-releases/news-release-details/herbalife-nutrition-ltd-announces-third-quarter-2018-earnings. ↩
Herbalife Nutrition Overview, THE WALL STREET JOURNAL, https://quotes.wsj.com/HLF?mod=searchresults_companyquotes (type HLF in search bar on website home page; click on Herbalife Nutrition under “companies and quotes”) (last visited Oct. 22, 2018 6:00:00). ↩
David Benoit, Bill Ackman Surrenders in His Five-Year War Against Herbalife, Wall St. J. (Mar. 1, 2018), https://www.wsj.com/articles/bill-ackman-surrenders-his-in-five-year-war-against-herbalife-1519854456?mod=searchresults&page=1&pos=11. ↩
Herbalife Nutrition Overview, THE WALL STREET JOURNAL, https://quotes.wsj.com (type HLF in search bar on website home page; click on Herbalife Nutrition under “companies and quotes”; Click “advanced charting”; click “all”) (last visited Oct. 22, 2018 6:00:00). ↩
Benoit, supra note 4 ↩
Press Release, Fed. Trade Comm’n, Herbalife Will Restructure Its Multi-level Marketing Operations and Pay $200 Million For Consumer Redress to Settle FTC Charges (Jul. 15, 2016) https://www.ftc.gov/news-events/press-releases/2016/07/herbalife-will-restructure-its-multi-level-marketing-operations. ↩
Tom Gara, The Case Against Herbalife, And What The Company Needs To Do About It, Wall St. J. (Dec. 20, 2012), https://blogs.wsj.com/corporate-intelligence/2012/12/20/the-case-against-herbalife-and-what-the-company-needs-to-do-about-it/?mod=article_inline. ↩
See Press Release, F.T.C., supra note 7. ↩
David Benoit & Brent Kendall, Herbalife to Pay $200 Million Over Claims of Misrepresentation, Wall St. J. (Jul. 16, 2018), https://www.wsj.com/articles/herbalife-to-pay-200-million-over-claims-of-misrepresentation-1468584397?mod=article_inline. ↩
See Stipulation to Entry of Order for Permanent Injunction and Monetary Judgment, FTC v. Herbalife Int’l. of Am., Inc., No. 2:16-cv-05217 (C.D. Cal. July 15, 2016) [hereinafter Consent Order]. ↩
Herbalife Nutrition Ltd., Quarterly Report (Form 10-Q) 21 (Aug. 1, 2018). ↩
See Freedom of Information Act Request, Fed. Trade Comm’n, FOIA-2017-01303 (Aug. 15, 2017) https://www.ftc.gov/system/files/documents/foia_requests/2017-01303%20Request.pdf. ↩
See Freedom of Information Act Response, Fed. Trade Comm’n, Re: FOIA-2017-01303 (Sept. 19, 2017) https://www.ftc.gov/system/files/documents/foia_requests/2017-01303%20Letter.pdf. ↩
STEPHANIE W. KANWIT, The Federal Trade Commission (Treatise) § 28:3 (2017). ↩
CORNISH F. HITCHCOCK, Guidebook to the Freedom of Information and Privacy Acts §4:12 (2018). ↩
See HITCHCOCK, supra note 20, at §4:4. ↩
FED. TRADE COMM’N, https://www.ftc.gov/about-ftc/foia/exemptions. ↩
FTC Disclosure Requests, 16 C.F.R. § 4.11 (2016). ↩
Margaret B. Kwoka, Deferring to Secrecy, 54 B.C. L. Rev. 185, 202 (2013). ↩
See Vaughn v. Rosen, 484 F.2d 820, 826 (D.C. Cir. 1973). ↩
Kwoka, supra note 27, at 185. ↩
Id. at 193. ↩
Id. at 196. ↩
Id. at 201. ↩
Id. at 211-212. ↩
HITCHCOCK, supra note 20, at §17:14. ↩
Kwoka, supra note 27, at 223-224. ↩
Freedom of Information Act Response, supra note 15. ↩
McDermott v. Fed. Trade Comm’n., 1981 WL 2056, at *2 (D.D.C. 1981). ↩
Critical Mass Energy Project v. N.R.C., 975 F.2d 871, 873 (D.C. Cir. 1992). ↩
HITCHCOCK, supra note 20, at §12:7. ↩
See Freedom of Information Act Released Records, Fed. Trade Comm’n, Re: FOIA-2017-01303 (Sept. 19, 2017) https://www.ftc.gov/system/files/documents/foia_requests/2017-01303%20Records.pdf ↩
See Vaughn, 484 F.2d at 823. ↩
Ioane v. I.R.S., 2010. WL 2600689, at *6 (D. Nev. 2010). ↩
Tags:Ackman, Compliance, Consent Order, FOIA, FTC, Herbalife, Vaughn Index
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