In re LabMD
, Briefing Book Page 1
Power-Hungry FC Bureaucrats: Defending Small Business against Administrative Overreach
In the Matter of LabMD, Inc.
, FC Docket No. 9357
On August 28, 2013, the Federal rade Commission (FC) issued a complaint against LabMD, a small cancer-detection lab, accusing it o engag-ing in unspecified “unreasonable” data security that allegedly violate Section 5 o the FC Act’s prohibition o “unair” trade practices. FC’s more-than our year abusive administrative action orced LabMD to shif ocus away rom running its business, and the company is now fighting or its lie. On March 20, 2014, Cause o Action and LabMD filed suit in Georgia to stop FC’s overreach. Te FC is attacking LabMD even though data-security practices or health inormation are regulated by the Department o Health and Human Services under the Health Insurance Portability and Accountability Act (HIPAA) and the Health Inormation echnology or Economic and Clinical Health Act (HI-ECH). Neither the FC nor HHS has accused LabMD o violating these laws. No court has ever ruled that FC has this authority and FC has issued no regulations on data-security practices that apply to LabMD. However, the agency is claiming the “administrative common law” o consent orders and Internet postings allows it to go afer anyone, anytime with no prior notice.
Te FC Retaliated Against LabMD when its Owner Exercised his First Amendment Rights and Spoke Out About Teir ainted Investigation.
Almost immediately afer LabMD’s CEO, Michael Daugherty, publicly criticized the FC and posted the trailer to his book, Te Devil Inside the Beltway, on his website, the FC accused LabMD o committing an “unair” trade practice by engaging in “unreasonable” data-security and issued an administrative complaint. Te FC’s administrative complaint relies heavily on allegations concerning an accounts-receivable file that a third party, iversa, obtained rom LabMD without the company’s knowledge or permission under highly irregular circumstances, even though an FC Commissioner had previously warned FC staff that reliance on that file could create “the appearance o bias or impropriety.” FC Commissioners and other personnel have repeatedly criticized LabMD in speeches, media interviews, blog posts and press releases. FC staff have asked Mr. Daugherty invasive, irrelevant questions during depositions, including asking about the doors in his home and layout o his basement. Commissioner Julie Brill was orced to recuse hersel afer she made wholly inappropriate comments about LabMD, showing she had already prejudged the outcome o the case.
BRIEFING BOOK
March 2014
In re LabMD
, Briefing Book Page 2
Te FC Violates Due Process Fair-Notice Requirements when it Punishes Companies without Defining “Unreasonable” and “Unfair” Data-Security Practices.
Even though Section 5 never mentions data security, the FC claims the statute’s text alone provides air notice. FC reuses to establish rules or regulations explaining what data-security practices it thinks Section 5 orbids or requires and reuses to issue advisory opinions or endorse industry standards. Instead, the FC apparently thinks it can regulate through afer-the-act enorcement actions, “uncodified standards o care,” and “unwritten rules.” Even during an enorcement proceeding, the FC claims “standards used to enorce Section 5 are outside the scope o discovery.”
Te FC’s Administrative Process—Where FC Commissioners Act as Prosecutors, Legislators, and Judges at the Same ime—Is Rigged and Violates Due Process.
FC Commissioner Joshua Wright’s empirical research demonstrates that LabMD’s ate is already sealed. FC enorcement staff have won literally 100% o FC administrative cases or a period o nearly twenty years. Commissioner Wright told Congress that, in light o “the agency’s admin-istrative process advantages and the vague nature o the Section 5 authority[,] . . . firms typically preer to settle Section 5 claims rather than go through the lengthy and costly administrative litigation in which they are both shooting at a moving target and may have the chips stacked against them.”
Te FC Relied Upon “False,” “Incomplete,” and “Inaccurate” Information to Launch Its Investigation into LabMD. Congress is Now Prodding Both the FC and iversa, the Source of that Information
On June 11, 2014 Congress’s chie watchdog, the House Committee on Oversight and Government Reorm, advised the Federal rade Commission (FC) that the inormation the FC obtained rom iversa, Inc. is “alse,” “incomplete” and “inaccurate.” Te Committee also said that it expected the FC to “cooperate ully” with any subsequent document requests or tran-scribed interviews with FC employees.Te FC obtained confidential LabMD patient inormation rom iversa in 2009 by way o a sham corporation located in the home o iversa’s CEO’s uncle. Although iversa had a strong commercial interest in the FC’s commencement o enorcement proceedings, there is no evidence that the FC took any steps to authenticate iversa’s claim that LabMD patient files had been ound in multiple places on a peer-to-peer network. As the FC and iversa were both aware, the unauthorized taking o patient files rom a Georgia workstation, by peer-to-peer sofware or by any other means, is a crime under Georgia law. o date, the FC has reused to make public the
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Tis has grown from a classic David-vs-Goliath battle into a dispute that could shape the future of federal health privacy regulation.
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LabMD CEO Michael Daugherty
In re LabMD
, Briefing Book Page 3ull nature and extent o its relationship with iversa.Te House Oversight Committee’s investigation should send a message to ederal agencies, the President and the courts that the arbitrary abuse o ad-ministrative power will not go unchecked. Te Committee’s action, and the record o testimony beore the Administrative Law Judge and Judge Duffey in the U.S. District Court in Georgia, all lead to a single conclusion: Tat the FC – including its commissioners and staff attorneys – must be stopped.
Case Files and Attachments
FC Administrative Complaint against LabMD..................................................4FC Order Denying Motion to Dismiss..............................................................16 FC Motion: “Standards Used to Enorce Section 5 Are Outside the Scope o Discovery”........................................................................23FC Subpoena or Michael Daugherty Book Drafs.........................................25Initial Pretrial Conerence: FC admits it has no Complaining Witnesses or Regulations....................................................................................28Excerpt rom Michael Daugherty Deposition: Te Doors in Your Basement......................................................................................................35FC Commissioner Tomas Rosch Dissent.......................................................38FC Commissioner Joshua Wright Critiques FC Process.............................40FC Commissioner Joshua Wright estifies beore House Energy and Commerce Committee................................................................................43Going on Offense: LabMD Sues FC in Federal Court....................................48Washington Legal Foundation: Te FC at a Crossroads: Can it be Both Prosecutor and Judge?..............................................................................66National Law Journal: FC Commissioner Julie Brill Forced to Recuse Hersel Afer Improper Statements......................................................70ranscript rom administrative proceedings beore the FC..........................72ranscript rom U.S. District Court hearing beore Judge William S. Duffey.......................................................................112Letter rom the House Oversight Committee to the FC..............................210LabMD’s Motion beore the ALJ to Admit the House Oversight Committee Letter as Evidence...................................213