Smith v. FTC

• Decision Date: 22 September 1975
• Docket Number: Civ. A. No. 75-15.
• Parties: A. O. SMITH et al., Plaintiffs, v. FEDERAL TRADE COMMISSION et al., Defendants.
• Court: U.S. District Court — District of Delaware

403 F. Supp. 1000

A. O. SMITH et al., Plaintiffs, v. FEDERAL TRADE COMMISSION et al., Defendants.

Civ. A. No. 75-15.

United States District Court, D. Delaware.

September 22, 1975.

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Richard F. Corroon, Charles S. Crompton, Jr., of Potter, Anderson & Corroon, Wilmington, Del., Gilbert J. Helwig, Pittsburgh, Pa., John M. Wood, Lee A. Rau, and Edward T. Tait, of Reed, Smith, Shaw & McClay, Washington, D. C., for plaintiffs.

W. Laird Stabler, U. S. Atty., Wilmington, Del., Robert J. Lewis, Gen. Counsel, Gerald Harwood, Asst. Gen. Counsel, James P. Timony, William A. Cerillo, Bruce G. Freedman, Mary L. Azcuenaga, Warren S. Grimes, F.T.C., Washington, D. C., for defendant F.T.C.

MURRAY M. SCHWARTZ, District Judge.

This case involves pre-enforcement judicial review of the Federal Trade Commission ("Commission" or "FTC") annual line-of-business reporting program.¹ Previously this Court preliminarily enjoined the defendant Commission from enforcing its Orders to File Form LB against the plaintiffs in this action and related litigation.² The instant controversy arises over two discovery motions, the Commission's Motion for a Protective Order and the plaintiffs' Motion to Compel.

By its Motion for a Protective Order³ the FTC seeks to halt the depositions of four Commission officials involved in the development and administration of the LB Program.⁴ In support of its motion the defendant Commission contends both that the depositions will be unduly burdensome, resulting in total disruption of the LB Program, and that all discovery in this action is improper. Further, the Commission has sought, in the event its motion is denied, to have the Court certify this question to the Third Circuit Court of Appeals pursuant to 28 U. S.C. § 1292(b).⁵ Plaintiffs have responded by asserting the Commission has failed to demonstrate the "good cause" required by Fed.R.Civ.Proc. 26(c) to justify issuance of a protective order. Plaintiffs oppose the FTC request for section 1292(b) certification on the ground that the matter before the Court involves no "controlling question of law."

Plaintiffs' Motion to Compel⁶ seeks 209 documents currently in defendants' possession,⁷ as well as an order requiring a Commission official to answer 17 questions as to which claims of privilege were interposed during the taking of his deposition. This particular facet of the instant litigation has been especially acrimonious, resulting in a wrestling match⁸ between opposing counsel and the Commission-induced disappearance of the Hubler documents during a deposition recess. However, in addition to the physical defenses raised by Commission counsel, several legal issues have been raised by the parties in connection with this motion. The Commission asserts that none of the documents or the 17 questions have any relevance whatsoever to the current suit. Further, the Commission has attempted to raise the executive privilege attaching to intraagency advisory communications as a bar to discovery with respect to many⁹ of the documents and the 17 specific questions. Plaintiffs have countered by arguing that the documents and subject-matter of the deposition questions are indeed relevant, the claim of executive privilege was improperly raised, and even if properly raised, subject to a multitude of specific exceptions. Plaintiffs also contend that any executive privilege claims properly attaching to the deposition questions were waived by the Commission during examination of the Commission official.

The parties' arguments in support and in opposition to the two motions are considered separately below.

I. SCOPE OF REVIEW

A. In General

The initial inquiry to be undertaken in measuring the propriety of a wide-ranging discovery request is whether the materials sought are relevant to any of the legal and factual issues being contested by the parties.¹⁰ In order to measure this relevance factor in a case involving judicial review of agency action under the Administrative Procedure Act, 5 U.S.C. § 551 et seq., it is first necessary to precisely delineate the appropriate scope and standard of such judicial review. See Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 413, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971).

The starting point for determination of the review standard is section 706 of the A.P.A., 5 U.S.C. § 706.¹¹ That section provides six basic standards by which propriety of administrative action is to be judicially measured. Of these standards, the "arbitrary and capricious" test, 5 U.S.C. § 706(2)(A) and the statutory mandate to set aside agency action that fails to satisfy various statutory, constitutional or procedural requirements, 5 U.S.C. § 706(2)(B), (C) and (D) govern all cases in which judicial review is authorized by section 701 and 702 of the A.P.A., 5 U.S.C. §§ 701 and 702.¹² Overton Park, supra at 414, 91 S.Ct. 814. Section 706 provides two additional review standards, the "substantial evidence test, 5 U.S.C. § 706(2) (E) and de novo review, 5 U.S.C. § 706(2)(F), both of which apply in only limited instances.

The "substantial evidence" test applies in only two situations. First, this test is properly employed to measure agency action based on an adjudicatory hearing. Overton Park, supra at 414, 91 S.Ct. 814; Camp v. Pitts, 411 U.S. 138, 141, 93 S.Ct. 1241, 36 L.Ed.2d 106 (1973). The only other opportunity for correct utilization of this test is review of agency findings made on a hearing record under 5 U.S.C. §§ 556 and 557. However, the applicability of these two sections are controlled by 5 U.S.C. § 553(c)¹³ which authorizes review on the record under sections 556 and 557 only where some other statute requires such hearings to be on the record. United States v. Allegheny-Ludlum Steel, 406 U.S. 742, 756-8, 92 S.Ct. 1941, 32 L.Ed. 2d 453 (1972); Overton Park, supra; Camp v. Pitts, supra. See, e. g., Dry Colors Manufacturers Ass'n, Inc. v. Dep't of Labor, 486 F.2d 98, at 104, n. 8 (3d Cir. 1973); Siegel v. Atomic Energy Commission, 130 U.S.App.D.C. 307, 400 F.2d 778, 785 (1967). See generally 2 K. Davis, Administrative Law Treatise § 13.08 (1958 ed.).

De novo review is similarly limited to two specific sets of circumstance.

"First, such de novo review is authorized when the agency action is adjudicatory in nature and the agency fact finding procedures are inadequate. And, there may be independent judicial fact finding when issues that were not before the agency are raised in a proceeding to enforce non-adjudicatory agency action." Overton Park, supra 401 U.S. at 415, 91 S.Ct. at 823; Camp v. Pitts, supra 411 U.S. at 141-2, 93 S. Ct. 1241.

It is clear in the instant controversy that neither the "substantial evidence" test nor de novo review are applicable. First, this Court is not reviewing an adjudicatory agency proceeding. Nor is it reviewing the findings of a hearing required to be on the record under 5 U.S. C. §§ 556 and 557. While the Court has held that for purposes of preliminary injunctive relief the FTC's promulgation of the LB Program in August, 1974, constituted rulemaking under section 4 of the A.P.A., 5 U.S.C. § 553, there is nothing in the Federal Trade Commission statute, 15 U.S.C. § 41 et seq., which requires such rulemaking to be on the record and accompanied by formal findings of fact. Secondly, this is a pre-enforcement proceeding, not an action to enforce non-adjudicatory agency action.¹⁴ Accordingly, the "substantial evidence" test and de novo review are equally inapposite to this litigation.

Therefore, whatever review is ultimately undertaken, it will be largely centered around the "arbitrary or capricious" test. In addition, plaintiffs' arguments that the LB Program violates statutory, constitutional and procedural provisions will require review under the standards provided in 5 U.S.C. § 706(2)(B), (C) and (D).¹⁵

Plaintiffs have challenged the FTC's adoption of the LB Program on, at least, six separate grounds. These include, inter alia, claims that: (1) the Commission exceeded its statutory authority in issuing its order of August 2, 1974, establishing the LB Program; (2) the LB Program is excessively burdensome given the high cost of compliance and the allegedly dubious value of the information to be collected; (3) the ambiguous and occasionally contradictory reporting instructions, when combined with the requirement of certifying reported data as true at the risk of criminal sanctions, deprive plaintiffs of their due process rights under the Fifth Amendment; (4) the reporting requirements constitute an unconstitutional taking of property because of the high cost of compliance and the allegedly substantial risks regarding public dissemination of confidential information; (5) the reporting requirements violate their Fourth Amendment rights to be free from unwarranted searches; and (6) the FTC's promulgation of the LB Program failed to comply with procedural requirements articulated in the A.P.A.

Issue number 1 is governed by the standard enunciated in 5 U.S.C. § 706(2)(C).¹⁶ Issues 3, 4, and 5 will all be controlled by the review standard contained in 5 U.S.C. § 706(2)(B).¹⁷ Issue number 6,¹⁸ will be controlled by 5 U.S.C. § 706(2)(D).

The remaining contention that the LB Program is unduly burdensome must be measured by the arbitrary or capricious standard. Although the ultimate standard of review on this issue is quite narrow, the Court must conduct a searching inquiry into the facts surrounding the FTC's actions. Overton Park, supra 401 U.S. at 415-6, 95 S.Ct. 814. See Bowman Transportation, Inc. v. Arkansas Best Freight System, Inc., 419 U.S. 281, 285, 95 S.Ct. 438, 42 L. Ed.2d 447 (1974). In making a determination as to whether the agency's action was arbitrary or capricious, "the court must consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment." Overton Park, supra 401...