Daugherty v. Sheer

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

)
MICHAEL J. DAUGHERTY, et al., )
)
Plaintiffs, )
)
v. ) Case No. 15-cv-2034 (TSC)
)
ALAIN H. SHEER, et al., )
)
Defendants. )
)

MEMORANDUM OPINION

Plaintiffs Michael Daugherty and LabMD, Inc. bring this Bivens action against Alain Sheer,

Ruth Yodaiken, and Carl Settlemyer, individuals employed by the Federal Trade Commission

(“FTC”), alleging that they are liable for violating, and conspiring to violate, Plaintiffs’ First,

Fourth, and Fifth Amendment rights. (Compl. ¶¶ 153–73). Defendants have moved to dismiss

under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). (ECF No. 13). For the reasons

stated herein, Defendants’ motion is GRANTED IN PART and DENIED IN PART.

I. BACKGROUND

The events of this case stretch from 2008 through the present. Throughout this time,

Defendants Sheer, Yodaiken, and Settlemyer worked for the FTC and investigated Plaintiffs

LabMD, Inc. and Daugherty, LabMD’s sole owner and chief executive officer, for acts that

potentially violated the FTC Act. (Compl. ¶ 1). In May 2008, LabMD was notified by Tiversa, a

cybersecurity firm seeking to sell its services to Plaintiffs, that a 1,718-page file containing the

personal and confidential health information of approximately 9,300 patients was available for

anyone to download on a peer-to-peer file sharing network. (Id. ¶ 48). LabMD then investigated

its own computers, located the peer-to-peer file sharing program on one of them, and deleted the

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program to prevent the ability for the file to be downloaded. (Id. ¶ 52).

Plaintiffs allege that Defendants learned of the shared file in spring 2009 and “should have

learned” at that time that LabMD was “the only source” of the file, meaning that the file had not

been downloaded or “spread anywhere on any peer-to-peer network.” (Id. ¶¶ 68–72 (emphasis in

original)). They further allege that, in retaliation for Plaintiffs’ refusal to contract with Tiversa for

data security services, Tiversa began to falsify data and create records showing that LabMD’s file

had spread and been downloaded by unknown individuals. (Id. ¶¶ 96–99). At some point during

these events, the FTC began investigating LabMD’s data security practices relating to this shared

file, and Plaintiffs allege that Defendants knowingly accepted and used Tiversa’s falsified records

to assist their investigation. (Id.). Plaintiffs further allege that Defendants agreed with each other

and with Tiversa that the firm would withhold from the FTC any exculpatory information about

LabMD during their investigation. (Id. ¶ 100). Plaintiffs allege that in furtherance of this goal,

Defendants worked with Tiversa to create a shell company to whom Tiversa would selectively give

records and which the FTC would then subpoena for those records, thereby avoiding the risk that

exculpatory information beneficial to Plaintiffs and harmful to Tiversa would be disclosed. (Id.

¶¶ 84–96, 104–05).

In early 2012, Plaintiffs allege that Daugherty “began to warn the public about the FTC’s

abuses” through “the press and social media and through a book.” (Id. ¶ 127). Plaintiffs allege

that Defendants escalated the intensity of their investigation, and ultimately recommended

commencing an enforcement proceeding, in retaliation for this public criticism. In particular,

Plaintiffs point to a September 7, 2012 interview Daugherty gave with an Atlanta newspaper,

following which Defendants “ramped up” their investigation, and the July 2013 release of a trailer

for Daugherty’s book The Devil Inside the Beltway, followed three days later by Defendant Sheer’s

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recommendation that an enforcement action be brought against LabMD. (Id. ¶¶ 127–32).

The FTC filed its administrative complaint against LabMD in August 2013. 1 Over two

years later, on November 19, 2015, an FTC administrative law judge issued an Initial Decision

dismissing the complaint after concluding that LabMD had not engaged in unfair acts that were

likely to cause substantial consumer injury under the FTC Act. 2 The next day, November 20,

2015, Plaintiffs filed their Complaint in this case. On July 29, 2016, the FTC issued an Opinion

reversing the ALJ’s decision and concluding that LabMD’s data security practices constituted an

unfair act within the meaning of the FTC Act. 3 Defendants have now moved to dismiss all claims

in this case. (ECF No. 13).

II. LEGAL STANDARD

A. Federal Rule 12(b)(1)

Federal courts are courts of limited jurisdiction and, as such, a district court “may not

exercise jurisdiction absent a statutory basis.” Exxon Mobil Corp. v. Allapattah Servs., Inc., 545

U.S. 546, 552 (2005); see also Fed. R. Civ. P. 12 (“If the court determines at any time that it lacks

subject-matter jurisdiction, the court must dismiss the action.”). “Limits on subject-matter

jurisdiction ‘keep the federal courts within the bounds the Constitution and Congress have

prescribed,’ and those limits ‘must be policed by the courts on their own initiative.’” Watts v. SEC,

482 F.3d 501, 505 (D.C. Cir. 2007) (quoting Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 583

(1999)). Such limits are especially important in the agency review context, where “Congress is

1
See Compl., In re LabMD, Inc., No. 9357 (F.T.C. Aug. 29, 2013), https://www.ftc.gov/sites/
default/files/documents/cases/2013/08/130829labmdpart3.pdf.
2
See Initial Decision, In re LabMD, Inc., No. 9357 (F.T.C. Nov. 19, 2015), https://www.ftc.gov/
system/files/documents/cases/151113labmd_decision.pdf.
3
See Opinion of the Commission, In re LabMD, Inc., No. 9357 (F.T.C. July 29, 2016),
https://www.ftc.gov/system/files/documents/cases/160729labmd-opinion.pdf.

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free to choose the court in which judicial review of agency decisions may occur.” Am. Petroleum

Inst. v. SEC, 714 F.3d 1329, 1332 (D.C. Cir. 2013) (internal quotation marks omitted). The law

presumes that “a cause lies outside [the court’s] limited jurisdiction” unless the party asserting

jurisdiction establishes otherwise. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377

(1994). Thus, the plaintiff bears the burden of establishing jurisdiction by a preponderance of the

evidence. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992); Shekoyan v. Sibley Int’l

Corp., 217 F. Supp. 2d 59, 63 (D.D.C. 2002).

In evaluating a motion to dismiss under Rule 12(b)(1) for lack of subject matter

jurisdiction, the court must “assume the truth of all material factual allegations in the complaint

and ‘construe the complaint liberally, granting plaintiff the benefit of all inferences that can be

derived from the facts alleged.’” Am. Nat’l Ins. Co. v. FDIC, 642 F.3d 1137, 1139 (D.C. Cir.

2011) (quoting Thomas v. Principi, 394 F.3d 970, 972 (D.C. Cir. 2005)). Nevertheless, “‘the court

need not accept factual inferences drawn by plaintiffs if those inferences are not supported by facts

alleged in the complaint, nor must the Court accept plaintiff’s legal conclusions.’” Disner v.

United States, 888 F. Supp. 2d 83, 87 (D.D.C. 2012) (quoting Speelman v. United States, 461 F.

Supp. 2d 71, 73 (D.D.C. 2006)). Further, under Rule 12(b)(1), the court “is not limited to the

allegations of the complaint,” Hohri v. United States, 782 F.2d 227, 241 (D.C. Cir. 1986), vacated

on other grounds, 482 U.S. 64 (1987), and “a court may consider such materials outside the

pleadings as it deems appropriate to resolve the question [of] whether it has jurisdiction to hear the

case,” Scolaro v. D.C. Bd. of Elections & Ethics, 104 F. Supp. 2d 18, 22 (D.D.C.2000) (citing

Herbert v. Nat’l Acad. of Scis., 974 F.2d 192, 197 (D.C. Cir. 1992)).

B. Federal Rule 12(b)(6)

A motion to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a claim tests the legal

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sufficiency of a complaint. Browning v. Clinton, 292 F.3d 235, 242 (D.C. Cir. 2002). “To survive

a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a

claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A claim

is plausible when it alleges sufficient facts to permit the court to “draw the reasonable inference

that the defendant is liable for the misconduct alleged.” Id. Thus, although a plaintiff may survive

a Rule 12(b)(6) motion even where “recovery is very remote and unlikely,” the facts alleged in the

complaint “must be enough to raise a right to relief above the speculative level.” Bell Atl. Corp. v.

Twombly, 550 U.S. 544, 555–57 (2007) (internal quotation marks omitted). Evaluating a 12(b)(6)

motion is a “context-specific task that requires the reviewing court to draw on its judicial

experience and common sense.” Iqbal, 556 U.S. at 679.

III. DISCUSSION

A. Subject Matter Jurisdiction

Defendants first argue that this court lacks subject matter jurisdiction to hear Plaintiffs’

claims because those claims may be brought only before the FTC in the agency’s administrative

proceedings. The Supreme Court held in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994),

that district courts lack jurisdiction to hear certain cases if “Congress has allocated initial review to

an administrative body [and] such intent is ‘fairly discernible in the statutory scheme.’” Id. at 207

(quoting Block v. Cmty. Nutrition Inst., 467 U.S. 340, 351 (1984)). To determine whether

Congress “intended to preclude initial judicial review,” courts look to “the statute’s language,

structure, and purpose, its legislative history, and whether the claims can be afforded meaningful

review.” Id. (internal citation omitted). The court must also consider “whether [a plaintiff’s]

claims are of the type Congress intended to be reviewed within this statutory structure.” Id. at 212.

Central to this question is whether the claims are “wholly ‘collateral’ to a statute’s review

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provisions and outside the agency’s expertise” and whether “a finding of preclusion could

foreclose all meaningful judicial review.” Id. at 212–13 (quoting Heckler v. Ringer, 466 U.S. 602,

618 (1984)); see also Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 489

(2010) (restating Thunder Basin principles).

1. Statutory Scheme

The court first considers whether Congress’s intent to require initial review of Plaintiffs’

claims by the FTC is “fairly discernible in the statutory scheme.” Thunder Basin, 510 U.S. at 207.

In the FTC Act, Congress directs the FTC to prevent persons, partnerships, or corporations “from

using unfair methods of competition in or affecting commerce and unfair or deceptive acts or

practices in or affecting commerce.” 15 U.S.C. § 45(a)(2). Upon finding that there is “reason to

believe” a corporation has engaged in conduct that violates the FTC Act, the FTC must issue a

complaint upon such corporation and hold a hearing to review evidence of the alleged unlawful

acts. 15 U.S.C. § 45(b). The charged entity has “the right to appear at the place and time so fixed

and show cause why an order should not be entered by the [FTC] requiring [it] to cease and desist

from the violation of the law so charged in said complaint.” Id. If the FTC concludes that the

corporation engaged in unlawful acts, it has the authority to issue a cease-and-desist order, and if

the charged party does not comply with the order, it may bring a civil action in U.S. district court

seeking an injunction and recovery of civil penalties. 15 U.S.C. §§ 45(b), (l), (m). The corporation

ordered to cease and desist its activities may obtain review from a U.S. Court of Appeals within

sixty days. 15 U.S.C. § 45(c).

This Circuit recently analyzed whether an analogous statutory scheme involving

administrative enforcement by the U.S. Securities and Exchange Commission precluded

jurisdiction for a constitutional challenge in district court. See Jarkesy v. SEC, 803 F.3d 9 (D.C.

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Cir. 2015). There, as here, the statute provided for a charged—or “aggrieved”—individual to seek

review in a court of appeals following adjudication before the agency, and for the reviewing court

to exercise “exclusive” jurisdiction to “affirm or modify and enforce or to set aside the order in

whole or in part.” Id. at 16 (quoting 15 U.S.C. § 78y(a)(3)); see also 15 U.S.C. § 45(d) (identical

language in FTC Act). After reviewing that statute’s details regarding the appellate review of the

agency’s decisions, the Circuit concluded that it was “fairly discernible that Congress intended to

deny [aggrieved respondents] an additional avenue of review in district court.” Jarkesy, 803 F.3d

at 17 (quoting Elgin v. Dep’t of Treasury, 132 S. Ct. 2126, 2134 (2012)) (alteration in Jarkesy).

The statutory schemes for the FTC’s and the SEC’s proceedings are also similar to those of the

Mine Safety and Health Administration considered by the Supreme Court in Thunder Basin. See

id. at 16 (comparing statutes).

As in Jarkesy, Plaintiffs here “do not seriously dispute that Congress meant to channel most

challenges to the [agency’s] administrative proceedings through the statutory review scheme.” 803

F.3d at 17. Therefore, applying the Circuit’s guidance in Jarkesy, the court finds that Congress

intended to allocate initial review of at least some claims to the FTC.

2. Wholly Collateral to the Agency’s Review

As in Jarkesy, Plaintiffs instead argue that their claims are not “of the type Congress

intended to be reviewed within this statutory structure.” 803 F.3d at 17 (quoting Thunder Basin,

510 U.S. at 212). Addressing this argument requires the court to proceed to the next phase of the

Thunder Basin framework—determining whether the claims are “wholly ‘collateral’ to a statute’s

review provisions and outside the agency’s expertise.” Thunder Basin, 510 U.S. at 212–13. In

Heckler, the Supreme Court explained that a plaintiff’s claims are not “collateral” if “at bottom”

they are an attempt to reverse the agency’s decisions. 466 U.S. at 614, 618. Similarly, in Elgin,

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the Court considered whether the plaintiffs’ constitutional claims were merely “the vehicle by

which they seek to reverse” the agency’s decisions. 132 S. Ct. at 2139–40. Additionally, in

Jarkesy, this Circuit concluded that the plaintiffs’ constitutional challenges were not collateral

because they were “inextricably intertwined with the conduct of the very enforcement proceeding

that statute grants the [agency] the power to institute and resolve as an initial matter.” 803 F.3d at

23 (quoting Jarkesy v. SEC, 48 F. Supp. 3d 32, 38 (D.D.C. 2014)). The Jarkesy court further

stated that “[i]t is difficult to see how [the claims] can still be considered collateral to any

Commission orders or rules from which review might be sought, since the ALJ and the

Commission will, one way or another, rule on those claims and it will be the Commission’s order

that [the plaintiff] will appeal.” Id. (internal quotation omitted) (first alteration in original).

Here, the parties disagree as to whether Plaintiffs’ Bivens claims against individual FTC

investigators are “inextricably intertwined” with their objections to the FTC’s enforcement

proceedings already raised directly before the FTC. In the court’s view, Bivens claims pose a

distinct question from the one addressed by the Circuit in Jarkesy because Plaintiffs’ claims are

inherently different from those that they may have—and did—bring before the FTC. Plaintiffs

allege that specific FTC employees conspired to violate Plaintiffs’ rights and caused monetary

injury during the course of their investigation and enforcement proceeding. In order to seek

redress for these injuries, Plaintiffs have brought their Bivens claims to this court because they

simply were unable to do so before the agency. The remedy sought by Plaintiffs is not a reversal,

or even reconsideration, of the FTC’s decision, as the Supreme Court found dispositive in Elgin

and Heckler. If Plaintiffs sought reversal or reconsideration, that remedy would clearly fall within

the FTC’s own jurisdiction, or within the court of appeal’s “exclusive” jurisdiction upon review.

See 15 U.S.C. § 45(b)–(d). However, the FTC Act does not authorize the agency to award

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monetary damages for, much less even consider, the allegedly tortious actions of agency

employees committed during the investigation or enforcement proceeding. See 15 U.S.C. § 45(b)

(providing FTC’s sole authority to issue cease-and-desist orders). Indeed, the FTC Act provides no

path for an individual to affirmatively challenge the acts of FTC officials within the administrative

process, and any such challenges must be raised as defenses. If all claims were required to be

brought before the agency, an aggrieved individual would be blocked from ever raising their tort

claims if the FTC ultimately decided not to pursue adjudication.

The legal challenge in this case therefore differs significantly from that in Thunder Basin,

in which the plaintiff sought pre-enforcement injunctive relief to halt the agency’s potential

enforcement action, see 510 U.S. at 205–06, and in Jarkesy, where the plaintiffs similarly sought

emergency injunctive relief to block a scheduled administrative hearing, see 48 F. Supp. 3d at 35–

36. While Defendants attempt to blur the line between this case and Jarkesy by arguing that

plaintiffs in both cases “assert purported constitutional challenges to the grounds for and conduct

of an on-going administrative proceeding,” (Def. Mem. at 9), this ignores the basis of Plaintiffs’

Bivens claims and the monetary remedy sought for the damage to their business operations. It is

true that Plaintiffs may raise similar allegations as affirmative defenses against the FTC, though

only in an attempt to show cause why they should not be subject to an order from the FTC, as the

statute gives them the right to do. See 15 U.S.C. § 45(b). However, here Plaintiffs only seek

monetary relief for officials’ conduct during the investigation. That the challenged acts occurred

during the FTC investigation and proceeding does not, in this court’s view, determine whether the

claims are collateral to the agency’s review. Indeed, nothing in the FTC Act or the relevant case

law suggests that a claim for monetary damages would be akin to those claims that prior courts

have determined are not “collateral” to the agency’s review, i.e. those seeking to circumvent or

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reverse an agency’s administrative decision. Therefore, the court finds that Plaintiffs’ Bivens

claims are wholly collateral to their ongoing enforcement proceedings.

3. Meaningful Judicial Review

Finally, in determining whether Plaintiffs’ claims must be adjudicated by the agency, this

court must also consider if “a finding of preclusion could foreclose all meaningful judicial review.”

Thunder Basin, 510 U.S. at 212–13. The court concludes that dismissing Plaintiffs’ claims would

indeed foreclose all judicial review, meaningful or otherwise. In Jarkesy, the Court determined

that the SEC was competent to decide the plaintiffs’ constitutional challenges, including a facial

non-delegation challenge to the underlying statute, because even if the agency could not declare a

statute unconstitutional, a reviewing court of appeals could do so in the course of determining

whether to uphold or reserve the agency’s order. 803 F.3d at 19 (citing Elgin, 132 S.Ct. at 2136–

37). However, these cases are distinguishable because of the remedy Plaintiffs seek here. In cases

such as Jarkesy and Thunder Basin, the plaintiffs sought a reversal of or injunction against an

agency’s enforcement proceedings by claiming that the agency had no constitutional authority to

proceed with its enforcement—a question that appellate courts can readily analyze upon review of

an agency’s order. Here, however, Plaintiffs seek monetary damages completely apart from the

FTC’s ultimate decision to issue an order against them, and whether to award damages is not an

issue that an appellate court can or would consider on an appeal from an FTC order. Therefore,

because Plaintiffs’ request for damages will not be considered before the agency or on appeal of

the agency’s order, the court finds that dismissal here would result in the deprivation of meaningful

judicial review.

In sum, based on its review of the framework laid out in Thunder Basin and recently

analyzed by this Circuit in Jarkesy, this court concludes that Plaintiffs’ claims are collateral to the

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ongoing administrative proceedings before the FTC and dismissal would preclude all meaningful

judicial review of these claims. Therefore, the court finds that it has subject matter jurisdiction to

continue consideration of Plaintiffs’ case.

4. Claim Preclusion

Defendants further argue that the question of whether this court has jurisdiction has already

been fully litigated before and decided in LabMD, Inc. v. FTC, 776 F.3d 1275 (11th Cir. 2015), and

this court is therefore precluded from reconsidering the issue. In this Circuit, the “doctrine of issue

preclusion, or collateral estoppel, bars ‘successive litigation of an issue of fact or law actually

litigated and resolved’ that was ‘essential to the prior judgment, even if the issue recurs in the

context of a different claim.’” Nat’l Ass’n of Home Builders v. EPA, 786 F.3d 34, 41 (D.C. Cir.

2015) (quoting Taylor v. Sturgell, 553 U.S. 880, 892 & n.5 (2008)); see also Yamaha Corp. of Am.

v. United States, 961 F.2d 245 (D.C. Cir. 1992) (laying out three factors for courts to evaluate issue

preclusion). Courts also apply this doctrine to “threshold jurisdictional issues.” Nat’l Ass’n of

Home Builders, 786 F.3d at 41.

In LabMD, Inc. v. FTC, the Eleventh Circuit found that the district court lacked subject

matter jurisdiction over LabMD’s Administrative Procedure Act (“APA”) claim against the FTC

for alleged ultra vires conduct because neither the FTC’s filing of an administrative complaint nor

its denial of LabMD’s motion to dismiss were final agency actions reviewable under the APA. See

776 F.3d at 1277–79. The Circuit court then determined that LabMD’s claims were unreviewable

even apart from the APA, as the constitutional claims brought against the FTC seeking a

preliminary and permanent injunction against continued FTC enforcement were required to be

brought before the agency under Thunder Basin. Id. at 1279–80; see also Compl. at 38–40, Case

No. 14-cv-0810 (N.D. Ga. Mar. 20, 2014) (requesting preliminary and permanent injunctive relief).

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 Unlike in LabMD, Inc. v. FTC, Plaintiffs here bring Bivens-type constitutional tort claims

against three agency employees, seeking monetary damages. While Defendants raise similar

jurisdictional arguments to those raised in the district court and at the Eleventh Circuit, this court

concludes that issue preclusion does not bar consideration of the jurisdictional issues here, as the

precise issue of jurisdiction over Plaintiffs’ Bivens claims has not been actually litigated by the

parties in a prior case. See Yamaha Corp., 961 F.2d at 254 (first factor to evaluate is whether “the

same issue now being raised [was] contested by the parties and submitted for judicial

determination in the prior case”). While many of the underlying facts overlap with the prior case,

and Defendants raise similar jurisdictional arguments, here Plaintiffs’ claims and the named

defendants are different from that earlier case. Therefore, this court is not barred by issue

preclusion from determining that it has subject matter jurisdiction over the present case.

B. Sufficiency of Plaintiffs’ Bivens Claims

In determining whether Plaintiffs have stated Bivens claims, the court must first “identify

the exact contours of the underlying right[s] said to have been violated” and determine “whether

the plaintiff[s] ha[ve] alleged a deprivation of a constitutional right at all.” County of Sacramento

v. Lewis, 523 U.S. 833, 841 n.5 (1998).

1. First Amendment

In Counts I through III, Plaintiffs allege that Defendants violated their First Amendment

rights, including freedom of speech, freedom of the press, and the right to petition the government

for redress of grievances. (Compl. ¶¶ 153–61). While the Supreme Court has not expressly held

that a plaintiff may seek monetary damages for First Amendment violations, courts in this Circuit

have concluded that such a remedy is available, particularly in the case of retaliatory acts. See

Patterson v. United States, 999 F. Supp. 2d 300, 307–11 (D.D.C. 2013) (collecting cases); Navab-

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Safavi v. Broad. Bd. of Governors, 650 F. Supp. 2d 40, 66 (D.D.C. 2009) (retaliatory prosecution);

Dellums v. Powell, 566 F.2d 167, 194–96 (D.C. Cir. 1977) (retaliatory arrest).

a. Elements of the Claim

To establish a First Amendment violation, Plaintiffs must allege “(1) that [they] engaged in

protected conduct, (2) that the government ‘took some retaliatory action sufficient to deter a person

of ordinary firmness in plaintiff[s’] position from speaking again;’ and (3) that there exists ‘a

causal link between the exercise of a constitutional right and the adverse action taken against

[them].’” Doe v. District of Columbia, 796 F.3d 96, 106 (D.C. Cir. 2015) (quoting Aref v. Holder,

774 F. Supp. 2d 147, 169 (D.D.C. 2011)). For the third element, causation “may be inferred—

especially at the pleading stage—when the retaliatory act follows close on the heels of the

protected activity.” Smith v. De Novo Legal, LLC, 905 F. Supp. 2d 99, 104 (D.D.C. 2012). Indeed,

the D.C. Circuit “has held that a close temporal relationship may alone establish the required

causal connection,” Singletary v. District of Columbia, 351 F.3d 519, 525 (D.C. Cir. 2003), if “the

two events are ‘very close’ in time,” Woodruff v. Peters, 482 F.3d 521, 529 (D.C. Cir. 2007)

(quoting Clark Cnty. Sch. Dist. v. Breeden, 532 U.S. 268, 273–74 (2001)).

Plaintiffs alleges that in early 2012 Daugherty “began to warn the public about the FTC’s

abuses (orchestrated by Sheer and Yodaiken) through the press and social media and through a

book.” (Compl. ¶ 127). Specifically, Plaintiffs state that Daugherty criticized the FTC in a

September 2012 interview with the Atlantic Business Chronicle, and on July 19, 2013, he posted

on the internet a trailer for his book, The Devil Inside the Beltway, about his experience with Sheer,

Yodaiken, and others at FTC. (Id. ¶¶ 128, 131). Plaintiffs also allege that Sheer and Yodaiken

“ramped up their investigative efforts against” them immediately after Daugherty’s interview in

September 2012, and then three days after Daugherty posted the trailer for his book, on July 22,

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2013, Sheer recommended that an enforcement action be commenced against Plaintiffs. (Id.

¶¶ 129–30, 132). Given the close proximity in time between Daugherty’s activity criticizing the

FTC officials and the FTC’s decisions with regard to Plaintiffs, the court finds that Plaintiffs have

articulated sufficient factual allegations to support the elements of a First Amendment claim

against Sheer and Yodaiken.

However, Plaintiffs have not alleged any facts supporting a claim against Defendant

Settlemyer for violating their First Amendment rights. With respect to Settlemyer, Plaintiffs plead

only that he knew or should have known that the evidence collected from Tiversa was unlawfully

obtained, falsified, or otherwise not trustworthy. (See Compl. ¶¶ 1, 66–71, 82–86, 96–100, 103–

04, 118–19 (allegations involving Settlemyer)). Because Plaintiffs’ Bivens claims are founded on

an allegation that government employees’ personal conduct violated their rights, “[t]he complaint

must at least allege that the defendant federal official was personally involved in the illegal

conduct.” Simpkins v. D.C. Gov’t, 108 F.3d 366, 369 (D.C. Cir. 1997) (citing Tarpley v. Greene,

684 F.2d 1, 9–11 (D.C. Cir. 1982)). Having failed to allege any facts with regard to Settlemyer’s

knowledge of Plaintiffs’ protected activity or his actions following that activity, Plaintiffs have

failed to state a claim against him.

At this stage of the litigation, accepting Plaintiffs’ allegations as true and resolving all

possible inferences in their favor, the court finds that Plaintiffs’ have stated a plausible claim that

Defendants Sheer and Yodaiken, but not Settlemyer, violated Plaintiffs’ First Amendment rights.

b. Special Factors Counseling Hesitation

The Supreme Court in Bivens recognized a cause of action for monetary damages in part

because “no special factors counsel[led] hesitation in the absence of affirmative action by

Congress.” Bivens v. Six Unknown Named Agents of Fed. Bureau of Narcotics, 403 U.S. 388, 396

14
(1971). In their Bivens analyses, courts must therefore determine whether “special factors counsel

hesitation” against recognizing a plaintiff’s claim for monetary damages. See, e.g., Meshal v.

Higgenbotham, 804 F.3d 417, 420–22 (D.C. Cir. 2015) (discussing the role of special factors in

Bivens cases). One such factor is “whether an alternative remedial scheme is available.” Id. at 425

(citing Wilkie v. Robbins, 551 U.S. 537, 550 (2007)). In Bush v. Lucas, 462 U.S. 367 (1983), for

example, the Supreme Court declined to recognize a federal employee’s Bivens claim alleging First

Amendment violations because Congress had provided a comprehensive scheme for monetarily

redressing such allegations, and indeed the plaintiff had already been awarded monetary damages

through that administrative scheme. Id. at 371, 389–90.

Defendants argue that the FTC Act’s administrative process, as described above in Section

III.A.1, creates such an alternative scheme because it “permits regulated parties to protect their

constitutional and other interests.” (Def. Mem. at 20). However, the mere existence of an

administrative scheme is not enough to preclude consideration of a Bivens claim; the court must

consider whether Congress “created a comprehensive scheme that was specifically designed to

provide full compensation to” the individuals whose constitutional rights were violated. Bush, 462

U.S. at 390 (Marshall, J., concurring). As discussed above in Sections III.A.2 and III.A.3, the

court finds nothing in the FTC Act that permits an aggrieved party to bring a tort claim to the FTC,

as any constitutional arguments may only be raised as defenses once a complaint is filed.

Moreover, the FTC has only the authority to issue or not issue a cease-and-desist order, and has no

power to award monetary damages. Therefore, the court has little difficulty concluding that in

enacting the FTC Act, Congress did not create a comprehensive scheme designed to provide

compensation for Plaintiffs’ claims here, and there are no other special factors that might persuade

the court to hesitate in recognizing Plaintiffs’ claims.

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 c. Statute of Limitations

With respect to Plaintiffs’ First Amendment claims, Defendants argue that the claims

against Yodaiken and Sheer must be dismissed because the statute of limitations expired before

Plaintiffs brought this suit. Defendants contend that this court should apply a three-year statute of

limitations, as this is the time frame within which tort suits must be brought under D.C. Code § 12-

301(8), and courts should “ordinarily look to analogous provisions in state law as a source of a

federal limitations period.” Doe v. DOJ, 753 F.2d 1092, 1444 (D.C. Cir. 1985). Although the

Complaint plainly states that early retaliatory acts were taken following a September 2012 news

article (see Compl. ¶¶ 128–30), Plaintiffs—for reasons that are unclear to the court—misstate their

own Complaint and argue in response that their earliest allegations involving retaliation are in

September 2014, so the filing of their Complaint in November 2015 was well within the three-year

period. This response is without merit, as it is based on Plaintiffs’ incorrect recitation of the facts

alleged in their own Complaint.

However, the courts notes that Plaintiffs frame the alleged retaliation as a series of ongoing

acts, claiming that Defendants increased the intensity of the investigation in 2012 and 2013, and

later in 2013 elevated the matter to an enforcement proceeding following additional public

criticism by Daugherty. (See Compl. ¶¶ 128–32). As a result, though neither party articulated it in

their briefs, the court is inclined to apply the “continuing tort doctrine” to Plaintiffs’ Bivens claims.

Under this doctrine, “[w]hen a tort involves continuing injury, the cause of action accrues, and the

limitation period begins to run, at the time the tortious conduct ceases.” Page v. United States, 729

F.2d 818, 821 (D.C. Cir. 1984). In Whelan v. Abell, 953 F.2d 663 (D.C. Cir. 1992), for example,

the D.C. Circuit wrote that “a lawsuit is a continuous, not an isolated event, because its effects

persist from the initial filing to the final disposition of the case. . . . A defendant subject to a

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lawsuit is likely to suffer damage not so much from the initial complaint but from the cumulative

costs of defense and the reputational harm caused by an unresolved claim.” Id. at 673. The case at

bar appears to be sufficiently analogous for the court to conclude that the statute of limitations

period only began to run when Defendants’ alleged retaliatory acts ended. Taking the July 2013

date on which Sheer recommended commencement of an enforcement action as the earliest

possible date for the end of the retaliation, Plaintiffs’ claims were filed eight months prior to the

expiration of the three-year window proposed by Defendants. The court therefore concludes that,

even in the absence of a precise calculation for when Plaintiffs’ window to file began or ended,

Plaintiffs filed their Complaint within that window.

In sum, the court finds that Plaintiffs have plausibly stated First Amendment claims for

which they may seek monetary damages against Sheer and Yodaiken, and neither consideration of

special factors nor the statute of limitations preclude further review.

2. Fourth Amendment

In Count IV, Plaintiffs allege that Defendants violated their Fourth Amendment rights.

(Compl. ¶¶ 162–64). The Fourth Amendment guards against “unreasonable searches and seizures”

of individuals’ “persons, houses, papers, and effects.” U.S. Const. amend. IV. Plaintiffs’

Complaint does not articulate what, if anything, was unlawfully and unreasonably searched or

seized, and how Defendants participated in the unlawful search or seizure. Indeed, the Complaint

appears to be completely devoid of facts which could plausibly support a Fourth Amendment

claim. Moreover, Plaintiffs failed to respond to Defendants’ argument that they alleged no facts to

support such a claim. (See Pl. Mem. at 29–32 (responding only to Defendants’ First Amendment

arguments)). Because Plaintiffs appear to have conceded this issue, and the court can identify

nothing in the Complaint to support a Fourth Amendment claim, Defendants’ motion to dismiss is

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GRANTED as to Count IV.

3. Fifth Amendment

In Counts V and VI, Plaintiffs allege that Defendants violated their procedural and

substantive due process rights in violation of the Fifth Amendment. (Compl. ¶¶ 165–70).

a. Procedural Due Process

“A procedural due process violation occurs when an official deprives an individual of a

liberty or property interest without providing appropriate procedural protections.” Abdelfattah v.

U.S. Dep’t of Homeland Sec., 787 F.3d 524, 538 (D.C. Cir. 2015) (quoting Atherton v. D.C. Office

of the Mayor, 567 F.3d 672, 689 (D.C. Cir. 2009)). This Circuit has noted that “the due process

clause requires, at a minimum, that the government provide notice and some kind of hearing before

final deprivation of a property interest.” Propert v. District of Columbia, 948 F.2d 1327, 1331

(D.C. Cir. 1991). Plaintiffs do not articulate in their Complaint or Opposition what interest,

whether liberty or property, has been deprived without necessary process; however, construing

their allegations liberally, the court finds that Plaintiffs appear to allege that because LabMD

ultimately closed due to the expenses of the investigation and enforcement proceedings, Daugherty

was deprived of the ability to pursue his chosen profession. (See Compl. ¶ 152).

The Supreme Court has held that “the right to hold specific private employment and to

follow a chosen profession free from unreasonable governmental interference comes within the

‘liberty’ and ‘property’ concepts of the Fifth Amendment.” Greene v. McElroy, 360 U.S. 474, 492

(1959); Kartseva v. Dep’t of State, 37 F.3d 1524, 1529 (D.C. Cir. 1994) (stating that Greene

recognized a constitutional “right to follow a chosen trade or profession”). To state a claim for the

deprivation of this right, Plaintiffs must allege that “the government formally debar[red] [them]

from certain work or implement[ed] broadly preclusive criteria that prevent[ed] pursuit of a chosen

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career.” Abdelfattah, 787 F.3d at 538 (quoting Trifax Corp. v. Dist. of Columbia, 314 F.3d 641,

643–44 (D.C. Cir. 2003)). This Circuit has found that “this ‘liberty concept’ protects corporations

as well as individuals.” Trifax Corp., 314 F.3d at 643 (citing Old Dominion Dairy Prods., Inc. v.

Sec’y of Def., 631 F.2d 953, 961–62 (D.C. Cir. 1980)).

Plaintiffs allege that “[t]hrough the Federal Defendants’ abuses of power and disregard for

the core constitutional rights of LabMD and Daugherty, the Federal Defendants have put LabMD

out of business and laid it to rest. In addition, they have deprived Daugherty of his right to make a

living from an extremely valuable asset that he built from the ground up.” (Compl. ¶ 152).

Plaintiffs also allege that Defendants’ investigation of LabMD “caus[ed] [its] insurance carriers to

cancel LabMD’s insurance coverage and caus[ed] crippling economic hardship and reputational

harm.” (Id. ¶ 116). As of September 2012, three years into Defendants’ investigation but before

the alleged “ramp[ing] up,” Plaintiffs claim they had already spent approximately $500,000 to

defend themselves and comply with the investigative demands. (Id. ¶¶ 128, 130). They further

allege that during the investigation and enforcement proceedings, Defendant Sheer “punish[ed]

LabMD” when he “filed or caused to be filed burdensome, duplicative, and oppressive discovery

requests.” (Id. ¶ 143). Plaintiffs further allege throughout their Complaint that all three

Defendants were involved in using falsified evidence and refusing to acknowledge exculpatory

evidence in their possession. (See, e.g., Compl. ¶¶ 118, 133).

Absent from Plaintiffs’ Complaint, however, is any allegation that they were deprived of

any process to which they entitled. A procedural due process claim is inherently tethered to an

allegation that a plaintiff was not given “the opportunity to be heard ‘at a meaningful time and in a

meaningful manner’” in connection with the deprivation of their liberty or property interest.

Mathews v. Eldridge, 424 U.S. 319, 333 (1976). Therefore, to state such a claim, Plaintiffs must

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allege as a basic element that Defendants acted without due process of law. See Propert, 948 F.2d

at 1331. Not only do Plaintiffs not state what process they were entitled to, but they also fail to

articulate why the hearings held by the FTC throughout the enforcement proceedings were

insufficient. (See Compl. ¶ 126 (referencing two hearings)). 4

At a minimum, a complaint must “give the defendant fair notice of what the . . . claim is

and the grounds upon which it rests.” Twombly, 550 U.S. at 555 (quoting Conley v. Gibson, 355

U.S. 41, 47 (1957)). As the court noted above, Plaintiffs failed to expressly articulate specifically

what property or liberty interested they allege was deprived, or what process they were due. If the

court construes their Complaint liberally, it can discern an allegation relating to a liberty interest to

pursue a chosen profession, but Plaintiffs have simply not alleged any facts to support their claim

that this deprivation occurred without due process of law. Therefore, the court concludes that

Plaintiffs have failed to state a claim for violation of their procedural due process rights, and

Defendants’ motion is GRANTED as to Count V.

b. Substantive Due Process

The Fifth Amendment additionally protects individuals when their property or liberty

interests are deprived not because of a “denial of fundamental procedural fairness . . . [but from]

the exercise of power without any reasonable justification in the service of a legitimate

governmental objective.” County of Sacramento, 523 U.S. at 845–46. However, only

“deprivations of liberty caused by ‘the most egregious official conduct,’ . . . may violate the Due

Process Clause.” Chavez v. Martinez, 538 U.S. 760, 774 (2003) (plurality opinion) (quoting Lewis,

523 U.S. at 846). Because the path to recovery is narrower under a substantive due process theory,

4
In the FTC’s 2016 Opinion, it also described an evidentiary hearing that began in May 2014 and
was completed in July 2015 in which Plaintiffs called numerous expert witnesses. See Opinion, In
re LabMD, Inc., No. 9357 (F.T.C. July 29, 2016).

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the court must consider “the threshold question [of] whether the behavior of the governmental

officer is so egregious, so outrageous, that it may fairly be said to shock the contemporary

conscience.” Lewis, 523 U.S. at 847 n.8; see also Abdelfattah, 787 F.3d at 540. As discussed

above, neither Plaintiffs’ Complaint nor Opposition articulate precisely what interest has been

deprived. Even assuming that Plaintiffs intended to allege a deprivation of the above-described

liberty interest in pursuing a profession, Plaintiffs do not to allege any facts that are so egregious as

to shock the conscience. Simply stated, Plaintiffs allege that Defendants knowingly used falsified

evidence in the course of their investigation and ignored exculpatory evidence. If true, such

actions may certainly be considered unethical and improper, but do not rise to the level of “the

most egregious official conduct.” Abdelfattah, 787 F.3d at 540. The court therefore concludes that

Plaintiffs have failed to state a claim for a substantive due process violation, and so Defendants’

motion is GRANTED on Count VI.

4. Civil Conspiracy under Federal Common Law

Finally, in Count VII, Plaintiffs allege that Defendants engaged in a civil conspiracy to

deprive Plaintiffs of their constitutional rights. (Compl. ¶¶ 171–73). In this Circuit, “[a] civil

conspiracy is a combination of two or more persons acting in concert to commit an unlawful act, . .

. the principal element of which is an agreement between the parties to inflict a wrong against or

injury upon another, and an overt act that results in that damage.” Lyles v. Hughes, 83 F. Supp. 3d

315, 323 (D.D.C. 2015) (quoting Graves v. United States, 961 F. Supp. 314, 320 (D.D.C. 1997)).

Therefore, “an essential element of a conspiracy claim is an allegation that the parties to the

conspiracy come to an agreement or meeting of the minds.” Id. (internal quotation omitted). A

plaintiff must offer more than conclusory allegations that there was an agreement between

defendants. See id.; see also Bush v. Butler, 521 F. Supp. 2d 63, 68–69 (D.D.C. 2007) (dismissing

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civil conspiracy claim because “plaintiff merely concludes that there was an agreement among the

defendants to deprive him of access to the courts”).

Defendants argue that Plaintiffs have not alleged the elements of a conspiracy claim;

Plaintiffs did not respond to this argument in their Opposition. The court agrees with Defendants,

and finds that, even accepting all of Plaintiffs’ allegations as true, they fail to allege facts to show

the existence of an agreement among the Defendants to deprive Plaintiffs of their constitutional

rights. Instead, Plaintiffs allege the following: Defendants “expressly or tacitly agreed and

conspired in 2009 that” Tiversa would “provide whatever evidence the FTC needed in its

investigation and enforcement of companies on the List, even if the evidence was fraudulent,”

“provide the FTC false evidence of source and spread,” and “withhold from production to the FTC

and third parties documents and things that were exculpatory to LabMD and Daugherty,” and they

further “agreed and conspired in 2009 to hurt, if not destroy, LabMD and to deprive Daugherty of

his livelihood and property.” (Compl. ¶¶ 96, 97, 100, 101). Such conclusory statements do not

allege with any specificity the “events, conversations, or documents indicating there was an

agreement between the defendants to violate [their] rights.” Butler, 521 F. Supp. 2d at 68–69.

Because Plaintiffs appear to have conceded this claim, and the court can discern no allegations

from the Complaint that plausibly support a conspiracy claim, the court GRANTS Defendants’

motion on Count VII.

C. Absolute and Qualified Immunity

1. Absolute Immunity (Sheer)

Defendants ask this court to find that during the alleged events Sheer was entitled to

absolute immunity from suit. The Supreme Court has recognized that certain government officials

have special functions requiring full exemption from liability, one of which is when they “are

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responsible for the decision to initiate or continue a proceeding subject to agency adjudication.”

Butz v. Economou, 438 U.S. 478, 516 (1978). Defendants argue that Sheer was entitled to absolute

immunity with regard to Plaintiffs’ “allegations that he recommended the enforcement action, then

served discovery burdening plaintiffs.” (Def. Mem. at 46). However, Defendants “bear[] the

burden of showing that such immunity is justified for the function in question,” Burns v. Reed, 500

U.S. 478, 486 (1991), and they have failed to present the court with any information about Sheer’s

job responsibilities and precise role in the alleged activity to determine whether he might be

entitled to absolute immunity. Pending further development of the factual record, the court will

deny Defendants’ motion to dismiss without prejudice on this ground.

2. Qualified Immunity (All Defendants)

Defendants also request that this court find that all Defendants are immune from suit

because they possess qualified immunity. Government officials may be protected by qualified

immunity only if “their conduct does not violate clearly established statutory or constitutional

rights of which a reasonable person would have known.” Harlow v. Fitzgerald, 457 U.S. 800, 818

(1982). In Saucier v. Katz, 533 U.S. 194 (2001), the Supreme Court established a two-step

analysis for qualified immunity, including “first, whether the alleged facts show that the

individual’s conduct violated a statutory or constitutional right, and, second, whether that right was

clearly established at the time of the incident.” Atherton v, 567 F.3d at 689 (citing Saucier, 533

U.S. at 200). In Pearson v. Callahan, 555 U.S. 223 (2009), the Court later clarified that district

courts have discretion to decide “which of the two prongs of the qualified immunity analysis

should be addressed first in light of the circumstances in the particular case at hand.” Id. at 236.

To determine if a right was clearly established, the court considers whether “at the time of the

challenged conduct, ‘[t]he contours of [a] right [are] sufficiently clear’ that every ‘reasonable

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official would have understood that what he is doing violates that right.’” Ashcroft v. al-Kidd, 563

U.S. 731, 741 (2011) (quoting Anderson v. Creighton, 483 U.S. 635, 640 (1987)).

In the court’s view, Plaintiffs’ First Amendment rights to criticize the actions of the federal

government without fear of government retaliation are as clearly established as can be, and a

serious escalation of an agency’s investigation or enforcement against Plaintiffs for publicly

criticizing the agency would appear to violate that clearly established constitutional right.

Therefore, the court DENIES Defendants’ motion to dismiss based on qualified immunity.

However, as discussed above, the court finds that a greater factual record is required before it can

determine the precise nature of Sheer’s and Yodaiken’s activities and whether they did in fact

clearly violate Plaintiff’s First Amendment rights, and so the court declines to conclusively

determine whether Defendants Sheer or Yodaiken are entitled to qualified immunity in this suit.

Because the court determines that the doctrines of absolute or qualified immunity do not

bar Plaintiffs’ First Amendment claims at this stage of the litigation, the court therefore DENIES

Defendants’ motion on Counts I, II, and III as to Sheer and Yodaiken and GRANTS Defendants’

motion on these Counts as to Settlemyer.

IV. CONCLUSION

For the foregoing reasons, Defendants’ motion to dismiss is GRANTED IN PART and

DENIED IN PART.

Date: March 31, 2017

Tanya S. Chutkan
TANYA S. CHUTKAN
United States District Judge

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