The Federal Trade Commission (FTC) has come up with some new tricks in recent years, but few have been more notable than its apparent decision to focus civil enforcement efforts not just against corporate entities, but against the individual executives who are allegedly responsible for unlawful conduct.
While the FTC Act always provided the Commission with this tool, individual liability had long been reserved for situations where the entity and the individual are difficult, if not impossible to distinguish (e.g., a sole proprietorship where the executive made all of the allegedly harmful decisions). More recently, the Commission has sought to hold individuals to account at far bigger enterprises, including public companies with many layers of decisionmaking. This change in focus began during the first Trump Administration, but took flight under the leadership of FTC Chairwoman Lina Khan. Accordingly, the FTC now routinely asks companies under investigation to name-names, that is, to identify individuals with responsibility for relevant business decisions.
While the FTC has shown few limits to its appetite for naming individuals, often refusing to consider well-established caselaw from the past decade, a new federal court ruling casts renewed doubt on the Commission’s ability to continue bringing claims against corporate management, holding that an executive is not automatically liable for his or her company’s practices just by virtue of being in charge. We hope the FTC takes careful note of the facts below:
Background
Meta is currently being sued by dozens of state attorneys general, government agencies, school districts, and personal injury plaintiffs (but, notably, not the FTC) for the platform’s alleged negative health effects on young users. Unlike the majority of FTC cases that settle through negotiated consent decrees, the case against Meta is proceeding in federal court, providing a court with the rare opportunity to rule on substance of an individual executive liability claim. The federal judge overseeing the case in the Northern District of California recently granted CEO Mark Zuckerberg’s motion to dismiss all claims brought against him for his role as a corporate officer at Meta.
The Order Granting Zuckerberg’s Motion to Dismiss
Under the state laws giving rise to plaintiffs’ claims, the court held that a corporate officer can be held personally liable for company actions if they “take part in the commission of the act or if they specifically directed the particular act to be done, or participated or cooperated therein.” As the CEO of Meta, plaintiffs alleged that Zuckerberg directly participated in Meta’s supposedly tortious conduct by (i) maintaining control over Meta from both a design and shareholder standpoint; (ii) being aware of safety risks that platform engagement posed to youth users; (iii) denying resource allocations to child safety and wellbeing; and (iv) making numerous public representations about the platform’s safety.
The court ruled that these arguments of “direct participation” failed because the wrong at issue was Meta’s fraudulent and negligent misrepresentation and concealment of the addictive platform design and its risks. To establish liability for Zuckerberg, plaintiffs must have alleged that he directed, sanctioned, or participated in Meta’s concealment of this information.
Zuckerberg’s Allegedly Misleading Affirmative Statements
First, plaintiffs alleged that Zuckerberg’s misleading affirmative statements qualify as direct participation in tortious misrepresentation and concealment. However, the court held that “misleading” statements on their own do not suffice to show the CEO’s participation in alleged fraudulent concealment, finding that there is no allegation that Zuckerberg ever directed an employee to conceal or suppress information. As a result, this argument failed to tie plaintiffs’ allegations to the misrepresentation theories.
Zuckerberg’s Alleged Control over Meta’s Social Media Products
Second, plaintiffs alleged that Zuckerberg exercised control over Meta’s social media products. The court held that control alone is insufficient to establish corporate officer participation, reasoning that to hold otherwise would “dissolve the distinction between a chief executive and the corporation.” The court went on, noting that under plaintiffs’ theory, Zuckerberg could also be held liable for not disclosing any negative internal report that came cross his desk.
Zuckerberg’s Alleged Awareness of Meta’s Safety Risks
Third, plaintiffs alleged that Zuckerberg failed to prevent Meta’s tortious conduct. While Zuckerberg allegedly rejected certain corporate initiatives related to teen wellbeing (such as decreased notifications or bans on plastic surgery face filters), the court found that these decisions were not enough to suggest that he “directed or authorized the suppression of information.” Simply rejecting resource funding requests or certain product proposals is not sufficient to constitute “authorization,” “participation,” or “sanctioning” the concealment of user wellbeing information.
Zuckerberg’s Alleged Involvement in Meta’s Products
Lastly, plaintiffs alleged that Zuckerberg’s involvement working with the social media products supports the finding that he was involved with the products’ negative impact on teens and concealment of that information. While Zuckerberg maintained general control of the company, the court held that this is insufficient to show that he specifically directed, authorized, or sanctioned Meta’s alleged tortious concealment.”
Conclusion
This decision in favor of Mark Zuckerberg will not translate directly to future FTC cases, as the FTC is not a plaintiff in this case, but, doubtless this case will be cited by defendants in any future FTC case alleging individual liability. The FTC Act provides the Commission with authority to bring claims against individuals where the FTC can show that the defendants “‘participated directly in the acts or practices or had authority to control them’ and ‘had actual knowledge of material misrepresentations, [were] recklessly indifferent to the truth or falsity of a misrepresentation, or had an awareness of a high probability of fraud along with an intentional avoidance of the truth,’’’ F.T.C. v. Cyberspace.Com LLC, 453 F.3d 1196, 1202 (9th Cir. 2006), a very similar standard to that examined by the court in the Meta case. Just as important is the strength of the Meta court’s reasoning, which carefully drew lines between day-to-day corporate management and affirmative acts of fraud.
This case should make it more difficult for the FTC to establish that an executive specifically “directed, sanctioned, or participated” in tortious conduct, rather than simply maintaining general control over a company as all executives are bound to do. At minimum, this case will provide some comfort for individuals facing decades-long sanctions for the conduct of the corporate entity they serve, and strengthen their resolve to fight the FTC’s continuing overreach in the area of executive liability.
