U.S. Federal Trade Commission building. Photo: Diego M. Radzinschi/ALM

The Federal Trade Commission on Wednesday adopted an indemnity policy that will shield lawyers and other staff from any personal liability for enforcement actions that draw a lawsuit and expose them to a monetary judgment.

The policy, adopted without public comment, will allow the agency to cover the cost of any adverse judgments against staff who are sued over actions taken on behalf of the regulatory agency. It comes as two FTC attorneys seek to fend off a lawsuit brought by LabMD Inc., the now-shuttered medical testing company that accused agency lawyers in 2015 of bringing a data privacy case based on “fictional” evidence. The two FTC lawyers are fighting in a U.S. appeals court to overturn a ruling that exposes them to liability.

In a Federal Register notice, the FTC said the potential for a monetary judgment against any employee could “hinder the agency’s effectiveness as a law enforcement agency.” Other agencies, including the U.S. Department of Justice and U.S. Commodity Futures Trading Commission, already afford their employees the same protection, the FTC said.

“The FTC’s ability to effectively protect consumers and promote competition depends upon the willingness of its employees to pursue investigations and litigation,” the FTC said. “Uncertainty regarding what conduct may lead to a personal liability claim resulting in a monetary judgment tends to intimidate employees, stifle creativity and initiative, and limit decisive action.”

The FTC’s notice of the new policy did not reference Georgia-based LabMD or its claims. An FTC spokeswoman declined to comment on the new policy.

The agency, in its notice, pointed to the U.S. Supreme Court’s decision in Bivens v. Six Unknown Named Agents, which held that personal damage awards against federal employees are permitted when they are found to have violated an individual’s constitutional rights.

Since that 1971 decision, the FTC said, “lawsuits against federal employees in their personal capacities have proliferated.” Still, the U.S. Supreme Court has shown reluctance to extend protection widely. The justices in June rejected personal liability claims against former FBI Director Robert Mueller III and former U.S. Attorney General John Ashcroft.

In November 2015, LabMD filed suit against three FTC attorneys—Alain Sheer, Ruth Yodaiken and Carl Settlemyer—alleging they brought a data privacy case against the company using fraudulent evidence. That month, an administrative judge dismissed the FTC’s case against LabMD, which alleged the company failed to take reasonable steps to prevent unauthorized access to patients’ information. The FTC later overturned the in-house judge’s decision and blamed LabMD’s lax data security for exposing a file that contained the personal information of nearly 10,000 patients.

LabMD challenged that decision, and the U.S. Court of Appeals for the Eleventh Circuit heard arguments last month.

LabMD’s case against the three FTC attorneys centered on the agency’s interaction with Tiversa Inc., a Pittsburgh-based data security firm that came under congressional scrutiny in 2014 over accusations that it hacked a LabMD computer and tried to blackmail the company. In the lawsuit, LabMD alleged Tiversa falsified evidence of the patient file spreading—and the three FTC attorneys “knowingly accepted and used Tiversa’s falsified records to assist their investigation.” Tiversa has denied any wrongdoing.

LabMD also alleged the three FTC attorneys intensified their investigation, and ultimately recommended bringing an enforcement action, in retaliation for LabMD CEO Michael Daugherty’s outspoken criticism of the agency, which included a self-published book titled “The Devil Inside the Beltway.”

A federal judge in March dismissed LabMD’s case against Settlemyer but kept alive some of the claims against Sheer and Yodaiken. Sheer and Yodaiken have since gone to the U.S. Court of Appeals for the D.C. Circuit to press for immunity in LabMD’s lawsuit. Neither lawyer responded to a request for comment Wednesday.

“It’s no coincidence that, given the FTC’s behavior and LabMD surviving its Bivens motion to dismiss, the FTC created this policy,” Daugherty told The National Law Journal in an email on Wednesday.

The FTC said the new policy would permit but not require it to indemnify an employee who suffers an adverse judgment. The policy also allows the agency to settle a claim against an employee. However, the FTC said it would generally “not entertain a request either to indemnify or to pay to settle a personal damage claim against an employee before entry of an adverse verdict, judgment or monetary award.”

The FTC said it finalized the policy without opening a comment period because it “is a general statement of policy relating to FTC management and personnel.”