A lawsuit by the Federal Trade Commission for injunctive and other equitable relief under the Sherman Act and the Federal Trade Commission Act falls under the exception to the automatic stay covering a governmental unit’s “police and regulatory power,” so says the Court of Appeals for the District of Columbia Circuit.

The FTC sued pharmaceutical companies in federal district court alleging that an agreement among them was a restraint of trade in violation of Section 1 of the Sherman Act, an unfair method of competition in violation of Section 5(a) of the FTC Act, and an exercise of monopoly power in violation of Section 2 of the Sherman Act.

The district court granted a motion to dismiss the complaint. While the appeal was pending, one of the pharmaceutical companies filed a petition to reorganize in chapter 11.

On appeal, the D.C. Circuit began by addressing its jurisdiction to determine whether any part of the appeal was subject to the automatic stay under Section 362(a)(1).

The bankrupt pharmaceutical company took no position, but the FTC and another pharmaceutical defendant-appellee contended that the appeals court had jurisdiction on account of the exception to the automatic stay in Section 362(b)(4).

With respect to an action against the debtor otherwise enjoined by Section 362(a)(1), Section 362(b)(4) provides that the filing of a bankruptcy petition

does not operate as a stay . . . of the commencement or continuation of an action or proceeding by a governmental unit . . . to enforce such governmental unit’s . . . police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit’s . . . police or regulatory power.

To decide whether the police and regulatory exception applies, Circuit Judge J. Michelle Childs quoted the First Circuit in her August 25 opinion for saying that “‘we evaluate whether’” the government action effectuates “public policy” or furthers the government’s own “pecuniary interest.” In re Kupperstein, 994 F.3d 673, 677 (1st Cir. 2021).

Again quoting the First Circuit, Judge Childs said that the exception applies if the “action is designed primarily to protect the public safety and welfare” and doesn’t apply if the government has a “pecuniary purpose” designed “to recover property from the estate.” Id. at 677-678.

Judge Childs cited the FTC’s complaint, which, it said, was filed “to prevent unfair methods of competition.” Furthermore, she said that the complaint did not seek monetary relief.

Based on the FTC’s “express purpose” for the lawsuit, Judge Childs decided that the appeals court had jurisdiction because “the regulatory power exception to the automatic stay is applicable to this proceeding.”

Having found jurisdiction, Judge Childs affirmed the district court’s judgment dismissing the suit for failure to state a claim.