Supreme Court to Weigh In on FTC Authority to Order Monetary Relief

Recent court decisions concerning Section 13(b) of FTC Act could change decades of precedent

By: David Rauf

The FTC has taken the position that the injunctive relief permitted by 13(b) allows it to disgorge revenue from scammers and corporations as well as regain restitution for victims.

“There’s an existing process outside of 13(b) for the FTC to pursue monetary relief, but it is cumbersome and requires more due process, which is why the FTC doesn’t like it.”    —Larry Steinberg, Chair, Multilevel Marketing Industry Group, Buchalter

This could dramatically affect the relationship between the direct selling industry and the FTC.     —Larry Steinberg, Chair, Multilevel Marketing Industry Group, Buchalter

The U.S. Supreme Court has agreed to decide whether the Federal Trade Commission (FTC) can continue to seek monetary rewards when it sues scammers and firms accused of deceptive business practices, setting the stage for a ruling that will have wide-ranging ramifications for the direct selling channel.

At issue is the extent of the FTC’s enforcement authority to recover ill-gotten gains under Section 13(b) of the FTC Act. For decades, the FTC has used 13(b) to pursue equitable monetary relief, in particular in the consumer protection arena. In that time, the provision has become one of the agency’s bedrock enforcement tools. The FTC says it has used 13(b) to secure billions of dollars in refunds to consumers defrauded in a variety of scams in recent years, and it’s a hammer the regulator has dropped on high-profile multi-level marketing firms such as BurnLounge, Vemma and Neora.

But the FTC’s broad interpretation of the statute also has attracted a flurry of legal challenges. And while courts around the country had continuously affirmed the agency’s use of the statute to recoup restitution for victims, that authority is now up in the air. Up until recently most appeals courts had agreed that 13(b) lets the FTC seek a court order requiring a wrongdoer to give the victims money back.

The provision does not expressly grant the FTC disgorgement power. It states that when the FTC has “reason to believe” that an individual or corporate entity “is violating, or is about to violate” a law enforced by the agency, it may bring suit in federal court “to enjoin such acts or practices.” Additionally, the statute says that “in proper cases, the Commission may seek … a permanent injunction.”

The FTC has taken the position that the injunctive relief permitted by 13(b) allows it to disgorge revenue from scammers and corporations as well as regain restitution for victims.

Over the course of roughly 40 years, the FTC’s interpretation of the provision has held up in court. But several recent decisions have cast doubt on the agency’s authority, including one delivered by the 7th U.S. Circuit Court of Appeals in August 2019 in a 2-1 majority decision in FTC v. Credit Bureau Center LLC.

The Credit Bureau Center case focused on the reach of the federal law that lets the agency go to court to seek an injunction and recoup money, and the decision disrupted long-standing precedent involving the FTC’s use of 13(b).

The Supreme Court will hear an FTC appeal from the Credit Bureau Center case, along with a companion case involving a company called AMG Capital Management that appealed a ruling by the 9th U.S. Circuit Court of Appeals. In the AMG case, the court backed the FTC’s authority to recoup ill-gotten gains, but the 9th Circuit panel acknowledged that AMG Capital Management’s argument had some merit.

The two cases will be heard together during the court’s next term, which starts in October. A ruling is expected by the summer, and will ultimately affect every industry and company the FTC regulates, from technology to pharmaceuticals to direct selling.

Direct selling insiders are watching closely.

“This could dramatically affect the relationship between the direct selling industry and the FTC,” says Larry Steinberg, chair of the Multilevel Marketing Industry Group at Los Angeles-based law firm Buchalter. “Right now Section 13(b) gives the FTC extraordinary leverage. Some of that leverage could be taken away if the ability to obtain monetary relief through Section 13(b) is eliminated or impaired.”

Less Appealing Options for FTC

The FTC has other ways to extract monetary rewards from individuals and firms as part of its enforcement duties. Those paths, however, are more limited, take substantially longer and require a much higher hurdle to clear.

The agency could promulgate new rulemaking focused on unfair and deceptive practices to allow it to pursue civil penalties in federal court. That’s a time-consuming process and would require public comment, debate and a vote from commissioners before a new regulation was enacted.

Or the FTC can use existing authority granted in a different provision of the FTC Act to pursue monetary relief—but the agency must first prevail in an administrative proceeding where a cease and desist order is granted and finalized. Then, the FTC can bring suit in federal court to enforce the order and go after ill-gotten gains.

Since that process can be long and tedious, potentially taking years in some cases, the FTC has historically used its enforcement power under 13 (b), which has proven much quicker and efficient.

Steinberg, a veteran direct selling lawyer who represented BurnLounge during its FTC litigation, says when the agency invokes authority under that provision it can “can go to court and do what it’s going to do” to pursue disgorgement without having to secure a cease and desist order from an administrative law judge. The agency, he says, doesn’t even have to notify the company it’s being investigated, and most don’t find out until after their assets are frozen by a federal judge.

“There’s an existing process outside of 13(b) for the FTC to pursue monetary relief, but it is cumbersome and requires more due process, which is why the FTC doesn’t like it,” says Steinberg, noting that BurnLounge ultimately was ordered to pay $16 million to the FTC. “The FTC would rather swoop in and do what it thinks is necessary to protect consumers without giving a defendant an opportunity to be heard before its business is shut down and its assets frozen.”

He adds: “When you look at 13(b) in connection with the overall statutory scheme of the complete FTC Act, there’s no reason for a court to imply broad, unwritten equitable powers.  There are other law enforcement mechanisms available to the FTC, which are expressly provided for in the statute.”

John E. Villafranco, an advertising law attorney who specializes in FTC cases for Kelley Drye & Warren LLP, says the FTC has been moving toward bringing cases under 13(b) “very aggressively.” 

The reason is simple, he says: The agency’s other option takes much longer. It would need to go before an administrative law judge for a cease and desist order, which would include a full discovery process and arguments from both sides until the case is concluded, and then file in federal court for disgorgement.

“They’re very happy with what they’ve achieved under Section 13(b) and are very concerned about potential limitations to that power,” he says.

Recent Disgorgement Decisions May Influence FTC Outcome

For its part, the FTC has referred to its ability to obtain monetary relief under 13(b) as a “cornerstone of the FTC’s enforcement program for more than 30 years.”

That underscores the sweeping ramifications that the Supreme Court’s ruling will have for the FTC, as the cases question the agency’s authority to demand equitable monetary relief such as restitution and disgorgement.

In its petition to the Supreme Court, the FTC said that the 7th Circuit’s decision in the Credit Bureau Center case “threatens the FTC’s ability to carry out its mission by eliminating one of its most important and effective enforcement tools.”

“The Commission depends heavily on Section 13(b) in carrying out its mandate to protect consumers and competition. It brings dozens of cases every year seeking a permanent injunction and the return of illegally obtained funds,” the FTC wrote in its court filing. “Of course, if the FTC persuades the Supreme Court that Section 13(b)’s grant of authority to seek injunctive relief carries with it an implied right to equitable monetary relief, the FTC will retain this central feature of its enforcement agenda.

If, however, the Supreme Court affirms the Seventh Circuit’s decision in Credit Bureau Center, it will leave the FTC with only the limited ability to seek financial redress through cease and desist order and rulemaking enforcement proceedings.

In the Credit Bureau Center case, the 7th Circuit reversed its own long-standing precedent and ruled that 13(b) “does not authorize restitutionary relief.” A federal judge had ordered the owner of the credit monitoring website to pay $5.2 million in restitution after consumers who responded to ads for apartments on Craigslist were required to click a link to obtain a free credit score from the company. Those who obtained a free credit score were automatically enrolled in a $29.94 a month credit monitoring service.

The court noted that the text of 13(b) only authorized injunctive relief, not equitable monetary relief or disgorgement. The court also pointed out that the FTC has other provisions it can use to achieve the same results. And in recognizing prior rulings handed down by the 7th Circuit on this issue, the court said it must give “considerable weight” to prior decisions, but it is “not bound by them absolutely and may overturn circuit precedent for compelling reasons.”

In the AMG case, the second 13(b)-focused appeal the Supreme Court will review during its coming term, the FTC sued a payday lender under 13(b) for unfair and deceptive practices, ordering restitution in the amount of $1.27 billion for victims. The 9th Circuit affirmed a lower court ruling awarding the FTC the more than $1 billion in equitable monetary relief.

AMG argued that 13(b) did not permit the FTC to seek disgorgement, but the court concluded that “it is foreclosed by our precedent” and allowed the monetary award to stand.

However, Judge Diarmuid O’Scannlain, who also wrote the panel decision, authored a special concurrence, arguing that prior 9th Circuit precedent interpreting 13(b) to award monetary relief was “no longer tenable.”

The decision in the Credit Bureau Center case created a circuit split by putting the 7th Circuit at odds with the seven other federal appeals courts that had previously decided the issue in the FTC’s favor. Because of that, Villafranco, the advertising law attorney who specializes in FTC cases, says he wasn’t surprised that the Supreme Court agreed to review the issue.

The two cases have been consolidated by the Supreme Court, and the importance of outcome can’t be overstated as it is set to conclusively decide the FTC’s authority to seek equitable monetary relief in the form of disgorgement.

“From the FTC’s perspective, winning those cases is of fundamental importance in preserving the way they carry on their business,” says Villafranco, who was part of the legal team that defended Herbalife during its high-profile FTC investigation.

He adds: “What does section 13b actually say? Does it say the FTC has the right to pursue disgorgement and restitution? The answer is ‘no,’ there’s no dispute about the plain reading of the statue. Putting aside what it actually says, how can it be interpreted? And, historically, it has been interpreted that the equitable power of the courts has allowed disgorgement. Now we’re seeing judges that aren’t willing to make that leap.”

Observers of the FTC’s 13(b) cases say they already have a recent decision from the Supreme Court that might shed a light on how events could play out. The U.S. Securities and Exchange Commission had its disgorgement authority challenged in Liu v. Securities and Exchange Commission. Similar to 13(b), the provision in question did not expressly authorize disgorgement.

In that case, the Supreme Court weighed the question of whether the SEC’s authority in civil enforcement actions to obtain “any equitable relief that may be appropriate or necessary for the benefit of investors.” The SEC had pursued disgorgement of $26 million when bringing a civil enforcement against a group of defendants accused of misappropriating investor funds.

The court upheld the SEC’s authority to seek disgorgement as a form of “equitable relief,” but narrowed the scope of relief that the SEC could obtain. It also required that money be returned to victims, casting doubt on whether a federal agency such as the SEC or FTC could deposit that disgorged funds into the U.S. Treasury instead of fully distributing that money back to those harmed.

In terms of monetary rewards, the court limited the SEC’s disgorgement power to relief in the amount of the accused scammer or corporation’s net profits instead of gross revenue received from purported victims.

While the Liu case does not dictate the outcome of the FTC’s 13(b) cases before the Supreme Court, the ruling is expected to have an impact and could ultimately limit any future restitution recoverable under 13(b).

“Some people think Liu is tremendously predictive of what’s going to happen in the Credit Bureau Center and AMG cases. I don’t feel as strongly as that,” says Steinberg, the veteran direct selling lawyer who defended BurnLounge against the FTC’s 13(b) case. 

He adds: “But in the Liu decision, eight justices have already ruled that it is inappropriate for a court of equity to order the disgorgement of gross revenues. It would be reasonable that that perspective, that disgorgement should be limited to net profits, could carry over when the court rules on the scope of 13(b).”

FTC Push on Capitol Hill

Meanwhile, as the 13(b) cases are pending before the Supreme Court, the FTC has commenced a full-court blitz of Congress, attempting to get lawmakers to affirm the agency’s authority to seek disgorgement through legislation, as a workaround to the courts.

At two virtual hearings last month, FTC officials pressed their cases to a subcommittee and then to the U.S. Senate Committee on Commerce, Science, and Transportation.

In opening remarks to the full committee, FTC Chairman Joseph Simons said the provision is relied on by the agency as its principal avenue to get money back for consumers. The FTC, he said, has used its authority under 13(b), as it’s been interpreted for decades, to return $10 billion to victims of scams. But recent court decisions now threaten that authority, he said.

“I strongly urge you to clarify the law on 13(b),” Simons told the committee.

At one point during the hearing, Sen. Mark Udall (D-New Mexico) asked the FTC officials if they supported a consumer protection bill he filed targeting COVID-19-related scams. The legislation gives the FTC and state Attorneys General more power to impose civil penalties on coronavirus fraud.

“We support that,” Simons responded. “The other thing I would say is we really need 13(b). With 13(b), we can go into federal court and get a TRO (temporary restraining order), preliminary injunction, and we can get an asset freeze for these fraudsters. Whereas civil penalties might take a while to get through the court system, and we have to get the Justice Department involved too.”

Simons added that “in the absence of 13(b)” enhanced civil penalties powers would be important, “but 13(b) is really important.”

FTC Commissioner Rebecca Kelly Slaughter said enhanced civil penalty authority would be helpful, but the process for obtaining monetary relief that way remains cumbersome.

That civil penalty authority, she said, helps the agency create leverage with companies to curb bad actions or negotiations: “Civil penalties are important because they put a big stick on the table.” However, when the FTC pursues monetary relief that way the agency can’t return the fund to victims, and Slaughter said, “what we want to do at the end of the day” is get that money back to consumers who have been harmed. In those situations, the money goes into the U.S. Treasury. Congress, Slaughter said, should provide new civil penalty authority coupled with clear language expressly granting the FTC power to use 13(b) for disgorgement.

“It’s one of the most important things we do, and right now that authority is under attack at the courts,” Slaughter said of 13(b). “Clarification from Congress on that point is enormously important.”

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