Seventh Circuit Curtails FTC's Authority to Seek Restitution
The Situation: Overruling its precedent, the United States Court of Appeals for the Seventh Circuit held that the Federal Trade Commission ("FTC") may not seek restitution under FTC Act Section 13(b) because the statute, which permits the FTC to obtain injunctions, does not explicitly contemplate restitution.
The Impact: This decision will limit the FTC's ability to collect monetary remedies for past conduct that violated antitrust or consumer protection laws. The FTC has obtained monetary remedies in amounts as high as $1.2 billion.
Looking Ahead: The FTC has the option either to file a petition for certiorari with the Supreme Court to try to overturn this decision, or to restrict actions seeking monetary remedies under Section 13(b) to other circuits in the hope that those courts would not follow the Seventh Circuit. Even if the FTC chooses not to seek Supreme Court review in this case, another party might do so in a future case.
FTC Act Section 5 authorizes the FTC, following a hearing, to order a person or corporation to cease and desist from using any unfair method of competition. FTC Rules provide for a hearing before an FTC administrative judge, subject to appeal to the full commission, and a subsequent right of appeal to a U.S. court of appeals. Congress amended Section 13(b) of FTC Act to permit the FTC to seek injunctive relief in federal court if the FTC has reason to believe that any person or corporation "is violating, or is about to violate" the FTC Act, and to obtain an injunction pending resolution of the administrative proceeding if the court finds that would be in the public interest. And "in proper cases," the court may issue a permanent injunction.
Other parts of the FTC Act permit monetary recovery in limited circumstances, none of which apply to an initial act of unfair competition. For example, if a defendant violates a cease and desist order after it becomes final, the Commission can sue for civil penalties and any equitable relief under Section 5.
Notably, the FTC has used Section 13(b)'s permanent injunction provision as an implicit authorization to obtain restitution or disgorgement of unlawfully obtained profits. The FTC and some courts have interpreted "injunction" to refer to all of a court's equity powers, even though nothing in the FTC Act explicitly authorizes disgorgement or any other monetary remedy with respect to an unfair method of competition that violates Section 5 of the FTC Act. The Seventh Circuit and other courts have upheld the FTC's ability to obtain such relief, ruling in consumer protection cases that the general injunctive provision of Section 13(b) invokes the general equitable jurisdiction of the federal courts—in short, that the FTC can seek restitution or disgorgement pursuant to an invocation of general equitable jurisdiction. That interpretation increasingly has come under question.
The FTC's Case Against Brown
Michael Brown owned and ran Credit Bureau Center, a credit-monitoring service offering "free" credit report and score information. Customers who signed up for a free credit score from Brown's websites also were automatically enrolled in Brown's credit-monitoring service, which charged a monthly subscription fee. Brown also hired another individual to act as a landlord of non-existent rental properties and to instruct potential renters to obtain credit reports through Brown's websites. The FTC alleged Brown generated more than $6.8 million in revenue through "unfair or deceptive acts or practices," and eventually sued under section 13(b) of the FTC Act. The FTC sought a permanent injunction and restitution and/or disgorgement of Brown's unlawful profits. The district court held that Brown's conduct warranted a permanent injunction and ordered Brown to pay more than $5 million in restitution to the Commission.
The bulk of Brown's appeal challenged the restitution order. The Seventh Circuit agreed with Brown, holding that Section 13(b)'s grant of authority to order injunctive relief "does not implicitly authorize an award of restitution," departing from long-held precedent that the Seventh Circuit had affirmed three times since 1989. The court overturned those rulings and vacated the district court's restitution award.
Rejecting the FTC's position, the Seventh Circuit recognized that implied restitution does not "sit comfortably" with the text of Section 13(b). First, the Seventh Circuit noted the Supreme Court's holding, in cases such as Meghrig v. KFC Western, that courts must consider whether an implied equitable remedy is compatible with a statute's express remedial scheme. The Credit Bureau court interpreted Meghrig to mean that exploration of statutory purpose is no longer the "polestar" in raising questions about the scope of the statute's remedies. Second, in analyzing Section 13(b)'s plain text and structure, the Seventh Circuit noted that the statute's other provisions include two enforcement mechanisms that expressly authorize restitution against unfair or deceptive acts and practices. Section 45(b) empowers the FTC to bring a cease-and-desist action to stop an ongoing or imminent violation, while Section 57b allows the FTC to promulgate rules that define bad acts, and then seek legal and equitable remedies against violators. In contrast, Section 13(b) lacks a notice requirement, a "central feature" in other parts of the statute that expressly permit monetary relief.
The Seventh Circuit's ruling comes on the heels of an analogous Supreme Court ruling and two circuit opinions discussing Section 13(b). In Kokesh v. SEC, the Supreme Court noted, but did not answer, a question as to whether courts have authority to order disgorgement for violation of federal securities laws when relevant statutes only provide for injunctive relief and monetary penalties. Likewise, in deciding whether Section 13(b) authorizes monetary relief for violations that occurred in the past, the Third Circuit in FTC v. Shire ViroPharma, Inc. rejected the FTC's pursuit of a permanent injunction (and ancillary equitable monetary remedies) when the defendant was not "violating" or "about to violate" the law.
In FTC v. AMG Capital Management LLC, the Ninth Circuit held that a defendant must pay equitable monetary relief for violation of Section 5 of the FTC Act. However, a majority of the three-judge panel would have voted to deny the relief, overturning Ninth Circuit precedent, but stated that it may not do so without an en banc hearing. Citing the Supreme Court's decision in Kokesh,the concurrence called out the circuit's "unfortunate interpretation" of the FTC Act, and suggested that the interpretation is no longer tenable given that Section 13(b) "unambiguously forecloses" monetary relief by authorizing only injunctions. Much like disgorgement in securities law, the concurrence said compelling defendants to pay monetary judgments styled as "restitution" under Section 13(b) does not simply restore the status quo (e.g., equitable relief), but leaves the defendant worse off and is more accurately "punitive" rather than "remedial." The "judicial skepticism" evinced by these courts buttresses the Seventh Circuit's reasoning.
The ruling sets the stage for a petition for certiorari to the Supreme Court. The Seventh Circuit decision follows the Ninth and Third Circuits in challenging the agencies' interpretation of Section 13(b). In part, the Seventh Circuit's discussion casts doubt on the presumption that Section 13(b) categorically authorizes a court's full equitable powers, including restitution. Now, at least two circuits have expressed skepticism that an implicit reading of Section 13(b) authorizes courts to order restitution. Other circuits, such as the Second, Fourth, and Tenth reached the conclusion that Section 13(b) categorically authorizes the court's full equitable powers. And, after recently filing a complaint against multi-level marketing distributors seeking equitable monetary relief in federal district court in Texas, the FTC could bring these same issues to a head in the Fifth Circuit.
Ultimately, the FTC could take comfort with the dissenters in Credit Bureau, in that the Seventh Circuit's decision is novel, or at least distinguishable, as a case in which a government plaintiff, not a private plaintiff, as in Meghrig, has an express right of action and an agency that seeks an expressly authorized injunction against a wrongdoer's harm. In light of the circuit split, the FTC may petition the Supreme Court for a writ of certiorari in an effort to overturn the Seventh (and possibly also the Third) Circuit decisions, and possibly explore this issue in the Fifth Circuit. Alternatively, the FTC could continue to seek restitution under Section 13(b) in other circuits, but this strategy also risks undermining the precedent in other jurisdictions that supports the FTC's interpretation of the FTC Act. Furthermore, even if the FTC chooses not to seek Supreme Court review, another party might. One way or another, it appears likely that the Supreme Court will be called upon to resolve this issue.
Three Key Takeaways
- This ruling limits the FTC's ability to bring cases and obtain restitution under Section 13(b) for antitrust and consumer protection law violations, at least in the Seventh Circuit.
- The FTC has other enforcement mechanisms to punish specific acts or practices that are "unfair or deceptive." Under Section 57b, the FTC must first promulgate rules that define acts that are unfair or deceptive, and then once it does so, seek remedies from violators.
- Three circuit courts now cast doubt on the FTC's ability to obtain restitution under the FTC Act. The ruling creates a circuit split, making it more likely that the Supreme Court would grant a petition for certiorari.
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