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Consumer Protection Enforcement Changes Likely Af

JONES DAY TALKS®: Consumer Protection Enforcement Changes Likely After SCOTUS AMG Decision

In AMG Capital Management v. FTC, the U.S. Supreme Court ruled the Federal Trade Commission Act does not allow the FTC to seek, from violators of the Act, "equitable monetary relief" in the form of restitution or disgorgement.

Jones Day partner David Morrell talks about how the Court's decision could alter the FTC's consumer-protection enforcement actions moving forward, the Justice Department's newly prominent role in these matters, and what potentially affected parties should know.

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Transcript:

Dave Dalton:

Earlier this year, a US Supreme Court decision held that the Federal Trade Commission Act does not allow the FTC to seek from violators of the Act equitable monetary relief in the form of restitution or disgorgement. So what now in terms of FTC enforcement and the parties potentially affected? Jones Day's David Morrell is here to sort out what are possibly very high stakes ramifications. I'm Dave Dalton. You're listening to Jones Day Talks. Jones Day partner, David Morrell, focuses on consumer protection in the context of litigation and federal investigations. He has experience with matters involving data privacy, healthcare, the Federal Trade Commission Act and the Food, Drug and Cosmetic Act. David has recently handled several high profile matters involving challenges to federal enforcement actions. Previously, he oversaw the US Department of Justice's Consumer Protection branch, which enforces laws relating to consumer fraud. Hey David, thanks so much for being here today.

David Morrell:

Yeah, thank you. It's great to be here.

Dave Dalton:

Before we jump into today's subject matter, let's talk a little bit about your background, if you don't mind. Now, you returned to Jones Day in March of this year. Is that correct?

David Morrell:

That's correct.

Dave Dalton:

Okay. What was going on before you came back to the firm earlier this year?

David Morrell:

So before I returned to the firm, I was at the US Department of Justice's Consumer Protection branch. And that, as its name suggests really, has a very broad consumer protection mission. So we use both civil and criminal tools to address harms to consumers, deception, fraud. We also work closely with the Food and Drug Administration and the Federal Trade Commission. And some of your listers might be a little surprised to hear me reference the Federal Trade Commission in particular since it's an independent agency. But a little known fact that we'll ultimately return to later is that DOJ actually has a role in enforcing the Federal Trade Commission Act in conjunction with the FTC. So we can talk a little more about that later. But perhaps the most famous example of this is the data privacy case that DOJ brought in 2019 against Facebook. And that was a significant FTC act that DOJ was involved in. But unlike the FTC, we at DOJ also had criminal authority and so we would bring criminal actions on behalf of consumers as well. So it was a very broad set of tools used to ensure the protection of American consumers.

Dave Dalton:

Interesting. Well, you certainly bring interesting experience back to the firm. And you clerked for Justice Thomas, is that correct?

David Morrell:

That's correct. Several years ago, yes, clerked for Justice Thomas and then came to the firm right after that.

Dave Dalton:

Okay. And law school was Yale. Did you grow up east coast or where are you from originally?

David Morrell:

I'm from Southern California actually. So I've migrated quite far from home, to my parents chagrin. But I'm now in DC and set up shop here.

Dave Dalton:

Well, we're glad you migrated back to Jones Day, that's for certain. Okay. You talked about the FTC a little bit, the Federal Trade Commission. Before we get into the main thrust of today's podcast, let's talk first about the Federal Trade Commission Act. When did that come into force and what was it originally intended to do?

David Morrell:

The Federal Trade Commission Act was passed in 1914. It was actually signed by President Woodrow Wilson. And its principle purpose really was to strengthen perceived deficiencies in US antitrust laws. So the Sherman Act was passed in 1890. Everyone's heard of the Sherman Act, which was an antitrust federal statute. There was a view that the Sherman Act was inadequate to address trusts and some of the monopolistic behavior of companies. And so the FTC Act was passed and it created the Federal Trade Commission itself and gave it a suite of authorities in the antitrust space.

In 1938, Congress really expanded the mission of the FTC by amending the FTC Act to prohibit not only unfair methods of competition, which really sounds in the antitrust space, but to also prohibit unfair or deceptive practices. And what that was really focused at was making it express that the FTC didn't need to demonstrate harm to competitors in order to bring an action under the FTC Act. And what this meant was it extended the FTC's protections to consumers because the FTC no longer had to demonstrate that there was some harm to competitors. Harm to consumers was enough.

And today, the FTC really divides, at least its enforcement components divide, along that basic division. So you have the competition bureau on one hand and you have the consumer protection bureau on the other. And the agency itself is really an amalgam of functions. And so what those two bureaus do is they conduct investigations. They can use compulsory process like subpoenas or civil investigative demands. They can conduct administrative proceedings before ALJs. They conduct rule making, so they can interpret statute and issue a rule that further clarifies the metes and bounds of that statute. And they also can conduct studies. So it's a real kind of broad suite of functions that the FTC performs.

Dave Dalton:

Yeah. Much more so than I thought. I think it's interesting, I'm going a bit off our outline here, David, but it's interesting that the consumer protections came off so much later than the antitrust provisions. In the world we live in today, it seemed like they would've either run in parallel or maybe even the consumer protections come first. I wonder why that was. Why do you think?

David Morrell:

Well, the presidential election of 1912, really saw a lot of attention on the issue of trusts. And again, as I mentioned, there was a view that the Sherman Act at the end of the 19th century was inadequate, it was not up to the task of addressing these trusts. And so President Wilson had campaigned on strengthening enforcement in that space. And so that really produced a strong desire for the federal government or Congress, in particular, to do something about antitrust. And it was only later, a couple decades later or a few decades later, that Congress made express that that wasn't going to be the sole function of the FTC, that they were also going to police unfair practices that harmed consumers, even if there was no harm among the competitors themselves.

Dave Dalton:

Sure. Okay. Now, in some of the notes you were kind enough to pass along in preparation for today's recording, you mentioned Section 5A of the Federal Trade Commission Act. That's pertinent to our discussion today. What does Section 5A pertain to? What does it do?

David Morrell:

So section 5A is the primary source of authority that the FTC has. In particular, its enforcement authority. So Section 5A prohibits two basic things. It prohibits unfair methods of competition, which again is the antitrust authority, and it also prohibits unfair or deceptive acts or practices. And that's the source of the consumer protection mission. And so my focus today, or our conversation's focus today, is really on the latter provision and the unfair deceptive acts or practices provision. So deceptive practices is just what it sounds like. It's claims that are likely to mislead reasonable consumers. And unfair practices are those that might not necessarily involve deception, but involve some consumer harm that's not justified by the benefits to the consumers.

Dave Dalton:

Okay. Certainly makes sense. Talk about the enforcement authorities the FTC has at its disposal. Somebody gets out of line, they're doing something wrong. What can the FTC do?

David Morrell:

So there's three principal pathways that the FTC can use to enforce the FTC Act. So the first that I'll point out is the administrative process. And what that means is that's administrative as opposed to a judicial process. So the FTC and its staff can conduct an investigation. They can issue an administrative complaint when they think there's evidence of wrongdoing under the FTC Act. And then they can actually conduct a trial-like proceeding within the agency before what's known as an administrative law judge, or ALJ. So the problem with this process as my description might imply, is that it's slow, it takes time. And what I didn't even mention which certainly adds to the length, is there's several layers of review. So there's internal layers of review that the parties can appeal to the Commission itself from the ALJ decision. And then there's also judicial review available by statute. And you put that all together and it's a very long process that the FTC has to undertake to obtain essentially at the end of the process a cease and desist order.

Now, if they do get that order at the end of the administrative process, they essentially have an injunction or an order not to engage in the misconduct, but they don't have any concrete relief in terms of money or even a court injunction. But what the statute does allow them to do once the FTC has gone through this administrative process is they can go file a complaint in federal district court and obtain what's called consumer redress or things like refunds of money or things along those lines. So there is a light at the end of the tunnel for the FTC in the form of consumer redress, but it is, again, as my description suggests, it's a very long process to get to that point.

Dave Dalton:

Okay. You mentioned there are three basic enforcement authorities. Talk about the other two.

David Morrell:

Yeah. So the second one that I'll point to is civil penalty action. And so in order for the FTC to obtain civil penalties which are set by statute for violations, it requires either a violation of a rule that the FTC has promulgated. So in other words, it's not enough to just have an asserted violation of Section 5A, the statute. There has to be a rule violation or violation of a final cease and desist order. So, i.e., when the FTC has gone through that long administrative process and has a final cease and desist order, well, if there's a violation, civil penalties may be available to the FTC to address that. And then finally, a little quirk is there are a few statutes out there that actually deem violations of the statute to be a violation of a FTC rule. So those are the three grounds for civil penalties.

But there's a little process twist to this that I have found is not generally known and it's something that FTC certainly does not advertise because it's an aspect of their statute that they're not happy with. But when they want civil penalties, they actually have to go through the US Department of Justice, and in particular, the office that I ran, the DOJ Consumer Protection branch. And so what the statute requires is anytime the FTC believes there's a basis to obtain civil penalties, they have to give notice to DOJ, they have to consult with DOJ, and DOJ then has essentially a right of first refusal to bring the case on behalf of the FTC in order to get civil penalties. So again, the FTC does not like having to go through that process, but it's required by statute if they want to obtain civil penalties.

Now the third pathway... So we've talked about the administrative complaint process, we've talked about civil penalties, and then the third path pathway is what I'll call the injunctive relief pathway. And so under Section 13B of the statute, the FTC Act that is, the FTC may actually proceed directly into federal district court without first going through the administrative process or going to DOJ in order to obtain injunctive relief, so to stop conduct that they believe is ongoing and violative of the FTC Act. Now, what's interesting about this pathway, the statute, Section 13B of the Act, refers to injunctive relief and allows the agency to obtain a permanent injunction under certain circumstances. Now, they got this authority in the 1970s. And very soon after Congress gave the FTC this authority, the FTC began using the injunctive relief authority to obtain monetary relief in the form of things like restitution or disgorgement. And over the last few decades, they've obtained billions of dollars using this authority that gives them the right to go into court to get an injunction, but makes no reference to monetary relief. And so FTC saw that they could essentially bypass these two other pathways and get money and injunctive relief all without having to go to DOJ or through their internal processes.

Dave Dalton:

Okay. And that segues nicely into our main subject matter of the day. Let's talk about AMG Capital v. the FTC. Give us some background on the case first. Then explain what the US Supreme Court ruled back in April. This started over short term loans. Is that correct?

David Morrell:

That's right. So in that case, you had a payday lender who made millions of loans and collected over a billion dollars in charges on those loans that the FTC believed were deceptive. But rather than issue an administrative complaint, because again, you don't have a violation of a rule asserted so the FTC would've needed to go through the administrative process in order to get monetary relief, the FTC went directly to federal district court under Section 13B, which is the injunction authority that we just talked about, the third pathway. But the FTC didn't request just an injunction. It also requested, and it obtained, monetary relief to the tune of over $1.2 billion. And what happened is the payday lender on the hook for just a massive sum of money, but the payday lender appealed arguing that Section 13B did not authorize that monetary relief. And so that's the issue that went to the Supreme Court.

Dave Dalton:

And the court ruled how?

David Morrell:

The Supreme court agreed with the payday lender. In a very careful textual analysis of the FTC Act, the Court held that while the FTC Act authorized monetary relief under some circumstances, the FTC could not use that third pathway, what I'm calling Section 13B, to obtain monetary relief. That provision refers to a permanent injunction, it doesn't refer to money, where other parts of the statute do refer to money. And the court found that distinction in references to money as meaningful and found that the FTC could not bypass the reticulated enforcement channels that Congress had created in order to get money.

Dave Dalton:

And this was a unanimous nine-nothing decision, Justice Breyer writing the opinion. Dave, as somebody who watches these things, and may I say, as a former Supreme Court clerk, you've got a much better view and angle on this, were you surprised? Nine-nothing, that's pretty clear, isn't it?

David Morrell:

I'm not surprised. And when you look at the statute, the Court's analysis is pretty persuasive that the FTC doesn't have authority under a provision granting injunctive relief to obtain money. Injunctions are a thing that are typically regarded as distinct from money damages. And so a 9-0 outcome, I guess given the general media coverage on the five-four type cases, it is surprising often when you see a 9-0. But when you actually look past the headline and look at the law, what's maybe more surprising is that the FTC for so long was able to get away with interpreting the term permanent injunction to authorize a massive, and like I said, billions of dollars of monetary relief.

Dave Dalton:

Sure, sure. Interesting matter to say the least. But however this shook out, it was not a good day for the FTC. What are the implications moving forward? What do you think happens next?

David Morrell:

Yeah. So just to frame it and put it in perspective, this is a massive blow to the FTC, this decision. So as I said, they obtained the 13B injunction authority in the 1970s. And over time, they increasingly used it to obtain monetary relief from alleged violators of the FTC Act. And it really became a principal source of their consumer protection efforts enforcement efforts in collecting monetary relief on behalf of consumers. And so the FTC is very unhappy with this result, and I'm confident are on the hill looking to Congress to restore their authority to go directly into court to obtain monetary relief.

But unless Congress gives them any new authority, there's a few implications that I think we're likely to see in the wake of the AMG decision. So one thing is DOJ's consumer protection branch is going to play an increasingly prominent role in the enforcement of the FTC Act. As I noted before when we talked about the three enforcement pathways, the FTC can't really go directly to court to obtain money unless it either goes through its administrative process, and at the end of that process, assuming it wins, it can go to district court for consumer redress, or it can go through the Department of Justice to obtain civil penalties. And so just an terms of devotion of resources and path of least resistance, it really makes sense to go through DOJ since you have civil penalties available and you can go directly to court without going through the administrative process.

And so what that means is DOJ is just going to be much more out front and center on some of the more significant matters. Now, DOJ is likely going to not take the matters that are small or maybe routine, but ones where there's large exposure for the defendant or perhaps involve legally novel issues. DOJ is likely to take those cases. And I think we're going to see many more cases brought by the Department of Justice under the FTC Act. And a good example of this, and this was even before the AMG case, but in 2019, I mentioned before, DOJ brought a case against Facebook that was one of the largest civil penalty actions ever brought behalf of the United States. And more recently you have the Dish Network case where they resolved with DOJ's Consumer Protection branch for $126 million just in penalties. And so, again, you're going to see more cases like that where DOJ is enforcing the FTC Act.

Dave Dalton:

Okay. Interesting. Any other implications of the Court's decision you see near term?

David Morrell:

One other likely implication of the AMG decision is I think we're going to start seeing more enforcement of rules. As I mentioned before when we talked about the three enforcement pathways, one of the ways in which the FTC can get civil penalties is by establishing a violation of a rule. It's not enough to establish just a violation of the statute itself. And so you can bet that the FTC is already, in wake of the AMG decision, going through its rule book, going through its many rules, dusting them off and starting to look for violations of those provisions.

And there's about around 60, give or take, or maybe a few more, but there's about 60 rules on the books, many of which people have probably never heard of but can have pretty significant consequences. And they also can impact a whole range of industries and sectors. So you have everything from labeling rules for energy, you have clothing and fabric related labeling rules. This isn't necessarily a rule, but it's more guidance that's formalized in the code of federal regulations, it's called the green guides, which governs environmental marketing claims. So there's a whole range of topics covered by these rules. And there's also some very significant rules that bring with them very significant exposure for companies who get on the wrong side of them. And one that I'd like to point out is the Children's Online Privacy Protection Act, or COPPA as it's known. So this is a provision that governs the collection of data or information from children. And there's been some pretty significant enforcement actions over the years. A couple years ago, there was a major enforcement action that was resolved for over $100 million against an online video provider for alleged violations of COPPA. And so these rules can be quite significant and you can expect that the FTC is looking not only at COPPA, but other rules that businesses might not be complying with right now.

Dave Dalton:

Sure. And you touched on this already with the COPPA penalty, if you will, but the financial exposure, the financial penalties for these violations can be very severe, right?

David Morrell:

That's right. Yeah. Penalties are very steep. So they're set by statute and they increase with inflation. And currently they're set at over $43,000 per violation. And what's important to note is not just the sticker price of a violation, but also looking at what the government regards as a violation. Because if you have a volume of violations associated with a single course of conduct, that number can get big, into the billions, very, very quickly. So especially in the technology environment, so online platforms, websites, or in the data privacy context, these violations can really multiply. So the government, you can expect to take the position that each click or page view or customer who saw their website constitutes a separate violation. So when you have online platforms that might be reaching millions of people, the number just becomes astronomical.

Dave Dalton:

Staggering.

David Morrell:

Staggering. And it doesn't necessarily mean the governments is going to collect on that, but it can still give a heavy discount to the defendant and collect something in the billions of dollar range. And so again, you have not just the per violation price, but also the conception that the government has of what qualifies as a violation. And so the volume can be vast.

Dave Dalton:

David, we've covered a lot in a short period of time today, and I thank you for this. This has been great. Let's wrap up with this, is there anything else listeners should know in the aftermath of AMG Capital Management v. FTC? Anything you might see as a kind of a key takeaway?

David Morrell:

So one thing I would just tell our listeners is the FTC, despite having pretty considerable enforcement authorities, all of those authorities are civil in nature, and it really relies on DOJ for criminal violations. But one thing that folks should be aware is as the Department of Justice, in particular, the Consumer Protection branch at DOJ becomes more involved as I think they will, what that means is DOJ, that component has not the authority to enforce the FTC Act, but also if they think that the conduct that the FTC has flagged might amount to a criminal violation, well, they could be in a position where the FTC would take the civil case and DOJ could open a criminal investigation based on the same course of conduct.

Now, that's obviously in sort of extreme cases where you might have potential criminal exposure. But companies should just be aware that given this new environment that the FTC's operating in where they're really dependent on DOJ much more than they have been in the past, that means that companies who are maybe just used to dealing with the FTC and the kind of purely civil nature of their proceedings, are really entering a realm where the stakes are in some ways higher given the potential criminal authorities that DOJ could bring to bear arising from the same set of facts. So in other words, that means an FTC Act case could turn criminal if the facts warranted it. So, listeners should just be aware that it's a new environment and the stakes have certainly increased.

Dave Dalton:

Well said. Well said. And the stakes certainly have. Hey David, I enjoyed this. You were terrific. This is your first Jones Day Talks podcast, right?

David Morrell:

That's right.

Dave Dalton:

I hope it's not your last. You were great. Thank you. You imparted some great information. I think our listeners will enjoy this. So thanks so much for being here today.

David Morrell:

Thank you. Appreciate it.

Dave Dalton:

For complete contact information for Jones Day partner, David Morrell, please visit Jonesday.com. And be sure to check out our insights page while you're there for more podcasts, publications, videos, newsletters, and other interesting content. Subscribe to Jones Day Talks at Apple Podcasts and wherever else quality podcasts are found. Jones Day Talks is produced by Tom Kondilas. As always, we appreciate your listening. I'm Dave Dalton. We'll talk to you next time.

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