Next month, the Supreme Court starts its new term, one that has particular significance for practitioners litigating before and against the FTC. In In our first ever video blog, partner John Villafranco discusses the two consolidated cases that will be heard this term, Federal Trade Commission v. Credit Bureau Center, LLC and AMG Capital Management, LLC v. Federal Trade Commission, and how the Court is set to decide whether Section 13(b) of the FTC Act authorizes the Agency to seek monetary relief. John notes that, absent a legislative fix, which is not currently on the Congressional agenda, the FTC may very well be poised to lose a valuable tool in its arsenal.
Turns out the best defense may not be a good offense, at least when litigating against the FTC. The Northern District of Illinois yesterday rejected an attempt by multi-level marketer Neora, LLC (formerly Nerium) to obtain a declaratory judgment that the company did not operate as a pyramid scheme and that the FTC was not authorized to seek restitution or disgorgement under Section 13(b) of the FTC Act.
The court granted the FTC’s motion to dismiss, finding that the “the claims presented are not ripe for judicial resolution and Plaintiffs can defend themselves in the enforcement action” that remains ongoing in the Northern District of Texas.” As we discussed back in November 2019 when the suit was first filed, Neora sought a number of declaratory judgments, including that: (1) the FTC was overstepping its authority under the FTC Act in attempting to regulate multi-level marketing companies by guidance and declining to count certain internal consumption as genuine demand when conducting a pyramid scheme analysis; and (2) the FTC lacks authority under Section 13(b) to seek monetary relief.
The latter issue will be considered by the Supreme Court in the coming term in two consolidated cases, F.T.C. v. Credit Bureau Center and AMG Capital Management, LLC v. F.T.C. Just last week, as discussed here, the Northern District of California granted a stay in the FTC’s pending enforcement action against Lending Club on the grounds that the Supreme Court’s decision on the FTC’s powers under Section 13(b) would “greatly simplif[y]” the case, “as no monetary relief will be at issue.”
For Neora, the battle remains ongoing. The court emphasized that “Plaintiffs undoubtedly have an adequate remedy in the [pending] enforcement action” because they “can raise the same arguments they assert here as defenses in that action.” That case was recently transferred from the District of New Jersey to the Northern District of Texas, where it remains pending.
On August 20, a Northern District of California court stayed the trial of an action the FTC brought against Lending Club in 2018 pending a Supreme Court ruling on the FTC’s authority to seek monetary restitution under Section 13(b) of the FTC Act. The issue of whether the FTC has authority to seek monetary relief under Section 13(b) was placed squarely before the Supreme Court in two petitions for certiorari that were consolidated and accepted for review by the High Court in July. Those cases, F.T.C. v. Credit Bureau Center and AMG Capital Management, LLC v. F.T.C., will be argued in October.
In its LendingClub complaint, the FTC had sought substantial monetary relief from LendingClub pursuant to its authority under Section 13(b), in the form of “rescission or reformation of contracts, restitution, the refund of monies paid, and the disgorgement of ill-gotten monies.” The trial in LendingClub had been scheduled for October. In finding a stay of that trial warranted, the LendingClub court emphasized that the FTC’s authority to seek monetary relief under Section 13(b) (or lack thereof) is “an issue of enormous consequence to this case.” The court explained, “[g]oing forward with trial would needlessly burden LendingClub to put on a trial defense only to possibly have the entire enterprise mooted by the FTC’s inability to seek any monetary relief under Section 13(b).”
The FTC had argued that the hardship of presenting a meritorious defense while the Supreme Court’s 13(b) decision was pending did not merit a stay. The LendingClub court soundly rejected the FTC’s argument, finding that the issue was not simply about hardship, but about “the viability of the remedy motivating the case.” Given that the remedy itself has the potential to be extinguished in the coming months, the court concluded that holding a trial before the Supreme Court’s decision issues “is fundamentally inequitable.” The LendingClub court noted a Supreme Court ruling limiting the FTC’s powers under Section 13(b) would “greatly simplif[y]” the case, “as no monetary relief will be at issue.” The court predicted that “the elimination of monetary relief will likely facilitate a negotiated resolution.”
The year ended with a flurry of activity related to the FTC’s ability to obtain permanent injunctions and restitution under Section 13(b) of the FTC Act. As we head into 2020, a level-set is in order.
To File or Not File is No Longer the Question
On December 19, 2019, the FTC filed a petition for writ of certiorari following the 7th Circuit decision in FTC v. Credit Bureau Center. The Solicitor General (who had first dibs) chose not to file. By our count, this FTC filing marks only the fourth time that the agency has represented itself before the Supreme Court over the past 45 years.
That makes three petitions for review on this issue presently before the Supreme Court. In addition to the FTC’s petition in Credit Bureau Center, petitions are pending in two 9th Circuit cases: Publishers Business Services v. FTC and AMG Captial Management v. FTC. Whether the Supreme Court will grant certiorari in any of these cases remains to be seen. While the Circuit split certainly appears to justify review, the numbers are the numbers: the Court hears only 100-150 of the 7,000 to 8,000 cases that it is asked to review each year.
As expected, the FTC petition argued that the 7th Circuit’s ruling upset long-standing and well-grounded precedent: “a district court’s authority to grant a permanent injunction under Section 13(b) includes the authority to require wrongdoers to return money that they illegally obtained.” The petition focused on the plain meaning of the word “injunction,” as well as other authority in support of its contention that Section 13(b) should be understood to include restitution and other forms of monetary relief.
The FTC also argued that its position is consistent with legislative intent, asserting that Congress understood how the Supreme Court interpreted the law under Porter v. Warner Holding Co. and Mitchell v. Robert DeMario Jewelry, Inc. when Section 13(b) became law. Finally, the FTC argued Congress has since reviewed Section 13(b) more than once, without revision, after several circuits ordered defendants in FTC cases to repay consumers.
Where was Solicitor General Noel Francisco in all of this and why did his office decide to sit this one out? The answer lies with another case that will be heard by the Supreme Court this term: Liu v. SEC. In Liu, the petitioners have asked the Court to consider “whether the Securities and Exchange Commission may seek and obtain disgorgement from a court as ‘equitable relief’ for a securities law violation even though [the Supreme] Court has determined that such disgorgement is a penalty.”
The petitioners in Liu rely on the Supreme Court’s decision in Kokesh v. SEC, and more specifically, a footnote in the opinion where the Court stated that it was not addressing “whether courts have properly applied disgorgement principles in this context” or “whether courts possess authority to order disgorgement in SEC enforcement proceedings.” The opinion in Liu, which is expected in June, will answer these questions. As the Liu petitioners have pointed out, following Kokesh, a number of Courts of Appeals have considered whether disgorgement is a legally permissible equitable remedy in SEC cases, and have concluded that it was not. For example, Justice Kavanaugh, while on the D.C. Circuit, noted in a concurrence (Saad v. SEC) that Kokesh “overturned a line of cases from [the D.C. Circuit] . . . that had concluded that disgorgement was remedial and not punitive.”
The importance of the outcome in Liu extends beyond the SEC to the FTC. Like the SEC, the FTC has relied on disgorgement of ill-gotten gains as one of its primary remedial tools. If the Court rules in favor of the Liu petitioners, and determines that disgorgement is not within the SEC’s statutory authority, the FTC will be forced to distinguish restitution to consumers under 13(b) from “disgorgement” in securities laws or arguably find itself in a position where it will have to rethink its fraud program entirely.
The Solicitor General, in his request for an extension of time to petition for a writ of certiorari, questioned whether the Court might benefit if it decided Liu before it considered the 13(b) issue: “The additional time sought in this application is needed to complete consultation with interested agencies and components of the government and to assess the legal and practical impact of the court of appeals’ ruling, including the relationship between the question presented here and the question presented in Liu v. SEC.” Those consultations apparently led the Solicitor General to conclude that Liu would have an impact on the 13(b) issue, which could not have been welcome news to the FTC.
In its petition, the FTC disagrees with the Solicitor General, arguing that these cases do not pose overlapping questions (a position also advanced by the FTC’s 9th Circuit adversaries in filings by petitioners in Publishers Business Services and AMG Capital Management). All of this explains why FTC General Counsel Alden Abbott is counsel of record on the FTC petition and not the Solicitor General.
Needless to say, eyes are on Liu. Twelve amici curiae briefs have been filed since December 16, 2019, with the general sentiment that Congress has not expressly authorized the SEC to obtain monetary relief through disgorgement.
Interested parties are also lining up on the 13(b) issue. Cause of Action Institute and Washington Legal Foundation filed amici curiae briefs in support of both the AMG and Publishers Business Services petition. These amici briefs argue that (1) the plain meaning of 13(b) does not allow for courts to order monetary relief, (2) an expansive interpretation of 13(b) violates the separation of powers and constitutional rights, and (3) district courts should not be allowed to continue using “equity of the statute” (judicial discretion/judicial rulemaking) to order monetary relief.
Meanwhile, the Battles Rage On
The continuing questions over the extent of the FTC’s enforcement authority to obtain monetary relief under Section 13(b) did not stop the Commission from filing a lawsuit on November 1, 2019 against multi-level marketer Neora, LLC and its CEO Jeffrey Olson for purportedly operating an illegal pyramid scheme that used deceptive marketing to sell supplements, skin creams, and other products. All indications are that it is business as usual at the FTC.
Pursuant to Section 13(b), the FTC seeks an injunction to stop Neora’s alleged pyramid scheme and an award of restitution to return money to consumers. The lawsuit, filed in the District of New Jersey, alleges that Neora (formerly known as Nerium International) and its CEO offered false promises that potential distributors could earn financial independence if they joined the company’s pyramid scheme – while, in reality, most recruits would end up losing money.
Believing that the best defense is a good offense, Neora beat the FTC to the punch and filed a lawsuit in the Northern District of Illinois against the FTC, asking the court to declare that the company did not operate a pyramid scheme. The company’s complaint also asserted that the FTC is not authorized to seek restitution or disgorgement under Section 13(b).
The FTC will appear in the Northern District of Illinois on January 7, 2020 to present its Motion to Dismiss or, in the Alternative, Failure to State a Claim. The FTC will argue that Neora filed this suit in an attempt to preempt the FTC’s enforcement action in New Jersey, which seems obvious, particularly when you consider timing and Neora’s forum choice (7th Circuit). The FTC will further argue that Neora has only one possible cause of action under the Administrative Procedure Act but fails the requirements for judicial review. As a result, the claims are not ripe for judicial consideration or, alternatively, the court should decline to exercise its discretionary jurisdiction to hear the case.
December also saw the 10th Circuit joining the 13(b) debate with its holding in FTC v. Nudge. There, the FTC alleged that the defendants engaged in a real-estate investment seminar fraud. The court found that because one of the named parties, Buy PD, was part of a common enterprise and continued to provide services to further the fraud, it is “about to violate” the law. Buy PD argued it had stopped marketing real-estate investment seminars directly to consumers in 2016. In an opinion that must have provided a measure of relief to the FTC, Judge Robert J. Shelby concluded that, because Buy PD continued to provide services related to the fraud and was a part of the common enterprise, it was enough for liability under Shire (“the Complaint alleges facts sufficient to reasonably infer the common enterprise is violating or is about to violate the law.”).
As predicted, the dispute over the scope of the FTC’s 13(b) authority has resulted in a steady flow of motions in federal court. These include, among many others, FTC v. Hoyal & Assocs., FTC v. Abbvie, Inc., FTC v. Dorfman, and Complete Merchant Solutions v. FTC. Indeed, given the Circuit split, one might argue that it would almost be malpractice not to raise the issue in litigation at this point.
And one can only wonder how this is all playing out during the investigational phase, under Part 2 of the FTC’s Rules of Practice, as respondents become more emboldened during settlement discussions related to redress. After all, there is a very real prospect that litigation might lead to a payment of $0. It is not hard to understand why respondents might stand their ground in negotiations and prefer to roll the dice in litigation, as opposed to agreeing to voluntarily pay tens or hundreds of millions of dollars to the U.S. Government.
Eyes on Congress
With the judicial outcome uncertain, the FTC has turned to Congress, floating proposed legislation that seeks (1) clear authority to seek permanent injunctions without the requirement that a defendant “is violating, or is about to violate” the law, (2) express permission to seek monetary relief, including restitution and disgorgement, and (3) a 10-year statute of limitations.
This effort mirrors the effort in Congress to minimize the impact of any decision in Liu. In March 2019, Senator Mark Warner (D-VA) introduced the Securities Fraud Enforcement and Investor Compensation Act, which would authorize the SEC to seek and courts to award disgorgement and restitution (Senator Warner has included similar language in a bipartisan anti-money laundering bill, S. 2563, the ILLICIT CASH Act). Related legislation also has been introduced: the Investor Protection and Capital Markets Fairness Act (H.R. 4344), the Stronger Enforcement of Civil Penalties Act of 2019 (S. 1854 / H.R. 3641), and the Strengthening Fraud Protection Provisions for SEC Enforcement Act of 2019 (H.R. 3701).
Of these bills, H.R. 4344 is furthest along. On November 18, 2019, by a vote of 314-95, the House passed H.R. 4344, authored by Reps. Ben McAdams (D-UT) and Bill Huizenga (R-MI). The legislation – endorsed by SEC Chairman Clayton – would authorize disgorgement as a remedy that the SEC can seek. It would also establish a 14-year statute of limitations.
In remarks on the House floor, Rep. McAdams stated: “The SEC estimates that, in the two years since the Kokesh decision, they have had to forgo over $1.1 billion of ill-gotten gains that bad actors can now keep that don’t get returned to investors. . . . In addition to $1.1 billion in forgone funds, the SEC is increasingly spending time and staff resources fighting new legal challenges from bad actors claiming that the SEC shouldn’t be able to seek disgorgement at all.”
The strong (and unusual, in this day and age) bi-partisan support for the bill suggests that prospects in the Senate are probably pretty good. If this legislation becomes law, the Court’s holding in Liu would be a non-issue and prospects for legislation on the Section 13(b) issue would improve.
To date, we have not seen a stand-alone bill that would expressly provide the authorization that the FTC contends it already possesses, but one is likely in the making and there are other ways to achieve the same result. Revisions to Section 13(b) could be included in an appropriations bill or as part of comprehensive privacy legislation. We will have to wait and see.
When it comes to this issue, it is going to be an eventful year.
Stay tuned for more installments of the “Section 13 (b)log.”
Yesterday, Commissioner Christine Wilson testified before the U.S. House Committee on Energy and Commerce Subcommittee on Consumer Protection and Commerce, and asked Congress to clarify the extent of the FTC’s authority to obtain monetary relief under Section 13(b) of the FTC Act.
The Commissioner’s remarks reflect the agency’s concern over the recent decision of the U.S. Court of Appeals for the Third Circuit in FTC v. Shire Viropharma Inc., holding that the FTC may only bring a case under Section 13(b) of the FTC Act when the FTC can articulate specific facts that a defendant “is violating” or “is about to violate” the law. And Shire may not be a one-off decision; the same issue is under review in the Seventh Circuit, which heard argument last month in FTC v. Credit Bureau Center, is likely headed to the U.S. Court of Appeals for the Eleventh Circuit in FTC v. Hornbeam Special Situations, and is before the Ninth Circuit, where Judge Diarmuid O’Scannlain in FTC v. AMG Capital Management, urged the Circuit to sit en banc to review what he sees as wrongly-decided prior decisions that had allowed the FTC to pursue monetary damages under Section 13(b).
In her remarks, Commissioner Wilson provided some perspective on how important this issue is to the FTC:
Decades of cases have established two key principles. First, the FTC may bring actions in federal district court to obtain injunctive relief. Second, the authority to grant injunctive relief confers upon courts the full panoply of equitable remedies, including equitable monetary relief. Our ability to protect consumers relies heavily on this authority. For decades, the FTC has used Section 13(b) to halt unfair and deceptive practices that have caused billions of dollars in consumer injury.
Commissioner Wilson referred to Shire and AMG Capital Management, noting that “recent decisions have raised questions about our authority that conflict with the clear intent of Congress and long-established case law.” She rejected the reasoning of the Third Circuit, which concluded that the FTC cannot seek injunctive relief when the challenged conduct is not “ongoing or imminent” adding that “fraudsters frequently cease their unlawful conduct when they learn of an impending law enforcement action” or “often suspend dubious advertising claims or anticompetitive conduct during the pendency of an FTC investigation.” She concluded that “this outcome is contrary to both Congressional intent and the vast majority of Section 13(b) case law” and urged Congress to provide clarification consistent with the FTC’s reading of the statute.
Representative Tony Cardenas (D-CA) was sympathetic to the appeal for clarification. He noted that, in 2018, the FTC was able to provide $2.3 billion in refunds to consumers who were defrauded. He asked for further comment about the implications of the recent decisions. Chairman Joseph Simons characterized the effect as devastating to fraud enforcement efforts and the FTC’s ability to make consumers whole. In response to this this exchange, Representative Cardenas stated that he agreed that Congress needs to clarify the law.
Last month, we wrote about the decision of the U.S. Court of Appeals for the Third Circuit in FTC v. Shire Viropharma Inc., holding that the FTC may only bring a case under Section 13(b) of the FTC Act when the FTC can articulate specific facts that a defendant “is violating” or “is about to violate” the law. We noted that the same issue in the context of a consumer protection action is likely headed to the U.S. Court of Appeals for the Eleventh Circuit in FTC v. Hornbeam Special Situations LLC.
This issue is also before the Ninth Circuit, where, in a concurring opinion Judge Diarmuid O’Scannlain in FTC v. AMG Capital Management, urged the Circuit to sit en banc to review what he see as wrongly-decided prior decisions that had allowed the FTC to pursue monetary damages in federal court under Section 13(b) of the FTC Act. The “text and structure of the statute unambiguously foreclose such monetary relief,” O’Scannlain wrote.
Some background: dating back to the 1980s, the FTC routinely used Section 13(b) as the basis to file lawsuits in federal court to stop allegedly deceptive, unfair, or anti-competitive conduct, and to seek permanent injunctive and monetary relief. Under Section 13(b), the FTC may seek an injunction in federal court “[w]henever the Commission has reason to believe … that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the [FTC].”
While in cases of pending acquisitions or ongoing fraud it may be clear that the FTC has reason to believe someone “is violating” or “is about to violate” the law, the FTC has also brought cases under Section 13(b) for claims arising from abandoned conduct. Shire, Hornbeam, and now Credit Bureau Center address the FTC’s authority to bring an action in federal court under Section 13(b) in these circumstances. Having lost in the Third Circuit in Shire, the FTC is looking for a different result in the Eleventh and Seventh Circuits, in order to bolster what the FTC views as a critically important aspect.
In Credit Bureau Center, the appellant argued that an Illinois federal court should not have entered a judgment for $5.2 million against a credit-monitoring company because Section 13(b) only permits the FTC to seek injunctive relief over the alleged wrongdoing. In response, the FTC argued that, while Section 13(b) expressly is limited to injunctions, the Seventh Circuit has recognized that “once you have the power to restrain and enjoin, you then have the power to impose other equitable remedies.” U.S. Circuit Judge Diane Sykes appeared skeptical, responding that “this whole authority that the FTC has claimed is purely by interpretation through the word ‘injunction” and “[t]hat may be how the agency operates, but that’s not mentioned anywhere in the statute.”
As we await word from the Eleventh, Ninth, and Seventh Circuits, we also are waiting to see whether the FTC will appeal the decision in Shire. Wins in the Eleventh and Seventh Circuits, and a refusal by the Ninth Circuit to take up the issue en banc, would obviously change that calculation, making it more likely that the FTC would seek cert and press its defense in support of the status quo.