As the parties prepare for oral argument before the Supreme Court on January 13 in AMG Capital Management LLC et al. v. FTC, case number 19-508, amicus briefs in support of the Commission’s position have been filed this week, with most warning of dire consequences for consumers and competition if the case does not break the Commission’s way:

  1. The National Consumer Law Center, UC Berkeley Center for Consumer Law and Economic Justice, Center for Consumer Law and Education, Housing Clinic of Jerome N. Frank Legal Services Organization at Yale Law School, and Professor Craig Cowie

“Absent a ‘clear and valid legislative command’ to the contrary, Congress does not impliedly impinge on the equitable powers of a court…Consumer redress through Section 13(b) actions, as envisioned by Congress and provided by the court, continues to protect American consumers and promote a fair marketplace. Stripping the courts of their equitable power to provide redress would create perverse market forces that would expose vulnerable populations to fraud while putting lawful market actors at a competitive disadvantage.” (3-4)

“Incomplete justice against deceptive practices only serves to mar the reputation of legitimate members of the free market and perpetuate harm against the American public.” (28)

  1. Public Citizen

“If, as petitioners contend, federal courts lack the authority to award complete relief in a § 13 action, and may only halt unlawful conduct prospectively, scam artists and other wrongdoers will have a green light to engage in prohibited conduct that harms consumers, secure in the knowledge that they are likely to retain the economic fruits of their unlawful ventures.  The end result will be to increase the financial harms experienced by American consumers, while curtailing the relief that consumers may obtain after unlawful actors are caught.” (2)

  1. 29 State AGs

“Stripping the FTC of its authority to seek restitution under Section 13(b) would weaken its efforts to combat unfair and deceptive practices, which, in turn, would frustrate federal-state collaboration and require States to divert resources away from other consumer-protection efforts to perform the duties previously fulfilled by the FTC.” (2)

“Without such authority [to return ill-gotten gains to victims], consumers and businesses in the amici States will be deprived of what is rightfully theirs, wrongdoers will be allowed to profit from their illegal conduct, and markets will become less fair and competitive.” (22)

  1. Open Markets Institute

“Besides overthrowing the established meaning of an injunction and rewriting the statutory text, the arguments of AMG and its amici would also encourage corporate lawbreaking at the expense of consumers, workers, rivals, and independent businesses.” (2)

  1. Truth in Advertising, Inc.

“The Section 13(b) regime petitioners urge the Court to tear down also harnesses another historic hallmark of equity jurisdiction – its focus on making relief effectual, a vital priority where defendants have the means and inclination to dissipate assets and frustrate judicial remedies.” (5)

“This Court should not credit petitioners’ and amici’s assurances – based on the continued availability of parallel state-law remedies – that imposing their ‘narrow construction’ of Section 13(b) would not adversely affect consumer protection.  That claim ignores the central lesson of experience under consumer protection law: Remedies that are expansive on paper often prove ineffectual in practice. It takes nothing away from state enforcers to recognize that their efforts are not substitutes for those of the Commission, which has vast expertise, national jurisdiction, and global reach and is unimpeded by structural and legal complexities that challenge state-level efforts to address nationwide and global misbehavior.” (7)

“Hundreds of pages of briefing cannot obscure the glaring reality that a rule giving the worst wrongdoers an absolute right to retain funds they took from unwitting victims will make consumers and the economy more vulnerable to harm.” (32)

6. The American Antitrust Institute

“the goals of U.S. antitrust law will be significantly impaired if the Federal Trade Commission is unable to prevent unfair methods of competition by seeking disgorgement in appropriate antitrust cases under Section 13(b) of the Federal Trade Commission Act.” (1)

“If the FTC cannot seek disgorgement in those cases, anticompetitive conduct will continue to pay. And the Commission will be hard-pressed to prevent it.” (3)

“If Section 13(b) prohibited traditional equitable remedies, the agency’s – and courts’ – only option for ensuring that a company will be able to divest its illegally-acquired assets would be to block a merger or acquisition outright. And so the agency would always be forced to forego a more targeted remedy – with less impact on the regulated business – in favor of the most drastic alternative, even when the Commission itself believes it is unnecessary to do so.” (24)

7. 43 Professors of Remedies, Restitution, Antitrust, and Intellectual Property Law

“An overly rigid conception of the statutory injunction power as including only a command to act or not act, but not the adjunct authority to order an accounting of profits or restitution of ill-gotten gains, belies the historic meanings and uses of injunctive authority.  Such a strict and formalistic view ignores the long history of injunctions and incident authority also to order restitution, even when the statute provides for injunctions without explicitly listing other remedies.” (3)

“Eliminating the ability of courts to award restitution in §13(b) cases would cause serious harm in many cases. It would unjustly enrich defendants, leave wrongdoing under-deterred, and fail to carry out the very purposes of the FTC Act – protecting against exactly this type of wrongful profiting from consumers.” (26)

8. And finally, a group of nine former FTC officials, all of whom helped advance the FTC’s consumer fraud program through aggressive use of Section 13(b) authority at various times between 1995 and 2020.  These nine officials include one former commissioner (Mozelle W. Thompson, 1997-2004); three former Directors of the Bureau of Consumer Protection (the legendary Jodie Bernstein, 1995-2001, David C. Vladeck, 2009-2012, and Jessica Rich 2013-2017); and five other former prominent FTC consumer protection attorneys (Eileen Harrington, Mary K. Engle, C. Lee Peeler, Teresa Schwartz, and Joel Winston).

“Make no mistake, Section 13(b) remains the FTC’s most important enforcement tool” (3)

“Unless Section 13(b) authorizes equitable remedies, including the appointment of receivers, accountings, and the imposition of asset freezes, the FTC would have little power to prevent asset dissipation and consumer redress would often be a fantasy.” (4)

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This morning, the Supreme Court released its calendar for its January 2021 oral arguments. AMG Capital Management, LLC v. FTC is on the docket. Oral argument in AMG has been scheduled for January 13, 2020.

As we’ve noted in prior posts, the High Court in AMG will review the question of whether or not Section 13(b) of the FTC Act authorizes the FTC to seek monetary relief from the individuals and entities it pursues under that statutory provision. Signs to date point to a strong likelihood that the Court will disallow such monetary remedies, finding that such remedies run contrary to the statutory text. Based on questioning at January’s oral argument, we may have a better sense of which way the Court is leaning.

 

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This morning, in a brief line order, the Supreme Court vacated its prior grant of the Federal Trade Commission’s petition for certiorari in Federal Trade Commission v. Credit Bureau Center, LLC (“Credit Bureau”). Justice Barrett did not take part in the decision to vacate the grant of certiorari. None of the remaining Justices dissented from the order.

As we explained in a prior post, in Credit Bureau, the Seventh Circuit reversed its prior precedent, concluding that Section 13(b) of the FTC Act does not authorize the FTC to obtain monetary restitution. In doing so, the Credit Bureau court admonished that Section 13(b) must be taken on its own terms. “By its terms, section 13(b) authorizes only restraining orders and injunctions,” not restitution. 937 F.3d 764, 767.

The Supreme Court’s action will not prevent this issue from being litigated at the High Court. Credit Bureau had been consolidated with another case, AMG Capital Management, LLC v. Federal Trade Commission (“AMG”). AMG is in many ways a parallel case to Credit Bureau, with similar facts leading to an opposite outcome. In AMG, a Ninth Circuit panel disapproved of the broad and atextual reading of Section 13(b) allowing for monetary restitution, but concluded that it “remain[ed] bound by” the ample Ninth Circuit precedent broadly construing Section 13(b). 910 F.3d 417, 427. AMG remains before the Supreme Court, and oral arguments will be heard sometime in the first half of 2021.

While the Supreme Court’s vacation of the grant of certiorari in Credit Bureau cannot be viewed as a definitive endorsement of the Seventh Circuit’s position, it certainly comes close. While not an outright affirmance on the merits, the vacation signals that the Supreme Court is comfortable with the Seventh Circuit’s Credit Bureau holding. When the Supreme Court vacates grants of certiorari, it will often do so with the brief explanation that the original grant of certiorari was “improvidently granted,” meaning that the Supreme Court no longer believes the case merits review. The Supreme Court did not do that here. Instead, the High Court simply vacated the grant. This, along with the continued presence of AMG on the Supreme Court’s docket, signals that the Supreme Court does think the issues in Credit Bureau merit review, but the Court no longer believes Credit Bureau is the best vehicle to review the issue of monetary restitution under Section 13(b).

While the Supreme Court’s line order does not specify why the Court vacated the grant of certiorari, we believe there is one likely reason. Justice Barrett (who did not participate in the vacation of the grant of cert) was a member of the Seventh Circuit when Credit Bureau was decided. While then Judge Barrett was not on the Credit Bureau panel, the panel’s decision was reviewed by the entire Seventh Circuit because it overturned prior Seventh Circuit precedent. While some members of the Seventh Circuit dissented from the panel’s Credit Bureau decision, Judge Barrett did not. Judge Barrett’s decision to allow Credit Bureau to stand while she was on the Seventh Circuit certainly qualifies as participation in a lower court’s case before it made its way to the Supreme Court. Many believe that it would have been an ethical conflict for Justice Barrett to participate again in a review of Credit Bureau—effectively reviewing her own decision.

The Supreme Court’s decision to vacate the grant of certiorari in Credit Bureau thereby allows Justice Barrett to participate in the AMG case on the merits while avoiding any ethical issues. The eight members of the Court who chose to vacate the grant of certiorari Credit Bureau are signaling that they want Justice Barrett to participate in the proceedings.

This, in turn, seems like a strong signal that the Supreme Court may reverse the Ninth Circuit’s decision in AMG, concluding that Section 13(b) does not allow for the FTC to obtain monetary restitution. If the High Court agrees with the Seventh Circuit’s Credit Bureau decision and reverses the Ninth Circuit’s contrary AMG decision, there is no real need to review the Seventh Circuit’s decision on the merits. The Supreme Court’s reversal of the Ninth Circuit’s AMG decision will, of course, be precedential nationwide. And, the Supreme Court will thereby effectively affirm Credit Bureau, allowing Justice Barrett to participate in its AMG decision while bypassing any ethical quagmires.

This morning, the Supreme Court heard its long-anticipated arguments in AMG Capital Management, LLC v. Federal Trade Commission. As we have previously explained, in AMG, the FTC’s use of Section 13(b) of the FTC Act to obtain monetary remedies is under the High Court’s microscope. While the outcome won’t be known for months, the Justices questioning at oral argument seem to suggest that the case might not break the FTC’s way.

The facts of AMG are straightforward. Scott Tucker was the owner of a single-proprietor business, AMG Capital Management. The business’s sole function was to provide payday loans. The FTC sued Scott Tucker, the owner of AMG, under Section 13(b) of the Act, asserting that the terms disclosed in the loan notes AMG provided to consumers did not reflect the harsher terms that Tucker actually enforced. The district court found Tucker liable, and pursuant to Section 13(b), levied a staggering $1.27 billion in equitable monetary relief to be paid by Tucker to the Commission. Tucker appealed this ruling to the Ninth Circuit. Tucker’s primary argument on appeal was that Section 13(b) forecloses monetary relief. The Ninth Circuit affirmed, and AMG’s petition to the Supreme Court on this issue was granted.

While some of the Justices at oral argument—particularly Justice Barrett and Alito—seemed concerned that reversing the Ninth Circuit’s judgment would provide an undeserved windfall to Tucker, a clear majority of the Court was more focused on the FTC’s broad interpretation of the statutory text. Justice Kavanaugh expressed the problem clearly and succinctly, when he stated to FTC counsel that, although he felt sympathy for the FTC’s concern with stemming bad actors, a regulatory agency is bound by its statutory mission. In Justice Kavanaugh’s words, “It seems the problem you have is the text.”

Although FTC counsel argued that prior case law from the nineteenth century allowed monetary equitable relief along with injunctive relief, Justice Roberts pointed out that those cases largely involved courts using their inherent equitable powers. An executive agency, by contrast, only retains equitable powers to the extent it is given them by statute. And while FTC counsel argued that the legislative intent when Section 13(b) was codified was to imbue it with broad equitable powers, AMG’s counsel effectively rebutted that argument, explaining that the best “way we determine Congress’s intent is by looking at the words on the page.”

While nothing is certain until a final decision is rendered, following oral arguments it seems even more likely that Section 13(b) of the FTC Act will be limited to its plain terms, allowing the FTC to use the statutory provision to obtain injunctive relief in court, and only that. As multiple Justices noted, Section 19 and Section 5(l) of the Act provide alternative avenues for relief. While Section 13(b) may be a more efficient method for the FTC to obtain monetary remedies, the majority of the Justices at oral argument signaled that efficiency alone is not a sufficient basis for imbuing an agency with such a powerful remedy.

All is not lost for the FTC. Again, here, Justice Kavanaugh led the way with a proposed solution for the Agency, when he asked, “Why isn’t the answer here for the Agency to seek this new authority from Congress for us to maintain a principle of separation of powers?”  With a new Congress about to be seated and proposed language that would amend Section 13(b) floating around the Hill, congressional clarification very well might be the FTC’s best path forward.

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With one eye on the U.S. Supreme Court, which is being asked to confirm that the FTC has authority to seek monetary relief under Section 13(b) in AMG Capital Management, LLC v. Federal Trade Commission, and the other eye on Congress which may or may not pass legislation authorizing monetary relief under Section 13(b), there has been very little said about what we might expect if neither were to occur.  What if the Court finds that 13(b) does not provide this authorization and Congress does not act?  How might the FTC seek consumer redress against entities alleged to have engaged in unfair or deceptive advertising practices in district court?  One answer is Section 19 of the FTC Act.  So then, what can we expect if Section 19 becomes the FTC’s best path forward?

Under Section 19 of the FTC Act, the FTC can pursue consumer redress for alleged unfair or deceptive practices, but first must file administratively for an order directing the target of the investigation to cease and desist from the allegedly unfair or deceptive practices and, if the order is challenged, go through several rounds of review—first by the Commission and then by the United States Court of Appeals.  Only after the Commission’s order becomes final can the FTC commence the Section 19 action in district court for consumer redress.  That action, of course, is still subject to the typical federal appellate process—which can make a Section 19 action an extremely time-consuming process.

F.T.C. v. Figgie International, Inc. provides an example of how Section 19 would work, as well as its limitations.  In Figgie, the FTC obtained a cease and desist order under Section 5 ordering Figgie to cease and desist from engaging in the unfair or deceptive practices it used to market its Vanguard heat detector products.  According to the FTC, “[t]he crux of Figgie’s message was that heat detectors could be relied on as life-saving fire warning devices, and that the best protection for one’s home is a combination of four or five heat detectors to one smoke detector.”

Following the administrative proceeding, the Administrative Law Judge concluded that every one of Figgie’s promotional materials “‘clearly conveys’ the claim that Vanguard heat detectors provide the necessary warning to allow safe escape from a residential fire.”  The promotional materials also discussed the National Fire Prevention Association (“NFPA”) standards “‘in such a way as to leave the reader with a distinct impression that [the NFPA] regards both smoke detectors and heat detectors as equally effective.’”  However, while the NFPA previously recommended using both smoke and heat detectors as part of a household fire warning system, after fire prevention experts conducted a series of tests that illustrated the limitations of heat detectors, the NFPA revised its standards to require only that smoke detectors (not heat detectors) be installed on each level of the home and outside each bedroom.

After an administrative trial, the ALJ found that Figgie knew of the changes in the NFPA standards and the limitations of heat detectors prior to making the challenged representations.  The ALJ found that Figgie’s representations were “misleading and deceptive in the absence of an explanation of the limits of heat detectors and the comparative superiority of smoke detectors.”  On appeal, the Commission upheld most of the ALJ’s findings and conclusions, but changed the disclaimer required on Figgie’s heat detectors.  The rest of the Commission’s cease and desist order “closely tracked the ALJ’s order” and prohibited Figgie from representing that heat detectors provide the necessary warning to permit safe escape from most residential fires, that combining heat detectors and smoke detectors provide greater warning than smoke detectors alone, and that Figgie may not misrepresent the capabilities of heat detectors to provide warning that would permit people to escape from residential fires.

After the cease and desist order became final (following an appeal to the Fourth Circuit Court of Appeals), the FTC filed an action pursuant to Section 19 in U.S. District Court for the Central District of California seeking consumer redress.  The FTC was awarded summary judgment by the district court, which found Figgie engaged in dishonest or fraudulent practices and awarded millions of dollars in consumer redress.

Of note, prior to summary judgment the district court granted the FTC’s “motion to deem ‘conclusive’” the list of 42 findings from the administrative proceeding.  That is because in a Section 19 proceeding, the Commission’s findings of material fact in support of a cease and desist order “shall be conclusive.”  On appeal, the Ninth Circuit noted that [t]he Commission’s findings, and those of the administrative law judge which the Commission adopted, are accordingly treated as established facts for purposes of this decision.”  Thus, to the extent that a district court’s findings deviate from the findings of the Commission, “the Commission’s findings control.”

The Ninth Circuit decision noted that “liability for past conduct would be imposed on Figgie if a reasonable person would have known in the circumstances that it was dishonest or fraudulent for Figgie to use the practices it did to sell heat detectors.”  In rejecting Figgie’s argument that actual knowledge was required, the Court noted that “Congress unambiguously referred the district court to the statement of mind of a hypothetical reasonable person, not the knowledge of the defendant.  The standard is objective, not subjective.”

Moreover, while the Ninth Circuit stated that “Section 19 liability must not be a rubber stamp of Section 5 liability,” it held that “[w]hen the findings of the Commission in respect to defendant’s practices are such that a reasonable person would know that the defendant’s practices were dishonest or fraudulent, the district [court] need not engage in further fact finding other than to make the ultimate determination that a reasonable person would know.”  The Figgie action, it held, was such a case, because it found there is “ample evidence in the Commission’s findings to satisfy a court that a reasonable person with Figgie’s access to the scientific data establishing the relative inferiority of heat detectors would have known that Figgie’s vigorous misrepresentations on their behalf were dishonest and fraudulent.”

And while the ALJ acknowledged “a debate among fire professionals” concerning the tenability limits of heat detectors, the Ninth Circuit relied on findings that “[a] consensus among experts, well supported by careful testing, established that smoke detectors almost always provide earlier warning than heat detectors, and Figgie had no basis for doubting the truth of the consensus, yet Figgie marketed its heat detectors in a manner designed to mislead consumers about this critical information.”  Hence, the conduct was deemed dishonest or fraudulent.

As Figgie demonstrates, the ALJ’s findings of fact almost certainly will be conclusive and, if appealed to the Commission, they are likely to be adopted.  The Commission, after all, is the entity that authorized the issuance of the administrative complaint that precipitated the Section 19 action in the first place.  All of this underscores how important it is to contest any underlying facts that may ultimately be considered to bear on whether the challenged conduct was dishonest or fraudulent.

Figgie seems to suggest a plausible alternative, if things don’t break the Commission’s way in AMG Capital Management.  If that is the case, then why haven’t we seen more Section 19(b) cases over the years?  One answer is undoubtedly the success of the Section 13(b) program.  Why engage in administrative litigation, without the possibility of consumer redress absent a showing of dishonest and fraudulent conduct?  This has undoubtedly led to the ALJ becoming a version of the Maytag repairman, with relatively few cases to manage.  The numbers bear it out:  from 1977 to 1986, the Commission brought 94 administrative cases; from 2007 to 2017, the Commission brought only 12.

But it is not just the money, it is the requirement that the Commission establish that the conduct was dishonest and fraudulent – no small task – and timing too.  Section 19 cases, as they have historically been conducted, take a very long time.  Consider that the FTC issued its administrative complaint against Figgie in May 1983, the ALJ issued his findings of facts in October 1984, and the decision was appealed to the full Commission and substantially adopted in April 1986.  Figgie then appealed the Commission’s Order to the U.S. Court of Appeals for the Fourth Circuit, where it was ultimately upheld in 1987.  By the time that the Ninth Circuit issued its decision on appeal from the Section 19 district court action and the petition for certiorari to the Supreme Court was denied in early 1994, more than a decade had passed since the issuance of the FTC’s administrative complaint.

Section 13(b) at the Start of the Supreme Court’s October Term:  Where Things Stand, Where They’re Likely to End, And A Proposed Legislative Fix

The Supreme Court’s new term began last Monday. This new term has taken on heightened significance with President Trump’s nomination of current Seventh Circuit Judge Amy Coney Barrett to the High Court. President Trump and Senator McConnell have vowed to place Barrett on the Court this year, with the aim of doing so before the November 3 election. With her confirmation hearing underway, it seems all but certain that Judge Barrett will soon become Justice Barrett, giving the Supreme Court a 6-3 conservative majority and likely cementing a rightward shift in upcoming jurisprudence for years to come.

One primary concern of the Court’s newly invigorated majority is textual fidelity. Sticking to a textual interpretation of statutes was something former Justice Scalia touted as a central tenet of judicial restraint. While originally more a conservative position, textualist renderings of statutes— in which the Court hews closely to the words of the texts and eschews interpretations that stray from the language’s plain meaning—have gained acceptance on both sides of the legal divide.

For practitioners litigating before and against the FTC, the ramifications of this textualist shift in jurisprudence will likely be massive. In two consolidated cases currently pending before the Court, Federal Trade Commission v. Credit Bureau Center, LLC and AMG Capital Management, LLC v. Federal Trade Commission, the new justice and her colleagues will be tasked with deciding whether or not Section 13(b) of the FTC Act authorizes the FTC to seek monetary relief from the individuals and entities it pursues under that statutory provision. Those cases, stemming from the Seventh and Ninth Circuits, respectively, will be heard and decided sometime in the first half 2021.

Although the text of Section 13(b) speaks only of injunctive relief, appellate courts have extended the reach of 13(b) to include monetary “restitution” since 1982. In 1989, the Seventh Circuit in FTC v. Amy Travel Serv., Inc. decided that Section 13(b) “carries with it the power to issue whatever ancillary equitable relief is necessary.” 875 F.2d 564, 571 (quotation omitted). Over the years, this expansive definition of 13(b) was adopted by nearly all of the Circuit Courts.

But that expansive definition of 13(b) is beginning to erode. On September 30, 2020, the Third Circuit, in FTC v. AbbVie Inc. et al, joined the Seventh Circuit in concluding that the reach of 13(b) does not extend to monetary restitution. These appellate decisions, along with the new composition of the Supreme Court, strongly suggest that, absent a legislative fix, the FTC’s historically broad restitution powers under 13(b) may soon be cut back, leaving practitioners with a wide-open question: What comes next?

Many believe that a legislative fix is in order, and steps have been taken to address the issue in Congress. Proponents argue that the FTC needs the broad powers appellate courts have historically provided it under Section 13(b) to indemnify the public against truly bad actors who commit egregious fraudulent conduct. But is a return to the status quo ante the right course of action?

One view is that a legislative remedy should be limited, so that restitution would be available under 13(b) only where the conduct rises to the level of  the “dishonest or fraudulent” standard articulated in Section 19 of the FTC Act. The FTC has a need for vibrant Section 13(b) remedies, but those remedies are only appropriate where the actors either knew or should have known that their conduct was false or deceptive. In more of the run of the mill substantiation cases, administrative proceedings are far more appropriate. There is a strong argument that any new language added to Section 13(b) should make that distinction clear.

Federal Trade Commission v. Credit Bureau Center, LLC (“Credit Bureau”)

Credit Bureau concerns a credit monitoring website that offered consumers what was purportedly a “free credit report and score.” Consumers opting to receive this report would unknowingly be enrolled in a monthly “membership,” costing $29.94 a month. Consumers only learned that they had been enrolled in the business’s monthly service when they received a post-hoc letter, detailing the commitment they had supposedly made.

The FTC sued Michael Brown, the sole owner and operator of Credit Bureau, under Section 13(b) of the Act. Relying on this longstanding precedent allowing the FTC to use Section 13(b) to assess money damages, the district court ordered Brown to pay more than $5 million is restitution to the FTC.

The district court’s ruling was appealed to the Seventh Circuit Court of Appeals. The Seventh Circuit, in a precedential opinion, reversed, finding that the FTC does not have the authority to obtain monetary restitution under Section 13(b). In doing so, the Credit Bureau court admonished that Section 13(b) must be taken on its own terms. “By its terms, section 13(b) authorizes only restraining orders and injunctions,” not restitution. 937 F.3d 764, 767. Because Section 13(b) does not explicitly authorize monetary restitution, the Seventh Circuit concluded that the FTC has no restitution powers under 13(b).

Ironically, it had been the Seventh Circuit, in Amy Travel Serv., that had originally expanded the FTC’s restitution powers under Section 13(b) thirty-one years ago. Although the principle of stare decisis would normally have constrained the Credit Bureau panel to follow Amy Travel’s precedent, even if the current panel disagreed with it, the Credit Bureau court decided that the textualist Supreme Court of the present-day would not allow Amy Travel to stand. In the words of the Seventh Circuit, “[s]tare decisis cannot justify adherence to an approach that [recent] Supreme Court precedent forecloses.” 937 F.3d 764, 767. The FTC asked the full Seventh Circuit to rehear the case, but that request was denied.

After being denied rehearing before the full Seventh Circuit, the FTC petitioned for certiorari of the Seventh Circuit’s Credit Bureau decision to the Supreme Court. In its Supreme Court petition, the FTC asked the Supreme Court to uphold the textual reading of Section 13(b) that has become prominent over the past thirty years. The Supreme Court accepted the FTC’s petition, granting certiorari, in July.

Notably, the FTC is representing itself before the Supreme Court. This is highly unusual. In the normal course of events, the Solicitor General of the United States represents government agencies at the High Court. In this case, the Solicitor General chose to sit it out, signaling that the Trump Administration might agree with the Seventh Circuit’s reading limiting the FTC’s powers under 13(b).

AMG Capital Management, LLC v. Federal Trade Commission (“AMG”)

AMG is in many ways a parallel case to Credit Bureau, with similar facts leading to an opposite outcome. Indeed, depending on what happens at the Supreme Court next year, AMG may represent the last of the old guard of cases in which the appellate court affirms the FTC’s broad restitution powers under Section 13(b).

AMG, like Credit Bureau, involved a single-proprietor business, AMG Capital Management. The business’s sole function was to provide payday loans. The FTC sued Scott Tucker, the owner of AMG, under Section 13(b) of the Act, asserting that the terms disclosed in the loan notes provided to consumers did not reflect the harsher terms that Tucker actually enforced. The district court found Tucker liable, and pursuant to Section 13(b), levied a staggering $1.27 billion in equitable monetary relief to be paid by Tucker to the Commission.

Tucker appealed the district court’s ruling to the Ninth Circuit Court of Appeals, arguing, inter alia, that Section 13(b) forecloses monetary relief. Like the Seventh Circuit in Credit Bureau, the Ninth Circuit noted that the argument that 13(b) does not allow restitution “has some force.” 910 F.3d 417, 426. Yet, unlike the Seventh Circuit, the AMG panel concluded that it “remain[ed] bound by” the ample Ninth Circuit precedent broadly construing Section 13(b). Id. at 427.

Two of the three judges on the AMG panel, in separate concurrences, called for the Ninth Circuit to rehear the case en banc, in order to overrule its prior precedent (something only the full Circuit has the power to do in the Ninth Circuit). However, the full Circuit denied AMG’s petition for a panel rehearing. After its petition for rehearing was denied, AMG filed a petition for certiorari with the Supreme Court. The Supreme Court granted that petition in July, consolidating the case with Credit Bureau for a single oral argument.

FTC v. AbbVie Inc. et al (“AbbVie”)

On September 30, in a precedential decision, the Third Circuit joined Credit Bureau in concluding that “district courts lack the power to [authorize monetary disgorgement] under Section 13(b).” The facts in Abbvie concerned a patented drug called AndroGel. The FTC sued the owners of Androgel’s patent under Section 13(b), alleging they had filed sham patent infringement suits against generic drug makers, and that they had entered into an anticompetitive reverse-payment agreement with one of those generic providers. The district court awarded the FTC disgorgement of $448 million.

The Third Circuit reversed the order of disgorgement. In doing so, the Abbvie panel, like the Seventh Circuit before it, focused on the text of the statute. The Abbvie court found that the text was dispositive, allowing only injunctive relief and (at best) minimal monetary penalties. In the Third Circuit’s view, “Section 13(b) authorizes a court to ‘enjoin’ antitrust violations. It says nothing about disgorgement, which is a form of restitution.” Emphasizing this point, the court wrote that “[a] contrary conclusion would undermine the FTC Act’s statutory scheme.” In reaching its conclusion, the AbbVie court explicitly relied on the findings of its sister Circuits in Credit Bureau and AMG, calling the Seventh Circuit’s Credit Bureau decision “a thorough and well-reasoned opinion.”

Because AbbVie was just decided, the Supreme Court will not be hearing it directly this term. However, Abbvie indicates that, when it comes to 13(b), the dominoes are falling. The appellate courts, like the Supreme Court, have become much more textually inclined over the last decade. The Third Circuit’s AbbVie panel consisted of two Trump appointees and a George W. Bush appointee. The parties before the Supreme Court in Credit Bureau are currently in the midst of briefing. The Third Circuit’s AbbVie decision is certain to play a large role in that briefing, and has further potential to influence the Supreme Court’s Credit Bureau decision.

The End of Restitution Under 13(b)?

Seventh Circuit Judge Amy Coney Barrett, President Trump’s nominee to join the Supreme Court, has often affirmed her textualist beliefs. This past summer, Barrett was quoted as explaining that “textualism matters because it is a theory, one that I think is consistent with the judicial role under the Constitution of what I do quite often, which is interpreting statutes.” Although Barrett was not on the Seventh Circuit’s Credit Bureau panel that reversed Amy Travel and concluded the FTC does not have broad restitution powers under Section 13(b), she did join the majority of the Seventh Circuit in voting to deny rehearing of that panel decision. This, along with her textualist bona fides, strongly suggests a Justice Barrett would affirm the Seventh Circuit and reverse the Ninth Circuit, concluding that Section 13(b) does not allow for monetary relief.

Even in the unlikely event Judge Barrett is not confirmed to the Supreme Court, any of the other women on President Trump’s short list are likely to take a similar textualist position. Even the shrinking liberal wing of the High Court has lately been going textualist, especially when it comes to statutory language akin to that of Section 13(b), language that is far from unambiguous.

Earlier this year, in Liu v. Securities and Exchange Commission, the Supreme Court analyzed a similar statute found in the Securities Exchange Act, Section 21(d)(5). The appellate courts had historically treated that statute similarly to 13(b) of the FTC Act, allowing the SEC to use it to seek monetary relief even though its text said nothing about disgorgement. In its June 22, 2020 ruling, the Supreme Court significantly narrowed the disgorgement remedy, finding that the text of the Exchange Act does not allow for the broad monetary disgorgement SEC has been wielding. Notably, it was Justice Sotomayor—now probably the most liberal member of the Court—that authored the Supreme Court’s Liu decision.

Textually, Section 13(b) provides even more limited powers than Section 21(d)(5) of the Exchange Act. While the Exchange Act specifically allows for “any equitable relief,” Section 13(b) of the FTC Act expressly limits itself to injunctive relief. Given the textualist inclinations of the current Court, and its continuing march toward textualism if Barrett is elevated to the bench—there is good reason to believe the justices will soon narrow or even do away with the FTC’s ability to seek monetary relief under 13(b).

And forces in favor of doing exactly that are ensuring their voices will be heard.  An amicus brief filed last week by the Washington Legal Foundation summarized the position of the groups in a manner that they hope will be fruitful:

To ‘start with the obvious,’ ‘injunction’ does not mean ‘restitution.’  Credit Bureau Ctr., 937 F.3d at 771-772.  ‘Apples,’ after all, does not mean ‘oranges.’  Nor does ‘injunction’ mean ‘equitable relief (including, at times, restitution).’  That would be like saying that ‘apples’ means ‘fruit (including, at times oranges).’  Nor, finally, can it be said that some aspect of the FTC Act’s structure reveals Congress’s subtle intent to use ‘injunction’ to mean ‘injunction, but maybe restitution too.’  Section 13(b) is plainly designed to be ‘a simple stop-gap measure,’ 910 F.3d at 431 (O’Scannlain, J., specially concurring), one that enables the FTC to enjoin a practice while it uses other statutory authority to prosecute an offender.

The Issue is Having an Effect in the Courts and at the Negotiating Table

With the fate of Section 13(b) in the balance, practitioners and lower courts are catching on. In late August, for example, a Northern District of California court granted the Motion to Stay of defendant LendingClub in a 13(b) action, pending the Supreme Court’s determination in Credit Bureau. The district court reasoned that, if the High Court significantly narrows 13(b)’s scope, “the viability of the remedy motivating the case” against Lending Club would disappear.

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).”

Lending Club is not the only defendant caught in the FTC’s crosshairs to raise the prospect of a near-term sea change. To date, at least nine other defendants in 13(b) actions around the country have requested that courts stay their cases pending the Supreme Court’s decision in Credit Bureau. We fully expect to see a flurry of these motions in the months ahead.

Earlier this month,  a federal district court judge in the Northern District of Texas granted one such motion, staying an FTC action against Match Group, Inc. In its complaint, the FTC had alleged that the company used fake love interest advertisements to trick consumers into purchasing paid subscriptions on Match.com, and sought disgorgement under Section 13(b). Notably, the Texas court chose to stay the case even though it was at an early stage – discovery had not yet commenced – evidently believing that the FTC would abandon its action if it could no longer receive a monetary remedy.

And just this past Friday, a federal district court in the Central District of California ruled for the FTC and against the defendants in FTC v. Cardiff, another 13(b) action. While the court had denied the defendants’ motion to stay the case prior to resolution of liability, “the Court recognized that the United States Supreme Court will likely decide whether restitution is available under Section 13(b)” in the coming term. The Cardiff court therefore stayed the resolution of liability pending the Supreme Court’s ruling, even though it had conclusively determined the defendants were liable under 13(b).

The effects of a potential Supreme Court decision neutering Section 13(b) also have implications outside of the courtroom. For companies currently engaged in FTC negotiations, knowing that a potential Supreme Court ruling limiting the FTC’s equitable powers under 13(b) can be a valuable asset. The awareness that the FTC may not be able to obtain monetary relief through Section 13(b) has an obvious effect on the context of such negotiations. Savvy practitioners now have the ability (some might say the obligation) to leverage the potential limitation of Section 13(b) restitution in order to push the FTC to discount monetary demands. After all, the FTC may soon lose any ability at all to demand monetary relief under 13(b).

What Comes Next?

Under the current 13(b) framework, the FTC has the ability to take a party directly to court, and to sue for both monetary and injunctive relief. If the FTC’s ability to sue for monetary relief goes away, the FTC will still be able to use Section 13(b) to enjoin a party in federal court, but in order to obtain monetary restitution, the FTC will have to resort to Section 19 of the FTC Act.

Under Section 19 of the Act, the FTC can seek monetary damages against a party in federal court, eventually. But the process to do so is cumbersome and time-consuming. First, the FTC must bring the case at the Commission before an Administrative Law Judge. Assuming the FTC prevails before the ALJ, the losing party can (and almost certainly will) appeal that decision to the full Commission. The FTC must make its case a second time before the Commission in order to receive a final order, allowing the case to be brought in federal court. Only then can the FTC begin prosecuting the actual lawsuit against the party. Especially compared to the current Section 13(b) framework, the Section 19 process is lengthy and convoluted, making it far harder for the FTC to obtain quick and effective monetary remedies.

There is some hope for those concerned about the FTC losing a major weapon in its arsenal following the Supreme Court’s Credit Bureau decision. On September 17, four Senate Republicans introduced S. 4626, the Setting an American Framework to Ensure Data Access, Transparency, and Accountability (SAFE DATA) Act – a comprehensive privacy bill. Section 403 of the bill, as currently written, would modify the text of Section 13(b) to clarify that the FTC has the explicit ability to obtain monetary restitution. The proposed provision comes in response to numerous agency requests for Congressional action on 13(b) following ongoing legal challenges to the scope of its authority.

While some portions of the SAFE DATA Act are contentious, revising Section 13(b) seems to carry bipartisan support. At a September 23 hearing on privacy legislation, Ranking Member Maria Cantwell, a Democratic Senator from Washington, suggested that the “core mission of the FTC would be crippled” without the authority to obtain monetary relief under Section 13(b). This suggests that a bipartisan legislative fix could be in the offing. Of course, given the political climate, such a legislative remedy is unlikely to be enacted until 2021, at the earliest. Without the enactment of such legislation, there is a very real possibility FTC’s ability to obtain monetary restitution from parties under Section 13(b) will be curtailed in the coming year.

Any Legislative Fix Should Curb FTC Excess

In the absence of the availability of monetary restitution under Section 13(b), the FTC will likely make more use of its remaining 13(b) powers. Particularly, the FTC will likely increasingly use Section 13(b) to attempt to enjoin and freeze companies’ assets quickly while a Section 19 action is pending. Instead of the current Section 13(b) landscape, consisting of federal litigation taking place over a defined period of time, followed by a potential money judgment (or not), companies in such a scenario would face potentially years of Section 19 litigation at the FTC and in court while their assets have already been frozen under Section 13(b).  This would have a devastating effect on a company’s business.

By losing its ability to seek 13(b) monetary restitution, the FTC could thereby ironically gain tremendous leverage over companies it ends up suing for injunctive relief under Section 13(b). Many companies would likely choose to settle with the FTC rather than face an indefinite asset freeze, even in those cases where settlement might not be appropriate.

To be sure, you would expect just about all parties to agree that the FTC should not be able to freeze assets of a typical advertiser whose substantiation for a product claim is called into question and there is no evidence that they acted in a dishonest and fraudulent manner. While there is an obvious difference between cases of fraudulent conduct and more run of the mill substantiation cases, the line has become increasingly blurred over the past ten years.

Given the Court’s leanings and the evident bipartisan support to reinvigorate Section 13(b), we may see a legislative fix in the coming year. Any legislative remedy should clarify that Section 13(b)’s remedies—both injunctive and monetary—can only be used against truly bad actors. In this regard, Congress has a clear legislative playbook to follow. Section 19 of the FTC Act allows the FTC to obtain monetary remedies only for “dishonest or fraudulent conduct.”

While the power courts of appeals have given the FTC under their expansive interpretations of Section 13(b) is warranted in severe situations, it should not be doled out to companies engaged in routine if not always perfect behavior, such as an alleged failure to properly substantiate claims. The FTC has other, administrative remedies to deal with those types of problems, and if the current Rules of Practice do not allow for acceptably fast disposition (they do not), those Rules can be revised. Section 13(b), however, is a powerful tool. If and when it is revised, Congress should ensure it is used only when necessary and appropriate – in cases involving dishonest and fraudulent conduct.

For more information on the FTC and other topics, see:

 

Advertising and Privacy Law Resource Center

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.

Stay tuned for more installments of the “Section 13 (b)log.”

For more information on the FTC and other topics, visit:

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.”

 

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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.”