The FTC Loses Big in the Seventh Circuit

In the August 21 split panel decision issued in Federal Trade Commission v. Credit Bureau Center LLC, the Seventh Circuit held that section 13(b) of the Federal Trade Commission Act (“FTCA”), 15 U.S.C. § 53(b), does not authorize an award of restitution.  In overturning its earlier precedent, the Seventh Circuit created a circuit split.  We expect that the FTC likely will seek Supreme Court review, and if that happens, it is unclear if the Court will accept the case.  This decision, at least temporarily, represents further weakening of the Federal Trade Commission’s (“FTC”) ability to obtain monetary relief.  It also could support an argument that the authority of other agencies, such as the Food and Drug Administration (“FDA”), should be revisited.

Background

The specifics of the case against Michael Brown and his company, Credit Bureau Center, are not important to the key holding in this case.  The long and short of it is that Michael Brown defrauded consumers into signing up for a monthly credit-monitoring service, resulting in millions of dollars of revenue.  Consumers complained to the FTC, which opened an investigation.  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].”  In January 2017, the FTC sued Brown under section 13(b) of the FTCA seeking an injunction and restitution.

On the Commission’s motion, the district court issued a temporary injunction, froze Brown’s assets, and appointed a receiver to manage his company.  Brown and the Commission later filed cross-motions for summary judgment.  In addition to contesting liability, Brown argued that section 13(b) does not authorize an award of restitution.

The Majority Opinion

The Seventh Circuit dedicated the bulk of its 66-page majority opinion to the issue of whether section 13(b) allows for restitution.  (It summarily upheld the lower court’s finding of liability and the permanent injunction.)  FTC did not seriously contest that the statutory authorization for injunctions in section 13(b) encompasses other forms of equitable relief like restitution, but contended that section 13(b) implicitly authorized restitution, pointing to Seventh Circuit precedent in FTC v. Amy Travel Service, Inc., 875 F.2d 564, 571 (7th Cir. 1989).

The court overturned Amy Travel, stating that it had erred in endorsing the notion that section 13(b) authorizes awards of restitution, not just restraining orders and injunctions.  The court noted that its current analysis was primarily one of statutory interpretation that had previously been “obscured in layers of caselaw.”  In acknowledging its creation of a circuit split, with the Ninth and Eleventh Circuits pitted directly against the finding here, the Seventh Circuit noted, “No circuit has examined whether reading a restitution remedy into section 13(b) comports with the FTCA’s text and structure.  Nor has anyone determined whether § 45 forecloses this remedy.”  Note that this very issue has arisen in other courts, including a district court case within the Eleventh Circuit that reached the same result as the Seventh Circuit did here.

Further, the court stated that stare decisis alone could not overcome the earlier case’s clear incompatibilities with the FTCA’s text and structure as well as the U.S. Supreme Court’s instruction in Meghrig v. KFC W., Inc., 516 U.S. 479, 487–88 (1996), “not to assume that a statute with ‘elaborate enforcement provisions’ implicitly authorizes other remedies.”  Because the FTCA has two detailed remedial provisions that expressly authorize restitution if the Commission follows certain procedures, allowing implied restitution through section 13(b) allows the Commission to circumvent these elaborate enforcement provisions.  Moreover, reading an implied restitution remedy into section 13(b) would make these other provisions largely pointless.  Thus, the court concluded that section 13(b)’s grant of authority to order injunctive relief does not authorize an award of restitution.

The Dissent

Chief Judge Wood, joined by Circuit Judges Rovner and Hamilton, wrote a dissent that focused on both a belief that the majority was making a mistake, and that it was doing so in a procedurally inappropriate way by avoiding en banc review.  The dissent characterized the majority opinion as incorrectly extrapolating from cases addressing whether a private party has an implied right of action to whether a government agency, which enjoys an express right of action under a statute for injunctive relief, is entitled to a restitutionary remedy that is ancillary to, or part of, the injunction.  The dissent further noted that the distinction of a government plaintiff “is especially important to the public-interest component of the analysis when the government seeks remedies that (1) lie uniquely within its toolbox and (2) are aimed squarely at undoing public harms and preventing future ones through deterrence.”

According to the dissent, the majority opinion “upends what the agency and Congress have understood to be the status quo for thirty years, and in so doing grants a needless measure of impunity to brazen scammers like the defendant in this case.”

The Final Word?

As the court noted, for 30 years the FTC has employed Section 13(b) as its go-to mechanism for obtaining restitution and other equitable remedies from entities that the FTC believes have violated the law.  As noted above, this case creates a circuit split about the authority of a federal government agency, which seemingly sets the stage for an FTC cert petition and a better than average chance for Supreme Court review.  So what would happen if the Supreme Court were to agree with the Seventh Circuit’s ruling?  Barring a change in the statute (which one FTC Commissioner recently sought in Congressional testimony) the FTC would be precluded from seeking restitution without going through the time-consuming and burdensome process of seeking and obtaining an administrative cease and desist order after a full trial, and then having to file a separate court action to get that relief.  For all practical purposes, an adverse ruling by the Supreme Court without a change in the wording of the statute would effectively take the FTC out of the business of obtaining restitution and other equitable remedies.

In the meantime, this decision represents yet another blow to how the FTC has historically asserted its authority.  As we covered here, here, here, here, and here, the Third Circuit earlier held that the FTC may only bring a case under Section 13(b) of the FTCA when it can articulate specific facts that a defendant “is violating” or “is about to violate” the law.  And there could be broader implications to other government agencies that seek restitution without explicit authority to do so.  As noted in articles published by John Fleder and Jeff Gibbs in 2003 and 2006, here and here, FDA’s authority to obtain restitution or disgorgement is not grounded in statute, and may not withstand scrutiny if subject to the same analysis the Seventh Circuit applied here.