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SEC Limits on Recouping Illegal Gains Could Check FTC Authority

June 24, 2020, 9:30 AM

The Federal Trade Commission will likely face fresh challenges to its authority to recover illegal profits from corporate wrongdoers after the Supreme Court imposed limits on the SEC’s ability to invoke similar powers.

In an 8-1 ruling Monday, the high court placed limits on the SEC’s ability to use disgorgement without considering and deducting legitimate business expenses. That ruling could help define the FTC’s disgorgement authority against companies engaged in fraud or anti-competitive conduct, which was never as explicit as the SEC’s powers, attorneys say.

The FTC has the additional hurdle of having to defend its authority to obtain disgorgement in the first place, Kathleen Benway, a former FTC chief of staff, told Bloomberg Law.

The decision in Liu v. SEC “doesn’t answer the question” of whether the FTC can obtain illegal profits as a form of restitution in the first place, Benway said.

But the ruling “certainly provides ammunition” to corporations and other defendants to limit their monetary liability when facing FTC disgorgement orders, Benway, now a partner at Alston & Bird LLP in Washington, said.

Higher Stakes

The FTC’s disgorgement powers have come under attack in recent years as corporations facing multimillion- dollar penalties have argued that the commission doesn’t have the explicit power to obtain monetary relief as a form of restitution in cases.

Under Section 13(b) of the FTC Act, the commission can seek injunctive relief to force a company from engaging in wrongdoing. However, it’s unclear if an injunction can also compel companies to pay back their illicit profits to the FTC.

Health information company Surescripts LLC challenged the FTC’s authority in a case that alleges the Arlington, Va. based company illegally monopolized the market for electronic prescription routing and eligibility. The FTC’s April 2019 case in the U.S. District Court for the District of Columbia survived a motion to dismiss. However, the judge overseeing the government’s case asked Monday for both parties to weigh in on how the Supreme Court’s SEC ruling impacts the FTC’s litigation moving forward.

The question of whether the FTC can recoup illicit profits has divided the courts. While several appellate courts, including the U.S. Court of Appeals for the Ninth Circuit, have ruled in favor of disgorgement, the U.S. Court of Appeals for the Seventh Circuit said in a consumer fraud ruling that courts can’t award such monetary relief to the FTC.

The Seventh Circuit reversed a lower court order requiring the owner of a company that offered free credit reports, Credit Bureau Center LLC, to pay a more than $5 million disgorgement penalty to the FTC. Credit Bureau Center had been charged by the FTC with fraud for tricking people into enrolling into monthly credit monitoring service through fake rental property ads and promises of “free” credit reports.

FTC officials have warned that any efforts to strip district courts of the authority to award monetary relief would “effectively reward fraudsters” for their illegal conduct, turning the commission’s powers into a mere “stop sign.”

The Supreme Court may take up the debate as there are currently three cases challenging the FTC’s disgorgement powers, Gerald Sachs, a partner at Venable LLP, said.

“How the Liu case impacts the Court’s treatment of the pending petitions related to the FTC remains to be seen, but it is sure to play some role should the Court take the petitions,” Sachs said.

Added Hurdles

If the FTC is able to keep its disgorgement powers, the commission is likely to still face the same limitations imposed on the SEC in Monday’s ruling.

Since the 1980s, district courts have routinely awarded the FTC disgorgement as a form of restitution in order to recover money for consumers defrauded by deceptive practices or forced to pay higher prices because of corporate anti-competitive schemes. The Seventh Circuit’s 2019 ruling in Credit Bureau marks one of the first major setbacks for the FTC’s restitution powers.

Provided that the FTC can obtain disgorgement, “the Court is likely to find the disgorgement determination should be based on no greater than net profits,” Sachs, a former FTC attorney, added.

Historically, the FTC has sought relief in the amount of gross profits—the entire amount that the company is alleged to have gained through deception or unfair business practices, Reed Freeman, a partner at Wilmer Cutler Pickering Hale and Dorr LLP, said.

The Supreme Court’s ruling in Liu v SEC “applies equally” to the FTC authority since the high court’s opinion was focused on how far a lower court can go in awarding relief, Freeman added.

Companies challenging the FTC may now have “leverage” to reduce a disgorgement amount, especially if the award exceeds net profits, Richard Newman, a business litigation attorney at Hinch Newman LLP, said.

“Defendants are likely to argue that they had legitimate expenses that should be deducted from a disgorgement determination and the FTC will have to counter that argument, which imposes additional litigation,” Sachs said.

—With assistance from Daniel R. Stoller

To contact the reporter on this story: Victoria Graham in Washington at vgraham@bloomberglaw.com

To contact the editors responsible for this story: Roger Yu at ryu@bloomberglaw.com, Mike Ferullo at mferullo@bloomberglaw.com

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