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INSIGHT: FTC Denied Restitution—Untangling the Knot or Immunity for ‘Brazen Scammers’ ?

Aug. 30, 2019, 8:00 AM

The U.S. Court of Appeals for the Seventh Circuit on Aug. 21 cannonballed directly into the roiling waters of debate over the Federal Trade Commission’s enforcement powers, when it determined in a closely-watched appeal that the agency does not have the right to restitution under the primary provision the commission uses to attack fraud—Section 13(b) of the FTC Act.

The decision is certain to lead to other challenges to the agency’s authority, and has set off a high level of speculation about what will happen next. The Seventh Circuit’s decision invokes a circuit split that will not be resolved unless the ruling is appealed to the U.S. Supreme Court.

In Federal Trade Commission v. Credit Bureau Center, the Seventh Circuit held that the FTC could not obtain restitution under Section 13(b), overturning the lower court’s decision to award $5.2 million in monetary relief. The decision represents a substantial limitation to the FTC’s enforcement power, as the agency previously has sought restitution when bringing deceptive practices claims in federal court.

This is no small deal. Between July 1, 2017, and June 30, 2018, according to the FTC’s 2018 Annual Report on Refunds to Consumers, the FTC’s Bureau of Consumer Protection obtained 114 court orders totaling $563 million and supported refund programs administered by FTC defendants or another federal agency to deliver more than $2.3 billion in refunds to consumers.

The Credit Bureau Center decision comes just six months after the Third Circuit held in FTC v. Shire Viropharma Inc. that the FTC cannot bring a case under Section 13(b) unless the FTC can articulate specific facts that a defendant “is violating” or “is about to violate” the law.

Credit Bureau Center goes a good deal further, limiting the type of equitable relief the FTC seeks at the end of a proceeding. The decision, written by Judge Diane S. Sykes, recognized that FTC has long viewed Section 13(b) as allowing for awards of restitution, and that various courts have endorsed that understanding, including the Seventh Circuit itself in FTC v. Amy Travel Service, 875 F.2d 564 (7th Cir. 1989).

Still, despite three decades of precedent, the Seventh Circuit vacated the restitution award. The court determined that Section 13(b)’s remedy provision must be limited to negative injunctions, and that, to read the statute in any other way, “would condition the Commission’s ability to secure restitution for past conduct on the existence of ongoing or imminent unlawful conduct” which would be an “illogical implication.”

Sharply Worded Dissent

A sharp dissent by Chief Judge Diane Wood rebuked the majority for overturning the long-standing Amy Travel precedent. According to the dissent, the FTC Act provides for a “finely crafted system of enforcement powers and remedies” and the majority’s approach “upends what the agency and Congress have understood to be the status quo for thirty years.”

A close examination of the FTC Act, Wood wrote, reveals that Congress expressly decided to give the agency a “menu” of options: the FTC has the ability to move unilaterally when it uses its rulemaking or cease-and-desist powers, and to act as a party before the court if it seeks a preliminary or permanent injunction. Unambiguously, the dissent then states: “It is not up to us to take away that which Congress gave.”

It is a safe bet that Credit Bureau Center is not the final word when it comes to the reach of Section 13(b). Congress could step in and write restitution into the FTC Act, as FTC Commissioner Christine Wilson has suggested.

Many legislators on both sides of the aisle likely will agree with Wood that reading mandatory equitable powers out of Section 13(b) is not the right result, particularly when dealing with the FTC’s fraud program. And, of course, the majority in Credit Bureau Center would agree that a legislative approach would be the correct course (“[i]t is now well settled that Congress, not the judiciary, controls the scope of remedial relief when a statute provides a cause of action.”).

Seek Supreme Court Review?

It also seems likely the FTC will seek certiorari before the Supreme Court—how could it not? In fact, the FTC has done it before when a Seventh Circuit decision went against the agency, obtaining a unanimous reversal in FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986).

A larger concern relates to the “brazen scammers,” as characterized by Wood. Without the threat of having to return ill-gotten gains and redress consumer injury, will their breed proliferate, causing substantial consumer injury? Or, as the majority seems to contend, should this not be a concern, given that Congress has already provided the FTC with all the tools it needs?

Is there a middle ground? In their excellent 2013 Antitrust Law Journal article, former FTC Chairman Tim Muris and Professor Howard Beales in many ways foresaw the current debate and suggested that the FTC and courts work to ensure that there are meaningful limits on the use of Section 13(b) to obtain consumer redress. 79 Antitrust Law Journal No. 1 (2013).

Their suggestion: “the touchstone for determining a “proper case” is whether a reasonable person would have known that the conduct was dishonest and fraudulent.” In other words, restitution under Section 13(b) should not be pursued in cases in which it would not be available under Section 19.

How this all will shake out remains an open question. In the meantime, expect a torrent of motion practice in Section 13(b) cases. We should also expect the FTC to continue to file Section 13(b) cases seeking restitution in every circuit, except, that is, the Seventh.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

John Villafranco is a partner at the law firm of Kelley Drye & Warren LLP. He is considered an authority on a range of issues involving consumer protection law.

Mindy Pava is a senior associate at the law firm of Kelley Drye & Warren LLP. Her practice focuses on general litigation, with a particular emphasis on false advertising cases.