In Historic Ruling, 7th Circuit Bars FTC Money Claims

A thunderbolt struck the Federal Trade Commission this week.  Here’s why.

In an op-ed attacking the unfairness of Federal Trade Commission asset freezes that effectively deny a defendant access to an attorney and the ability to defend himself (“FTCAdLaw’s Rothbard Calls on Congress to Remedy FTC Unfairness,” July 2019), I quoted “dicta” (noncontrolling language) from recent court decisions that questioned the predicate of an asset freeze in the first place – the FTC’s statutory authority to obtain disgorgement and restitution in an injunction action brought under Section 13(b) of the FTC Act.  If the FTC lacks the right to obtain money in such a case, then its right to an asset freeze to preserve the remedies of disgorgement and restitution goes away.

For nearly 40 years, dating to the decision by the Ninth Circuit Court of Appeals in FTC v. H.N. Singer in 1982, the unanimous judicial consensus has been that the FTC has the implied or “ancillary” equitable authority to obtain disgorgement and restitution – and by extension an asset freeze – under Section 13(b). That consensus was shattered on Wednesday of this week, in a decision by the Seventh Circuit Court of Appeal in FTC v. Credit Bureau Center et al.

Reversing the district court, the Seventh Circuit held that Section 13(b) expressly authorizes only injunctions and does not implicitly authorize restitution.  The individual defendant in the case, who had been ordered to turn over $5.2 million after being found liable for deceptively promoting a credit monitoring service, is now entitled to the full return of his money.

In a 43-page opinion that meticulously analyzes the wording of Section 13(b) and the decades of caselaw that has liberally interpreted it to authorize restitution and disgorgement, the court concluded that neither the text nor structure of the provision allows such a remedy and that the broad consensus that had formed around it was wrong!To reach this decision, the court had to overrule one of its long-standing precedents – and mainstays in FTC jurisprudence – FTC v. Amy Travel Service, and go against all of its sister circuits. While not an easy thing to do, the court said it was necessary, explaining that “when deciding whether we should overturn precedent, ‘[w]e are not merely to count noses. The parties are entitled to our independent judgment….’ We are well aware that we need a compelling reason to overturn circuit precedent. ‘However, important as stare decisis is, it is equally important for us to respect the statutes that Congress has passed and to correct any problems we see in our prior interpretations of those statutes.’”

While an understanding of the reasoning of the decision (and of the dissent to it) is important, and can be found here in the decision itself, for the present it’s also good to discuss some of its immediate ramifications.  First, until now, FTC demands for asset freezes and receiverships in Section 13(b) litigation, and for turnover of all or substantially all assets in settlement negotiations, have been routinely made and routinely accepted, because a defendant, under the heavy weight of legal precedent overwhelmingly favoring the FTC, had little or no recourse.  Now, under Credit Bureau Center, he does.  In challenges to asset freeze and monetary settlement demands (which every FTC defense attorney must now make, or be guilty of malpractice), the FTC, for the first time in ages, will have to defend the past consensus against the onslaught of the Seventh Circuit’s reasoning.  In short, Section 13(b) requests for asset freezes, receiverships, and disgorgement will no longer be a foregone conclusion and a slam dunk.  The FTC will have to get its money the old-fashioned way: it will have to earn it.

Second, while the Seventh Circuit ruling was by a three-judge panel, which normally could be followed by a request by the FTC for rehearing by the entire court, under a procedural rule invoked by the panel, that opportunity has been foreclosed. The panel decision is thus the final decision of the Seventh Circuit.  The FTC therefore must decide whether it wants to live with the decision, and hope that other courts don’t follow suit, or seek review by the U.S. Supreme Court, which is dominated by conservative “textualists” who could be sympathetic to the Seventh Circuit’s faithful adherence to the text of Section 13(b), which provides only for an “injunction” and says nothing about “disgorgement.”  (One is Justice Neil Gorsuch, who at oral argument on the question of the SEC’s authority to obtain disgorgement, answered: “Well, here we don’t know, because there’s no statute governing it. We’re just making it up.” The FTC has a tough strategic call to make.

Third, we can expect the FTC to hurriedly ratchet up any efforts already under way to get Congress to grant it express statutory authority to obtain disgorgement and restitution under Section 13(b).  

Credit Bureau Center has shifted the ground between the FTC and those on the receiving end of its law enforcement investigations and lawsuits. Whether it’s a seismic shift felt across the country, or only in the regions of the Seventh Circuit, will depend on how receptive other courts are to the reasoning of the opinion, and/or how successful the FTC is in lobbying Congress for explicit statutory power to obtain money in federal court injunction cases.  It’s a new game. Stay tuned….       

Talking about Direct Response, FTC, Online Marketing

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