For decades, the Federal Trade Commission (FTC) has sought and obtained restitution from parties engaged in fraud, utilizing authority provided under § 13(b) of the FTC Act. Last week, the Seventh Circuit of the U.S. Court of Appeals halted that option, ruling that § 13(b) does not give the FTC such authority. The holding creates a stark circuit split, making the issue ripe for consideration by the U.S. Supreme Court, which has taken a limited view of agencies' remedial powers in at least one recent decision. In the meantime, the holding limits the FTC's recourse in cases pending in the Seventh Circuit. It also opens the door to similar challenges from entities opposite the FTC in other jurisdictions—and potentially other law enforcement agencies.
The FTC sued the defendants under § 13(b) of the FTC Act, 15 U.S.C. § 53(b), alleging that Defendants' websites and referral program violated several consumer protection statutes. The FTC alleged that defendants offered a "free" credit report and score to consumers, but hid the fact that applying for the "free" report automatically enrolled customers in a monthly, automatically-renewing credit monitoring "membership." The Commission sought and ultimately obtained a permanent injunction, as well as an order requiring the defendants to pay more than $5 million in restitution.
Seventh Circuit Opinion
The defendants appealed to the Seventh Circuit. The Seventh Circuit vacated the restitution award and held that § 13(b) does not permit such relief. In a decision written by Judge Diane Sykes, the majority opined that "by its terms" § 13(b) authorizes restraining orders and injunctions, and nothing more. The majority's rationale was based on a close textual read of § 13(b), suggesting it only authorizes "forward-facing" remedies (namely, injunctions). The majority, describing restitution as a remedy to address past harms, concluded that it was not expressly or implicitly permitted by § 13(b).
This ruling overturned the Seventh Circuit's earlier holding in FTC v. Amy Travel Service, Inc., 875 F.2d 564 (7th Cir. 1989) that restitution is implicitly authorized by § 13(b). In the majority opinion, Judge Sykes engaged in a detailed analysis of the Amy Travel progeny, ultimately deciding its holding to be inconsistent with subsequent U.S. Supreme Court decisions.
In a fiery dissent, Chief Judge Diane P. Wood criticized the majority for overturning long-standing precedent, as well as for denying the FTC's request for a rehearing en banc. Judge Wood disagreed with the majority's analysis and conclusion, warning that the majority's ruling "tied the hands of a government agency" without the "careful consideration that plenary en banc review would have provided."
The FTC has often used its § 13(b) authority since Amy Travel to seek restitution. This new decision, issued by a panel of judges all appointed by Republican presidents, creates a circuit split. Given the restrictive impact that the Seventh Circuit's opinion may have on the FTC, it is foreseeable that the FTC will appeal the decision to the U.S. Supreme Court. Congress could also step in and provide a legislative fix, but it is yet unclear whether it will take any action.
Affirmance by the Supreme Court would be consistent with the Supreme Court's decision in Kokesh v. the Securities and Exchange Commission, 137 S. Ct. 1635 (2017). In Kokesh, the Court curtailed the Securities and Exchange Commission's authority to pursue disgorgement under a broad provision that authorized the SEC to pursue "equitable remedies." The Kokesh decision suggests that the current Court may be inclined to limit agencies' remedies to only those specifically enumerated by statute. Ultimately, if the Supreme Court affirms the Seventh Circuit's reading of § 13(b), then the FTC would only be able to obtain restitution in federal court after violations of cease and desist orders or rules issued by the Commission. Theoretically the FTC could also seek restitution in settlements, though only time will tell if the ruling will practically limit the FTC's ability to obtain restitution in that manner.
In the interim, the FTC still has the authority to seek restitution for consumers through other enforcement mechanisms, as well as § 13(b) actions brought in other circuits. The FTC could also attempt to circumvent the Seventh Circuit's restriction by seeking restitution through joint actions or law enforcement "sweeps" done in partnership with state enforcement agencies empowered to obtain restitution through state consumer protection statutes.
This opinion could serve as leverage for all defendants currently under, or defending against, the imposition of a restitution order under § 13(b) or similar statutes that can be read in such a limited fashion. Entities currently involved in FTC investigations, or in industries actively regulated by the FTC, should take the Seventh Circuit's opinion into consideration. It's very possible that the Seventh Circuit just lessened companies' risk of having to pay back ill-gotten profits or make payments to address consumer harm.
The case is styled Federal Trade Commission v. Credit Bureau Center, LLC et al., Case No. 18-2847 (7th Cir. 2019).
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