The Supreme Court agreed to hear a case that will decide whether the Federal Trade Commission can seek to recoup funds unlawfully obtained by individuals and companies resulting from violations of consumer protection laws.
Section 13(b) of the Federal Trade Commission Act authorizes the FTC to bring an action in federal court against any person who “is violating, or is about to violate, any provision of law enforced by” the FTC to “enjoin any such act or practice” and obtain a permanent injunction. Many courts of appeals have held that a district court’s authority to grant a permanent injunction under Section 13(b) includes the authority to require wrongdoers to return ill-gotten gains.
But in August 2019, in FTC v. Credit Bureau Center, the Seventh Circuit reversed its long-standing precedent splitting from seven other circuits to hold that Section 13(b) “does not authorize restitutionary relief.” The FTC effectively lost its argument that Congress allow for the authority to seek restitution when it empowered the agency to seek an injunction.
“The resolution of that question is critically important to the Commission’s ability to carry out its consumer protection and antitrust enforcement missions,” the FTC wrote in its petition to the justices. The Seventh Circuit’s decision, the FTC said, “threatens the FTC’s ability to carry out its mission by eliminating one of its most important and effective enforcement tools.”
“We look forward to proving to the Supreme Court that the FTC Act empowers us to fully protect consumers by ensuring that money unlawfully taken from them is rightfully returned,” FTC General Counsel Alden Abbott said in response to the Supreme Court’s granting of the petitions.
Reason to worry
The core issue in the consolidated FTC case shares similarities with a case the Supreme Court decided on June 22 in Liu v. SEC, which reaffirmed the Securities and Exchange Commission’s authority to recoup profits obtained from fraudulent schemes while limiting the scope of what can be sought through disgorgement. Some legal experts say the FTC may have reason to worry, considering the decision in Liu. “Even if Section 13(b) authorizes ‘restitutionary relief,’ in general, the restrictions that Liu imposed on the SEC’s disgorgement authority may limit the FTC’s continued ability to obtain large awards,” law firm Sullivan and Cromwell wrote.
In Liu, the Supreme Court was very clear that disgorgement applies only to the wrongdoer’s net profits after deducting “legitimate” business expenses. The Supreme Court also found joint and several liability is generally not appropriate in disgorgement cases, unless the wrongdoers were partners.
“Together, these limitations imposed in Liu may support the Second Circuit’s approach [in FTC v. Verity Intl] limiting the amount of restitution recoverable under Section 13(b) to ‘the benefit unjustly received by the defendants,’ whereas other circuits allow the FTC to seek the full amount of loss to consumers as restitution, including on a joint-and-several-liability basis,” Sullivan & Cromwell stated.
Limiting any future restitution awards could, in the FTC’s own words, negatively impact “one of its most important and effective enforcement tools.” The court is expected to take on the case next term and issue a decision by June 2021.