Last Thursday, July 9, 2020, the U.S. Supreme Court agreed to review the Federal Trade Commission’s authority to order restitution to consumers who have been hurt by fraud in the marketplace.
This article outlines the FTC’s power – under Section 13B of the Federal Trade Commission Act – and their authority to seek injunctive relief against a person, partnership, or corporation who furthers the dissemination of misleading and/or false materials or participate in some type of deceptive business practice.
The Criminal Lawyer Group White Collar Crimes Division consist of top-rated federal defense attorneys with experience dealing in federal charges and investigations carried out by the FTC, SEC, DOJ, and more.
If you, your business, partnership, or corporation is under investigation by the SEC or FTC, call us now to schedule your free and completely confidential attorney consultation.
What is the FTC?
Origination and Authority of the Federal Trade Commission
The Federal Trade Commission is a federal government entity that was adopted in 1914 to give the U.S. government the legal tools that it needed to use against individuals, businesses, and corporations who were participating in – or in some way furthering – unfair, anti-competitive, and/or deceptive business practices.
The Federal Trade Commission Act (1914)
The Federal Trade Commission Act (1914) established the Federal Trade Commission (FTC).
- Consent Agreements: The FTC Act allows accused parties to enter into consent agreements with the Federal Trade Commission that would informally resolve the conduct at issue without litigation.
- Cease and Desist Orders: The FTC Act also allows the Federal Trade Commission to issue cease and desist orders that are enforceable through the Federal Circuit appeals court that would govern the jurisdiction where the conduct is alleged to have happened.
- Referring Matters to the DOJ for Criminal Prosecution: The FTC can also refer the matter to the United States Department of Justice for criminal investigation and charges at the same time for failure to abide by an FTC consent decree or cease and desist order could also result in contempt of court charges or contempt and or a Department of Justice referral.
Section 13B of the Federal Trade Commission Act
One of the hotly contested provisions of the Federal Trade Commission Act is Section 13B.
Authority to Seek Injunctive Relief
Section 13B of the FTC Act gives the Federal Trade Commission the authority to seek injunctive relief against a person, partnership or corporation who causes the dissemination of misleading and/or false materials or participate in some manner of deceptive business practices.
Section 13B of the act, in more general terms, allows the FTC to target people who are believed to be in violation of the Clayton or Sherman Acts—both of which are antitrust laws.
A plain reading of Section 13B leaves the impression that the purpose of this section was to allow the Federal Trade Commission to prevent ongoing violations by businesses or individuals and/or prohibit those individuals from continuing those types of practices.
However, 13B was silent on (and does not once mention) fines, penalties, or disgorgement.
FTC v. Amy Travel Service Inc., 875 F.2D 564 (7th Cir. 1989)
The use of Section 13B as an authorized tool for the recovery of ill-gotten gains and imposition of fines. Section 13B of the FTC Act gained its footing from a decision made in the matter of FTC v. Amy Travel Service Inc., 875 F.2D 564 (7th Cir. 1989).
In 1989, the Federal Trade Commission pursued a Texas-based travel company for selling what the company referred to as “travel passports.” Travel passports – according to Amy Travel Service – was a list of locations, hotel packages, and potential flights that were being sold to the public through heavy telephone marketing at the course of $200 to $300 per passport.
What was not being told to the customers was that the amount charged by Amy’s Travel Service did not include the flights, hotel stays, or any other accommodations.
The issue is that this was only learned after the initial expenditure that attracted the Federal Trade Commission’s attention. After pursuing litigation against Amy Travel Services, the Federal Trade Commission persuaded a District Court in Texas that Section 13B allowed for disgorgement of the ill-gotten gains and the freezing of assets belonging to the Corporation.
FTC v. HN Singer, 668 F.2 D 1107 (9th Cir. 1982)
On appeal to the 7th Circuit, the Court relied on a 9th Circuit appellate decision from 1982, FTC v. HN Singer, 668 F.2 D 1107 (9th Cir. 1982).
The Court in Singer held that when the legislature granted the Federal Trade Commission permanent injunctive power it, by implication, granted the court authority to grant ancillary relief necessary to complete justice. Relying on Singer, the 7th Circuit in Amy Travel Service reached the same conclusion.
From 1989 until as recent as 2010, the United States Circuit Court of Appeal for the 2nd Circuit, 5thCircuit, 8th Circuit, 9th Circuit, 10th Circuit, and 11th Circuit adopted the reasoning of the 7thCircuit and concluded that the Federal Trade Commission had the authority to impose fines and seek disgorgement under Section 13B.
FTC v. Credit Bureau Center LLC, 937 F.3d 764 (7th Cir. 2019)
In 2019, FTC v. Credit Bureau LLC made its way to the 7th Circuit Court of Appeals for a review, bringing with it the question of whether – under existing case law from the United States Supreme Court – the decision made in Amy Travel Services is correct.
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Facts of the Matter:
In Credit Bureau LLC, the defendant advertised free credit scores which invited people to sign up to receive free credit reports. However, by signing up, the customer was unknowingly also signing up for automatic enrollment in the company’s credit monitoring system at the cost of $29.95 per month.
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Undercutting Apartments on Craigslist:
The aspect that really caught the Federal Trade Commission’s attention was the conduct of a contractor of Credit Bureau LLC who would log onto Craigslist to post nonexistent apartments at below-market rates and list himself as the landlord. When unsuspecting apartment hunters would respond to the listings, they would be sent the link requesting that they sign up to access a free credit report. The apartment hunters would also be included, without their knowledge, in a credit monitoring program run by Credit Bureau LLC for the cost of $29.95 a month.
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Violation of the Online Shoppers Act as well as the Federal Trade Commission’s Prohibition Against Unfair, or Deceptive Acts or Practices:
The Craigslist ad generated 2.7 million consumers and over 6.8 million dollars in revenue. Upon review by the Federal Trade Commission, the conduct in this particular case was found to have violated the Online Shoppers Act as well as the Federal Trade Commission’s prohibition against unfair, or deceptive acts or practices. The defendant in this case was subjected to an injunction as well as a $5,000,000 fine.
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Prohibition of the Imposition of Fines, Penalties, and Disgorgement under Section 13B of the Federal Trade Commission Act as an Unauthorized Penalty:
On appeal, counsel for the defendant argued that a 1996 decision issued by the United States Supreme Court in Meghrig v. KFC Western Inc., 516 US 479 (1996) would prohibit the imposition of fines, penalties, and disgorgement under Section 13B of the Federal Trade Commission Act as an unauthorized penalty.
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Court Holding:
The ultimate answer by the 7th Circuit was that the decision made in Amy Travel Services was incorrect. The 7th Circuit heavily analyzed the KFC Western Inc. decision that was relied upon by the defendant and found that that decision foreclosed the interpretive application of fines and financial penalties under Section 13B.
Because the Court in KFC Western Inc. held that under the plain reading of a remedial statute that allows for a mandatory injunction, one that restrains a responsible party, does not contemplate the award of past course – whether it is deemed damages or equitable distribution.
It is with this reasoning that the 7th Circuit overturned the longstanding opinion in Amy Travel Services that had been followed by almost every other Circuit Court of Appeals in the United States.
Supreme Court to Review FTC’s Power to Impose Fines and Penalties
Recently – in light of the circuit split that goes to the core of the Federal Trade Commission’s authority – the United States Supreme Court has agreed to review the case of Credit Bureau LLC.
The Court will finally decide – after almost thirty (30) years of the Federal Trade Commission imposing fines and penalties upon individuals, partnerships, and corporations (valued at hundreds of billions of dollars) – whether it was in the agency’s authority to do so from the beginning – (since the legislator has never expressly or implicitly authorized such action to be taken by the Federal Trade Commission.)
When considering what the United States Supreme Court may do when it ultimately does hear oral arguments and decide the case of Credit Bureau LLC, we must look at a 2017 Supreme Court decision in KoKesh v. SEC from June 5th, 2017.
KoKesh v. SEC 137 S.Ct. 1635 (2017)
In KoKesh case, Charles KoKesh was charged by another government regulatory agency (in this instance, the Security Exchange Commission) with appropriating or misappropriating fines.
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Question re: 5-Year Statute of Limitations
Does the five-year statute of limitations of 28 U.S.C. §2462 applies to claims brought by the Securities and Exchange Commission seeking repayment of illegally obtained funds?
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Court Holding:
Yes, the five-year statute of limitations works to limit the FTC’s power to impose fines and penalties. Ultimately, the court ordered that KoKesh pay 34.9 million dollars for ill-gotten gains causally connected to his misappropriation violations.
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Appeal:
On appeal to the United States Supreme Court, KoKesh argued that disgorgement should be barred by the five-year statute of limitations under 28 U.S.C. Section 2462.
28 U.S.C. Section 2462
While the Circuit Court had ruled that Section 2462 did not apply to Security Exchange Commission disgorgement – because it is not a punishment for illegal activity – it has been allowed by the courts since the 1970s.
Disgorgement – Deterrent or Compensatory?
The United States Supreme Court took a different approach to how disgorgement is meant to be a deterrent rather than compensatory.
Therefore, it functions as a penalty to which the five–year statute of limitations does apply.
In that ruling, the Supreme Court effectively foreclosed the opportunity of the Security Exchange Commission to impose fines or penalties for conduct that was over five years old, even though they had done so since the 1970s with broad federal court approval to do so.
The decision in Kokesh gives a strong indication of the United States Supreme Court’s perception of financial punishment imposed upon individuals, partnerships, and corporations for wrongdoing and the court’s desire to not only limit those punishments but to outright prohibit them when it is not expressly authorized by statute.
The relevance of the Credit Bureau LLC case being granted certiorari by the United States Supreme Court has many courts uncertain of the application that allowed the Federal Trade Commission to impose financial penalties for over thirty (30) years.
Takeaway:
Almost every circuit has addressed the issue of whether the Federal Trade Commission is allowed, under 13B, to impose financial penalties that have relied on the decision rendered by the 7th Circuit and Amy Travel Services.
Now – with the 7th Circuit having overturned the decision and reasoning of Amy Travel Services – many defendants with matters currently pending before district courts throughout the United States can make strong arguments that any financial penalties imposed by the Federal Trade Commission is unauthorized and possibly be successful in maintaining financial assets gained by these individuals.
Another factor that many courts have taken into account when addressing the financial penalty issue of disgorgement is the fact that while disgorgement is generally argued to be a recovery of ill-gotten gains that one would think would be returned to the victims.
However, the regulatory practices of the Federal Trade Commission and Security Exchange Commission suggests otherwise.
The fact is that the FTC and the SEC are not mandated to return those funds to the victim. In fact, those funds can be turned over to the United States Treasury Department for use as they deem fit (or appropriate.)
Call Us Now
As criminal defense practitioners, we have run into many defendants who have expressed a clear willingness to return funds to alleged victims but have had strong objections when they learned that the funds would be possibly turned over to the United States Treasury Department and the victims not made whole.
In some cases, defendants are left battling multiple civil lawsuits in different forums even after a resolution of an investigation conducted by the Federal Trade Commission or Securities Exchange Commission in an effort to make themselves whole.
The Criminal Lawyer Group White Collar Crimes Division consist of top-rated federal defense attorneys with experience dealing in federal charges and investigations carried out by the FTC, SEC, DOJ, and more.
If you, your business, partnership, or corporation is under investigation by the SEC or FTC, call us now to schedule your free and completely confidential attorney consultation.
