LawFlash

Seventh Circuit: FTC Cannot Seek Restitution in Federal Court Actions Under FTC Act’s Section 13(b)

August 27, 2019

The US Court of Appeals for the Seventh Circuit has held that the Federal Trade Commission (FTC) cannot seek monetary relief in actions brought in federal court under Section 13(b) of the Federal Trade Commission Act (FTC Act). The Seventh Circuit’s decision, issued on August 21 in FTC v. Credit Bureau Center, LLC, overruled 30 years of its own precedent and broke with eight other federal appeals courts, creating a circuit split that may ultimately lead the US Supreme Court to resolve the issue. The decision is also the latest setback for the FTC in litigation brought under Section 13(b), following the Third Circuit’s decision earlier this year that Section 13(b) authorizes the FTC to bring suit in federal court only in cases of ongoing or imminent—as opposed to past—misconduct.

Background

In the Credit Bureau Center case, the FTC sued a company and its owner for advertising “free” credit reports without adequately disclosing that consumers would be enrolled in an expensive credit monitoring service on an ongoing basis.[1] The FTC brought its lawsuit under Section 13(b), which authorizes the FTC to “bring suit in a district court of the United States to enjoin [an unlawful] act or practice.”[2]

The FTC sought a permanent injunction, as well as an award of restitution from the defendant. Construing Section 13(b) to permit both, the district court issued the permanent injunction and ordered the defendant to pay more than $5 million in restitution.

The Seventh Circuit Decision

The defendant appealed to the Seventh Circuit. Although the defendant also challenged the issuance of the permanent injunction, the appeal focused principally on the district court’s award of restitution. The defendant argued that, because the FTC had brought its lawsuit under Section 13(b), and because Section 13(b)’s text refers to injunctions as the FTC’s exclusive remedy, the FTC could not seek—and the district court could not order—restitution.

The Seventh Circuit began its analysis with an overview of the three primary means by which the FTC can exercise its enforcement authority. First, the FTC is authorized to bring an internal enforcement action before an administrative law judge, who can issue a cease and desist order.[3] If the defendant subsequently violates the cease and desist order, the FTC can file a lawsuit in federal court seeking injunctive relief and monetary damages.[4] While the statute authorizes civil penalties payable to the United States Treasury for all order-violation cases to obtain money to be returned to consumers, the FTC must prove to a court that the original cease and desist order relates to conduct “which a reasonable man would have known under the circumstances was dishonest or fraudulent”—effectively limiting that remedy to consumer protection cases.[5] Second, under the FTC’s general rulemaking authority, the FTC is authorized to preemptively promulgate rules making specific “unfair or deceptive acts or practices” unlawful.[6] The FTC may file a lawsuit in federal court seeking civil penalties if it can prove that the defendant had “actual knowledge or knowledge fairly imputed” that its conduct violated a defined FTC rule.[7] The FTC can also seek consumer redress, including consumer refunds or actual damages, for violations of covered rules,[8] subject to a three-year statute of limitations.[9]

As the Seventh Circuit observed, these first two means of enforcement afford the FTC a narrowly circumscribed right of access to the federal courts. In the case of administrative enforcement proceedings, the FTC may seek enforcement of a cease and desist order in federal court, but only after the order has issued and the defendant has engaged in a further violation. In the rulemaking context, the FTC’s ability to sue in federal court is limited to consumer protection cases involving unfair or deceptive conduct (and does not extend to competition cases) and is limited further by the need to show actual or imputed knowledge of wrongdoing on the part of the defendant.

The FTC’s third means of enforcement is conferred in Section 13(b), which provides:

Whenever the Commission has reason to believe . . . that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the Federal Trade Commission, and . . . that the enjoining thereof . . . would be in the interest of the public—the Commission . . . may bring suit in a district court of the United States to enjoin any such act or practice.


Thus, unlike the narrow rights of access to federal court afforded through the administrative enforcement and rulemaking processes, Section 13(b) provides the FTC with broader access to federal court, provided that the FTC can establish that the defendant “is violating, or is about to violate” the law, and that enforcement would be in the public interest.

As the defendant argued in Credit Bureau Center, however, the only remedy that Section 13(b) refers to is the FTC’s ability to seek a preliminary or permanent injunction. Unlike the provisions of the FTC Act that permit the FTC to seek monetary relief for violations of a cease and desist order or knowing violations of promulgated rules, Section 13(b) on its face permits only the issuance of injunctive relief. Thus, the defendant argued, in a case brought under Section 13(b), the FTC was not entitled to restitution.

In its response, the FTC did not dispute that Section 13(b) makes no reference to a right to recover restitution. Rather, the FTC relied on a line of cases in the Seventh Circuit and elsewhere that have held that while injunctive relief is the only remedy expressly authorized in Section 13(b), the statute permits other implied remedies, including restitution. Most notably, in a 1989 case, FTC v. Amy Travel Service, Inc., the Seventh Circuit held that the “statutory grant of authority to the district court to issue permanent injunctions includes the power to order any ancillary equitable relief,” including restitution.[10]

In a detailed analysis that parsed Section 13(b)’s text and legislative history, as well as the FTC’s broader enforcement authority, the Seventh Circuit concluded that “Section 13(b)’s grant of authority to order injunctive relief does not implicitly authorize an award of restitution.”[11] Echoing the special concurrence that Judges Diarmuid O’Scannlain and Carlos Bea in the Ninth Circuit issued last year,[12] the court noted that, unlike the statutory authorizations that permit the FTC to seek relief in federal court for violations of cease and desist orders or for promulgated rules, neither the text nor the legislative history of Section 13(b) support allowing restitution awards in Section 13(b) cases. The Seventh Circuit’s analysis also focused on a Supreme Court decision, Meghrig v. KFC Western, Inc., which had been issued after the Seventh Circuit’s decision in Amy Travel, and which warned that “where Congress has provided elaborate enforcement provisions for remedying the violation of a federal statute, . . . it cannot be assumed that Congress intended to authorize by implication additional judicial remedies . . . .”[13]

Citing Amy Travel’s “clear incompatibilities with the [FTC Act]’s text and structure, Meghrig, and the Supreme Court’s broader refinement of its implied remedies jurisprudence,” the Seventh Circuit concluded that Section 13(b) does not authorize monetary relief and overturned the district court’s award of restitution against the defendant. The court simultaneously issued an order denying rehearing en banc.

Implications and Next Steps

The decision in Credit Bureau Center puts the Seventh Circuit at odds with eight other federal appeals courts and raises the potential that the Supreme Court may elect to hear this issue. If it did so, the stakes would be high for the FTC, which has consistently sought restitution or other monetary relief as an implied remedy under Section 13(b) in both consumer protection and competition cases for decades.

In consumer protection cases, in addition to merely avoiding the Seventh Circuit, the FTC is likely to look for existing trade regulation rules such as the Telemarketing Sales Rule[14]—or statutory designations of “deemed” trade regulation rules like that in the Fair Debt Collection Practices Act[15]—to charge in what would previously have been standalone Section 13(b) cases to provide a potential alternative basis for consumer redress under Section 19.

Adding to the stakes is the fact that, earlier this year, the FTC suffered another significant defeat in a case brought under Section 13(b). That case, FTC v. Shire ViroPharma, Inc., was a competition case challenging purported sham petitioning of the US Food and Drug Administration by a life sciences company.[16] Because all of the alleged misconduct occurred years before the FTC filed its complaint, the Third Circuit held that the FTC had failed to allege that the defendant “is violating, or is about to violate” the law, as Section 13(b) requires, and affirmed dismissal of the lawsuit. The FTC opted not to petition the Supreme Court in that case. The Credit Bureau Center decision now further limits the FTC’s ability to litigate in federal court under Section 13(b).

Contacts

Morgan Lewis has broad experience in FTC litigation and Section 13(b) litigation in particular in both antitrust and consumer protection cases. For example, Morgan Lewis lawyers served as counsel to the defendant in Shire ViroPharma. If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington, DC
J. Clayton Everett, Jr.
Jon R. Roellke
Scott A. Stempel
Willard K. Tom

Philadelphia
R. Brendan Fee
Steven A. Reed

Dallas
David I. Monteiro

Boston
Daniel S. Savrin

New York
Richard S. Taffet

San Francisco
Brian C. Rocca



[1] FTC v. Credit Bureau Ctr., LLC, Nos. 18-2847 and 18-3310 (7th Cir. Aug. 21, 2019).

[2] 15 U.S.C. § 53(b).

[3] 15 U.S.C. § 45(b).

[4] 15 U.S.C. §§ 45(l), 57b(a)(2).

[5] 15 U.S.C. § 57b(a)(2).

[6] 15 U.S.C. § 57a(a)(1).

[7] 15 U.S.C. § 45(m)(1)(A).

[8] 15 U.S.C. § 57b(a)(1), (b).

[9] 15 U.S.C. § 57b(d).

[10] FTC v. Amy Travel Serv., Inc., 875 F.2d 564, 572 (7th Cir. 1989).

[11] Credit Bureau Ctr., slip op. at 3.

[12] FTC v. AMG Capital Mgmt., LLC, 910 F.3d 417, 429–37 (9th Cir. 2018).

[13] Meghrig v. KFC W., Inc., 516 U.S. 479, 487–88 (1996).

[14] 16 C.F.R. pt. 310.

[15] See 15 U.S.C. § 1692l(a) (“All of the functions and powers of the Federal Trade Commission under the Federal Trade Commission Act are available to the Federal Trade Commission to enforce compliance by any person with this subchapter, irrespective of whether that person is engaged in commerce or meets any other jurisdictional tests under the Federal Trade Commission Act, including the power to enforce the provisions of this subchapter, in the same manner as if the violation had been a violation of a Federal Trade Commission trade regulation rule.”)

[16] FTC v. Shire ViroPharma, Inc., 917 F.3d 147 (3d Cir. 2019).