7th Circuit Overturns Precedent, Holds FTC Can’t Get Restitution Under FTCA Section 13(b)

Weiner Brodsky Kider PC

Weiner Brodsky Kider PC

A three-judge panel of the U.S. Court of Appeals for the Seventh Circuit recently struck down a 30-year-old precedent, ruling that the FTC does not have implied authority under Section 13(b) of the FTC Act to seek restitution from a company for defrauding consumers.  The opinion relied heavily on a 1996 Supreme Court case which ostensibly held that a court must consider whether an implied statutory remedy is compatible with a statute’s express remedial scheme before imposing a remedy that is not specifically authorized.  A majority of the court’s active judges declined to rehear the case en banc, but the circuit’s chief judge, along with two others, would have granted rehearing and issued a dissent, discussed below.

In the underlying lawsuit, the FTC sued a credit monitoring service and its owner for engaging in a fraudulent scheme to mislead consumers into signing up for its services.  These consumers were not conspicuously informed that signing up for the “free” credit report automatically enrolled them in a credit-monitoring service that charged a monthly fee.  Many complained to the FTC, which sued the defendant in district court and sought both an injunction against continued operation and restitution.

The district court initially issued a temporary injunction, froze the company’s assets, and appointed a receiver.  On cross-motions for summary judgment, the lower court held that the defendant violated the FTC Act, FCRA, the Free Credit Reports Rule, and the Restore Online Shopper Confidence Act (ROSCA).  A permanent injunction was imposed and the owner was ordered to pay $5.2 million in restitution.

On appeal, the Seventh Circuit upheld the permanent injunction.  With respect to restitution, however, the court sided with the defendant, who argued that the express statutory remedy that allows the FTC to seek an injunction to prevent future harm under section 13(b) of the FTC Act does not also provide for an implied remedy to impose restitution for past misconduct.

This ruling overturns the long-standing Seventh Circuit precedent established in FTC v. Amy Travel Service, Inc. (1989).  The court’s new ruling describes, at length, how it believes the Supreme Court’s intervening decision in Meghrig v. KFCW, Inc. (1996) cautions against reading into law implied remedies that are not part of an express remedial scheme, particularly where there are other enforcement provisions available.

Here, the court noted the FTC Act provides two other mechanisms for the FTC to obtain restitution: first, a cease and desist order may be pursued administratively, which, after administrative and judicial review procedures are followed, can lead to a final order and a suit for legal and equitable relief; and second, the FTC can promulgate rules to define specific acts or practices as unfair or deceptive, the violation of which can lead to legal and equitable remedies, including restitution, from violators.

The opinion was circulated before publication under a local court rule because it would overturn circuit precedent.  In dissent, the circuit’s chief judge criticized the majority decision to proceed without rehearing given the significance of tying the “hands of a government agency” and stripping the FTC of authority to seek restitution under 13(b), as well as the panel’s reliance on Meghrig.  The chief judge distinguished that case as one that addresses whether a private party has an implied right of action under federal environmental statutes, and not whether the FTC’s right to pursue statutory injunctive relief includes restitution as an ancillary component of that relief.  The chief judge also highlighted that eight other circuits have followed the Amy Travel interpretation of the FTC’s power to seek implied statutory restitution under 13(b), and cautioned that the majority’s decision not to rehear the matter en banc was leading the court into error.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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