FTC looks to Section 5 penalty offense authority in sending notices to for-profit schools that outline practices found to be unfair or deceptive

Ballard Spahr LLP

Ballard Spahr LLP

The FTC announced yesterday that it has sent a “Notice of Penalty Offenses” to 70 for-profit higher education institutions that outlines a number of practices that the FTC has previously found to be unfair or deceptive.

The seven practices outlined in the Notice generally relate to claims made by schools about their graduates’ job and earnings prospects.  The Notice warns that engaging in these practices could subject a school to civil penalties and cites a number of administrative cases brought by the FTC against for-profit institutions in which the FTC found these practices to be a UDAP violation.  The Notice indicates however that it does reflect any assessment as to whether the school has engaged in deceptive or unfair conduct.

In its announcement regarding the Notices, the FTC stated that it “is resurrecting its Penalty Offense Authority, found in Section 5 of the FTC Act.” 15 U.S.C. § 45(m)(1)(B) provides:

If the Commission determines in a proceeding under subsection (b) that any act or practice is unfair or deceptive, and issues a final cease and desist order, other than a consent order, with respect to such act or practice, then the Commission may commence a civil action to obtain a civil penalty in a district court of the United States against any person, partnership, or corporation which engages in such act or practice—

(1) after such cease and desist order becomes final (whether or not such person, partnership, or corporation was subject to such cease and desist order), and

(2) with actual knowledge that such act or practice is unfair or deceptive and is unlawful under subsection (a)(1) of this section.

In such action, such person, partnership, or corporation shall be liable for a civil penalty of not more than $10,000 [currently adjusted to $43,792] for each violation.

The FTC’s cover letter accompanying the Notices advises schools that receipt of a Notice “puts your company on notice that engaging in [any of the seven practices outlined in the Notice] could subject the company to civil penalties of up to $43,792 per violation.”  As indicated in a blog post about the Notices, the FTC’s position is that “[t]he receipt of a Notice will help the FTC establish that [a school that engages in any of the outlined practices] had ‘actual knowledge’ [that it was engaging in an unfair or deceptive practice]” and allow the FTC to sue in federal court and seek civil penalties.  The blog post also notes that the FTC’s Penalty Offense Authority is not limited to companies involved in the education marketplace and warns other companies “that the FTC will use every tool at its disposal to protect consumers from deceptive and unfair practices.”

The FTC’s “resurrection” of its Penalty Offense Authority would appear to be part of its efforts to blunt the impact of the U.S. Supreme Court’s AMG decision in which the Court ruled that Section 13(b) of the FTC Act does not authorize the FTC to seek monetary relief such as restitution or disgorgement.  In a recent memo to FTC Commissioners and staff outlining her “vision and priorities” for the agency,  FTC Chair Lina Khan indicated that in light of AMG, it is particularly critical for the FTC to use its “full set of tools and authorities.”

In his prepared remarks about the FTC’s use of its Penalty Offense Authority to target for-profit school, FTC Commissioner Rohit Chopra, recently-confirmed as CFPB Director, also stated that “[t]his legal tool is particularly important, given the Supreme Court’s recent ruling in AMG Capital Management.”  In 2020, Mr. Chopra co-authored a paper that discussed why the FTC should resurrect its Penalty Offense Authority.  (Mr. Chopra wrote the paper with Samuel Levine who was recently named Director of the FTC’s Bureau of Consumer Protection.)

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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