FTC’s Section 13(b) Powers Undermined by Two Circuit Courts

Ballard Spahr LLP

Ballard Spahr LLP

Two recent Circuit Court opinions have significantly undermined the FTC’s powers under Section 13(b) of the Federal Trade Commission Act (FTCA).  These pivotal decisions may ultimately require the U.S. Supreme Court to clarify Section 13(b)’s boundaries.

First, in FTC v. Shire Viropharma, Inc., the Third Circuit Court of Appeals held that in order to file a suit under Section 13(b), the agency must include specific allegations that a defendant “is violating or about to violate” a law enforced by the FTC.  In Shire, the FTC had sought a permanent injunction and restitution for Shire’s alleged unfair methods of preventing generic drug competition.  The district court granted Shire’s motion to dismiss for failing to meet Section 13(b)’s requirement that the violation is either in process or eminent.  The Third Circuit agreed, and affirmed the district court’s decision, noting the alleged conduct had ceased years prior to the FTC’s complaint: “‘[A]bout to violate’ means something more than a past violation and likelihood of recurrence.”

Second, in FTC v. Credit Bureau Center, LLC, the Seventh Circuit reversed its own precedent and created a circuit split by holding that the FTC does not have authority to seek restitution under Section 13(b) because its plain terms provide solely for injunctive relief.

The FTC filed suit against Credit Bureau Center for operating a website that seemingly offered free credit reports and automatically enrolled users in a credit monitoring service for $29.94 a month.  The FTC alleged that the website’s small print and solicitation scheme violated the FTCA’s prohibition on “unfair or deceptive acts or practices” as well as the Restore Online Shopper Confidence Act, the Fair Credit Reporting Act, and the Free Credit Reports Rule.  On cross-motions for summary judgment, the district court found Credit Bureau Center liable on all counts and issued a permanent injunction, set limitations on Credit Bureau Center’s principal’s ability to participate in the credit reporting industry, and also ordered Credit Bureau Center to pay over $5 million in restitution.

On appeal, the Seventh Circuit affirmed the permanent injunction, but held that “section 13(b)’s grant of authority to order injunctive relief does not implicitly authorize an award of restitution.”  In so doing, the Seventh Circuit overturned its own precedent in FTC v. Amy Travel Service and created a dramatic circuit split, as a majority of circuits had relied upon the Seventh Circuit’s analysis in Amy Travel in allowing the FTC to seek restitution under Section 13(b).  Such cases include FTC v. Gem Merchandising Corp. (11th Cir.), FTC v. Sec. Rare Coin & Bullion Corp. (8th Cir.), FTC v. Bronson Partners LLC (2d Cir.), FTC v. Freedom Communications Inc., (10th Cir.), FTC v. Pantron I Corp. (9th Cir.) and FTC v. Ross (4th Cir.).

In explaining its reversal of long-standing precedent, the Seventh Circuit noted that the Supreme Court had evolved its understanding of implied remedies in recent decisions, most notably Meghrig v. KFC Western.  In Meghrig, the Supreme Court ruled that the Resource Conservation and Recovery Act does not provide implied or equitable restitution because its plain language is limited to forward-looking remedies. The Seventh Circuit determined that “[i]n light of the [Supreme] Court’s commands in Meghrig, our holding in Amy Travel is no longer viable.”

Because the Seventh Circuit opinion overruled its own precedent, the panel had to circulate its opinion to all the circuit judges before publication. A majority did not favor rehearing the case en banc, but Chief Judge Diane Wood penned a dissent that was joined by two other judges.  It is likely the Supreme Court will be presented with this issue again, due to the circuit split.

It is important to note that although the FTC cannot seek civil money penalties under Section 13(b), the CFPB has the full array of remedies at its disposal under Dodd-Frank (restitution, disgorgement, injunctive relief, civil money penalties) for violations of any Federal consumer financial law.

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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