FTC successfully uses Section 19 of FTC Act to obtain restitution as alternative to Section 13(b)

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An Illinois federal district court has ruled that Section 19 of the FTC Act provided an alternate route for the FTC to obtain restitution after its prior restitution award under Section 13(b) of the FTC Act was vacated by the Fifth Circuit because it concluded that monetary relief is not available under Section 13(b).

In FTC v. Credit Bureau Center, LLC, the FTC filed suit against Credit Bureau Center (CBC) for operating a website that offered a free credit report and score but automatically enrolled consumers who applied for the free information in a credit monitoring service for a monthly fee.  The FTC alleged that the website’s marketing and negative option feature violated the FTC Act’s UDAP prohibition and the Restore Online Shopper Confidence Act (ROSCA).  The district court granted judgment in favor of the FTC, issued a permanent injunction, and ordered CBC to pay over $5 million in restitution.

On appeal, the Seventh Circuit affirmed the permanent injunction, but vacated the restitution award after holding that Section 13(b) does not authorize monetary relief.  (The U.S. Supreme Court granted the FTC’s petition for a writ of certiorari and the case was meant to be consolidated with AMG Capital Management v. FTC but the Supreme Court vacated the grant of certiorari.  Subsequently, in AMG, the Supreme Court ruled that Section 13(b) does not authorize the FTC to seek monetary relief such as restitution or disgorgement.)  Following AMG and the Seventh Circuit’s issuance of its mandate, the FTC filed a motion with the district court in its action against CBC to amend the judgment to reimpose the same restitution under Section 19 and ROSCA.

Section 18 of the FTC Act authorizes the FTC to issue rules defining acts or practices that are unfair or deceptive.  If a rule promulgated under Section 18 is violated, the FTC can seek “legal and equitable remedies, including restitution, from violators” under Section 19 of the FTC Act.  Section 5(a) of ROSCA allows the FTC to enforce ROSCA by treating violations of ROSCA as violations of a rule promulgated under Section 18.

The FTC filed its motion to amend the judgment under Rule 59(e) of the Federal Rules of Civil Procedure, which requires the moving party to “clearly establish a manifest error of law or an intervening change in the controlling law or present newly discovered evidence.”  The FTC asserted that it could seek monetary relief for ROSCA violations under Section 19, a provision it did not cite in its complaint.  It also contended that because Section 5(a) of ROSCA incorporates all of its enforcement authority under the FTC Act, the FTC had not only put CBC on notice about the factual basis for its ROSCA claim and the remedy sought (i.e. restitution), but also implicated an alternative route for seeking that remedy.  According to the FTC, it was entitled to the same redress awarded in the prior judgment but under ROSCA and Section 19 rather than Section 13(b).

In response to the FTC’s motion, CBC asserted a number of counterarguments, including that the court could not amend its prior judgment because the Seventh Circuit’s mandate did not permit any further proceedings, the FTC law of the case doctrine precluded the FTC from pursuing relief under an alternative statute, the FTC had waived monetary redress under Section 19 by pursuing such relief under Section 13(b), and unfair prejudice because the FTC had not specifically invoked Section 19 in its complaint.

The district court agreed with the FTC that the Seventh Circuit’s mandate did not preclude it from granting the same relief under Section 19 that it had previously granted under Section 13(b) because the Seventh Circuit did not address whether the FTC could pursue monetary relief under Section 19.  It also rejected all of CBC’s other arguments and concluded that “because the complaint sufficiently tied the FTC’s factual allegations and claims for relief to the ROSCA violation, the invocation of section 5(a) of ROSCA was enough to put CBC on notice about ‘the methods of enforcement and nature of relief available under Section 19.’”  The district court stated that it was “persuaded that it has the authority to amend the prior judgment under Rule 59(e) due to the intervening change in the law” and amended its prior judgment to award the same consumer redress under ROSCA and Section 19.”

For cases that involve violations of FTC rules, such as the Telemarketing Sale Rule and rules implementing the Children’s Online Privacy Protection Act, or statutes such as ROSCA that include language treating a statutory violation as a violation of a consumer protection rule under the FTC Act, the FTC can be expected to continue to file actions in federal district court seeking either consumer redress under Section 19 or civil penalties under Section 5(m)(1)(A) of the FTC Act.  For cases that do not involve rule violations (i.e. cases only alleging UDAP violations), in order to obtain monetary redress, the FTC will need to first establish the respondent’s UDAP liability in the administrative action (and any appeals), before it can seek monetary relief in federal district court pursuant to Section 19.

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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