Money, Money, Money - Recent Decision Shows a Court Wrestling with the Proper Amount of Civil Penalties to Award the FTC



Much ink has been spilled over the impact of the Supreme Court’s AMG decision on the Federal Trade Commission (FTC). That decision held that Section 13(b) of the FTC Act did not authorize a federal court to award equitable monetary relief for violations of Section 5 of the FTC Act, and it required the agency to get a lot more creative in some of its theories of monetary recovery. The FTC could get money through Section 19 of the FTC Act, through the complex two-part administrative and federal litigation process, and through allegations of certain rule and other statute violations.

As a result, we are seeing more FTC cases alleging rule violations or more creative interpretations of existing statutes in order to allow the agency to seek money in federal court. And we are starting to see how courts are interpreting the agency’s theories and approaches. We are also starting to see courts doing assessments of how much money the agency can recover under Section 19 as redress and as a civil penalty.

A recent decision in a case involving merchant cash advances to small businesses sheds some interesting light on many of these issues. The agency had alleged that the defendant was individually responsible for making multiple unauthorized withdrawals from small businesses’ banks, sometimes taking thousands of dollars more than the agreed repayment amount.

The FTC won summary judgment in this case against the remaining individual defendant in the fall of 2023, but the court found that to determine the appropriate amount of redress and penalties, a trial was necessary – a jury trial no less, which is not a typical FTC trial.

In the underlying case, the FTC alleged that the individual defendant violated Section 5 of the FTC Act through deceptive and unfair practices involving merchant cash advances that were provided to small businesses. The FTC also alleged a violation of a somewhat obscure provision of the Gramm-Leach-Bliley Act (GLB), which provides that is unlawful to use false or deceptive information to obtain a consumer’s bank account information.

Because of the AMG decision, and the fact that the FTC had filed in federal court (and did not file an administrative action), the FTC could not recover money in federal court on the FTC Act counts. The GLB count however was a very different thing – and the court held that Section 19 of the FTC Act allowed the agency to recover both redress and penalties for the GLB violations.

So the FTC had a jury trial, and the jury held that the defendants owed $3.5 million in damages and $7.5 million in civil penalties. But the story does not end there – the court then evaluated the jury’s determinations and upped the ante.

There are very few litigated FTC decisions where a court does a deep dive into assessing the proper amount of a civil penalty. So let’s start with the approach the court takes here. At the outset, the FTC in most cases is allowed to seek up to roughly $52,000 per violation as a civil penalty. That’s a huge range – from a fraction of a penny per violation at one end to $52,000 at the other. So how does a court figure out that sweet spot? Well, there are a bunch of factors to be considered. In fact, the FTC Act provides that when “determining the amount of such a civil penalty,” a court should consider:

the degree of culpability, any history of prior such conduct, ability to pay, effect on ability to continue to do business, and such other matters as justice may require.

Now, let’s be clear – these are not factors that lend themselves to a precise and solid calculation. But the court goes through the five factors and evaluates each one, most of which land to the detriment of the defendant. And let’s be even clearer – the court does not appear to have a particularly positive impression of this defendant. The decision is replete with damning emails and other evidence that, according to the court, showed that the defendant “boasted about his illegal conduct and treated it as a laughing matter, evidencing little remorse for his illegal conduct.” For example, video evidence showed the defendant:

making grossly threatening comments to a borrower over the phone in order to intimidate the borrower from gaining information. Among other things, Mr. Braun threatened to send the consumer to jail and said he would spit on the consumer’s “XXXXX face on visiting day” in prison. Mr. Braun told the consumer to drive his Honda “off a cliff” and that he hoped the consumer’s wife would leave him.

So let’s just say that this was perhaps not a very sympathetic defendant. And the court assesses the factors and decides that the proper penalty amount here was $18,000 per violation and that there were 942 violations of the GLB for a total penalty of just under $17 million – about $10 million more than what the jury found.

We should put this penalty assessment into perspective, of course. First, this was conduct that was quite egregious and had an impact on a few thousand consumers. In many other cases, the FTC alleges numbers of violations that are dramatically higher – and in such cases, a court is not likely to land at $18,000 per violation (particularly since ability to pay is a factor). Second, as you can tell from the excerpts above, this was perhaps not a sympathetic defendant that was trying hard to comply with the law but made a small misstep. This wasn’t a case involving an online cancellation process where a company required four steps to cancel instead of two. It’s a very different case.

But that’s not all, folks. The court also awards redress for the consumers who were harmed by the GLB violations. Civil penalties go to the U.S. Treasury, but Section 19 also allows the FTC to obtain money necessary to redress injury to consumers. That money goes back to the harmed small businesses.

The FTC – through an expert analysis and random sampling – detailed how often the defendant overcharged consumers or underfunded their loans, and the court found the following:

Applying the three-year statute of limitations that is applicable to this part of the case, the FTC’s evidence showed that Mr. Braun is responsible for underfunding 364 deals by an average of $3,022, which totals $1,100,008, and the FTC’s evidence also showed that Mr. Braun is responsible for over-collecting on 247 deals by an average of $9,397, which totals $2,321,059.

The defendant failed to successfully rebut the FTC’s showing in this case but was given an opportunity to do so.

It is quite an interesting decision, written by Judge Rakoff of the Southern District of New York, and we can be confident the FTC will be citing this one for some time to come.

[View source.]

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.

© BakerHostetler | Attorney Advertising

Written by:


BakerHostetler on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide