Supreme Court deprives FTC of key enforcement tool

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On April 22, in AMG Capital Management v. FTC, the Supreme Court unanimously struck down one of the Federal Trade Commission’s key enforcement tools.

The decision prevents the FTC from seeking monetary relief in federal court under Section 13(b) of the FTC Act – a practice the FTC has followed for decades, and with increasing frequency in recent years. The immediate effect will likely be a longer and more complicated process in FTC enforcement cases and greater involvement by state attorneys general.

Background

The FTC serves a dual role of enforcing both the U.S. federal competition and consumer protection laws. In general, the FTC has two tracks on which it can enforce these laws: through its own administrative litigation process or through an action in federal court.

Section 5 of the FTC Act creates the structure for the administrative track. First, the FTC may file a complaint against any entity which it has “reason to believe” has engaged in unfair methods of competition or unfair or deceptive acts or practices. If the entity contests the charges, then the FTC will litigate the case before an administrative law judge, who will hold an adversarial, trial-type proceeding. The administrative law judge will then issue a decision, which will contain a cease-and-desist order against the challenged conduct if it finds in favor of the FTC. The losing party may appeal the administrative law judge’s ruling to a full panel of the Federal Trade Commission. From there, the next stage of appeal would be to one of the U.S. Circuit Courts of Appeal, depending on the location where the case arises. Section 19 of the FTC Act allows the FTC to proceed in federal district court to enforce compliance with any final cease-and-desist order, and to recover money damages for any non-compliance.

Section 13 of the Act, which Congress added in the 1970s, governs the judicial track. The amendments permit the FTC to proceed directly to federal court to obtain a temporary restraining order, preliminary injunction, or, “in proper cases,” permanent injunction against a challenged practice. Shortly after passage, the FTC began using Section 13(b), and particularly the “permanent injunction” authority, to proceed directly into federal court and receive a variety of equitable relief, including monetary relief like restitution and disgorgement, while bypassing the Section 5 procedure. This has become the FTC’s preferred route, as it generally can be accomplished more quickly, creates easier and more direct enforcement, and allows the FTC to avoid being sent to a circuit on appeal with less favorable law. In oral argument before the Supreme Court, the FTC acknowledged that “there’s no question” that it files more cases in federal court than it does before the administrative law judges.

The Supreme Court Case

Scott Tucker is a convicted racketeer whose company AMG made payday loans causing consumers to pay over $1 billion in unfair charges based on deceptive terms. The FTC sued Tucker and AMG in federal court under Section 13(b), ultimately receiving an injunction ordering the defendants to pay $1.27 billion in restitution and disgorgement. The defendants appealed, arguing that the FTC’s 13(b) practice of collecting money damages is not legally authorized under the FTC Act.

The Supreme Court framed its decision as a simple matter of textual analysis. The question posed, according to the Court, was the “purely legal question” of whether the words “permanent injunction[] grant the Commission authority to obtain monetary relief directly from courts, thereby effectively bypassing the process set forth in §5 and §19[.]”

In a unanimous decision, the Court answered “no,” for several reasons. First, the statutory language of Section 13(b) only described injunctions, which are distinct from equitable monetary relief. Second, the Court noted that, taken in full context, Section 13(b) is only about authorizing injunctions to prevent ongoing conduct related to matters in front of an administrative law judge, before the administrative law judge has the opportunity to reach a final decision. Rather than operating as a standalone source of relief, Section 13(b) was only meant to prevent ongoing harm while the administrative process plays out. Third, the Supreme Court found support for its view when Section 13(b) is read alongside Sections 5 and 19. The latter provisions spell out the process by which federal courts have a limited opportunity to issue money damages after a cease-and-desist order becomes final. These limited procedures would not make sense if the FTC could simply obtain the same relief by bypassing the administrative procedure and proceeding under Section 13(b) from the outset.

The Supreme Court appeared unimpressed with the non-textual arguments that the FTC offered. While it recognized that many circuit courts have accepted the FTC’s interpretation over the years, and noted that Congress may have arguably acquiesced in it, the Court found that these actions were not sufficient to overcome the clear statutory language. It also rejected arguments that permitting monetary relief under Section 13(b) is desirable from a policy perspective. The Court noted that nothing prevents the FTC from receiving monetary relief through the administrative procedure specified in Sections 5 and 19. If that process is too burdensome, it is up to Congress to revise the FTC Act.

Implications

While the FTC may still pursue monetary damages through Sections 5 and 19, the process for doing so will now be more complicated and time-consuming than it was before. The fact that the FTC prefers to litigate damages claims in federal court reflects its belief that that process is preferable. Acting FTC Chairwoman Rebecca Slaughter announced, in response to the Supreme Court’s decision, that “the Court has deprived the FTC of the strongest tool we had to help consumers when they need it most” and called for Congress to act quickly to reinstate its power.

Ordinarily, any action from Congress addressing this issue would likely take many years. But the renewed focus on competition issues from both Democrats and Republicans on Capitol Hill means that a much quicker legislative response is possible. The Supreme Court’s decision may also have the unintended effect of fostering more cooperation between the FTC and state attorneys general. The attorneys general often have statutory authority to seek monetary damages and can sue alongside the FTC to obtain the type of relief that the FTC has historically sought.

In the meantime, we do not expect that this decision will dampen the FTC’s efforts to bring cases. The FTC will likely evaluate its strategy and continue its enforcement through a mix of cases in federal court and its own administrative procedure.

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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