Taking Another Look at Courts Interpreting Section 19 of the FTC Act

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BakerHostetlerAfter the Supreme Court held that the Federal Trade Commission (FTC) could no longer use Section 13(b) of the FTC Act to seek equitable monetary relief in federal court, the agency quickly ransacked the sofa, seeking spare change and any other statutory tools it could find to compensate. Section 19 of the FTC Act contained language that came closest to mirroring aspects of what made 13(b) an effective tool for decades, but with some caveats.

Section 19 has two key uses. First, after a full FTC administrative litigation that ends with a cease and desist order, the FTC can use Section 19 to go to federal court and seek monetary relief for fraudulent and dishonest conduct. Second, for many rule violations, the FTC can go straight to federal court and use Section 19 to seek redress and/or civil penalties (though the DOJ has a role to play if the relief sought includes penalties). Section 19 provides that in both types of actions, the court may “grant such relief as the court finds necessary to redress injury to consumers … resulting from the rule violation or the unfair or deceptive act or practice, as the case may be. Such relief may include, but shall not be limited to, rescission or reformation of contracts, the refund of money or return of property, the payment of damages, and public notification respecting the rule violation or the unfair or deceptive act or practice, as the case may be; except that nothing in this subsection is intended to authorize the imposition of any exemplary or punitive damages.” Notably, disgorgement is not an enumerated remedy, but there is a lot in Section 19 that can allow the FTC to get some real recovery in certain cases.

Because the FTC focused so much on Section 13(b) for decades, there is not much case law interpreting the contours of Section 19, but that is starting to change. Back in December 2021, we wrote about one of the early post-AMG cases (FTC v. Noland)that sought recovery under Section 19, and that case did not go well for the FTC. In short, a district court held that in the context of a claim involving the Mail Order Rule, although the court conceded that there was some harm to consumers, it held that Section 19’s language emphasizing relief “necessary to redress injury to consumers” required the FTC to show individualized harm for each consumer at issue. This interpretation was certainly different from how most courts had looked at similar issues under Section 13(b).

Since that time, a few more courts have looked at Section 19 issues, and so far, the Noland opinion discussed above is being distinguished. A district court decision from April 2022 demonstrates this. The case requires us to go back to spring 2020, when hand sanitizer was nowhere to be found. A few months later, the FTC started bringing law enforcement actions, and one of those early cases was against a company that promised to quickly ship such products, despite the fact that it was not able to meet those promises for a variety of reasons. The FTC alleged, among other things, Mail Order Rule violations and FTC Act claims regarding a COVID-19 prevention and treatment product. The FTC sought net revenue minus refunds that had already been issued.

Things turned out differently this time for the application of Section 19 in a summary judgment decision. The Court looked at Noland and went right into “distinguishing other cases” mode. It held that there was no need to demonstrate individual reliance in this case because the FTC demonstrated that there were “material representations that were widely disseminated,” which therefore allowed for the presumption of reliance. The Court focused on the fact that unlike in Noland, the deception here happened pre-purchase through the “materially misleading shipping promises.” “[G]iven Defendants’ widely disseminated materially misleading claims that they had hand sanitizer in stock and ready to ship, the Court finds that the FTC is entitled to a presumption of reliance.” Defendant failed to rebut the presumption. The Court also noted that net revenue was the appropriate measure of relief and not net profits.

One twist, however, is worth flagging. Under 13(b), most courts would at that point have required the defendant to pay the FTC revenue minus refunds, and the FTC would use those funds to send consumer redress directly to purchasers and any money left over would go to the United States Treasury. Here, however, the Court implemented a redress plan that required consumers to make refund requests rather than receiving funds outright. The money would be escrowed by the FTC, and any funds remaining after the redress program would return to the defendants, which again is quite different from what was the norm under 13(b).

Section 19 law will continue to develop, and we will keep you posted as we learn of more courts addressing the contours of this now-important part of the FTC Act.

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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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