Why the Supreme Court’s Unanimous FTC Decision Changes Everything

Manatt, Phelps & Phillips, LLP

The Supreme Court has just made it significantly more difficult for the Federal Trade Commission (FTC) to obtain monetary relief in enforcement actions, terminating a practice the FTC has engaged in for decades to exact monetary recoveries. Unless and until Congress legislates a change, the FTC may no longer proceed directly to federal court under Section 13(b) of the FTC Act to do so, and, therefore, myriad contested judgments might need to be reopened.

What Happened

The applicable law has long been straightforward. Under the FTC Act, Congress granted the FTC authority to enforce the act’s prohibitions on “unfair or deceptive acts or practices” (UDAPs) by commencing administrative proceedings pursuant to Section 5. FTC administrative proceedings are a two-step process in which the FTC initially obtains a cease-and-desist order from an administrative law judge which is subject to direct appeal to a federal court of appeals. Then, once a cease-and-desist order becomes final, the FTC may seek injunctive relief, civil penalties and other relief including consumer redress if the cease-and-desist order is violated. Importantly, such relief requires proof that “the act or practice to which the cease and desist order relates is one which a reasonable man would have known under the circumstances was dishonest or fraudulent.”

In addition to administrative proceedings, the FTC may proceed directly to court in two circumstances. First, and applicable here, under Section 13(b) of the FTC Act, the FTC is entitled to seek a “permanent injunction” when a defendant “is violating, or is about to violate, any provision of law enforced by the” FTC. Second, where an FTC rule has been violated, or after entry of a cease-and-desist order, the FTC may proceed directly to court and seek penalties and monetary relief including damages and consumer redress, pursuant to Section 19. However, these two direct suit remedies also have knowledge requirements; for example, in the absence of a prior FTC order, the agency must likewise establish that the defendant had “actual knowledge or knowledge fairly implied on the basis of objective circumstances that such act is unfair or deceptive and is prohibited by such rule.”

Given these constraints, the FTC has for many decades taken the broad position that it is entitled to proceed directly to federal court to seek monetary penalties solely as part of the requested permanent injunctive relief, relying on Section 13(b) and the “equitable relief” provision in Section 5(l). While the statute itself dates back to 1914, Congress granted the FTC additional powers in 1973 to seek, directly, those court remedies and, in 1975, added Section 19 rights.

In AMG Capital Management v. FTC (Supreme Court, April 22, 2021), a unanimous Supreme Court held that the FTC may not seek monetary relief or penalties in an action brought under Section 13(b). Writing for the Court, Justice Stephen Breyer concludes that Section 13, by its terms, concerns prospective injunctive relief, not retrospective monetary relief. Further, that provision permits the FTC to proceed directly to district court when the FTC seeks either preliminary injunctive relief pending administrative proceedings or when it thereafter seeks only a permanent injunction.

In reaching this conclusion, the Court relies not just on Section 5(l) and 13(b), but also on Section 19 of the FTC Act, which collectively make clear that the right to seek a permanent injunction ties back solely to the earlier request for preliminary injunctive relief. In particular, Section 13 allows the FTC to seek preliminary injunctive relief where it believes there is continuing harm after weighing the traditional factors for injunctive relief. Thereafter, it then permits the district court to make that preliminary injunction permanent in “proper cases.” Taken together, concludes the Court, it is clear the injunctive relief that may be granted is solely prospective in nature, and cannot include restitution or other monetary penalties for past behavior.

Here, the amount of money at stake was extraordinary. The underlying lawsuit involves Scott Tucker, a well-known figure in the small-dollar, short-term lending industry, whose billion-dollar business collapsed after repeated accusations of unfair and deceptive acts and practices. Back in 2012, the FTC charged Tucker and his related companies with numerous UDAP violations but, in so doing, entirely skipped the administrative proceedings process. In addition to seeking permanent injunctive relief, the FTC demanded, and the lower court ordered, that Tucker and companies pay an incredible $1.27 billion in consumer restitution. The Ninth Circuit rejected the appeal, but the Supreme Court granted certiorari, leading to this bombshell decision.

Why It Matters

This is a full-body blow to the FTC’s enforcement powers and places a significant amount of more recent FTC orders for monetary relief in jeopardy.

But Congress may come to the rescue, and quickly. FTC Acting Chair Rebecca Kelly Slaughter has now called for Congress to address AMG Capital through legislation, asking “Congress to act quickly and advance legislation to protect and strengthen the FTC’s powers.” Further, the full FTC appeared before a Senate committee on April 20 calling for Section 13(b) legislation. Given the FTC’s traditional focus on fraudsters and scam artists, there may be bipartisan support for a legislative reversal of the decision.

Unless and until Congress acts, we anticipate several immediate consequences of the decision:

First, because other agencies may bring enforcement actions in which they do not have to prove knowledge in order to secure relief, the FTC in the short term may refer more matters to the CFPB (where consumer financial laws are implicated, as in the AMG matter), to the DOJ, to state attorneys general and to state regulators.

Second, the FTC may recast direct suits as ones limited to injunctive relief and file concurrent administrative proceedings. Parties could be compelled through the administrative process to pay significant monetary penalties, and those administrative proceedings could still be enforced, thereafter, in federal court.

Third, the FTC may engage in more rulemaking to allow more direct-to-court cases (although there is still a knowledge requirement for those claims).

Fourth, parties that have been on the receiving end of monetary judgments on matters filed directly in federal court should promptly reach out to counsel about seeking relief from these rulings, especially those obtained less than one year ago. Rule 60 of the Federal Rules of Civil Procedure allows a party to seek relief from a final judgment “within a reasonable time—and for reasons (1), (2), and (3), no more than a year after the entry of the judgment or order or the date of the proceeding.” Grounds 1, 2 and 3 are each inapplicable here. The fourth ground is that “the judgment is void,” and a party may conceivably move “within a reasonable time,” even if greater than one year, on the basis that judgment itself is void in accordance with AMG Capital, to the extent it ordered monetary relief.

So, what about consent judgments? In those cases, parties may be out of luck in that they may have formally consented to the monetary payments and waived appeals.

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. Attorney Advertising.

© Manatt, Phelps & Phillips, LLP

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