Stephen R. Cochell
Requiem for Consumer Redress Under Section 13(b) of the FTC Act?
This short article is to give a small firm practitioner’s view of the FTC’s abuse of Section 13(b) of the FTC Act (the “Act”). The Supreme Court will hold oral argument on the issue in AMG Capital Management, LLC v. FTC, No. 19-508, 2020 U.S. LEXIS 5378 (2020). Ironically, it was a small firm practitioner who laid the foundation for the likely demise of the FTC’s use of Section 13(b) to seize the assets of businesses and owners to obtain restitution under the FTC Act. FTC asset freezes are devastating to small businesses and the owners whose personal assets are seized without regard to whether they are related to the underlying fraud claims made by the FTC. AMG was granted certiorari with FTC v. Credit Bureau Center, 937 F.3d 964 (7th Cir. 2020), which reversed almost four decades of precedent holding that Section 13(b) authorized recovery of equitable restitution under the Act.
As summarized below, we believe the Supreme Court should reverse the 9th Circuit’s ruling in AMG and affirm the Seventh Circuit’s decision in FTC v. Credit Bureau Center, which is being held pending the Court’s decision in AMG. The FTC should follow the law as it was written and intended by Congress.
The FTC Act was adopted to prevent and protect consumers from deceptive trade practices. The Act was intended to provide a balance that affords businesses the freedom to operate and provide services or products to consumers so long as they do not engage in unfair or deceptive trade practices. Significantly, the Act does not impose strict liability for consumer complaints and is not designed to protect consumers who fail to act reasonably under the circumstances. A body of case law, however, has developed that makes it almost impossible for defendants to successfully defend themselves in Section 13(b) cases. In many cases, consumers either do not read contracts that are clear as to the terms and pricing of services or, in some cases, subsequently claim that they were misled by advertising to avoid paying for their services.
In 2017, I was contacted by Michael Brown, a former client whose business, Credit Bureau Center, had been seized and shut down by the FTC. Like most small companies, the owner’s assets are seized at the same time as their company assets, leaving them little or no funds to defend themselves against the power the Federal Trade Commission. In many cases, individuals have no choice but to stipulate to preliminary injunctions because they have no funds to retain counsel. When they go to court, they are frequently denied funds because the courts view the funds as belonging to consumers allegedly victimized by the owners and their companies. Similarly, defendants are frequently unable to afford their short term if not long-term living expenses.
Thus, the FTC starts with an incredible advantage and leverage that allows the agency to extract settlements that may or may not be warranted under the facts of a case. Moreover, the FTC usually has a team of about three to five or more lawyers ready to serve time consuming discovery and put defendants in a never-ending defensive posture unless they “cooperate” and settle. Those who raise legal issues and show some sign of fighting the charges are then implicitly if not expressly threatened with permanent injunctions and loss of everything they own.
I have represented three sets of clients in this circumstance. In two cases, the courts denied legal fees because the attorneys either advised their clients to stipulate to a preliminary injunction in the hope of settling the case or they were unrepresented and lacked the means to oppose the motion. In the third case, the district court allowed fees for the preliminary injunction and provided some limited fees when I subsequently entered the case but denied additional fees necessary to finance discovery of witnesses identified by the FTC around the country. Because of the significant legal issues, we decided to proceed in the hope of being paid our fees upon final resolution of the case.
If I learned anything about the process in FTC cases, litigants should not stipulate to preliminary injunctions. Once the preliminary injunction is entered, you have little chance of getting fees and being able to fight on an even playing field with the FTC. That is because the district courts frequently have local rules that prevent a party from subsequently challenging a preliminary injunction unless they can show new evidence or a material change in circumstance.
Obtaining living expenses is also an almost insurmountable hurdle unless a litigant can show that they have no other means of paying their rent and expenses. Even then, the courts reluctantly grant living expenses. The FTC usually prevails in arguing that defendants have other assets or have hidden assets. The burden is usually placed on the defendant to prove otherwise.
In all three cases that I undertook after entry of injunctive relief, the Receivers then conducted an investigation that was time consuming, expensive and resulted in free discovery for the FTC. The FTC’s investigations tend to be conducted by either paralegals or junior lawyers who take a one-sided, result oriented view to getting the Temporary Restraining Order and a Preliminary Injunction. Busy district judges often rely on the allegations made by the FTC to make decisions and frequently do not have the benefit of attorneys who actually have the resources or the know-how to challenge the evidence.
In Credit Bureau Center, Defendants filed a Motion to Dissolve the Preliminary Injunction based on SEC v. Kokesh, 137 S.Ct. 1635 (2017) and the argument that the plain language, text and structure of the FTC Act did not authorize the Court to allow injunctive relief. The trial court denied the motion and subsequently granted summary judgment. The Seventh Circuit reversed. The FTC sought a writ of certiorari to the Supreme Court which was granted.
The Supreme Court will hear oral argument in AMG In FTC v. AMG, the 9th Circuit affirmed its long standing ruling in FTC v. H.N. Singer holding that Section 13(b) authorized district courts to award equitable restitution under Section 13(b) of the FTC Act. Fortunately for AMG, the Seventh Circuit decided Credit Bureau Center, which created the circuit split. Ironically, the appointment of Amy Coney Barrett to the Court resulted in her recusal from Credit Bureau Center, as Justice Barrett voted against en banc consideration of the case. The Court then decided to hold Credit Bureau Center pending the disposition of AMG.
In Credit Bureau Center, the Seventh Circuit reversed almost four decades of unbridled power by the FTC. This included the right to seek equitable restitution despite the statutory framework that was clearly designed to prevent unfair, misleading or deceptive trade practices. Congress allowed the FTC to seek injunctive relief of deceptive trade practices and allow it time to file administrative complaints to be adjudicated before the Commission.
Section 13(b) specifically provided that the agency could file the request for injunctive relief but had to file an administrative complaint within twenty days of obtaining an injunction or the injunction would be dissolved by the Court. This provision was apparently, if not obviously included to prevent the FTC from doing an end run around Congressional intent underlying its adoption of Section 19 of the FTC Act, which allows restitution and other equitable relief if, but only if, the FTC pursues an administrative complaint within twenty days of the injunction, and obtains a cease and desist order that is subsequently violated. In FTC v. Evans, 775 F.2d 1084 (9th Cir. 1985), the Ninth Circuit simply disregarded that provision holding that the ability to obtain a permanent injunction implicitly allowed the FTC to pursue the case in federal court.
The authority granted in Singer and its progeny is, to say the least, draconian. Over the years, the FTC obtained rulings that allowed it to file the equivalent of class actions without any safeguards provided by Congress under Rule 23. Similarly, the courts simply presume class action damages without any showing that “class representatives” actually represent the class or sub-classes. A substantial number of consumers are frequently damaged by imposition of a receivership because consumers often lose services they wanted, needed and often paid for. Indeed, many consumers never even hear from the FTC until three to five years later when they get a check that does not remotely resemble whatever losses are claimed by the FTC. Incredibly, there was little, if any challenge to the FTC’s exercise of power until the Credit Bureau Center case.
The Ninth Circuit relied on Porter v Warner, 328 U.S. 395 (1947), which seemed to imply the authority to district courts to exercise the entire spectrum of equitable power based on the power to issue injunctive relief under the Emergency Price Controls Act, which specifically allowed the Courts to issue "a permanent or temporary injunction, restraining order, or other order." In sum, Congress gave the agency the right to issue any order to accomplish the purpose of controlling wartime profiteers. In Meghrig v. KFC Western, Inc., 516 U.S. 479 (1996), the Court made it clear that district courts cannot imply remedies in a provision allowing for injunctions if, as in Section 19 of the Act, Congress has already enacted an elaborate enforcement scheme for consumer redress.
In April, 2020, the Supreme Court handed down a decision in SEC v. Liu, 140 S.Ct. 1936 (2020) affirming the principles enunciated in in Kokesh holding that the SEC could not seek equitable restitution against an individual’s assets if the assets were unrelated to the underlying fraud that was the subject of the Complaint. Moreover, the award of restitution by an alleged wrongdoer may not exceed each wrongdoer’s net profits from the enterprise.
The Supreme Court’s language in Liu was a broad statement of the “transsubstantive principles” of equitable restitution. In one case, however, the trial court allowed the FTC to seize another business started by one of the defendants eighteen months after filing of the complaint despite the fact that the new business was unrelated to the underlying fraud allegations. Surprisingly, the district court held that SEC v. Liu applied only to SEC and not to FTC cases. FTC v. Cardiff, 2018 U.S. Dist LEXIS 118113 (C.D. Cal. 2020). This injunction ruling is on appeal to the Ninth Circuit Court of Appeals and set for oral argument on March 2, 2020.
Most recently, in FTC v. Abbvie, 976 F.3d 327 (3d Cir. 2020), the Third Circuit Court of Appeals refused to adopt the rule in Singer and sided with the Seventh Circuit’s decision in Credit Bureau Center.
The Supreme Court will now weigh in on whether the text and structure of Section 13(b) allows the FTC to seize and impose receiverships over businesses and their owners. The FTC is now starting to lobby Congress for statutory authority despite the fact that the agency has not used its authority to seek restitution under Section 19, which provides the balance that was actually intended by Congress under the Act.
Regardless, Congress should hold hearings and scrutinize the FTC’s handling of FTC cases before granting any further authority to the FTC.
For more information, please refer to cochelllawfirm.com or contact Stephen Cochell.