SUPREME COURT SKEPTICAL OF AUTHORITY FOR FTC ASSET FREEZES AND RECEIVERSHIPS

The Supreme Court heard oral arguments in FTC v. AMG, 910 F.3d 417 (9th Cir. 2018), cert. granted, No. 19-508. As a matter of full disclosure, I served as trial and appellate counsel in FTC v. Credit Bureau Center, LLC, 937 F.3d 964 (7th Cir. 2019), a companion case to AMG which will be decided after a decision by the Court in AMG. The AMG case was decided by the Ninth Circuit, which relied on long-standing precedent to reverse its holding that Section 13J(b) allows the FTC to seize businesses and personal assets of company owners to satisfy monetary judgments. Until Credit Bureau Center reversed long-standing precedent in seven circuit courts of appeal, it was unlikely the Supreme Court could demonstrate a circuit split or some other ground justifying review of the Ninth Circuit’s decision.

The FTC’s power to freeze company and individual assets, as well as obtaining receiverships pending litigation places extraordinary power in the hands of the agency, and does so without express Congressional authority. In Credit Bureau Center, we challenged that authority based on the plain language and structure of the statute. We urged the FTC to settle with us to avoid the necessity of appealing the case. The FTC scoffed at the idea that it would lose the argument and was encouraged by the trial court’s ruling affirming Seventh Circuit precedent allowing monetary recovery under Section 13(b). At every step, the FTC took a hard line claiming that they had authority to seize assets. Even after the Seventh Circuit ruled against the FTC, the FTC refused to recognize that perhaps they were wrong. The Solicitor General declined to appear on behalf of the FTC. The likely reason is that the Solicitor General’s Office did not agree with the FTC’s position. Joel Marcus, the FTC’s Associate General Counsel for Litigation, argued the case to the Supreme Court.

While one cannot scientifically predict any appellate court’s ultimate decision in a case, the tone and tenor of the Court’s questions do not bode well for the FTC. As a whole, the justices appeared deeply concerned that the FTC did not have the authority to seek restitution based on a statute that provided for consumer redress through Section 19 (restitution and other equitable relief) and Section 5(l) (civil penalties) of the Act. A fundamental issue is whether the Court will apply a free wheeling approach where courts interpret a statute by “looking at what Congress had in mind” and then interpret the statute, as opposed to a textual analysis of the statute, which is more disciplined and “more suited to our role under the Constitution.”

The FTC argued that Congress adopted Section 13(b) as part of a set of options for the FTC—to adopt regulations, pursue administrative action, obtain cease and desist orders to be followed by Section 19 actions on violation of the orders or directly file Section 13(b) cases.

AMG’s counsel effectively argued that Section 13(b), Section 19 and Section 5(l) of the Act make it abundantly clear that the amendments to the FTC Act were designed to advance its core mission to provide guidance to businesses and prevent deceptive trade practices---not punish those who violate the Act. Based on principles of statutory interpretation set out in Meghrig v. KFC Western, Inc, 516 U.S. 479 (1996) the Supreme Court will not allow a damages remedy to be implied in a statute where, as in the FTC Act, Congress has already provided for such damages. The Meghrig decision, standing alone, may be sufficient for reversal in AMG. Why would Congress allow the FTC to circumvent the elaborate administrative process adopted by Congress?

The FTC’s “choice” in consumer protection cases, of course, is Section 13(b) because it does not have to file an administrative complaint, obtain a cease and desist order and then seek monetary penalties or restitution. Justice Kagan asked how many consumer protection cases were filed by the FTC as administrative complaints. The FTC did not appear particularly forthcoming simply stating that it filed one or two administrative complaints when, in fact, virtually all its consumer protection cases in the last five years (before Credit Bureau Center) were filed as Section 13(b) cases. AMG argued that Section 13(b) effectively deprived defendants of the protections afforded by the administrative process, including a higher standard of scienter and a statute of limitations. It seems readily apparent that the FTC gravitated to Section 13(b) because it is faster and easier to get large judgments through Section 13(b) than an administrative process that may provides protections to alleged wrongdoers.

Justice Alito stated that a paper authored by a former FTC appellate lawyer was extremely damaging to the FTC’s case. In a paper tracing the “genesis” of the FTC’s use of Section 13(b), the author admitted that FTC’s own lawyers knew there was no express statutory language or legislative history to support the FTC’s claim that it had authority to seek monetary redress under Section 13(b). The author also describes how the FTC selected jurisdictions and cases to expand its implied authority arguments. Justice Sotomayor observed that Section 13(b) appeared to be “a narrow supplement to an overall judicial process.” Justice Thomas expressed the view that the text of Section 13(b) was “forward looking” and designed to prevent a future or present action.

Justice Kagan pointedly told the FTC that:

Legislative history is not unimportant to me. What am I to make of the fact that I saw nothing suggesting that Congress understood that Section 13(b) authorizes money awards? Quite to the contrary, the prior versions of what became section 19 triggered extensive debate because there wasn’t money damages available, and Section 19 was passed to remedy what was perceived as a fault in the bill as it existed.

Justice Kagan further expressed doubt that Congress authorized considered Section 13(b) as a standalone provision authorizing monetary redress stating that the FTC’s interpretation of Section 13 made Congressional adoption of Sections 5 and 19 “entirely irrelevant.” Justice Gorsuch similarly expressed the concerns that the FTC’s use rendered the protections in Section 19 “superfluous” and “another step away from what Congress had anticipated would be a regulatory regime that’s never materialized.”

Justice Breyer, in particular, made it clear that the FTC’s argument about Section 13(b) was inconsistent with the history of the statute. The “compromise” was that the FTC would tell a party “what you’re doing is wrong” (a cease and desist order) but the FTC then used Section 13(b) in a way to eliminate that protection. Justice Kavanaugh expressed a view that the FTC had a problem with the text of the statute which created a separation of powers issue.

The FTC argued that Porter v. Warner, 328 U.S. 395 (1947) and Mitchell v. Robert DeMario Jewelry, Inc., 361 U.S. 288 (1960) for the proposition that Section 13(b)’s provision allowing entry of permanent injunctions empowered the courts to exercise the full panoply of equitable remedies. AMG counsel pointed out that, unlike the FTC Act, Porter and DeMario did not involve a statutory framework that already provided for monetary redress. Justice Roberts observed that the FTC’s authority did not involve government agencies. The agency’s authority for Section 13(b) was granted by Congress; in other words, if Congress did not grant the agency authority to seek restitution, the district courts cannot imply such authority into the statute.

One argument that appeared to be of interest to the Court was the argument that seven circuit courts have, for the last forty years, interpreted the Act to allow the imposition of receiverships and restitution awards. Thus, the Court should not disturb an effective enforcement strategy by the FTC. AMG’s counsel argued that long standing errors in precedent do not take precedence over a statute’s language. In preparing briefs in Credit Bureau Center, we reviewed the available appellate briefs in the seven circuits approving use of Section 13(b), but found no cases where any of the attorneys squarely challenged use of Section 13(b) based on the plain language of the statute or on principles of statutory interpretation based on Meghrig. Appellate courts do not consider issues that are never raised. Until SEC v Kokesh, 137 S.Ct. 1637 (2017), it never occurred to most lawyers that the FTC’s use of Section 13(b) should or could be challenged.

It seems unlikely that the Court will give much credence to long standing, but erroneously decided precedent. While the FTC generally appeals to the courts to “save” Section 13(b) as a valuable enforcement mechanism, the Supreme Court will likely hold that it is for Congress, not the courts to grant such enforcement authority. Indeed, the Court will likely take a broad approach that it must discourage administrative agencies from “stretching” the law and substituting their policy preferences instead of applying the law passed by Congress.

For more information, contact Steve Cochell at (346)800-3500; see cochelllawfirm.com.