Will the Supreme Court Save the FTC’s Disgorgement Authority?

In January, I wrote about emerging caselaw questioning the long-held view in the federal courts that federal law enforcement agencies, like the Federal Trade Commission and Securities and Exchange Commission, have the legal authority to require violators of their statutes to disgorge their “ill-gotten” gains. (See “Is the FTC’s Most Fearsome Power Now in Peril Before the Supreme Court?”)  I discussed two cases in particular that are before the Supreme Court now.  In one, FTC v. Credit Bureau Center, the FTC is asking the Court to hear and reverse a decision of the Seventh Circuit Court of Appeals holding that the FTC lacks disgorgement authority under its statute. The Court has not yet decided whether to take the case.  In the other, SEC v. Liu, which the Court has accepted, it heard oral argument this month and will be issuing a decision by the end of June.  Because of arguable similarities between the SEC’s and the FTC’s statutory schemes, I and other FTC attorneys and observers have been keenly interested in how the Court decides the disgorgement question in Liu because of what it could mean for the FTC’s own disgorgement powers.  From the oral argument, we now have our first insights into the justices’ thinking on the issue and perhaps our first clues as to what the decision will be and its implications for the FTC’s disgorgement authority.  In my judgment, having listened to the argument, both the SEC and the FTC have more reason to be optimistic about the outcome than the defendants in the two cases.

The SEC statute in question authorizes the agency to seek an injunction against a violation and any equitable relief that may be appropriate or necessary for the benefit of investors.”  It says nothing about disgorgement. The question presented to the Court, therefore, is whether “equitable relief”, as provided for in the statute, includes disgorgement.  In SEC v. Kokesh, in 2017, the Supreme Court held that disgorgement was a penalty, thus making it a legal, rather than an equitable, remedy.  It did so, however, only in the context of deciding whether a federal statute of limitations, which covers actions seeking penalties, applied to a case in which the SEC was seeking disgorgement.  Further, in holding the statute of limitations did apply, it emphasized that it was expressing no view on the underlying issue of whether the SEC possesses disgorgement authority. During argument, Justice Ginsberg was quick to note this disclaimer and the distinction between the two cases, pointedly observing that the fact the Court held that disgorgement is a penalty (thus, not equitable relief) in one context does not mean it would reach the same conclusion in another.

While there was much esoteric argument and questioning about the parameters of “equitable relief” in the statute in light of the historical development of equitable remedies in the law, a number of justices – liberal and conservative alike – honed in on a couple of very practical questions, in a way that suggested they were looking for a solution to save the SEC’s disgorgement power.  One was to inquire how often the SEC actually returns disgorged assets to victimized investors, versus simply turning the money over to the U.S. Treasury.  This led to some justices suggesting that the SEC, as a condition of obtaining disgorgement, be required to return recovered funds to victims wherever feasible.  The other was to ask how the disgorgement calculation worked in actual practice, specifically, what if any business expenses were excluded from the calculation.  The justices seemed to show an interest in narrowing the profits to be disgorged by permitting deduction for  expenses except those that directly contributed to the securities violation (i.e., expenses associated with making misrepresentations about an investment).  It is always hazardous to predict an outcome in a case based on oral argument, but several members of the Court certainly seemed to be looking for a practical way to save the SEC’s disgorgement authority, while placing limits on it.

Like the SEC’s statute, the FTC’s authorizes injunctions, but unlike it, makes no provision for “equitable relief.”  Because of this difference, how the Court interprets “equitable relief” in the SEC statute vis a vis disgorgement may tell us very little about how it would construe the FTC’s statute on the same question, since it does not contain those two important words. Without the “hook” of those words, the Court, should it hear Credit Bureau Center or another case challenging the FTC’s disgorgement authority, conceivably could have a harder time finding that authority in the FTC’s statute than it did in Liu.  As a matter of statutory interpretation, it could come down to whether the single word “injunction,” an equitable remedy employed to prevent future harm, encompasses disgorgement, a tool used to redress past harm.  If so, and if it were to be as determined to save the FTC’s disgorgement powers as it seems to be to save the SEC’s, the Court could look for inspiration to the dissenting opinion in the 7th Circuit decision in Credit Bureau Center.  It argues that injunctions come in many varieties, mandatory as well as prohibitory; they are flexible enough to contain a disgorgement component for equitable restitution; and disgorgement of ill-gotten gains has a forward-looking purpose of deterrence, not just a backward-looking function of redress.

Pending the Court taking up Credit Bureau Center or a similar FTC case directly, a decision in Liu upholding but limiting the SEC’s disgorgement authority could circumscribe the FTC’s disgorgement authority in the same way.  The FTC, like the SEC, has complete discretion whether to return disgorged assets to harmed consumers or give the money to the Treasury, and frequently opts for the latter.  It also routinely seeks disgorgement not just of a defendant’s illicit profits, but its entire gross revenue from the challenged business activity, less chargebacks and credits.  A decision in Liu limiting the SEC’s discretion in disposing of disgorged assets, by mandating their return to victims whenever feasible, and requiring deduction of business expenses not directly incurred in furtherance of the illegal scheme in the disgorgement calculation, appropriately should carry over to the FTC as well.  While this would not represent the total victory that opponents of the FTC’s disgorgement authority might want, it could make a meaningful difference to FTC defendants in individual cases, and certainly provide fresh legal ammunition to their counsel as they oppose disgorgement, or seek to limit its impact on their clients.                                                   

FTC Hammers Offshore Processor for “Unfairly” Enabling Deceptive Free Trials

We think of the Federal Trade Commission as an anti-deception agency, and it is just that.  The vast majority of its cases are brought against deceptive business practices.  By statute, however, the FTC is also empowered to prevent practices that are “unfair.” This authority comes in handy when the FTC may not be able to make a deception charge stick.  It is a particularly convenient tool to use against third parties who allegedly facilitate deception but are not involved in the deceptive conduct itself and may be able to defeat a deception count on that ground.       

As interpreted by the FTC, a business act or practice is unfair if it: (a) causes substantial consumer injury; (b) the injury is not “reasonably avoidable;” and (c) the injury is not outweighed by any benefit to consumers or competition.  This standard has been upheld against third party facilitators of consumer deception, including payment processors.  In the 2009 case of FTC v. Interbill, Ltd. et al, a federal district court found that a processor engaged in unfair conduct by processing sales that resulted in substantial and unavoidable consumer injury with knowledge that the merchant was billing consumers without authorization.  The court ordered redress of $1.7 million and prohibited Interbill from processing unless it first conducted a “reasonable investigation” of a prospective client and instituted a compliance monitoring system.   

Since Interbill, the FTC, using its unfairness authority, has obtained more settlements against payment processors for facilitating consumer fraud or deception by their merchant clients.  Last month, extending its global reach over the payments industry, it announced a settlement of charges it had brought against a Latvian-based processor, SIA Transact Pro, and its owner, for processing allegedly deceptive and unauthorized free trial negative option offers for dietary supplements and personal care products sold by a U.S. company, Apex Capital Group, which had previously settled with the FTC. In an amended complaint adding the Transact Pro defendants to the case, the FTC alleged that they committed unfair acts by engaging in “credit card laundering” by providing processing for dozens of shell companies fronting for Apex, and by helping Apex evade excessive chargeback monitoring, resulting in substantial and unavoidable consumer injury.   

After failing to knock out the complaint on jurisdictional grounds (the court having found sufficient contacts between defendants and the U.S. even though the company is in Latvia and the owner is a Latvian citizen), Transact Pro, to settle, agreed to pay $3.5 million.  Equally if not even more significantly, it also agreed to a truly startling set of restrictions on its business – more sweeping and intrusive than in any previous FTC payment processor settlement.  They include categorical bans on payment processing for: negative option and free trial offers; several specifically named verticals; and merchants on the MATCH list for excessive chargebacks or fraud.  Also imposed are a ban on credit card laundering and numerous merchant account practice prohibitions, including on misrepresentations, use of shells and nominees to obtain processing, and “load balancing”, transaction splitting and “microtransactions” to evade fraud and risk monitoring.  Most striking of all, however, are a set of incredibly detailed and prescriptive requirements for screening and monitoring of high risk” and other “covered” merchant clients. A “high-risk” client is one who processes 15% or more “Card Not Present” transactions generating $500,000 or more in revenue.  A “covered client” is anyone doing business in one or more of 15 named verticals or who sells through outbound telemarketing.

The screening requirements include obtaining: (1) exact information on clients’ owners and controlling persons; (2) a list of all business and trade names and websites used in marketing; (3) the name of every acquiring bank and payment processor used in the preceding two years, and all merchant identification numbers used; (4) past chargeback rate and total return rate (for ACH or RCPO transactions) for the preceding 3 months and estimates of future rates; (5) trade and bank references; and (6) whether the client has ever been placed in a chargeback monitoring program the preceding 2 years or been the subject of an FTC or other law enforcement agency complaint.  Defendants must also take reasonable steps to assess the accuracy of the information, including reviewing: the client’s websites; recent monthly processing statements; and marketing materials. They must reject any client who appears to be engaged in deceptive marketing or billing practices.

The monitoring requirements include: (i) seeing if current clients are “high-risk” and, if so, promptly screening them as required; (ii) regularly reviewing all such clients’ websites, chargeback rates and total return rates; (iii) regularly calculating and updating their chargeback and total return rates; (iv) immediately stopping processing and closing all accounts for any “covered client” whose total return rate exceeds 2.5% and whose total number of returned ACH Debit or RCPO transactions exceeds 50; or whose monthly chargeback rate exceeds 1% and whose total  chargebacks exceeds 50 in 2 of the past 6 months; (v) immediately conducting an exhaustive investigation of any “high-risk” client, excluding a covered client, whose total return rate exceeds 2.5% and whose total number of returned ACH Debit or RCPO transactions in any month exceeds 50; or whose monthly chargeback rate exceeds 1% and whose total chargebacks exceed 50 in 2 of the past 6 months; (vi) stopping processing and close all accounts for any such investigated high-risk client within 60 days, unless defendants establish, by clear and convincing evidence, the absence of an FTC violation; (vii) and immediately stopping processing and closing all accounts where defendants know or should know the client is engaged in fraud and risk monitoring evasion.

Transact Pro is the latest but surely not the last reminder that payment processors continue to have a big FTC bullseye on their chests and that those located offshore are not beyond the FTC’s reach.  It is also a warning that if they don’t redouble their risk underwriting and monitoring efforts voluntarily, the FTC is more than ready to impose its own set of onerous and laborious due diligence measures, of the type that Transact Pro is now under a federal court order to conduct.

Is the FTC’s Most Fearsome Power Now in Peril Before the Supreme Court?

The thunderbolt that struck the Federal Trade Commission last August still reverberates, with the full impact of its force still to be determined.

As I wrote then (“In Historic Ruling, 7th Circuit Bars FTC Money Claims”), the thunderbolt was a decision by the Seventh Circuit Court of Appeals, in FTC v. Credit Bureau Center et al., that rejected decades of FTC jurisprudence to hold that the FTC lacks the authority to obtain a monetary judgment against alleged violators in federal court.  Reversing the district court, the Seventh Circuit held that Section 13(b) of the FTC Act, the relevant statutory provision, expressly authorizes only injunctions and does not implicitly authorize equitable monetary relief, such as disgorgement or restitution.  The individual defendant in the case, who had been ordered to pay $5.2 million after being found liable for deceptively promoting a credit monitoring service, now owes nothing.

The decision was a thunderbolt for two reasons.  One, for nearly 40 years, dating to the decision by the Ninth Circuit Court of Appeals in FTC v. H.N. Singer in 1982, the unanimous judicial consensus has been that the FTC has implied “ancillary” equitable authority to obtain disgorgement and restitution – and by extension provisional monetary relief such as asset freezes – under Section 13(b). That consensus has now been shattered by the Seventh Circuit in Credit Bureau Center. Two, in reliance on that seemingly bedrock authority, the FTC has made the pursuit of monetary relief in court — and unconditional monetary settlement demands – the centerpiece of its consumer protection enforcement and deterrence strategies.  What inspires fear in FTC targets and brings them to the bargaining table is not a tough injunction or even a ban on involvement with a particular product category or marketing technique, though they certainly aren’t “pleasant” and can cramp a company’s competitiveness and bottom line.  What brings them to their knees is MONEY – the power to force someone to disgorge all their “unjust gains” from an allegedly unfair or deceptive business practice.  The FTC has been cold-bloodedly ruthless and enormously effective in the application of this power, having extracted hundreds of millions of dollars from defendants in just the last few years.

Since the legal justification for that power was repudiated by the Seventh Circuit five months ago, FTC watchers and industry participants have been anxiously waiting to see how the FTC would respond to this potentially existential blow to its enforcement clout.  Would it treat the decision as a “one off” and hope that other circuits would regard it as an outlier and not be persuaded by it?  Or would it seek review by the Supreme Court and, if so, would the Court grant it and reverse the Seventh Circuit? 

After months of speculation, we now know the answer.  Last month, the FTC filed a petition with the Supreme Court asking that it take the case.  This could be a risky gamble by the agency given that the Court is dominated by conservative “textualists” who could be sympathetic to the Seventh Circuit’s faithful adherence to the text of Section 13(b), which provides only for an “injunction” and says nothing about “disgorgement.”  (One is Justice Neil Gorsuch, who at oral argument in a case in which the question of the Security and Exchange Commission’s authority to obtain disgorgement came up, answered: “Well, here we don’t know, because there’s no statute governing it. We’re just making it up.”) The FTC had a tough strategic call to make and now, having made it, we have to wait and see if the Court accepts the case and, if so, if the call was a smart one.

Credit Bureau Center isn’t the only case pending before the Supreme Court that could have perilous ramifications for the FTC’s monetary authority. The Court is also set to hear oral argument in March in Liu v. SEC, which will resolve whether the SEC can obtain disgorgement under federal securities statutes (the same question Justice Gorsuch was pondering in an earlier SEC case that set up this one). Because the securities statutes at issue in Liu are arguably similar to Section 13(b), the Court’s decision and reasoning in that case could carry persuasive weight on the Section 13(b) issue.  It also, conceivably, could affect its decision whether to grant review in Credit Bureau Center and, if it does, foreshadow its ruling in that case. 

Supreme Court review of the FTC’s monetary authority under Section 13(b) also has been sought by the defendants in the Ninth Circuit case of FTC v. AMG Capital Management, based on a concurring opinion in the decision there which expressed doubt over the existence of that authority.  The Solicitor General, however, acting on behalf of the FTC, has sought a stay of defendants’ review petition, arguing that the question it presents overlaps with the question presented in Liu.  Should the Court decide to take one of the FTC cases, the odds would therefore seem to heavily favor Credit Bureau Center.

As powerful and even invincible as the FTC has felt over the longest time since the courts granted it the authority to seek money under Section 13(b) decades ago, if it is in touch with reality at all, it can’t help but be a little nervous as the fate of that authority, and the immense enforcement power it confers, potentially hangs in the balance in these pending cases before the Supreme Court.  That fate could be known soon.  2020 promises to be an exceptionally important and consequential year for many reasons.  This could be one of them, at least for advertisers and marketers presently and in the future having to tangle with the FTC.

FTCAdLaw’s Rothbard to Speak at Affiliate Summit, Jan. 27, 2020, Las Vegas, NV

William Rothbard and FTCAdLaw are proud to announce that he will be a speaker at Affiliate Summit West at the Paris Las Vegas Hotel on January 27, 2020. The topic of his talk is, “California’s Tough New Privacy Law is Here.  Are You Ready?

Rothbard will hold free consultations with attendees to discuss how he can use his decades of experience in advertising and marketing law to assist them with their legal compliance needs, including FTC regulation, text marketing (TCPA), data privacy (GDPR and CCPA), social influencers,transactions, and more.

To schedule a meeting, contact Rothbard@FTCAdLaw.com.  



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