In Historic Ruling, 7th Circuit Bars FTC Money Claims

A thunderbolt struck the Federal Trade Commission this week.  Here’s why.

In an op-ed attacking the unfairness of Federal Trade Commission asset freezes that effectively deny a defendant access to an attorney and the ability to defend himself (“FTCAdLaw’s Rothbard Calls on Congress to Remedy FTC Unfairness,” July 2019), I quoted “dicta” (noncontrolling language) from recent court decisions that questioned the predicate of an asset freeze in the first place – the FTC’s statutory authority to obtain disgorgement and restitution in an injunction action brought under Section 13(b) of the FTC Act.  If the FTC lacks the right to obtain money in such a case, then its right to an asset freeze to preserve the remedies of disgorgement and restitution goes away.

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 the implied or “ancillary” equitable authority to obtain disgorgement and restitution – and by extension an asset freeze – under Section 13(b). That consensus was shattered on Wednesday of this week, in a decision by the Seventh Circuit Court of Appeal in FTC v. Credit Bureau Center et al.

Reversing the district court, the Seventh Circuit held that Section 13(b) expressly authorizes only injunctions and does not implicitly authorize restitution.  The individual defendant in the case, who had been ordered to turn over $5.2 million after being found liable for deceptively promoting a credit monitoring service, is now entitled to the full return of his money.

In a 43-page opinion that meticulously analyzes the wording of Section 13(b) and the decades of caselaw that has liberally interpreted it to authorize restitution and disgorgement, the court concluded that neither the text nor structure of the provision allows such a remedy and that the broad consensus that had formed around it was wrong!To reach this decision, the court had to overrule one of its long-standing precedents – and mainstays in FTC jurisprudence – FTC v. Amy Travel Service, and go against all of its sister circuits. While not an easy thing to do, the court said it was necessary, explaining that “when deciding whether we should overturn precedent, ‘[w]e are not merely to count noses. The parties are entitled to our independent judgment….’ We are well aware that we need a compelling reason to overturn circuit precedent. ‘However, important as stare decisis is, it is equally important for us to respect the statutes that Congress has passed and to correct any problems we see in our prior interpretations of those statutes.’”

While an understanding of the reasoning of the decision (and of the dissent to it) is important, and can be found here in the decision itself, for the present it’s also good to discuss some of its immediate ramifications.  First, until now, FTC demands for asset freezes and receiverships in Section 13(b) litigation, and for turnover of all or substantially all assets in settlement negotiations, have been routinely made and routinely accepted, because a defendant, under the heavy weight of legal precedent overwhelmingly favoring the FTC, had little or no recourse.  Now, under Credit Bureau Center, he does.  In challenges to asset freeze and monetary settlement demands (which every FTC defense attorney must now make, or be guilty of malpractice), the FTC, for the first time in ages, will have to defend the past consensus against the onslaught of the Seventh Circuit’s reasoning.  In short, Section 13(b) requests for asset freezes, receiverships, and disgorgement will no longer be a foregone conclusion and a slam dunk.  The FTC will have to get its money the old-fashioned way: it will have to earn it.

Second, while the Seventh Circuit ruling was by a three-judge panel, which normally could be followed by a request by the FTC for rehearing by the entire court, under a procedural rule invoked by the panel, that opportunity has been foreclosed. The panel decision is thus the final decision of the Seventh Circuit.  The FTC therefore must decide whether it wants to live with the decision, and hope that other courts don’t follow suit, or seek review by the U.S. Supreme Court, which 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 on the question of the SEC’s authority to obtain disgorgement, answered: “Well, here we don’t know, because there’s no statute governing it. We’re just making it up.” The FTC has a tough strategic call to make.

Third, we can expect the FTC to hurriedly ratchet up any efforts already under way to get Congress to grant it express statutory authority to obtain disgorgement and restitution under Section 13(b).  

Credit Bureau Center has shifted the ground between the FTC and those on the receiving end of its law enforcement investigations and lawsuits. Whether it’s a seismic shift felt across the country, or only in the regions of the Seventh Circuit, will depend on how receptive other courts are to the reasoning of the opinion, and/or how successful the FTC is in lobbying Congress for explicit statutory power to obtain money in federal court injunction cases.  It’s a new game. Stay tuned….       

FTCAdLaw’s Rothbard Calls on Congress to Remedy FTC Unfairness

In a recent op-ed published in the Los Angeles Daily Journal, entitled, “It’s About Time to Give FTC Defendants a Fairer Shot,” FTCAdLaw’s William Rothbard sharply criticized the current “assembly line” of asset freezes in deceptive business practice cases brought by the Federal Trade Commission and other law enforcement agencies, without basic due process protections such as prior notice and hearing.  He called on Congress to stiffen the presently lenient standards by which the FTC can get an asset freeze and thereby deny businesses the financial ability to defend themselves.  “Without the ability to defend themselves, Rothbard writes, “[defendants’] have no choice but to surrender and allow the government to take everything….Often with families, they are left penniless and forced to start over, a daunting task.  Suicides happen.  And all without a fair opportunity for a trial to determine their culpability.”

While acknowledging the legal rationale for asset freezes – preservation of assets for restitution to remedy consumer harm caused by deceptive business activity – Rothbard finds fault in the current system in which it is all too easy for the FTC to obtain an asset freeze and a receiver from a federal judge, which in almost all cases is a death knell for the affected business and its owners.  To “level the playing field for FTC defendants,” Rothbard writes, “Congress must step in and amend the FTC’s statute, making explicit its right to seek monetary relief in federal court and under what terms.”  Specifically, he wants Congress to:

  • Require the FTC, as a condition of getting an asset freeze, to prove, through “actual evidence rather than unsupported assertion, a substantial probability that without one, assets will be secreted or dissipated;”
  • Require courts to release frozen funds for living and legal expenses “in proportion to the total amount available, unless the defendant has independent means of support;”
  • Prohibit receivers from liquidating a defendant’s assets “until there has been a final adjudication of liability or a settlement.” 

These reforms, in Rothbard’s view, will help right a system that for too long has been “rigged against FTC defendants in asset freeze cases.  It is time their rights and property are protected, too, and that they be given a fair shot to defend themselves in court.”

CBD: Marching Toward Legality and Equality in California

Since I reported in January (“CBD is Now Legal – Kind of, Sort Of”) that the march toward legalization of hemp-derived CBD following Congressional decriminalization in last December’s Farm Bill had hit a road bump at the FDA, forward momentum toward mainstreaming the “miracle” molecule has resumed at a quickened pace ever since.  In May, the FDA, which had declared CBD still to be illegal under its laws despite criminalization because CBD is a “drug,” held a public forum to receive input from the hemp industry and other stakeholders for a new high-level internal agency working group charged with exploring “pathways” toward legalization of hemp-derived CBD in the nation’s food supply.  Last month, the USDA, which has jurisdiction over the cultivation of hemp, announced that it would be accelerating its schedule for promulgation of a federal regulatory plan for hemp production from next year to next month, while states that have the option of developing their own regulatory plans or complying with the federal one continue to work on theirs.

Proceeding apace with these federal developments has been action at the state level to pave the way for the legal marketing and sale of CBD.  None has been more significant than in California, where CBD legislation is moving swiftly and with overwhelming support through the state legislature.  California, like some other states, has been hamstrung by the FDA’s restrictive position since it incorporates FDA law and policy into its own regulation of food and dietary supplements.  Only a change in state law could override that regulatory policy.       

That change appears to be coming, and fast.  On May 22, the California Assembly unanimously passed AB228, a bill that would allow the legal sale of food, food additives and dietary supplements containing CBD within the state.  Under the proposed law, a food, beverage, or cosmetic would not be considered adulterated by the inclusion of industrial hemp or cannabinoids, extracts, or derivatives from industrial hemp.  If enacted, AB228 would end state prohibition on the sale of CBD products based on the federal Food, Drug and Cosmetics Act (or at least the FDA’s interpretation of the Act).  It also would end California’s attempts to enforce the ban, which have included state raids on warehouses and impoundment of CBD consumables.

Despite enforcement efforts, CBD products remain widely available in California.  Enactment of AB228 would recognize that “on the ground” reality and end enforcement of the ban completely, shifting enforcement priorities to compliance with manufacturing and quality standards and crackdowns on unscrupulous marketers making false CBD health claims.

Significantly, the bill also would allow CBD products to be sold not only in retail stores, but in licensed cannabis dispensaries along with marijuana, which became legal for recreational use in California at the start of 2018.  This would end the anomaly of state sanctioning in licensed outlets of the sale of the “THC” branch of the cannabis family that get’s people high, but not the hemp-derived CBD branch that has no psychoactive effect.

AB 228 is now in committee in the California Senate, with no date yet set or known for final action.  Given unanimous passage in the House and the heavily Democratic Senate, it will be surprising if it does not pass and become law this year.

Meanwhile, another California hemp bill, SB153, would mesh California law with the federal government’s and require the state agriculture department to submit a hemp cultivation plan to the USDA, as provided for in the Farm Bill.  It similarly passed the Senate without a nay vote and is now in Assembly committee.

As the New York Times has written, “With CBD popping up in nearly everything — bath bombs, ice cream, dog treats — it is hard to overstate the speed at which CBD has moved from the Burning Man margins to the cultural center.”  It also is hard to overstate the impact that legalization of CBD in California – the trendsetter of all things cultural in America – will have on other states as they move to formulate their own regulatory and legislative responses to popular demand for CBD in everything. It could even affect the urgency of the FDA’s so far methodical march toward federal legalization.  Let’s hope so.

Warning to CBD Marketers: The FTC is now on the Beat

When the CBD craze first began to gain steam in 2017, and dubious claims of its “amazing” health benefits began to proliferate, I said it would be only a matter of time before the Federal Trade Commission took notice and pounced.  Indeed, I even predicted that the game of Russian Roulette that deceptive CBD marketers were playing with the FTC would end badly for some, and in 2018.  (See “FDA Moves Against CBD Marketers Again. Is the FTC Next?,” Jan. 2018).  I was wrong. The FTC didn’t strike last year.  What I didn’t understand, until recently learning from a senior FTC official, is that as long as CBD was still a banned illegal substance under federal law and within the jurisdiction of the Drug Enforcement Agency, it made no sense “programmatically” for it to be an FTC enforcement priority.

Well, now it’s 2019 and unless you’ve been on vacation on the other side of the world and disconnected from all your devices, you know that last December, Congress, as part of the “Farm Bill,” legalized hemp-derived CBD containing less than 0.3% THC (the psychoactive compound that distinguishes hemp from its cannabis cousin, marijuana, which remains on the ban list).  With this green light, and the new surge of momentum it was bound to give to the “CBD Rush,” it didn’t take long for the FTC to get in the game. 

Acting jointly with the Food and Drug Administration, this month the FTC sent out its first set of warning letters to companies making false and unsubstantiated “disease treatment” claims for CBD products. The letters, which went to Nutra Pure LLC, Pot Network Holdings, Inc., and Advanced Spine and Pain, LLC (d/b/a Relievus), address advertising for a range of CBD supplements, such as “Hemp Oil,” “CBD Softgels,” “Liquid Gold Gummies,” and “CBD Oil.” Ads for these products claim they can effectively treat diseases, including cancer, Alzheimer’s, fibromyalgia, and “neuropsychiatric disorders.” In addition, ads for the Nutra Pure products claim that, “Science also shows that CBD has anti-emetic, anti-convulsive, anti-inflammatory and analgesic properties,” and that, “CBD is a viable option for minimizing these effects within the brain.”  The joint FTC-FDA letters warn the companies about the potential legal consequences of making unsupported health and efficacy claims in advertising, and instruct them to notify the FTC of the specific action taken to address the agencies’ concerns.

Unlike the FDA, which routinely sends warning letters to companies making unsubstantiated health claims or unapproved drug claims and gives them a chance to voluntarily comply, the FTC usually will open an investigation in the first instance and take enforcement action against an advertiser unless it determines that no violation occurred.  Occasionally, however, and especially in the case of an emerging (or newly legal) product category or marketing method (think social influencer marketing), it will initially use the softer “warning letter” approach. That almost certainly was the reasoning behind its decision to only “warn” these three companies.  They should consider themselves lucky, though, because make no mistake:  the FTC’s forbearance is limited and the warnings are clearly a shot across the bow.  The next move the FTC makes against a CBD marketer – and there will be many more than one – will be a full-blown investigation and law enforcement action leading to a permanent federal court injunction, restitution, and, in the most egregious circumstances, an asset freeze against the company and its principals.

On the FDA side, the warning letters not only demand that the companies cease their deceptive and unlawful drug claims or face legal consequences, but reaffirm its position, as previously explained in this space (see “CBD Is Now Legal – Kind Of, Sort Of,” Jan. 2019), that as it now stands (and notwithstanding the decriminalization of CBD in the Farm Bill), CBD in food or dietary supplement form is illegal under the Food, Drug and Cosmetics Act because the FDA, by virtue of having already approved a drug containing CBD, has deemed CBD to be a drug.  As stated in the warning letters:

FDA has concluded…that CBD products are excluded from the dietary supplement definition under…the FD&C Act….Under those provisions, if an article (such as CBD) is an active ingredient in a drug product that has been approved under…the FD&C Act…then products containing that substance are outside the definition of a dietary supplement….CBD is the active ingredient in the approved drug product Epidiolex.


In plainer English, the FDA Commissioner, in recent Congressional testimony, underscored the present illegality of CBD under FDA law by expressing the hope that “by [the FDA] taking selective enforcement actions, you’re going to see voluntary compliance from the legitimate manufacturers and retailers, because they are marketing an unlawful product.”

At about the same time as these warning letters were being sent and the FDA Commissioner was testifying, however, the FDA announced that it would be holding a public hearing on cannabis, and that it also was forming a high-level internal agency working group to explore potential pathways for dietary supplements and/or conventional foods containing CBD to be lawfully marketed.  While that is welcome news to the burgeoning CBD industry and consumers craving CBD as a perceived elixir for their ailments, it will be months if not years before those pathways are found and codified in FDA law.  Meanwhile, current and would-be “cowboy” CBD marketers have been forewarned:  the FTC has joined the FDA on the CBD beat, and with its immense (and scary) enforcement powers, is looking for its first scalps.  If you are or are thinking about selling a CBD product, good legal counsel can help you avoid being one of them.                           



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