Section 13(b) at the Start of the Supreme Court’s October Term: Where Things Stand, Where They’re Likely to End, And A Proposed Legislative Fix

Section 13(b) at the Start of the Supreme Court’s October Term: Where Things Stand, Where They’re Likely to End, And A Proposed Legislative Fix

The Supreme Court’s new term began last Monday. This new term has taken on heightened significance with President Trump’s nomination of current Seventh Circuit Judge Amy Coney Barrett to the High Court. President Trump and Senator McConnell have vowed to place Barrett on the Court this year, with the aim of doing so before the November 3 election. With her confirmation hearing underway, it seems all but certain that Judge Barrett will soon become Justice Barrett, giving the Supreme Court a 6-3 conservative majority and likely cementing a rightward shift in upcoming jurisprudence for years to come.

One primary concern of the Court’s newly invigorated majority is textual fidelity. Sticking to a textual interpretation of statutes was something former Justice Scalia touted as a central tenet of judicial restraint. While originally more a conservative position, textualist renderings of statutes— in which the Court hews closely to the words of the texts and eschews interpretations that stray from the language’s plain meaning—have gained acceptance on both sides of the legal divide.

For practitioners litigating before and against the FTC, the ramifications of this textualist shift in jurisprudence will likely be massive. In two consolidated cases currently pending before the Court, Federal Trade Commission v. Credit Bureau Center, LLC and AMG Capital Management, LLC v. Federal Trade Commission, the new justice and her colleagues will be tasked with deciding whether or not Section 13(b) of the FTC Act authorizes the FTC to seek monetary relief from the individuals and entities it pursues under that statutory provision. Those cases, stemming from the Seventh and Ninth Circuits, respectively, will be heard and decided sometime in the first half 2021.

Although the text of Section 13(b) speaks only of injunctive relief, appellate courts have extended the reach of 13(b) to include monetary “restitution” since 1982. In 1989, the Seventh Circuit in FTC v. Amy Travel Serv., Inc. decided that Section 13(b) “carries with it the power to issue whatever ancillary equitable relief is necessary.” 875 F.2d 564, 571 (quotation omitted). Over the years, this expansive definition of 13(b) was adopted by nearly all of the Circuit Courts.

But that expansive definition of 13(b) is beginning to erode. On September 30, 2020, the Third Circuit, in FTC v. AbbVie Inc. et al, joined the Seventh Circuit in concluding that the reach of 13(b) does not extend to monetary restitution. These appellate decisions, along with the new composition of the Supreme Court, strongly suggest that, absent a legislative fix, the FTC’s historically broad restitution powers under 13(b) may soon be cut back, leaving practitioners with a wide-open question: What comes next?

Many believe that a legislative fix is in order, and steps have been taken to address the issue in Congress. Proponents argue that the FTC needs the broad powers appellate courts have historically provided it under Section 13(b) to indemnify the public against truly bad actors who commit egregious fraudulent conduct. But is a return to the status quo ante the right course of action?

One view is that a legislative remedy should be limited, so that restitution would be available under 13(b) only where the conduct rises to the level of the “dishonest or fraudulent” standard articulated in Section 19 of the FTC Act. The FTC has a need for vibrant Section 13(b) remedies, but those remedies are only appropriate where the actors either knew or should have known that their conduct was false or deceptive. In more of the run of the mill substantiation cases, administrative proceedings are far more appropriate. There is a strong argument that any new language added to Section 13(b) should make that distinction clear.

Federal Trade Commission v. Credit Bureau Center, LLC (“Credit Bureau”)

Credit Bureau concerns a credit monitoring website that offered consumers what was purportedly a “free credit report and score.” Consumers opting to receive this report would unknowingly be enrolled in a monthly “membership,” costing $29.94 a month. Consumers only learned that they had been enrolled in the business’s monthly service when they received a post-hoc letter, detailing the commitment they had supposedly made.

The FTC sued Michael Brown, the sole owner and operator of Credit Bureau, under Section 13(b) of the Act. Relying on this longstanding precedent allowing the FTC to use Section 13(b) to assess money damages, the district court ordered Brown to pay more than $5 million is restitution to the FTC.

The district court’s ruling was appealed to the Seventh Circuit Court of Appeals. The Seventh Circuit, in a precedential opinion, reversed, finding that the FTC does not have the authority to obtain monetary restitution under Section 13(b). In doing so, the Credit Bureau court admonished that Section 13(b) must be taken on its own terms. “By its terms, section 13(b) authorizes only restraining orders and injunctions,” not restitution. 937 F.3d 764, 767. Because Section 13(b) does not explicitly authorize monetary restitution, the Seventh Circuit concluded that the FTC has no restitution powers under 13(b).

Ironically, it had been the Seventh Circuit, in Amy Travel Serv., that had originally expanded the FTC’s restitution powers under Section 13(b) thirty-one years ago. Although the principle of stare decisis would normally have constrained the Credit Bureau panel to follow Amy Travel’s precedent, even if the current panel disagreed with it, the Credit Bureau court decided that the textualist Supreme Court of the present-day would not allow Amy Travel to stand. In the words of the Seventh Circuit, “[s]tare decisis cannot justify adherence to an approach that [recent] Supreme Court precedent forecloses.” 937 F.3d 764, 767. The FTC asked the full Seventh Circuit to rehear the case, but that request was denied.

After being denied rehearing before the full Seventh Circuit, the FTC petitioned for certiorari of the Seventh Circuit’s Credit Bureau decision to the Supreme Court. In its Supreme Court petition, the FTC asked the Supreme Court to uphold the textual reading of Section 13(b) that has become prominent over the past thirty years. The Supreme Court accepted the FTC’s petition, granting certiorari, in July.

Notably, the FTC is representing itself before the Supreme Court. This is highly unusual. In the normal course of events, the Solicitor General of the United States represents government agencies at the High Court. In this case, the Solicitor General chose to sit it out, signaling that the Trump Administration might agree with the Seventh Circuit’s reading limiting the FTC’s powers under 13(b).

AMG Capital Management, LLC v. Federal Trade Commission (“AMG”)

AMG is in many ways a parallel case to Credit Bureau, with similar facts leading to an opposite outcome. Indeed, depending on what happens at the Supreme Court next year, AMG may represent the last of the old guard of cases in which the appellate court affirms the FTC’s broad restitution powers under Section 13(b).

AMG, like Credit Bureau, involved a single-proprietor business, AMG Capital Management. The business’s sole function was to provide payday loans. The FTC sued Scott Tucker, the owner of AMG, under Section 13(b) of the Act, asserting that the terms disclosed in the loan notes provided to consumers did not reflect the harsher terms that Tucker actually enforced. The district court found Tucker liable, and pursuant to Section 13(b), levied a staggering $1.27 billion in equitable monetary relief to be paid by Tucker to the Commission.

Tucker appealed the district court’s ruling to the Ninth Circuit Court of Appeals, arguing, inter alia, that Section 13(b) forecloses monetary relief. Like the Seventh Circuit in Credit Bureau, the Ninth Circuit noted that the argument that 13(b) does not allow restitution “has some force.” 910 F.3d 417, 426. Yet, unlike the Seventh Circuit, the AMG panel concluded that it “remain[ed] bound by” the ample Ninth Circuit precedent broadly construing Section 13(b). Id. at 427.

Two of the three judges on the AMG panel, in separate concurrences, called for the Ninth Circuit to rehear the case en banc, in order to overrule its prior precedent (something only the full Circuit has the power to do in the Ninth Circuit). However, the full Circuit denied AMG’s petition for a panel rehearing. After its petition for rehearing was denied, AMG filed a petition for certiorari with the Supreme Court. The Supreme Court granted that petition in July, consolidating the case with Credit Bureau for a single oral argument.

FTC v. AbbVie Inc. et al (“AbbVie”)

On September 30, in a precedential decision, the Third Circuit joined Credit Bureau in concluding that “district courts lack the power to [authorize monetary disgorgement] under Section 13(b).” The facts in Abbvie concerned a patented drug called AndroGel. The FTC sued the owners of Androgel’s patent under Section 13(b), alleging they had filed sham patent infringement suits against generic drug makers, and that they had entered into an anticompetitive reverse-payment agreement with one of those generic providers. The district court awarded the FTC disgorgement of $448 million.

The Third Circuit reversed the order of disgorgement. In doing so, the Abbvie panel, like the Seventh Circuit before it, focused on the text of the statute. The Abbvie court found that the text was dispositive, allowing only injunctive relief and (at best) minimal monetary penalties. In the Third Circuit’s view, “Section 13(b) authorizes a court to ‘enjoin’ antitrust violations. It says nothing about disgorgement, which is a form of restitution.” Emphasizing this point, the court wrote that “[a] contrary conclusion would undermine the FTC Act’s statutory scheme.” In reaching its conclusion, the AbbVie court explicitly relied on the findings of its sister Circuits in Credit Bureau and AMG, calling the Seventh Circuit’s Credit Bureau decision “a thorough and well-reasoned opinion.”

Because AbbVie was just decided, the Supreme Court will not be hearing it directly this term. However, Abbvie indicates that, when it comes to 13(b), the dominoes are falling. The appellate courts, like the Supreme Court, have become much more textually inclined over the last decade. The Third Circuit’s AbbVie panel consisted of two Trump appointees and a George W. Bush appointee. The parties before the Supreme Court in Credit Bureau are currently in the midst of briefing. The Third Circuit’s AbbVie decision is certain to play a large role in that briefing, and has further potential to influence the Supreme Court’s Credit Bureau decision.

The End of Restitution Under 13(b)?

Seventh Circuit Judge Amy Coney Barrett, President Trump’s nominee to join the Supreme Court, has often affirmed her textualist beliefs. This past summer, Barrett was quoted as explaining that “textualism matters because it is a theory, one that I think is consistent with the judicial role under the Constitution of what I do quite often, which is interpreting statutes.” Although Barrett was not on the Seventh Circuit’s Credit Bureau panel that reversed Amy Travel and concluded the FTC does not have broad restitution powers under Section 13(b), she did join the majority of the Seventh Circuit in voting to deny rehearing of that panel decision. This, along with her textualist bona fides, strongly suggests a Justice Barrett would affirm the Seventh Circuit and reverse the Ninth Circuit, concluding that Section 13(b) does not allow for monetary relief.

Even in the unlikely event Judge Barrett is not confirmed to the Supreme Court, any of the other women on President Trump’s short list are likely to take a similar textualist position. Even the shrinking liberal wing of the High Court has lately been going textualist, especially when it comes to statutory language akin to that of Section 13(b), language that is far from unambiguous.

Earlier this year, in Liu v. Securities and Exchange Commission, the Supreme Court analyzed a similar statute found in the Securities Exchange Act, Section 21(d)(5). The appellate courts had historically treated that statute similarly to 13(b) of the FTC Act, allowing the SEC to use it to seek monetary relief even though its text said nothing about disgorgement. In its June 22, 2020 ruling, the Supreme Court significantly narrowed the disgorgement remedy, finding that the text of the Exchange Act does not allow for the broad monetary disgorgement SEC has been wielding. Notably, it was Justice Sotomayor—now probably the most liberal member of the Court—that authored the Supreme Court’s Liu decision.

Textually, Section 13(b) provides even more limited powers than Section 21(d)(5) of the Exchange Act. While the Exchange Act specifically allows for “any equitable relief,” Section 13(b) of the FTC Act expressly limits itself to injunctive relief. Given the textualist inclinations of the current Court, and its continuing march toward textualism if Barrett is elevated to the bench—there is good reason to believe the justices will soon narrow or even do away with the FTC’s ability to seek monetary relief under 13(b).

And forces in favor of doing exactly that are ensuring their voices will be heard. An amicus brief filed last week by the Washington Legal Foundation summarized the position of the groups in a manner that they hope will be fruitful:

To ‘start with the obvious,’ ‘injunction’ does not mean ‘restitution.’ Credit Bureau Ctr., 937 F.3d at 771-772. ‘Apples,’ after all, does not mean ‘oranges.’ Nor does ‘injunction’ mean ‘equitable relief (including, at times, restitution).’ That would be like saying that ‘apples’ means ‘fruit (including, at times oranges).’ Nor, finally, can it be said that some aspect of the FTC Act’s structure reveals Congress’s subtle intent to use ‘injunction’ to mean ‘injunction, but maybe restitution too.’ Section 13(b) is plainly designed to be ‘a simple stop-gap measure,’ 910 F.3d at 431 (O’Scannlain, J., specially concurring), one that enables the FTC to enjoin a practice while it uses other statutory authority to prosecute an offender.

The Issue is Having an Effect in the Courts and at the Negotiating Table

With the fate of Section 13(b) in the balance, practitioners and lower courts are catching on. In late August, for example, a Northern District of California court granted the Motion to Stay of defendant LendingClub in a 13(b) action, pending the Supreme Court’s determination in Credit Bureau. The district court reasoned that, if the High Court significantly narrows 13(b)’s scope, “the viability of the remedy motivating the case” against Lending Club would disappear.

The trial in LendingClub had been scheduled for October. In finding a stay of that trial warranted, the LendingClub court emphasized that the FTC’s authority to seek monetary relief under Section 13(b) (or lack thereof) is “an issue of enormous consequence to this case.” The court explained, “[g]oing forward with trial would needlessly burden LendingClub to put on a trial defense only to possibly have the entire enterprise mooted by the FTC’s inability to seek any monetary relief under Section 13(b).”

Lending Club is not the only defendant caught in the FTC’s crosshairs to raise the prospect of a near-term sea change. To date, at least nine other defendants in 13(b) actions around the country have requested that courts stay their cases pending the Supreme Court’s decision in Credit Bureau. We fully expect to see a flurry of these motions in the months ahead.

Earlier this month, a federal district court judge in the Northern District of Texas granted one such motion, staying an FTC action against Match Group, Inc. In its complaint, the FTC had alleged that the company used fake love interest advertisements to trick consumers into purchasing paid subscriptions on, and sought disgorgement under Section 13(b). Notably, the Texas court chose to stay the case even though it was at an early stage – discovery had not yet commenced – evidently believing that the FTC would abandon its action if it could no longer receive a monetary remedy.

And just this past Friday, a federal district court in the Central District of California ruled for the FTC and against the defendants in FTC v. Cardiff, another 13(b) action. While the court had denied the defendants’ motion to stay the case prior to resolution of liability, “the Court recognized that the United States Supreme Court will likely decide whether restitution is available under Section 13(b)” in the coming term. The Cardiff court therefore stayed the resolution of liability pending the Supreme Court’s ruling, even though it had conclusively determined the defendants were liable under 13(b).

The effects of a potential Supreme Court decision neutering Section 13(b) also have implications outside of the courtroom. For companies currently engaged in FTC negotiations, knowing that a potential Supreme Court ruling limiting the FTC’s equitable powers under 13(b) can be a valuable asset. The awareness that the FTC may not be able to obtain monetary relief through Section 13(b) has an obvious effect on the context of such negotiations. Savvy practitioners now have the ability (some might say the obligation) to leverage the potential limitation of Section 13(b) restitution in order to push the FTC to discount monetary demands. After all, the FTC may soon lose any ability at all to demand monetary relief under 13(b).

What Comes Next?

Under the current 13(b) framework, the FTC has the ability to take a party directly to court, and to sue for both monetary and injunctive relief. If the FTC’s ability to sue for monetary relief goes away, the FTC will still be able to use Section 13(b) to enjoin a party in federal court, but in order to obtain monetary restitution, the FTC will have to resort to Section 19 of the FTC Act.

Under Section 19 of the Act, the FTC can seek monetary damages against a party in federal court, eventually. But the process to do so is cumbersome and time-consuming. First, the FTC must bring the case at the Commission before an Administrative Law Judge. Assuming the FTC prevails before the ALJ, the losing party can (and almost certainly will) appeal that decision to the full Commission. The FTC must make its case a second time before the Commission in order to receive a final order, allowing the case to be brought in federal court. Only then can the FTC begin prosecuting the actual lawsuit against the party. Especially compared to the current Section 13(b) framework, the Section 19 process is lengthy and convoluted, making it far harder for the FTC to obtain quick and effective monetary remedies.

There is some hope for those concerned about the FTC losing a major weapon in its arsenal following the Supreme Court’s Credit Bureau decision. On September 17, four Senate Republicans introduced S. 4626, the Setting an American Framework to Ensure Data Access, Transparency, and Accountability (SAFE DATA) Act – a comprehensive privacy bill. Section 403 of the bill, as currently written, would modify the text of Section 13(b) to clarify that the FTC has the explicit ability to obtain monetary restitution. The proposed provision comes in response to numerous agency requests for Congressional action on 13(b) following ongoing legal challenges to the scope of its authority.

While some portions of the SAFE DATA Act are contentious, revising Section 13(b) seems to carry bipartisan support. At a September 23 hearing on privacy legislation, Ranking Member Maria Cantwell, a Democratic Senator from Washington, suggested that the “core mission of the FTC would be crippled” without the authority to obtain monetary relief under Section 13(b). This suggests that a bipartisan legislative fix could be in the offing. Of course, given the political climate, such a legislative remedy is unlikely to be enacted until 2021, at the earliest. Without the enactment of such legislation, there is a very real possibility FTC’s ability to obtain monetary restitution from parties under Section 13(b) will be curtailed in the coming year.

Any Legislative Fix Should Curb FTC Excess

In the absence of the availability of monetary restitution under Section 13(b), the FTC will likely make more use of its remaining 13(b) powers. Particularly, the FTC will likely increasingly use Section 13(b) to attempt to enjoin and freeze companies’ assets quickly while a Section 19 action is pending. Instead of the current Section 13(b) landscape, consisting of federal litigation taking place over a defined period of time, followed by a potential money judgment (or not), companies in such a scenario would face potentially years of Section 19 litigation at the FTC and in court while their assets have already been frozen under Section 13(b). This would have a devastating effect on a company’s business.

By losing its ability to seek 13(b) monetary restitution, the FTC could thereby ironically gain tremendous leverage over companies it ends up suing for injunctive relief under Section 13(b). Many companies would likely choose to settle with the FTC rather than face an indefinite asset freeze, even in those cases where settlement might not be appropriate.

To be sure, you would expect just about all parties to agree that the FTC should not be able to freeze assets of a typical advertiser whose substantiation for a product claim is called into question and there is no evidence that they acted in a dishonest and fraudulent manner. While there is an obvious difference between cases of fraudulent conduct and more run of the mill substantiation cases, the line has become increasingly blurred over the past ten years.

Given the Court’s leanings and the evident bipartisan support to reinvigorate Section 13(b), we may see a legislative fix in the coming year. Any legislative remedy should clarify that Section 13(b)’s remedies—both injunctive and monetary—can only be used against truly bad actors. In this regard, Congress has a clear legislative playbook to follow. Section 19 of the FTC Act allows the FTC to obtain monetary remedies only for “dishonest or fraudulent conduct.”

While the power courts of appeals have given the FTC under their expansive interpretations of Section 13(b) is warranted in severe situations, it should not be doled out to companies engaged in routine if not always perfect behavior, such as an alleged failure to properly substantiate claims. The FTC has other, administrative remedies to deal with those types of problems, and if the current Rules of Practice do not allow for acceptably fast disposition (they do not), those Rules can be revised. Section 13(b), however, is a powerful tool. If and when it is revised, Congress should ensure it is used only when necessary and appropriate – in cases involving dishonest and fraudulent conduct.

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