First thing, I would like to direct you my first Lawfare piece on data brokers and national security.
After the Supreme Court of the United States (SCOTUS) ruled unanimously against the Federal Trade Commission (FTC), the primary committee of jurisdiction in the House discussed options for a statutory fix.
The FTC’s ability to act quickly just got sucked into the federal privacy law vortex.
Cocktail Party
Even before SCOTUS struck down the FTC’s ability to go to court and quickly enjoin bad actors and to seek monetary damages, the agency was begging Congress to pass a fix. However, Congress opted not to even though it did slip a provision into a recent COVID-19 stimulus bill giving the FTC the authority to seek civil fines against COVID-19 scammers. The Senate Commerce, Science, and Transportation Committee’s top Republican has a provision in his proposed privacy legislation, “SAFE DATA Act” (S.4626), that would restore the FTC’s ability to use Section 13(b) of the FTC Act as it has for the last forty years. However, the repeated reference to this bill and even more explicit linkage between Section 13(b) and privacy legislation are making clear Republicans will insist on linking the issue. Democrats want a decoupling and favor quick legislation to give back to the FTC what SCOTUS said the agency never truly had.
Meeting
The House Energy and Commerce Committee held the second hearing in Congress in as many weeks on the FTC and Section 13(b) authority. Committee Democrats are foursquare behind a bill that would undo the SCOTUS ruling, but Republicans are calling for a modulated course of action that ensures the FTC does not return to its 1970’s heyday. Democrats are framing matters as urgent, arguing that consumers will be exposed to fraud and scams. On the other hand, Republicans seem more focused on procedure issues.
Geek Out
In AMG Capital Management, LLC v. FTC, SCOTUS found that term “permanent injunction” in 15 U.S.C. 53(b) (aka Section 13(b) of the FTC Act) does not allow the agency to seek and receive “equitable monetary relief such as restitution or disgorgement.” In writing for the Court, Justice Stephen Breyer framed the issue to be decided:
Did Congress, by enacting §13(b)’s words, “permanent injunction,” grant the Commission authority to obtain monetary relief directly from courts, thereby effectively bypassing the process set forth in §5 and §19?
SCOTUS asserted:
Several considerations, taken together, convince us that §13(b)’s “permanent injunction” language does not authorize the Commission directly to obtain court-ordered monetary relief. For one thing, the language refers only to in- junctions. It says, “in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction.” 15 U. S. C. §53(b) (emphasis added). An “injunction” is not the same as an award of equitable monetary relief… We have, however, sometimes interpreted similar language as authorizing judges to order equitable monetary relief.
SCOTUS held “We must conclude, however, that §13(b) as currently written does not grant the Commission authority to obtain equitable monetary relief.”
Prior to both the SCOTUS ruling and the House Energy and Commerce Committee hearing, committee member, Representative Tony Cárdenas (D-CA) introduced the “Consumer Protection and Recovery Act” (H.R.2668), a bill cosponsored by every Democrat on the House Energy and Commerce Committee. Cárdenas serves as the Vice Chair of the Consumer Protection and Commerce Subcommittee. In his press release, Cárdenas claimed:
The bill amends Section 13(b) of the FTC Act to explicitly reaffirm the FTC’s longstanding authority to obtain injunctive and equitable relief, including monetary redress for consumers in court for all violations of the laws it enforces. The bill also makes explicit that the FTC may pursue many kinds of equitable relief, including restitution for losses, contract reformation and recission, monetary refunds, and the refund of property, as well as forcing bad actors to return their ill-gotten gains.
Indeed, the bill does amend Section 13 of the FTC act and adds a new section making clear the FTC can seek an injunction or restraining order for past violations of the FTC Act before a compliant has been issued or a final order issued. The new provisions explicitly empower the FTC to seek and obtain restitution, disgorgement, return of property, and refunds. One provision limits the amount of disgorgement the FTC may obtain and directs a court to subtract any restitution or refunds the FTC has previously gotten. Finally, any monetary relief the FTC could seek and obtain is limited to conduct going back only ten years.
The House Energy and Commerce Committee’s Consumer Protection and Commerce Subcommittee held a hearing on H.R.2668.
Subcommittee Chair Jan Schakowsky (D-IL) assured Republicans their ideas and legislation would be considered as the committee determines how to fix Section 13(b). She emphasized the urgency in Congress acting swiftly to help consumers. Schakowsky mentioned the $200 million the FTC secured from Herbalife for people deceived by its multi-level marketing claims. She remarked that despite the claims of some, Section 19 takes too long and would allow the FTC to seek ill-gotten money long after the money is gone. Schakowsky added she would like to see other FTC reform, but Section 13(b) legislation is most pressing. She called for quick passage of a bill and lauded H.R.2668.
Chair Frank Pallone Jr (D-NJ) discussed the long history of the FTC providing monetary relief and compensation under Section 13(b) in his opening remarks. He stressed Democratic support for H.R.2668. Pallone claimed other FTC provisions are insufficient and require much more time for the agency to recover money from violators. He dismissed proposals to weaken how the agency traditionally used its Section 13(b) authority and called for strong legislation to be enacted quickly.
In his opening remarks, Subcommittee Ranking Member Gus Bilirakis (R-FL) stressed that the unanimous SCOTUS decision spanned the ideological spectrum of the Justices. He called out what he saw as Democratic process abuses in not calling all four FTC Commissioners to testify and not allowing Republican alternatives to H.R.2668 be discussed. Bilirakis warned that providing authority to the FTC under Section 13(b) to seek monetary damages was important but so, too, is making sure the agency does not receive too much power. He harkened back to the FTC in 1970’s and its “abuses of power.” Bilirakis also cautioned Slaughter against starting an FTC rulemaking on privacy because it would further muddy the U.S. privacy picture. He explicitly linked privacy legislation with a Section 13(b) fix.
In his opening statement and speaking in lieu of Ranking Member Cathy McMorris Rodgers (R-WA), Representative Kelly Armstrong (R-ND) focused on committee process issues for the most part. He decried the majority’s refusal to include Republican bills at the hearing. Armstrong also discussed the view of some that the FTC was an agency out of control during the 1970’s, with the implication being the restrictive Magnusson-Moss rulemaking process and other limits were a necessary check. He seemed to suggest some interest in enacting a Section 13(b) fix but tied this issue to broader privacy legislation just as the top Republican on the Senate Commerce, Science, and Transportation Committee has. Armstrong’s remarks suggest Republicans will use the SCOTUS decision as leverage to try to get Democrats to drop their insistence that federal privacy legislation not preempt all state privacy laws and allow people to sue for violations.
Acting FTC Chair Rebecca Kelly Slaughter stated that SCOTUS reversed four decades of FTC use of Section 13(b) to get money back for consumers in the form of restitution, disgorgement, and other means, and to stop harm. She called for quick enactment of a bill to undo the ruling. Slaughter argued that SCOTUS eliminated the FTC’s best tool to obtain monetary penalties when a company violates the FTC Act. She claimed these provisions allowed the agency to give $11.2 billion back to harmed consumers in the previous five years. Slaughter warned that not fixing 13(b) would result in a number of indirect harms to people and businesses. She asserted offenders would no longer need to worry about returning ill-gotten funds and could ignore FTC orders to stop engaging in illegal conduct. Slaughter stated the FTC needs authority to create incentives for companies to stop engaging in illegal actions and to return money to harmed consumers.
In her joint written testimony submitted with the three other FTC Commissioners, Slaughter explained:
Section 13(b) of the FTC Act has been the agency’s primary and most effective way of returning money to consumers that was unlawfully taken from them. The relevant portion of Section 13(b), often referred to as the “second proviso,” authorizes the FTC to sue directly in federal court for violations of the FTC Act and states that “in proper cases, the Commission may seek, and after proper proof, the court may issue, a permanent injunction.” Beginning in the 1980s, seven of the twelve courts of appeals, relying on longstanding Supreme Court precedent, interpreted the language in Section 13(b) to authorize district courts to award the full panoply of equitable remedies necessary to provide complete relief for consumers, including disgorgement and restitution of money. For decades, no court held to the contrary. In 1994, Congress ratified its intent to enable the FTC to obtain monetary remedies when it expanded the venues available for FTC enforcement cases, strengthening the Commission’s ability to bring redress cases.
Consumer Reports Financial Fairness and Legislative Strategy Director Anna Laitin asserted in her written remarks:
- Rep. Cardenas’ Consumer Protection and Recovery Act would amend the FTC Act to restore the authorities that the Commission has successfully operated under for more than 40 years. It would enable the Commission to pursue fraudulent and deceptive actors and to return money to the people they harmed. And it would end any debate about the proper role for the FTC in achieving relief for consumers.
- Importantly, this bill extends the § 13(b) authorities for equitable remedies to all violations of the FTC Act, and does not create artificial delineations of the types of illegal acts that should qualify. The FTC has authority to enforce against unfair and deceptive acts and practices, as well as unfair methods of competition. It should have authority to seek equitable remedies in all cases under its jurisdiction — disgorgement of ill-gotten gains, and restitution for consumer losses. It is a simple matter: if a business makes money from violating the FTC Act, it should not be able to keep that money.
- The disgorgement and restitution that were previously allowed for under § 13(b) and that are provided for in the Consumer Protection and Recovery Act are vital tools for the FTC’s law enforcement work. But to truly be able to deter bad behavior, and keep industry honest, the Commission needs the authority to assess civil penalties against the worst actors. Under current law, the Commission can generally assess penalties against companies that violate an FTC Rule or a consent decree, but cannot do so in the first instance.
University of California, Berkeley School of Law Center for Consumer Law and Economic Justice Executive Director argued in his written statement:
The following suggestions – all endorsed in various forms by bipartisan cohorts of FTC commissioners, and all supported by broad coalitions of advocates for consumers, small businesses, veterans, and seniors – would restore the FTC to its rightful and logical position as the nation’s leader in consumer protection.
1. Restore the FTC’s authority to get money back to consumers from whom it was unlawfully taken. This most salient fix is critical to the functioning of the FTC as a consumer protection agency.
2. Give the FTC full authority to obtain an injunction barring future misconduct. A court order barring the conduct that the FTC has gone to such pains to investigate and prove is a vital part of the toolbox of the Commission or any consumer protection agency. A thief who takes your wallet may end up closely monitored on probation or, after prison, on parole – whether or not he had stopped taking wallets by the time he was caught. When a business steals your money, it too should be subject to additional supervision, with quicker enforcement.
3. Provide the FTC with the default ability to require the payment of civil penalties. Give businesses and individuals who are inclined to break the law a reason not to do so. Routine civil penalty authority is exercised by state Attorneys General – and in some states local government authorities – in almost all the cases that they bring. It is common sense to ensure that the FTC is able to make use of the same tools as its state and local counterparts.
4. Establish a Civil Penalty Fund dedicated to providing compensation to victims of unfair and deceptive business practices who cannot be repaid by the businesses or individuals that harmed them. All too often, scam artists spend the money they steal from consumers. By the time the FTC can fully prosecute a case, the judgment – frequently for an impressively large amount of restitution – must be suspended because of the defendants’ inability to pay. There is a way around this dilemma: Congress can grant the FTC authority to set up a Civil Penalty Fund or Consumer Redress Fund to provide a source of relief to victims, funded by civil penalties collected in other cases. The CFPB has exercised this type of fund effectively and with great benefit to consumers. This fund could also receive funds paid pursuant to an order to disgorge illegally-obtained money when it is not practicable to return those funds to consumers.
5. Give the FTC the same ability to make rules that is exercised by other federal agencies. Rulemaking under the Administrative Procedures Act provides all stakeholders the ability to express their views, and requires the agency to consider those views. And unlike the Commission’s current sclerotic Magnusson-Moss rulemaking authority, the proceedings will not be so delayed that the rule is likely to be outdated by the time it is finally issued.
6. Fully fund the FTC so that it may effectively play its role as the nation’s consumer protection agency. As former Commissioner William Kovacic explained at a hearing before this subcommittee in February, the FTC cannot accomplish the mission that Congress has set for it without a significant infusion of resources.19 That money is a wise investment: far greater sums will be returned to consumers and small businesses, and received from customers by competitors who play by the rules.
7. Give the FTC general authority to prevent price gouging in emergencies. This is a power currently held by the states and exercised by attorneys general across the nation. Providing the FTC the same authority would add measurably to the nation’s ability to respond to natural disasters and other emergencies; these events are too frequent to make it feasible for Congress to pass separate legislation each time one occurs.
8. Provide the FTC authority over common carriers. When the common carrier exemption was included in the FTC Act more than 100 years ago, it was logical to exempt the monopoly providers of common carrier services, who were not disciplined by competition but rather by detailed rate and service regulation. Since that time, the telecommunications industry and the regulatory role of the federal government have changed dramatically. As the Ninth Circuit observed three years ago, the FTC Act already
9. Give the FTC authority over non-profit corporations. The Internal Revenue Service has nominal authority now, but its purview is limited essentially to whether a tax-exempt organization should be able to maintain that status. Given the widespread business activities of nonprofit corporations like hospital chains, and all-too-common examples of
10. Trust the FTC. This final step informs all the others. There can be no doubt that there is more work to do protecting consumers than the FTC currently has the tools or resources to accomplish. There is also no doubt that the FTC has been trammeled in ways that its sister agencies, federal and state, have not. Whatever the reason, it is high time to retire the “zombie ideas” about the FTC – that the Commission is unnecessary, or overreaching, or heavy-handed, or inefficient. It is time, as one commissioner stated in Senate testimony last week, to “turn the page on the FTC’s perceived powerlessness.”
George Washington University Professor Emeritus and former FTC official J. Howard Beales, Ph.D contended in his written statement:
- Section 19 sets out a specific process for seeking monetary relief in consumer protection cases. The Commission first determines in the administrative process that there has been a violation of Section 5, and, after appeals are exhausted and the order becomes final, files a separate action in federal district court to obtain monetary relief. When the agency seeks monetary relief from legitimate companies, this process is entirely workable. Legitimate companies will still be there when the litigation concludes, and money will still be available to redress consumers. In fact, the overwhelming majority of cases against legitimate companies are resolved through settlement, and there is no substantive difference between a settlement that cites Section 19 as the statutory basis for monetary relief and one that cites Section 13b.
- In fraud cases, however, the Section 19 process is likely unworkable. It would require what we have termed a “Triple Hybrid” procedure, involving three distinct legal actions litigated in at least three (but sometimes four or five) separate fora. It would begin with an action under Section 13(b) to seek an ex parte asset freeze and temporary restraining order, assuming such an action is allowed under the Court’s reading of 13(b). While the district court monitors the receivership, the Commission would file and litigate an administrative action to adjudicate the alleged violation. After appeals were exhausted and the Commission’s order final, the Commission would file a separate district court action seeking redress under Section 19.
- It seems unlikely that district court judges would, or should, accept such a process, where they are asked to freeze assets, supervise a receivership, but surrender all ability to resolve the case on the merits. Without an asset freeze, however, there will likely be nothing left for consumers at the end of the litigation.
- Legislation should clearly authorize the Commission to use the process of Section 13(b), subject to the substantive limitations of Section 19, to pursue cases in which the Commission believes monetary relief is appropriate. If the court determines that a violation occurred but does not meet the Section 19 standard, it would simply enter appropriate injunctive relief, as it can clearly do under the Court’s decision.
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Michael Kans 