Supreme Decisions: High Court Weighing FTC’s Enforcement Authority

By Leonard L. Gordon, Mary M. Gardner, and Michael A. Munoz

This fall, the U.S. Supreme Court is set to hear two consolidated cases that will have a far-reaching impact on the advertising and marketing industry. The issue before the court is whether the Federal Trade Commission (FTC) can obtain equitable monetary relief, such as disgorgement, under Section 13(b) of the FTC Act — and, if so, how that relief might be measured.

Although, on its face, Section 13(b) only authorizes the FTC to seek a permanent injunction as a remedy to “unfair methods of competition” and “unfair or deceptive acts or practices,” until recently, courts have routinely held that the FTC’s authority to seek equitable monetary relief under Section 13(b) is implied in their authority to obtain injunctive relief. Recent challenges to the FTC’s authority — and subsequent shift in lower courts’ jurisprudence — have brought this issue to a head before the Supreme Court.

In the first of the two cases, AMG Capital Management v. FTC, the Ninth Circuit determined that a court’s equitable powers to order monetary relief, including disgorgement, are implied within the phrase “injunctive relief.” Specifically, the Ninth Circuit relied on precedent that held “injunctive relief” invokes the court’s equity jurisdiction to deprive wrongdoers of their unjust gains.

Notably, several members of the Ninth Circuit wrote a concurring opinion calling into question the prior decisions on which the majority relied to support its conclusion. The concurring judges specifically noted that such a broad reading of Section 13(b) is no longer tenable where it renders meaningless Congress’s express limitation on the FTC’s authority.

In stark contrast, the Seventh Circuit — in FTC v. Credit Bureau Center — overturned past precedent in favor of examination and interpretation of the plain text of Section 13(b), as well as the overarching statutory scheme of the FTC Act. Based on this textual analysis, the Seventh Circuit determined that Section 13(b) only authorizes the FTC to obtain restraining orders and injunctions — not monetary relief. Furthermore, the Seventh Circuit noted that, because Congress provided for equitable monetary relief under Section 19 of the FTC Act, the absence of such relief from Section 13(b) demonstrates Congress’ intent that the FTC use other sections of the FTC Act to obtain monetary relief.

Underlying these cases is a recent decision from the Supreme Court regarding the U.S. Securities and Exchange Commission’s (SEC) authority to recover equitable monetary relief. In Liu v. SEC, the statute at issue allowed the SEC to obtain “equitable forms of relief.” Liu argued that the disgorgement award that the SEC obtained was a penalty, and therefore did not constitute “equitable” relief permissible under the statute.

Though the Supreme Court found this argument unpersuasive, it did hold that the SEC’s authority to obtain disgorgement is limited to a defendant’s net profits, i.e., gross profits gained from the defendant’s unlawful conduct minus legitimate business expenses. The court also held that disgorged funds must be returned to investors when feasible, rather than benefit the public at large.

Finally, the court called into question the imposition of “joint-and-several liability” where it “could transform any equitable profits-focused remedy into a penalty.” Ultimately, the Court remanded to the Ninth Circuit to determine whether the defendants can be found liable for profits as “partners engaged in concerted wrongdoing.”

Given the parallels between the SEC’s and the FTC’s authority, the Liu decision is already having an impact on FTC enforcement actions wherein the FTC typically seeks to hold defendants jointly and severally liable for the entirety of consumers’ losses from the alleged wrongful conduct, rather than for net profits defendants gained from allegedly illegal conduct. Indeed, Liu may have a particularly dramatic impact on intermediaries and other service providers involved in alleged wrongful conduct at the center of FTC litigation, such as payment processors, whose net profits from alleged unlawful conduct are typically dwarfed by the alleged total losses to consumers for which the FTC seeks to hold that defendant responsible.

Because these cases will significantly impact the potential financial liability of those that may find themselves subject to FTC investigations and enforcement actions for “unfair or deceptive acts or practices,” it is worth monitoring the Supreme Court’s decision, expected before the end of the court’s term in late June 2021.

The authors and others at Venable have considerable experience representing advertisers, payment processors, and merchants in FTC investigations and law enforcement actions, including matters litigating the FTC’s enforcement authority under Section 13(b) of the FTC Act and issues related to regulatory compliance, risk management, and other consumer protection concerns. For more information, visit Venable’s Advertising and Marketing practice at www.venable.com/adlaw.