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Upcoming Supreme Court cases could stop FTC from halting businesses and freezing assets via TROs
July 16, 2020

Upcoming Supreme Court cases could stop FTC from halting businesses and freezing assets via TROs

By: Andrew Silver

If it was not already apparent, the Supreme Court last week made it clear that it is taking a close look at the power of federal agencies to obtain monetary relief such as disgorgement or restitution through civil proceedings.  Indeed, on June 22, the Court in Liu v. Securities and Exchange Commission held that although the SEC had the power to obtain disgorgement in civil proceedings brought under the Securities Exchange Act, it must account for legitimate business expenses.  In other words, by requiring business expenses to be deducted from a disgorgement calculation, the Court indicated that the SEC can only obtain disgorgement of net profits, as opposed to gross profits, of a scheme found to violate the Securities Exchange Act.

The need to resolve a “circuit split”

Now, a $1.27 billion award against the operator of a high-interest lending enterprise in a lawsuit brought by the Federal Trade Commission is in flux, and, by extension, as are the future enforcement abilities of the FTC as a whole.  Two and a half weeks after the Liu decision, the Supreme Court indicated that its examination of government disgorgement practices is not limited to the SEC, when it granted certiorari to review two different appeals courts decisions regarding the FTC’s authority to obtain disgorgement.  In the October 2020 term, the Court will hear arguments in both FTC v. Credit Bureau Center, LLC, and AMG Capital Management, LLC v. FTC.

At stake in AMG Capital Management is a restitution award of approximately $1.27 billion entered against a payday lender.  In that case, the FTC sued Scott Tucker and his businesses for issuing payday and other high-interest loans, and enforcing loan terms that differed from the loan terms that were disclosed.  A federal trial court in the District of Nevada entered the $1.27 billion award against Tucker and his businesses, ordering restitution and disgorgement to be paid to consumers and the U.S. Treasury.  Although the U.S. Court of Appeals for the Ninth Circuit affirmed the award against Tucker and his businesses in AMG Capital Management, a subsequent decision by the U.S. Court of Appeals for the Seventh Circuit jeopardized that outcome by creating a “circuit split,” that could lead to the Supreme Court reversing the massive award against Tucker.

In August 2019, the Seventh Circuit in Credit Bureau Center, broke with six other federal appeals courts (and also reversed its own previous ruling) when it ruled that the FTC could not seek monetary relief such as disgorgement or restitution under Section 13(b) of the FTC Act.  The decision in Credit Bureau Center reversed a $5 million restitution award against the operator of a “credit monitoring service” that was found to have fraudulently enrolled customers in a $30/month service.  Until the ruling in Credit Bureau Center, in obtaining monetary relief such as disgorgement or restitution, the FTC consistently relied on the provision of Section 13(b) of the FTC Act which provides that “in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction,” and federal appeals courts regularly sided with the FTC on that issue.

In Credit Bureau Center, the Seventh Circuit held that restitution and disgorgement are not included in a “permanent injunction” because those remedies are targeted toward past harms, whereas injunctions target ongoing or imminent future harms.  This decision reversed both the Seventh Circuit’s own decision, and also disagreed with holdings by the every other federal appeals court to have addressed the issue, all of which have held that Section 13(b) of the FTC Act confers something that resembles “full equitable powers” or the ability to obtain “equitable monetary relief,” which includes disgorgement and restitution.

An agency’s enforcement practice is threatened

The FTC’s power to obtain disgorgement is not just a powerful tool available to it during lawsuits.  In fact, this tool provides the FTC with great power at the moment a lawsuit is commenced.  Because the disgorgement or restitution amount typically held to be available is global gross revenue (without accounting for business expenses and the like), the FTC in tandem with civil complaints frequently moves for and obtains temporary restraining orders (TROs) that operate to freeze a defendant’s assets and shut down the defendant’s business, right at the outset of the case.  In other words, the FTC argues to courts at the beginning of a case that because the potential disgorgement or restitution amount is so high, if the company is allowed to continue to operate, the money that could be obtained in a judgment would disappear while the case proceeded, if courts do not freeze assets and halt businesses via a TRO.

Courts typically grant these TROs because the showing a defendant opposing an FTC lawsuit must make at the TRO stage is quite challenging.  Namely, to successfully oppose a TRO, defendants generally must demonstrate that even if the allegations made by the FTC regarding the business’s advertisements were accepted as true, the business would be able to continue as a viable business without using such advertisements.  Because of this high bar, the FTC frequently prevails at the TRO phase and obtains orders freezing assets and halting defendants’ businesses, effectively crippling a business before it has an opportunity to truly defend itself on the merits.

A recent example of this typical practice of the FTC’s TRO practice is a lawsuit it brought this month in the U.S. District Court for the Middle District of Florida against GDP Network LLC and related entities, challenging a suspect credit card interest rate reduction business claimed to target financially distressed and older Americans.  The FTC filed its lawsuit in federal court on Monday, July 6, and by the end of the week, on Friday, July 10, the judge entered a temporary restraining order halting the business’s operation, freezing its assets, and appointing a receiver over the business.

There are arguments in favor of the FTC being able to retain the power that it wields via TROs—namely, the defendants it targets are often unsympathetic companies claimed (as in the case of GDP Network) to prey on the elderly or financially vulnerable with suspect financial or nutraceutical products, and freezing assets at the outset is the only way to ensure that assets will be available to pay a judgment—but the fact remains that the ability to shut a defendant down at the outset of a lawsuit is an extraordinary tool the FTC wields, and often leads to settlements.  So, if the Supreme Court takes away the FTC’s ability to obtain restitution or disgorgement, it will not just be taking away a remedy; it will also take way the FTC’s ability to argue via a TRO application that the threat of a high monetary award requires a business to be halted at the outset, which would present a significant challenge to the FTC’s enforcement objectives.

The Credit Bureau Center and AMG Capital Management decisions cannot both stand

One of the most recent decisions to uphold the FTC’s ability to obtain disgorgement or restitution under the FTC Act was the Ninth Circuit’s decision in AMG Capital Management, which, in affirming the $1.27 billion ruling against Tucker and his businesses, found that monetary relief such as disgorgement or restitution was impliedly available under Section 13(b) of the FTC Act, in spite of the “permanent injunction” language in the statute.  By granting certiorari in both Credit Bureau Center and AMG Capital Management and confronting the question of whether or not Section 13(b) authorizes disgorgement or restitution head-on, the Supreme Court will resolve this split between the Seventh Circuit and its fellow Courts of Appeal, and one of the decisions—Credit Bureau Center or AMG Capital Management—will be overruled.

Although the Supreme Court in Liu upheld the SEC’s ability to obtain disgorgement, it seriously curtailed it by requiring the deduction of legitimate business expenses.  But the Court allowing for the SEC to continue to pursue disgorgement is not necessarily a sign that the FTC will obtain the same result before the Court.  This is because the Section 13(b) of the FTC Act only utilizes “injunctions,” whereas the Securities Exchange Act does authorize “equitable relief,” which can include disgorgement and restitution.  Indeed, in Liu, the Court found that “equitable relief” included disgorgement.  For the Court to find that the FTC can obtain monetary relief under Section 13(b), it would need to rely on different reasoning.  Given the “net profit” limitation in Liu, however, it seems reasonable to expect that Court to, at a minimum, require that legitimate business expenses be deducted from any disgorgement or restitution calculation, if it does not outright take away the ability to pursue monetary relief under Section 13(b).

The FTC itself seems to be aware of the lack of clarity of its power under Section 13(b).  Indeed, at a panel event early this year, FTC Chairman Joseph Simons commented that he would like to see Congress clarify Section 13(b) of the FTC Act.  And in May 2019, FTC Commissioner Christine Wilson explicitly Congress to clarify that the remedies the FTC may pursue under Section 13(b) includes equitable relief.  Congress has taken no such action, leaving the FTC needing to now fight at the nation’s highest court for the ability to obtain monetary relief in civil suits under Section 13(b).

Should the Court find that Section 13(b) does not enable the FTC to seek restitution, that would not entirely strip the FTC of the ability to pursue that remedy.  Rather, it would have to do so under Section 19 of the FTC Act, which would require the FTC to first obtain a ruling in its favor in an administrative proceeding, and only then go to federal court seeking equitable relief such as restitution (as opposed to being able to go straight to federal court under Section 13(b)).  That would make for a far slower and more complicated process (and one that would likely hamper the FTC’s typical TRO methodology), but it would also make for a development that critics of the FTC’s claims of broad restitution authority would welcome.

Because Credit Bureau Center and AMG Capital Management will be argued this fall, the Supreme Court will not rule until 2021.  However, when it rules, not only might the $1.27 billion judgment against Tucker and his businesses disappear, but the FTC might find itself without a tool that it has long claimed to be in its toolbox.