FYI: 6th Cir Holds Arbitration and Other Amendments to Deposit Agreement Failed for Lack of Mutual Assent

The U.S. Court of Appeals for the Sixth Circuit recently held that a Bank Services Agreement ("BSA") and its subsequent amendments were invalid to the extent that they materially changed the terms of the original agreement.

 

In so ruling, the Sixth Circuit noted that the defendant bank gave the plaintiffs no choice other than to agree to the new terms or to close their high-yield savings accounts subject to the BSA, and therefore that the parties did not mutually assent to the amendments.

 

The Court also concluded that the bank did not act reasonably when it added the arbitration provision years after the plaintiffs' accounts were established, thus violating the implied covenant of good faith and fair dealing.

 

A copy of the opinion is available at:  Link to Opinion

 

In 1989, the plaintiffs opened Money Market Investment Accounts ("MMIAs") with a bank. The bank guaranteed that the MMIAs' annual rate of interest would "never fall below 6.5%."

 

The original contract did not limit an account holder's right to enforce the agreement in court but stated: "Changes in the terms of this agreement may be made by the financial institution from time to time and shall become effective upon the earlier of (a) the expiration of a thirty-day period of posting of such changes in the financial institution, or (b) the making or delivery of notice thereof to the depositor by the notice in the depositor's monthly statement for one month."

 

In 1997, the bank merged with another bank, and then in 2001, merged with the defendant bank, which sent a BSA with an arbitration provision to each account holder. A 2004 BSA amendment added a class action waiver.

 

A 2017 Amendment made more changes to the BSA, including a more extensive arbitration provision and a statement that continued use of the account after receiving notice constituted acceptance of the changes. The plaintiffs maintained their accounts. In 2018, the plaintiffs were notified that the annual percentage rate applicable to their accounts would drop from 6.5% to 1.05%.

 

In March 2019, the plaintiffs filed a putative class action against the defendant bank for breach of contract due to its actions in lowering the guaranteed interest rate. The defendant bank filed a motion to dismiss and to compel arbitration, which the trial court granted. The plaintiffs timely appealed.

 

The Sixth Circuit reviews de novo both the existence and validity of an agreement to arbitrate. Walker v. Ryan's Family Steak Houses, Inc., 400 F.3d 370, 376 (6th Cir. 2005). Such review is conducted pursuant to "ordinary state-law principles that govern the formation of contracts." Glazer v. Lehman Bros., Inc., 394 F.3d 444, 450 (6th Cir. 2005).

 

Here, the relevant law was Tennessee state law. Williams v. Smith, 465 S.W. 3d 150, 153 (Tenn. Ct. App. 2014). Despite "a national policy favoring arbitration," Southland Corp. v. Keating, 465 U.S. 1, 10 (1984), an arbitration agreement will not be enforced if the parties never agreed to arbitrate in the first place. Capps v. Adams Wholesale Co., Inc., 2015 WL 2445970, at *3 (Tenn. Ct. App. 2015).

 

In Tennessee, two essential elements in the formation of a valid contract are (1) consideration and (2) mutual assent. Staubach Retail Servs.-Southeast, LLC v. H.G. Hill Realty Co., 160 S.W.3d 521, 524 (Tenn. 2005). The plaintiffs argued that both consideration and mutual assent were missing with regard to the arbitration provision.

 

The Sixth Circuit rejected the plaintiffs' argument that consideration was lacking, noting that both state and federal courts have consistently found that consideration exists so long as the arbitration agreement binds both parties. Pyburn v. Bill Heard Chevrolet, 63 S.W.3d 351, 358 (Tenn. Ct. App. 2001)

 

However, the Sixth Circuit agreed with the plaintiffs that mutual assent to the arbitration provision was missing. A meeting of the minds sufficient to give rise to mutual assent "is determined by assessing the parties' manifestations according to an objective standard." Wofford v. M.J. Edwards & Sons Funeral Home Inc, 490 S.W.3d 800, 810 (Tenn. Ct. App. 2015). Whether any given action "constitutes an acceptance must be assessed in terms of whether it would lead a reasonable person to conclude that the offer has been accepted." Rode Oil Co. v. Lamar Advert. Co., 2008 WL 4367300, at *8 (Tenn. Ct. App. Sept. 18, 2008).

 

Because the plaintiffs did not explicitly assent to the arbitration provision, the question became whether the plaintiffs were otherwise bound to the BSA and its amendments by virtue of their continued use of their accounts. The trial court determined that the plaintiffs took action sufficient to manifest assent to the arbitration provision by continuing to maintain their accounts with the defendant.

 

The trial court found three factors especially persuasive. First, the plaintiffs never objected, over the course of almost two decades, to the arbitration provision. Second, even though the plaintiffs never signed any of the agreements or otherwise assented in writing, the BSAs explicitly stated that continuing to hold accounts with the defendant would function as an acceptance of their terms. The final factor the court noted was that individuals and organizations who maintain accounts at banks would reasonably expect their relationship with the bank to be governed by some sort of agreement.

 

The Sixth Circuit found several problems with the trial court's analysis. First, the record was unclear as to whether the BSAs were distributed in a manner consistent with the MMIA agreements.

 

Second, regarding the BSAs' language that merely maintaining the accounts was deemed acceptance, the Sixth Circuit noted that it already addressed this issue in Lee v. Red Lobster Inns of America, Inc., 92 F. App'x 158 (6th Cir. 2004), reasoning that "[t]he flaw in the district court's analysis is that it places the burden on the [consumers] to . . . object to a company's unilaterally adopted arbitration policy or risk being found to have agreed to it. This is not how contracts are formed." Id. at 162.

 

Third, the Sixth Circuit concluded that whether individuals and organizations who maintain accounts at banks would reasonably expect their relationship with the bank to be governed by some sort of agreement was not material. The proper question was whether, upon assenting to the original two-page MMIA agreement, such individuals and organizations would reasonably expect their relationship to be governed, more than a decade later, by new provisions unilaterally added by a successor bank to such an extent that the BSA ultimately contained terms that materially changed the plaintiffs' rights and obligations under the original agreement. See Johnson v. Welch, 2004 WL 239756, at *8 (Tenn. Ct. App. 2004).

 

The plaintiffs did not contest that the bank could make reasonable changes to the banking agreement pursuant to the MMIA's change-of-terms provision. They instead asserted that the bank's discretion under the original change-of-terms provision to amend the terms was not unlimited, but was subject to two requirements: (1) that any changes be reasonable, and (2) that the defendant exercise its discretion to make such changes in a manner consistent with the implied covenant of good faith and fair dealing.

 

In making this argument, the plaintiffs principally relied on Badie v. Bank of America, 67 Cal. App. 4th 779 (Cal. Ct. App. 1998), a case with facts materially indistinguishable from those present here. The Badie court explained that a bank does not have a unilateral right "carte blanche to make any kind of change whatsoever so long as a specific procedure is followed." Id. at 791. The change must instead be "a modification whose general subject matter was anticipated when the contract was entered into." Id. As a result, the court said that it could not "assume . . . that notice alone, without some affirmative evidence of the depositor's consent, could bind a depositor to a significant change regarding matters that were not addressed in the original contract at all." Id. at 793.

 

The Sixth Circuit concluded that Badie's logic was applicable here, where the record was unclear as to whether the bank made the changes to the BSAs in a manner consistent with the original change-of-terms provision, or if the plaintiffs even received the 2001 BSA or its 2004 and 2017 amendments.

 

The appellate court was persuaded that the Tennessee Supreme Court would follow the logic of Badie. First of all, the defendant provided the plaintiffs with no opt-out opportunity. In the Court's view, this left the plaintiffs with no choice other than to acquiesce to the new arbitration provision or to close their high-yield savings accounts. And the Court observed that closing their accounts was a totally unreasonable option because doing so would eliminate the motivating factor of maintaining the accounts, the promise of a perpetual 6.5% annual interest rate.

 

The Sixth Circuit also held that the defendant bank did not act reasonably when it added the arbitration provision years after the plaintiffs' accounts were established, and that the defendant bank violated the implied covenant of good faith and fair dealing in its attempt to use the original change-of-terms provision to force the plaintiffs to arbitrate. From July 2001 to January 2018, the defendant continued to honor the 6.5% interest-rate guarantee. The Court thus concluded that the plaintiffs were lulled into not giving a thought to the unilateral addition of the arbitration provision in the BSA.

 

Accordingly, the Sixth Circuit held that there was no mutual assent to the arbitration provision, and so the BSA and its subsequent amendments were invalid to the extent that they materially changed the terms of the original agreement. Thus, the Court reversed the trial court's grant of the defendant bank's motion to dismiss and compel arbitration and remanded the case for further proceedings consistent with this opinion.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

  

 

 

 

FYI: 4th Cir Upholds Class Cert in "Inflated Appraisal Tactics" Lawsuit

The U.S. Court of Appeals for the Fourth Circuit recently affirmed in part and vacated and remanded in part a trial court's grant of summary judgment in favor of the plaintiffs.

 

The plaintiffs brought a class action suit alleging that the pressure tactics used by the defendants on home appraisers to raise the appraisal values on the plaintiffs' homes constituted conspiracy, breach of contract and unconscionable inducement under the West Virginia Consumer Credit and Protection Act.

 

The Fourth Circuit concluded that class certification was appropriate, and that the plaintiffs were entitled to summary judgment on their claims for conspiracy and unconscionable inducement.  

 

However, the Court concluded that a contract was formed in the loan documents that the trial court failed to observe, such the question of whether that contract was breached, and whether there were resulting damages, needed to be decided by the trial court on remand.  Additionally, the Fourth Circuit agreed with the plaintiffs that the implied covenant of good faith and fair dealing applied to the parties' contract, but held that it cannot by itself sustain the trial court's decision.

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiffs were a putative class of "[a]ll West Virginia citizens who refinanced" a total of 2,769 mortgages with the defendant lender from 2004 to 2009 for whom the lender obtained appraisals from the defendant appraisal manager.

 

The lender collected information from the plaintiffs, including an estimated value of their homes. The lender relayed the plaintiffs' estimates of value to the appraisal manager, which passed those estimates on to contracted appraisers via appraisal engagement letters. If an appraisal came back lower than the estimated value, appraisers received phone calls from the appraisal manager drawing their attention to the estimated value and asking them to take another look.

 

This practice was allegedly common at the beginning of the class period, but after Fannie Mae and Freddie Mac implemented the Home Valuation Code of Conduct on May 1, 2009, it ceased.

 

The plaintiffs brought putative class action actions against the lender, the appraisal manager, and three other defendants in West Virginia state court in 2011, which were removed to federal court in 2012. After a narrowing of the claims and the defendants, three claims remained: (1) a civil conspiracy claim against both the lender and the appraisal manager; (2) a claim of unconscionable inducement to contract under the West Virginia Consumer Credit and Protection Act against the lender; and (3) a breach of contract claim against the lender.

 

The trial court conditionally certified the plaintiffs' class and granted in part and denied in part each of the parties' motions for summary judgment. The court then held an evidentiary hearing on damages, after which it imposed a statutory penalty of $3,500 as to unconscionability for each of the 2,769 violations, for a total of $9,691,500. The court also awarded the plaintiffs the appraisal fees they had paid as damages for breach of contract, for a total of $968,702.95. The court did not award separate damages for conspiracy.

 

On appeal, the defendants first challenged the trial court's decision to certify the class under Rule 23 on the issue of predominance. They argued that questions of standing, their statute-of-limitations defense, the unconscionable inducement analysis, various breach of contract issues, and the calculation of damages all required individual determinations that should have defeated class certification.

 

The Fourth Circuit reviews a class-certification decision for abuse of discretion. See Sharp Farms v. Speaks, 917 F.3d 276, 290 (4th Cir. 2019). "A district court abuses its discretion when it materially misapplies the requirements of [Federal] Rule [of Civil Procedure] 23," EQT Prod. Co. v. Adair, 764 F.3d 347, 357 (4th Cir. 2014), or "makes an error of law or clearly errs in its factual findings." Thorn v. Jefferson-Pilot Life Ins. Co., 445 F.3d 311, 317 (4th Cir. 2006).

 

The defendants first argued that there were class members who did not suffer any injuries because they benefited from obtaining the loans. Accordingly, in the defendants' view, the trial court lacked Article III power to award damages to those class members.

 

However, the Fourth Circuit held that, even if some plaintiffs were not injured, "[o]nce injury is shown, no attempt is made to ask whether the injury is outweighed by benefits the plaintiff has enjoyed from the relationship with the defendant. Standing is recognized to complain that some particular aspect of the relationship is unlawful and has caused injury." 13A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 3531.4 (3d ed. 2008 & Supp. 2020).

 

Next, the appellate court determined that the statute-of-limitations question is straightforward and susceptible to classwide determination because the trial court pointed to several ways in which the defendants could perform the "ministerial exercise" of determining which loans fell outside the applicable limitations period.

 

Furthermore, the Fourth Circuit held that the plaintiffs did not need to prove that they were actually induced into a loan by the challenged practice. Instead, the plaintiffs needed only to show misconduct on the part of the defendants, and concealment thereof, relating to a key aspect of the loan-formation process which necessarily contributed to the class members' decisions to enter the loan agreements.

 

The Court concluded that this is a determination that can be made across the class, since (1) for every member of the class, the defendants engaged in the same allegedly unconscionable practice, sharing borrowers' estimates of value with appraisers while failing to disclose that practice to the plaintiffs, and (2) unconscionable behavior affecting the appraised value of a property inherently impacts the borrower's decision to obtain a loan based on that number.

 

The defendants also argued on appeal that the breach of contract claim should be litigated on an individual basis because some homeowners (not specifically any member of the class) sometimes sought to persuade appraisers to increase their appraisal values themselves and because there would be no damages, and thus no breach of contract, if the appraiser would have reached the same result with or without the borrower's estimate of value.

 

However, the Fourth Circuit concluded that this evidence can be evaluated through the "ministerial exercise" of comparing actual home values to estimates of value.

 

Finally, the defendants contended that the trial court could not order statutory penalties class-wide, arguing that the court was required to consider the level of harm suffered by each class member individually.

 

But the appellate court pointed out that the West Virginia Supreme Court of Appeals has clarified that "an award of civil penalties pursuant to" section 46A-5-101(1) is "conditioned only on a violation of a statute" and is permissible even for "those who have suffered no quantifiable harm" as long as they have been "subject to undesirable treatment described in [section 46A-2-121 or related provisions] of the [West Virginia Consumer Credit and Protection] Act." Vanderbilt Mortg. & Fin., Inc. v. Cole, 740 S.E.2d 562, 566, 568–69 (W. Va. 2013).

 

Therefore, the Fourth Circuit affirmed the trial court's certification of the plaintiffs' class.

 

The Fourth Circuit then turned to the question of whether the defendants breached their contracts with each of the class members. The Court reviews de novo a trial court's interpretation of state law, contract, and grant of summary judgment. See Schwartz v. J.J.F. Mgmt. Servs., Inc., 922 F.3d 558, 563 (4th Cir. 2019).

 

The appellate court noted that, under West Virginia law, "[a] claim for breach of contract requires proof of the formation of a contract, a breach of the terms of that contract, and resulting damages." Sneberger v. Morrison, 776 S.E.2d 156, 171 (W. Va. 2015). Additionally, formation of a contract under West Virginia law requires "an offer and an acceptance supported by consideration." Dan Ryan Builders, Inc. v. Nelson, 737 S.E.2d 550, 556 (W. Va. 2012).

 

The Fourth Circuit concluded that the Deposit Agreement section in the plaintiffs' loans created a contract. The Court observed that the section was labeled "agreement" and included an offer, acceptance, and consideration: the plaintiffs paid a deposit in exchange for the lender beginning the loan application process, which could include an appraisal or credit report.

 

However, the Fourth Circuit noted that the trial court failed to recognize this contract in their initial review of the case. Therefore, the Court concluded that whether the contract was breached, and whether there were resulting damages, were questions that the trial court needed to review in the first instance. See Fusaro v. Cogan, 930 F.3d 241, 263 (4th Cir. 2019).

 

Next, the appellate court observed that, in West Virginia, there is an implied "covenant of good faith and fair dealing in every contract for purposes of evaluating a party's performance of that contract." Evans v. United Bank, Inc., 775 S.E.2d 500, 509 (W. Va. 2015). The Court included lender/borrower cases in the ambit of that covenant.

 

West Virginia law does not allow an independent claim for breach of the implied covenant unrelated to any alleged breach of contract. Evans, 775 S.E.2d at 509. Here, however, the Fourth Circuit held that the plaintiffs' complaint clearly alleged a claim for breach of contract and cited the implied covenant as relevant to that claim.

 

However, the Fourth Circuit held that the implied covenant of good faith and fair dealing is only relevant to determining whether there was a breach. There must have also been resulting damages for the plaintiffs' breach-of-contract claim to succeed. See Sneberger v. Morrison, 776 S.E.2d 156, 171 (W. Va. 2015).

 

Accordingly, the Court concluded that the trial court may only grant summary judgment to the plaintiffs on the breach of contract claim on remand if it concludes that (1) the lender breached its contracts with the class members, an analysis which may take into consideration how the covenant of good faith and fair dealing impacted the evaluation of the lender's performance under the contracts; and (2) the class members suffered damages as a result.

 

Then the Fourth Circuit turned to the plaintiffs' unconscionable inducement claim. The West Virginia Consumer Credit and Protection Act (the "WVCCPA") authorizes a court to act when a loan agreement was "unconscionable at the time it was made" or "induced by unconscionable conduct." W. Va. Code § 46A-2-121(a)(1).

 

Thus, according to the appellate court, unconscionable inducement is simply "unconscionable conduct that causes a party to enter into a loan." McFarland v. Wells Fargo Bank, N.A., 810 F.3d 273, 285 (4th Cir. 2016). Courts are to analyze such claims "based solely on factors predating acceptance of the contract and relating to the bargaining process," that is, "the process that led to contract formation." Id. at 277–78. A plaintiff must show more than procedural unconscionability: he or she must demonstrate unconscionable behavior on the part of the defendant, such as an affirmative misrepresentation or active deceit.

 

To assess a claim of unconscionable inducement under the WVCCPA, the Fourth Circuit stated that courts should look to the defendant's conduct, not to the bargaining strength of the parties or the substantive terms of the agreement. For claims based on affirmative misrepresentations, the plaintiffs must demonstrate that they subjectively relied on that conduct. For claims based on concealment, however, a plaintiff need only show that the defendant's conduct was unconscionable and that this unconscionable conduct contributed to the formation of the plaintiff's decision to enter the loan.

 

In this case, the Fourth Circuit agreed with the trial court's view that the defendants sought to pressure appraisers to match targeted appraisal values and concealed this practice from the plaintiffs, a process that, in combination, contributed to the plaintiffs' decisions to enter the loan agreements. Under the standard outlined above, the Court held that this conduct rose to the level of unconscionable inducement under the WVCCPA.

 

The plaintiffs' final claim against the defendants was for conspiracy. The defendants' only argument on appeal was that the trial court's summary judgment decision on the plaintiffs' conspiracy claim was derivative of its ruling on the unconscionable inducement claim. Because the Fourth Circuit already affirmed the trial court's decision to grant summary judgment to the plaintiffs on their inducement claim, this argument failed.

 

Accordingly, the Fourth Circuit affirmed the trial court's decisions to grant class certification, grant summary judgment to the plaintiffs on their conspiracy and unconscionable inducement claims, and award statutory damages. However, the appellate court also vacated the trial court's grant of summary judgment to the plaintiffs on their breach of contract claim and the related damages award, and remanded that claim for further proceedings consistent with this decision.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

  

 

 

 

FYI: SCOTUS Limits FTC's Ability to Obtain Equitable Monetary Relief

The Supreme Court of the United States recently held that the Federal Trade Commission Act ("FTC Act") allows permanent injunctions to prevent future violations, but does not authorize the Federal Trade Commission ("FTC") to seek, or a court to award, equitable monetary relief such as restitution or disgorgement, except that the FTC may obtain monetary relief by first invoking its administrative procedures and then Section 19's redress provisions (which includes limitations).

 

A copy of the opinion is available at:  Link to Opinion

 

The FTC filed a complaint against the petitioner alleging deceptive payday lending practices in alleged violation of the FTC Act,  Section 5(a). 15 U. S. C. §45(a)(1). The trial court entered a permanent injunction to prevent the petitioner from committing future violations and relied on the same authority to direct the petitioner to pay $1.27 billion in restitution and disgorgement.

 

The Ninth Circuit rejected the petitioner's argument on appeal that Section 13(b) does not authorize the award of equitable monetary relief.

 

The petitioner then sought certiorari in the SCOTUS. In light of recent differences that have emerged among the federal Circuit Courts of Appeal as to the scope of Section 13(b), the SCOTUS granted the petition.

 

The FTC has authority to enforce the FTC Act's prohibitions on "unfair or deceptive acts or practices" by commencing administrative proceedings under Section 5. 15 U.S.C. 45(a)(1)–(2). Section 5(l) authorizes the FTC, following completion of the administrative process and the issuance of a final cease and desist order, to seek civil penalties, and it permits courts to "grant mandatory injunctions and such other and further equitable relief." §45(l).

 

Furthermore, Section 19 authorizes courts to grant "such relief as the court finds necessary," §57b(b), in cases where someone has engaged in unfair or deceptive conduct with respect to which the FTC has issued a final cease and desist order. §57b(a)(2)

 

Here, the FTC sought equitable monetary relief directly in the trial court under Section 13(b)'s authorization to seek a "permanent injunction" without using the FTC's Section 5 administrative proceedings. §53(b). However, the SCOTUS held that Section 13(b) does not explicitly authorize the FTC to obtain court-ordered monetary relief and that such relief is foreclosed by the structure and history of the FTC Act. Id.

 

First, the SCOTUS noted that the language of Section 13(b) refers only to injunctions. Section 13(b) states, "in proper cases the [FTC] may seek, and after proper proof, the court may issue, a permanent injunction." §53(b).

 

The Court interpreted the language and structure of Section 13(b), taken as a whole, to indicate that the words "permanent injunction" have a limited purpose, a purpose that does not extend to the grant of monetary relief. In the Court's view, the provision focuses upon relief that is prospective, not retrospective, namely that of stopping seemingly unfair practices from taking place while the FTC determines their lawfulness. §53(a)

 

In addition, the SCOTUS held that the structure of the FTC Act beyond Section 13(b) confirms this conclusion. Congress in Sections 5(l) and 19 gave courts the authority to impose limited monetary penalties and to award monetary relief in cases where the FTC has issued cease and desist orders, i.e., where the FTC has already engaged in administrative proceedings.

 

Since in these provisions Congress explicitly provided for "other and further equitable relief," §45(l), and for the "refund of money or return of property," §57b(b), the SCOTUS concluded that it likely did not intend for Section 13(b)'s more cabined "permanent injunction" language to have a similarly broad scope.

 

Moreover, the SCOTUS observed that the latter provision, Section 19, comes with certain important limitations that are absent in Section 13(b). For instance, Section 19 applies only where the FTC begins its Section 5 process within three years of the underlying violation and seeks monetary relief within one year of any resulting final cease and desist order. §57b(d). And it applies only where "a reasonable man would have known under the circumstances" that the conduct at issue was "dishonest or fraudulent." §57b(a)(2); see also §45(m)(1)(B)(2). In addition, Congress enacted these other, more limited, monetary relief provisions at the same time as, or a few years after, it enacted Section 13(b) in 1973.

 

The SCOTUS reasoned that it was highly unlikely that Congress would have enacted provisions in Section 19 expressly authorizing conditioned and limited monetary relief if the Act, via Section 13(b), had already implicitly allowed the FTC to obtain that same monetary relief and more without satisfying those conditions and limitations. Nor was it likely to the Court that Congress, without mentioning the matter, would have granted the FTC authority so readily to circumvent its traditional Section 5 administrative proceedings.

 

The SCOTUS thus read Section 13(b) as authorizing injunctive but not monetary relief, which produces a coherent enforcement scheme: the FTC may obtain monetary relief by first invoking its administrative procedures and then Section 19's redress provisions (which includes limitations). The FTC may use Section 13(b) to obtain injunctive relief while administrative proceedings are foreseen or in progress, or when it seeks only injunctive relief.

 

Accordingly, the SCOTUS reversed the Ninth Circuit's judgment and remanded the case for further proceedings consistent with this decision.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars