Sunday, September 3, 2023

FYI: 7th Cir Holds Disgorgement to U.S. Treasury Exceeds Relief Authority Under FTC Act

The U.S. Court of Appeals for the Seventh Circuit previously held that Section 13(b) of the Federal Trade Commission Act ("FTC Act") does not authorize restitution or disgorgement awards and overruled a $5 million restitution award entered in the trial court.


After the Supreme Court of the United States agreed with the Seventh Circuit's interpretation of the FTC Act in AMG Capital Management, LLC v. FTC, 141 S. Ct. 1341, 1344 (2021), the case was remanded back to the trial court, which reinstated the restitution award under the federal Restore Online Shoppers' Confidence Act ("ROSCA") and section 19 of the FTCA.


In this appeal, the Seventh Circuit affirmed the award but removed the direction that any excess funds should be deposited "to the U.S. Treasury as disgorgement," finding that instruction exceeded the remedial scope of section 19.


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


An individual owned a credit-monitoring business that used a "negative option feature" on its websites, offering visitors a free credit report but automatically enrolling them in a $29.94 monthly subscription when they applied for that report. Information about the monthly membership was not clearly and prominently displayed. The business owner's contractors created website traffic by posting internet advertisements for fake rental properties and directing applicants to the websites for a "free" credit score.


The Federal Trade Commission ("Commission") sued the business owner under FTC Act section 13(b), which authorizes restraining orders and permanent injunctions to enjoin conduct that violates its prohibition of unfair or deceptive trade practices. 15 U.S.C. § 53(b). On its face, section 13(b) authorizes only injunctive relief, but the Commission long interpreted it to permit restitution awards —- an interpretation previously adopted by the Seventh Circuit and others.

The trial court entered a permanent injunction and ordered the business owner to pay more than $5 million in restitution. However, in the prior appeal, the Seventh Circuit overruled its precedent and held that section 13(b) does not authorize restitution awards. The SCOTUS granted certiorari and agreed that section 13(b) does not authorize equitable monetary relief.


On remand to the trial court, the Commission argued that the Supreme Court's decision had significantly changed the law and requested the reimposition of the restitution award under ROSCA and section 19 of the FTCA.


The business owner's liability for violating ROSCA had already been established by the Seventh Circuit in the first appeal.  The Commission now pointed to section 5 of ROSCA, which treats a statutory violation as a rule violation under the FTC Act and permits the Commission to seek relief under section 19 of the FTC Act. 15 U.S.C. § 8404(a).


Section 19 of the FTC Act, in turn, permits the court to "grant such relief as the court finds necessary to redress injury to consumers," including "the refund of money" and "the payment of damages." 15 U.S.C. §§ 57b(a)–(b).


The trial court reimposed the restitution award under section 5 of ROSCA and section 19 of the FTC Act, and entered the requested amended judgment. The business owner appealed.


On appeal, the business owner claimed that the Commission waived reliance on section 19 by not raising it in the first round of litigation.


However, the Seventh Circuit observed that the Commission's original complaint did allege that the business owner violated section 5 of ROSCA. Because that provision incorporates section 19 of the FTC Act by reference, treating a statutory violation under ROSCA as a rule violation under section 18 of the FTC Act, the Court held that the Commission could seek redress under section 19. Furthermore, the Court noted that the ROSCA violation was established in the trial court's first judgment, and the Seventh Circuit affirmed that liability finding in the first appeal.


Next, the business owner argued that because the Commission chose to rely on section 13(b) of the FTC Act over ROSCA and section 19 in the first appeal, it could not shift course in the second appeal. The Seventh Circuit countered by pointing out that the Commission relied on an established interpretation of section 13(b), long endorsed by the appellate courts. In the Seventh Circuit's view, pursuing the same monetary relief under ROSCA and section 19 in the first appeal, before the section 13(b) precedent was overturned, would have been unnecessary and redundant.


The Seventh Circuit also concluded that section 19 permits all forms of redress to make consumers whole, including "the refund of money." Accordingly, the amended restitution award appropriately refunded to consumers the amount that had not yet been returned by the business owner or his contractors.


However, the Seventh Circuit did modify the judgment to remove the direction to the Commission to deposit any excess money not used for consumer redress and administrative expenses "to the U.S. Treasury as disgorgement" because this part of the judgment swept beyond section 19 of the FTC Act. As modified, the Appellate Court affirmed the trial court's judgment.




Ralph T. Wutscher
Maurice Wutscher LLP
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