FTC Suffers Another Loss Regarding Its Section 13(b) Powers

The FTC has consistently taken the position that the injunctive relief permitted by Section 13(b) allows it to collect disgorgement of a defendant’s revenues as well as restitution. Up until recently, the concept of implied restitution has generally held up in court. However, a string of recent decisions has cast doubt on the FTC’s broad interpretation of the statute, the strongest of which was delivered by the Seventh Circuit in August 2019 in a 2-1 majority decision in FTC v. Credit Bureau Center LLC.

Prior to the Credit Bureau decision, courts were reluctant to overturn existing precedent on this issue. For example, in FTC v. Hornbeam Special Situations, LLC, Judge Batten of the Northern District of Georgia stated that the language of Section 13(b) “clearly states that it is a provision for injunctive relief, temporary or permanent,” further stating that the statute “mentions nothing of disgorgement or otherwise.” With this said, however, Judge Batten concluded that the court was bound by precedent to allow the FTC’s desired remedies.

The same issue was raised by the Ninth Circuit in FTC v. AMG Capital Management, LLC. In this case, the defendant argued that “equitable monetary relief” is not an injunction and therefore the court cannot rely on Section 13(b) to support a $1.27 billion award. While the Ninth Circuit panel acknowledged that the defendant’s argument had some merit, it ultimately concluded that “it is foreclosed by our precedent” and allowed the monetary award to stand.

This seemingly consistent reliance on precedent has been upended by Credit Bureau  case. Here, the FTC alleged that Credit Bureau Center and its sole owner and operator, Michael Brown, used a “negative option feature” on its websites to attract customers. The websites offered a “free credit report and score.” However, the details of this offer, displayed in much smaller text, were such that customers who applied for the “free” information were automatically enrolled in a $29.94 monthly “membership” subscription. It was only after customers were automatically enrolled that they were informed that the monthly fee was for Brown’s credit-monitoring service. The FTC sought a permanent injunction and restitution. The district judge entered a permanent injunction and ordered Brown to pay $5 million restitution to the FTC.

On appeal, the Seventh Circuit overturned its precedent, concluding that “section 13(b)’s grant of authority to order injunctive relief does not implicitly authorize an award of restitution.” The court noted that although it must attribute “considerable weight” to its prior decisions, it is “not bound by them absolutely and may overturn circuit precedent for compelling reasons.”

With respect to restitution, the court reasoned that the FTC Act contains two separate provisions that expressly authorize restitution in certain situations, but require detailed notice before obtaining it. Therefore, allowing implied restitution through Section 13(b) when that paragraph did not explicitly provide for it would allow the FTC to “circumvent these elaborate [notice and] enforcement provisions and seek restitution directly through an implied remedy.” In reaching this conclusion, the Seventh Circuit overturned a well-known case entitled FTC v. Amy Travel Services, Inc., which had been controlling precedent since 1989.

The $5 million restitution award was vacated.

Takeaway: Because the other federal Circuit Courts of Appeal permit the FTC to obtain restitution under Section 13(b), the Seventh Circuit decision creates a circuit split that could eventually be decided by the Supreme Court. It is not yet clear, however, whether the FTC will seek an appeal with the Supreme Court in this case. Additionally, the circuit split may prompt a call to Congress to make legislative changes to establish clarity. In the interim, it appears inevitable that the FTC will be faced with additional challenges to its authority under Section 13(b) to seek restitution.

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