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Courts Ratchet Up Scrutiny of Implied Federal Agency Enforcement Tools

Client Alert

Authors: Jay A. Dubow, Robin P. Sumner, Lindsay D. Breedlove and Jason A. Kurtyka

11/06/2019
Courts Ratchet Up Scrutiny of Implied Federal Agency Enforcement Tools

Federal agencies have long wielded a set of enforcement tools not explicitly provided for by statute. Restitution—used by the Federal Trade Commission (FTC) to secure billions from defendants—and disgorgement—the Securities and Exchange Commission’s (SEC) tool to obtain ill-gotten profits (or avoided losses)—appear nowhere in the relevant statutes. But the tide may be turning for defendants. The U.S. Supreme Court recently agreed to consider the availability of disgorgement in an SEC enforcement action. And a recent Seventh Circuit decision foreclosed the FTC’s ability to obtain restitution from defendants sued under section 13(b) of the Federal Trade Commission Act (FTC Act). The Seventh Circuit’s decision is worth examining in detail, because it not only holds immediate implications for defendants in FTC proceedings, but also potentially provides guidance for the Supreme Court’s review of SEC disgorgement.

Key takeaways:

  • Federal agencies have pursued implied statutory remedies for years, with little scrutiny from the federal bench. Recent decisions explicitly challenge that status quo for FTC actions, and the Supreme Court’s pending review of SEC disgorgement plausibly suggests that federal agencies may not have access to their preferred enforcement tools in years to come.

  • Even in the current climate, expect federal agencies to take advantage of uncertainty and circuit splits. The FTC, for example, will likely avoid unfriendly jurisdictions by relying on its broad venue provisions, which permit the FTC to sue in any district where a defendant “resides or transacts business.” The SEC also can select friendly forums in many cases.

  • Depending on the work-arounds available to the agency, defendants facing federal agency investigations should consider raising challenges to the scope of the agency’s remedies as a newly viable defense and settlement lever.

Challenges to Statutory Remedies Available to the FTC

Two recent circuit decisions specifically limit the FTC’s enforcement toolkit, leading the trend toward narrowing implied statutory remedies available to federal agencies. The FTC has “several tools to enforce the [FTC] Act’s prohibition on unfair or deceptive trade practices.” While the FTC may pursue administrative remedies that have traditionally required expending more resources and yielded smaller rewards, its preferred enforcement route—via FTC Act section 13(b)—allows the agency to bypass administrative procedure. If the FTC believes anyone “is violating, or is about to violate” an FTC-enforced law, the FTC may immediately seek a temporary restraining order or temporary or permanent injunction. 15 U.S.C. § 53(b). A temporary restraining order or injunction will dissolve if the FTC does not file an administrative complaint within 20 days. However, “in proper cases[,] the [FTC] may seek, and . . . the court may issue, a permanent injunction.”

Section 13(b) has been described as a “significant weapon” and “a mainstay of the [FTC’s] consumer protection program.” However, until the 1980s, it was only used to bolster administrative proceedings. Since then, however, the FTC has argued, and circuit courts have agreed, that by invoking the district court’s equitable jurisdiction under section 13(b), the district court has access to, and may use, a full suite of equitable remedies, including restitution. An implied restitution remedy allowed the FTC to collect over $17.5 billion through section 13(b) proceedings from 2016, 2017, and 2018 alone—far outpacing the funds obtained through administrative civil penalties.

A recent notable limitation on the FTC’s section 13(b) enforcement authority appeared in the Third Circuit’s decision in FTC v. Shire Viropharma, Inc., released in early 2019. As we explained at the time, the appellate court concluded that section 13(b) only permits the FTC to halt ongoing or imminent harms, and does not allow the FTC to sue for past conduct, even if it believes that conduct has “a reasonable likelihood” of recurring. The Third Circuit panel side-stepped the remedies question tackled by the Seventh Circuit, but its decisions strongly suggested that section 13(b) permits the FTC to obtain only injunctive relief (and nothing more) to address ongoing or imminent conduct.

The Seventh Circuit’s decision in FTC v. Credit Bureau Center, LLC more clearly undermines the FTC’s section 13(a) authority. In 2017, the FTC brought a suit against Credit Bureau Center, LLC, and its sole operator and owner, for duping customers who believed they were receiving “free” credit-related information into subscribing to a $29.94 monthly membership. Defendants also enlisted the help of an agent who funneled unwitting consumers to defendants’ website by advertising fake rental properties and directing applicants to obtain a “free” credit report from defendants. The district court entered a permanent injunction and ordered defendants to pay more than $5 million in restitution.

On appeal, defendants conceded liability but argued section 13(b)’s reference to preliminary and permanent injunctions—and no other remedy—meant the FTC was prohibited from seeking any more relief than the statute explicitly authorized. In other words, because section 13(b) does not say a district court can require restitution, the FTC cannot seek it under section 13(b). The Seventh Circuit agreed, reversing decades of precedent and creating tension with eight sister circuits, most of whom had tacitly agreed that the FTC’s section 13(b) remedies include restitution. The Seventh Circuit explained that restitution is an inherently retrospective remedy because it orders the return of unlawful, past gains. Injunctions, on the other hand, halt ongoing or prevent imminent harms. The appellate court reasoned that if section 13(b), which only provides for injunctive relief, could be used to recoup restitution for past harms, then restitution would be conditioned on proof of ongoing or imminent conduct. According to the Seventh Circuit, such a reading was illogical.

Moreover, the court continued, Congress provided the FTC with avenues to seek equitable and civil penalties in actions pursuant to section 5 of the FTC Act. Both backward-looking enforcement provisions in section 5 explicitly authorize “the refund of money,” and when a person violates a final order, a district court can “grant mandatory injunctions and such other and further equitable relief as they deem appropriate.” If the FTC could use section 13(b) to obtain restitution without navigating section 5’s administrative process, then, the Seventh Circuit reasoned, it would have been unnecessary for Congress to enact section 5. By reading section 13(b) prospectively, the court afforded independent significance to each of the FTC’s enforcement tools.

The Seventh Circuit’s logic was not limited to FTC-specific principles. It also relied on the Supreme Court’s refusal to find implied statutory remedies where Congress did not provide them. In Meghrig v. KFC Western, Inc., the Supreme Court held that an environmental statute in which Congress permitted private plaintiffs to obtain injunctions against toxic-waste handlers did not provide an implied restitution remedy. Similarly, the Seventh Circuit reasoned that because Congress did not list restitution among the section 13(b) remedies, the FTC was foreclosed from seeking it.

Additional Challenges to Judicially Implied Remedies, Including SEC Disgorgement

The Seventh Circuit’s about-face from decades of precedent recognizing implied agency enforcement tools is not an isolated occurrence. Cracks have emerged in the Ninth Circuit, too. In a concurring opinion ultimately agreeing to uphold the FTC’s power to seek restitution, a Ninth Circuit judge questioned whether restitution was an equitable remedy at all. If restitution resembled a “penalty,” rather than an equitable remedy, then section 13(b) does not permit its use, the judge reasoned.

The Ninth Circuit concurrence relied on the Supreme Court’s 2017 decision in Kokesh v. SEC, which resolved how to categorize the SEC’s pursuit of disgorgement for statute of limitations purposes. Courts had long considered disgorgement to be an equitable, rather than a legal, remedy, which allowed them to hold that SEC enforcement actions seeking disgorgement were not subject to the five-year statute of limitations applicable at law. In Kokesh, the Supreme Court rejected this understanding, holding that disgorgement resembled a penalty that must be sought within the generic five-year limitations period.

Disgorgement in the SEC enforcement context, like restitution in the FTC enforcement context, is an implied statutory remedy; the Securities Exchange Act does not list disgorgement among the SEC’s tools. Although questions arose at oral argument regarding the statutory basis for the SEC’s disgorgement power, the Kokesh Court explicitly disclaimed a wider holding, noting in a footnote that it was not addressing “whether courts possess authority to order disgorgement in SEC enforcement proceedings or [ ] whether courts have properly applied disgorgement principles in this context.”

That said, categorizing disgorgement as legal rather than equitable has implications for the implied statutory authority question. Legal penalties, on one hand, are intended to punish the defendant and deter future misconduct, while equitable remedies are designed to restore the status quo among the parties. Courts, by virtue of their inherent equitable jurisdiction, have access to and can fashion equitable remedies whether or not the relief is expressly provided for by statute. Disgorgement is one of those judge-made remedies that has historically been viewed as equitable. However, penalties are not considered a traditional equitable remedy, which means courts can only impose penalties to the extent permitted by statute. Although Kokesh only offered an opinion on disgorgement’s characterization as legal or equitable for statute of limitations purposes, it implied that because disgorgement is a penalty rather than an equitable remedy, courts cannot conclude that the SEC has the ability to seek such a remedy without express statutory authorization.

Despite the potential to read Kokesh as precluding SEC disgorgement, not all courts have been swayed. In Liu v. SEC, the Ninth Circuit, in a non-precedential opinion, concluded that it need only review the district court’s disgorgement order for an abuse of discretion, relying on pre-Kokesh Ninth Circuit precedent to categorize disgorgement as an equitable remedy subject to that deferential standard of review. Although Liu contended that Ninth Circuit precedent could not be squared with Kokesh, the panel held only that “Kokesh expressly refused to reach” whether the SEC has the authority to seek disgorgement. In short, the Ninth Circuit panel gave the Supreme Court’s logic the back of its hand.

Implications

The Supreme Court granted certiorari in the Liu case on November 1, 2019, signaling a desire to revisit the SEC’s implied disgorgement remedy and, potentially, to issue a decision guided by principles with broader implications. To be sure, the Court will attempt to square Kokesh’s logic with whatever conclusion it reaches—an exercise that presents a less-vigorous intellectual challenge if the Court reverses the Ninth Circuit’s decision in Liu and holds that disgorgement is not available to the SEC.

A ruling for the petitioners could also undermine implied enforcement tools available to several federal agencies, including the Consumer Financial Protection Bureau, Commodities Futures Trading Commission, Department of Energy, and the Food and Drug Administration. For decades, these federal agencies have successfully argued that courts may order certain remedies—including disgorgement, restitution, asset freezes, and contract rescission—even though the relief was not explicitly provided for by statute. In Liu, the Supreme Court will consider that practice’s legitimacy.

The Seventh Circuit’s decision might also prove persuasive to the Supreme Court as it evaluates Liu. Credit Bureau held that courts should not presume Congress authorized any relief beyond that expressly provided by statute. The securities laws only explicitly permit the SEC to obtain injunctions, specific monetary penalties, and equitable relief in federal court. However, the SEC can seek disgorgement in administrative proceedings. Like the Seventh Circuit, the Supreme Court may view Congress’s distribution of SEC enforcement tools as an intentional choice that should not be altered by the courts. Such a holding would not only deal a significant blow to the SEC’s enforcement powers but undermine the legitimacy of all implied agency enforcement tools.

The Supreme Court will likely not issue a decision until next summer. In the meantime, expect the SEC to continue pursuing disgorgement, as no circuit court has gone as far as to hold that the remedy is unavailable to the SEC. Rather, like the Ninth Circuit, appeals courts have avoided the question by relying on the Kokesh Court’s disclaimer that its decision had no bearing on disgorgement’s availability.

With regard to the FTC’s enforcement authority, Credit Bureau is only binding in the Seventh Circuit and Shire Viropharma is only authoritative in the Third. In other circuits, the FTC is not likely to concede a successful enforcement tool. Expect the FTC to maximize use of section 13(b)’s venue provision—which permits the FTC to sue in any district where a defendant “resides or transacts business”—to avoid the Seventh Circuit and file suit in more FTC-friendly jurisdictions like the Ninth Circuit. The FTC also likely will read Credit Bureau as only narrowly applying to restitution, which means the FTC is not foreclosed from securing an asset freeze or contract rescission.

Defendants should nonetheless consider potential challenges to agency enforcement authority if facing agency scrutiny. Agencies may agree to settlements favorable to defendants if they are reluctant to pursue a particular case as a “test case” to resolve unsettled legal principles, including the extent of their authority to pursue implied statutory remedies. In addition, while private plaintiff suits frequently involve larger demands than enforcement actions and therefore cause more heartburn, private plaintiff suits often immediately follow public disclosure of agency enforcement proceedings. To the extent agencies are less willing to use agency resources to pursue enforcement actions where implied statutory remedies are questionable or not available, private plaintiffs will have to do their own legwork, potentially reducing the threat of private litigation, at least until the plaintiffs’ bar adjusts.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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