The Federal Trade Commission (FTC) has for years sued in federal court to obtain restitution of losses or disgorgement of profits from unfair methods of competition or unfair or deceptive acts or practices. This has allowed the FTC to avoid the time-consuming FTC administrative hearings that can produce only a cease-and-desist order.
The U.S. Supreme Court has now unanimously held that the FTC Act does not give the FTC authority to get restitution or disgorgement in federal court without a prior administrative cease-and-desist order. Even before the decision, the FTC commissioners had asked Congress to amend the FTC Act to allow this.
The district court found that the defendants operated several companies that made payday loans to consumers. Further, it found they misled borrowers in the description of the automatic renewal provisions of the loan agreements, the repayment terms, and the finance charges. Instead of starting an administrative cease-and-desist action against them, the FTC sued in federal district court. The FTC requested not only an injunction restraining the challenged conduct, but also restitution to the borrowers and disgorgement of their profits. The district court enjoined Defendants from engaging in the consumer loan business and directed them to pay US$1.27 billion in restitution and disgorgement. On appeal, the Ninth Circuit affirmed. However, two of the three judges questioned the correctness of those precedents.
Section 5 of the FTC Act authorizes the FTC to file an administrative complaint against any party the FTC has reason to believe has been or is using an unfair method of competition or unfair or deceptive act or practice. An administrative law judge in the FTC conducts a hearing and prepares a report. If appropriate, the administrative law judge orders the party to cease and desist the challenged conduct. Such an order is then reviewable by the commissioners of the FTC and then by a federal court of appeals.
Section 13(b), added in 1973, authorizes the FTC to obtain a temporary restraining order or a preliminary injunction from a district court to restrain the use of an unfair method of competition or an unfair or deceptive practice while the administrative hearing is pending. It empowers the FTC in proper cases to get from the court a permanent injunction. In its 1973 revisions to the FTC Act, Congress also added language which allows a district court to award civil penalties against persons who violate a final FTC cease-and-desist order. That language also authorizes courts to enter mandatory injunctions and such other and further equitable relief as they deem appropriate in the enforcement of such final orders of the Commission.
Two years later Congress added Section 19 to the FTC Act, authorizing district courts to remedy an unfair or deceptive act or practice as to which a cease-and-desist order has been entered by granting such relief as the court finds necessary to redress injury to consumers, or other persons, provided that a reasonable man would have known the act or practice was dishonest or fraudulent. The language authorized the refund of money, the rescission or reformation of contracts, and the payment of damages.
In the late 1980s, the FTC began using these permanent injunction powers to bring district court actions for consumer refunds and disgorgement of profits received through deceptive acts and practices without first obtaining a cease-and-desist order.
In its unanimous opinion the Supreme Court emphasized that the question before it was not whether the FTC’s ability to obtain monetary relief for consumer protection and antitrust violations without pursuing lengthy cease-and-desist order process would be beneficial from a policy perspective. It was only whether Congress had authorized use of that procedure. It concluded the legislation did not grant such authority. The Supreme Court considered the language as a whole to be focused on relief that is prospective, not retrospective.
Additionally, the Supreme Court saw the detailed structure for awarding conditional monetary relief from deceptive practices after the entry of a cease-and-desist order to be inconsistent with an interpretation of the law that would authorize monetary remedies against a broader class without first getting a cease-and-desist order.
The FTC has placed increased reliance on an expansive interpretation of its powers under to get compensation for victims of unfair competition or deceptive conduct. It has obtained substantial amounts in both restitution and disgorgement.
New legislation restoring the FTC’s power to get restitution and disgorgement has widespread political support. Whether that limited change gets enmeshed with broader antitrust revisions is an open
question.