FTC Can No Longer Seek Restitution for Consumers
On April 22, the U.S. Supreme Court unanimously ruled that the Federal Trade Commission (FTC) could no longer seek consumer restitution through Section 13(b) of the FTC Act— a provision the FTC has been using for nearly 40 years to impose monetary penalties against companies engaging in deceptive practices.
Understanding the impact of this decision requires knowledge of the FTC Act’s history, its deeply intertwined amendments and how it has been used for decades to secure compensation for victims of deceptive corporate practices–including privacy violations.
What is Section 13(b)?
Before 1973, the FTC could not bring suit against businesses that engaged in anti-competitive, unfair, or deceptive behavior. Although Section 5 of the FTC Act explicitly prohibits this type of behavior, the only enforcement action the FTC could take was through administrative proceedings. This meant the FTC could issue an order directing businesses to stop their illegal behavior, but it could not recover any money the businesses gained from it.
If this sounds like a mere slap on the wrist, the FTC would agree. This is why, in 1973, Congress passed Section 13(b)– an amendment of the FTC Act that allowed the FTC to go to court and obtain a “permanent injunction” against any current or future violators.
What is Section 19?
Two years later, Congress took it a step further, passing Section 19 of the act, which explicitly authorized the FTC to seek monetary relief for violations including rescissions, refunds, damages and returns of property.
Section 19 gave the FTC and victims a clear path towards compensations that still exists today. However, it’s important to note that the FTC prefers not to seek relief through Section 19 because of the barriers involved in doing so.
When seeking damages through Section 19, the FTC must first obtain an administrative cease-and-desist order. Once it does that, monetary relief can only be obtained if that order is further violated and if it is proven in court that a “reasonable person” would understand the further violations as “dishonest or fraudulent.”
Therefore, in such cases, the FTC has consistently turned to Section 13(b) to seek monetary relief, as its path towards compensation is far less convoluted. The FTC has argued that the “permanent injunctions” authorized in Section 13(b) can be interpreted to include rescissions, refunds, damages, and returns of property– the same types of monetary relief established in Section 19.
For the most part, circuit courts have accepted this argument, and Section 13(b) has stood as a quick, reliable path for the FTC to impose monetary penalties against violating companies. This has allowed them to dodge the multi-step process and forgiveness for past violations that comes with seeking relief through Section 19–until now.
The Decision
The Supreme Court unanimously rejected the FTC’s use of Section 13(b) as a vehicle for broad monetary relief against deceptive companies, undermining the path the FTC has been taking for decades.
It ruled that Section 13(b) concerns only prospective–not retrospective–monetary relief. In short, it only allows the FTC to seek injunctive relief to stop future fraud or deception, and could no longer be used to seek relief for past violations, including compensation or damages for impacted consumers.
What Does This Mean?
If the FTC hopes to provide relief to a party harmed by a violation of the Act, they would have to do so under Sections 5 and 19.
Of course, Section 5 limits action to administrative proceedings and Section 19 only offers relief for further violations that are deemed dishonest and fraudulent.
In short, the process is going to get more tedious for the FTC, more challenging for consumers seeking compensation, and a lot slower for everyone. A consumer seeking retribution will need the FTC to file a cease-and-desist order on their behalf, and will only be successful if the violation continues.
The most likely outcome is that the FTC will play a much less pivotal role in the process. The burden of enforcement will likely fall onto state attorney generals, granted that their state consumer protection and data privacy laws give them the authority to take action. If not, such cases might be passed on to the Consumer Financial Protection Bureau or the Department of Justice.
Of course, it won’t be that simple. In the past, such investigations were often collaborations between states and the FTC, with states benefiting from the FTC’s resources and federal authority. For now, the FTC will need to play a more passive role in consumer restitution cases and states will need to make a lot of the big moves on their own.
The FTC exiting the equation does not mean they can be easily replaced. Before the ruling, consumers harmed by deceptive, fraudulent and anti-competitive corporate behavior relied on the FTC’s authority to seek justice, with the FTC claiming that “Section 13(b) enforcement cases have resulted in the return of billions of dollars to consumers targeted by a wide variety of illegal scams and anticompetitive practices, including $11.2 billion in refunds to consumers during just the past five years.” The decades of legal precedent that allowed the FTC to do that have been undermined in favor of a more literal interpretation of Section 13(b).
For now, the ball is in Congress’s court. On the surface, punishing scammers seems like a bipartisan issue, so experts predict that Congress will “move quickly to enact legislation that would empower the FTC to seek restitution and disgorgement of ill-gotten gains.” In a statement, FTC Acting Chair Rebecca Kelly Slaughter has already called on Congress to do so.
Time will tell whether Congress will answer the FTC’s call. For the time being, scam victims remain in a limbo where the FTC has no power to seize money companies gained from illicit practices without first sending a cease-and-desist.