The FTC enforces the Federal Trade Commission Act of 1914, a long-standing federal statute that gives the commission the power to “prevent persons, partnerships, or corporations … from using unfair methods of competition … and unfair or deceptive acts or practices. …” The FTC exercises that power through administrative actions against alleged violators. Under its administrative power, the FTC can order a company to “cease and desist” its unfair actions—and to pursue civil penalties and fines of up to $10,000 “for each violation” the company commits following an FTC cease-and-desist order.

The FTC was also given the authority to pursue civil lawsuits following an administrative cease-and-desist order and obtain money damages. However, the standard for obtaining money damages requires the FTC to show that the practice the company engaged in is “one which a reasonable man would have known under the circumstances was dishonest or fraudulent. …” Separately, the FTC also was given the authority to go directly to the federal or state courts to obtain a temporary or permanent injunction against anyone who “is violating, or is about to violate” the 1914 act.

Disgorgement Funds for Consumers

It is the separation of the FTC’s authority in the courts that the Supreme Court was concerned about. The FTC had been using its authority to get injunctions to also obtain “disgorgement,” a requirement that the company pay back any money gained as a result of the fraud, which the FTC would generally restore to consumer victims. The practice had begun in the early 1980s and had been endorsed by some, but not all, federal appeals courts, as a logical and practical extension of the equitable relief obtained by an injunction. (Law School 101: An injunction is a form of “equitable relief” in which the court seeks to stop an illegal action and/or restore the status quo. Damages, such as those for an injury or a fraud, are a form of “legal relief” that is intended to compensate a victim for a loss that has already occurred.) The reasoning was that the disgorgement was part of stopping the fraudulent practice and returning to the status quo. Over the years, the FTC obtained billions of dollars of disgorgement funds that it restored to consumers.

However, businesses started pushing back. One such business was AMG Capital Management, LLC, which operated online, short-term payday loan companies. The FTC asserted that AMG companies misled consumers with automatic renewal provisions buried in the fine print, which resulted in deceptive charges often totaling more than three times the original loan amount. The FTC sued and obtained both an injunction and disgorgement of more than $1 billion.

AMG’s Supreme Court Case

When the Supreme Court agreed to hear AMG’s appeal, there were expectations that the court might limit the FTC’s use of its injunction authority to get disgorgement relief. The recent appointments of several conservative justices suggested a pro-business mindset, as well as a more textualist mindset. Textualism is the belief that a statute, regulation, or constitutional provision should be read based strictly on the text of the document and not with any interpretation of what it might or could mean.

The Supreme Court’s decision in the AMG case was focused on the text of the Federal Trade Commission Act, asserting that the language of the injunction provision limited it to injunctions only. Among other things, the use of the phrase “violating, or is about to violate” was considered to be “prospective” relief, or action to stop an existing or pending violation. Disgorgement was a “retrospective” remedy for a past violation. In sum, the court said that expanding the limited authority given to the FTC to obtain an injunction to incorporate a wide range of other equitable remedies “would allow a small statutory tail to wag a very large dog.”

Interestingly, and surprising to some, the ruling was a 9-0 unanimous decision, meaning that even the court’s more liberal, non-textualist justices believed that the FTC exceeded its authority under the 1914 act. The FTC continues to have the authority to pursue fraud and unfair practices through its administrative cease-and-desist process, followed by either the civil penalties of $10,000 per post-order violation or money damages or both. However, the more cumbersome procedures and the more limited standard of a “reasonable man” are seen as hindering the FTC’s ability to pursue fraud and obtain compensation for defrauded consumers.

Congress Steps In

Seeming to anticipate the court’s decision, the FTC has been working with Congress to redraft its authority so that the statute will clearly (and textually) allow the FTC to obtain both injunctions and disgorgement in a single action. In a previously scheduled April 20 hearing before the Senate Committee on Commerce, Science, and Transportation, which was intended to deal with the FTC’s response to COVID-19-related scams, the FTC’s acting chair, Rebecca Kelly Slaughter, and several other FTC commissioners testified about the problem. Their combined testimony argued that the (then) uncertainty in the FTC’s authority was taxing its resources, as “[d]efendants now routinely attempt to delay ongoing litigation” and use other means to prevent the FTC from taking enforcement action.

There is a precedent for congressional action to provide an administrative agency with authority to pursue both injunctions and disgorgement. Earlier in 2021, Congress clarified language in the Securities Exchange Act to grant the Securities and Exchange Commission with explicit authority to obtain monetary remedies for securities law violations. On the heels of the Senate hearing, Rep. Tony Cardenas (D-Calif.) introduced HR 2668 in the House of Representatives to “affirmatively confirm the authority of the Federal Trade Commission to seek permanent injunctions and other equitable relief. …”

Any legislative solution will likely generate some level of controversy and raise questions. Would it apply retroactively, or would the FTC need to start over in pursuing violations? Will legislators seek to restrain or put limits on what type or amount of monetary relief the FTC can pursue? In the meantime, the FTC does have some options, including pursuing cease-and-desist orders and injunctions to stop fraud and other unfair practices.  However, unless and until Congress acts, the FTC’s ability to gain restitution on behalf of consumers seems to be severely hampered.