The Federal Trade Commission operates under a century-old statute, and the strains of age are beginning to show. The FTC’s authority to obtain equitable monetary relief in federal court under Section 13(b) of the Federal Trade Commission Act—an authority that has been presumed by the Commission, and repeatedly affirmed by courts, for decades—is under attack in three circuits.
In FTC v. Credit Bureau Center, LLC, the Seventh Circuit reversed its long-standing precedent and held that Section 13(b), which on its face entitles the FTC to seek “injunctions” in federal court, does not also permit courts to award the FTC equitable monetary relief, such as restitution, rescission, or disgorgement. As the Seventh Circuit stated, “restitution isn’t an injunction”—the only thing expressly authorized under Section 13(b).
The Ninth Circuit has not been quite as bold as the Seventh in overturning precedent but nonetheless has raised similar questions about the FTC’s Section 13(b) power. In FTC v. AMG Capital Management, LLC, the court relied on stare decisis to reaffirm the FTC’s power to obtain equitable monetary relief under Section 13(b), only to have a majority of the panel concur specially to explain why this interpretation of the FTC Act “is no longer tenable.”
A second, but related, front involves the circumstances under which the Commission can ask a federal court for injunctive relief in the first place. In FTC v. Shire ViroPharma, Inc., an antitrust case, the Third Circuit held that the “clear text” of Section 13(b) of the FTC Act limits the FTC to challenging conduct that is ongoing or imminent.
One of the driving forces behind these recent challenges to the FTC’s authority to seek equitable monetary relief is the Supreme Court’s decision in Kokesh v. SEC, which held that the Securities and Exchange Commission’s imposition of disgorgement was a “penalty” for purposes of the federal statute of limitations. The Court in Kokesh expressly punted on whether the SEC had the authority to seek disgorgement, but in Liu v. SEC, it answered the question in the affirmative—the SEC does indeed have that power, with limitations.Although animated by the distinction between legal and equitable remedies, not economics, Liu’s requirements that disgorgement focus on profits rather than revenue and not include items that “have value independent of fueling a fraudulent scheme” is largely consonant with the economic framework presented in this article.
Although it is far from clear how the Supreme Court will dispose of these challenges to the FTC’s power in AMG Capital, the challenges certainly present a heightened threat to the FTC’s longstanding use of Section 13(b) to obtain monetary relief in federal court without first having an administrative hearing. If the FTC were to lose this power, it would severely curtail or even eliminate its ability to address pure fraud—“the consumer protection analog to price fixing in antitrust”—which has become a core part of the FTC’s consumer protection work since the inception of the “Fraud Program” in the early 1980s.
In our view, this existential threat to the FTC’s ability to obtain equitable monetary relief in federal court is neither a cause for alarm nor a call to defend the current regime. Rather, we view it as an opportunity to reexamine the judicially-created superstructure around Section 13(b) and to erect an improved and economically coherent remedial framework. Toward that end, in this article we are agnostic about the FTC’s legal authority under Section 13(b). We focus our attention on excavating the jurisprudential foundations of the current state of law, which allows the FTC to impose sanctions out of proportion to consumer harm when dealing with legitimate products—defined as those with significant positive demand absent deception. After identifying the problem, we offer some solutions grounded in the law and economics of optimal sanctions. Our suggestions to bring economic coherence to the FTC’s remedial authority may have the collateral benefit of helping to preserve an important tool in the FTC’s arsenal to protect consumers from the most harmful types of fraud.
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The authors would like to thank Bikram Bandy, Howard Beales, Tim Muris, Andrew Stivers, and the editors of the Antitrust Law Journal for helpful comments.
