In 2013, two of us warned that this unwarranted expansion of the agency’s authority would jeopardize the heretofore uncontroversial fraud program itself. Unfortunately, the problems we anticipated have materialized in a case now before the Supreme Court. A second case raising these same issues was also before the Court, but the grant of certiorari was recently vacated. Both the FTC and the defendants in the cases take extreme positions, the agency claiming that it can always use 13(b) to obtain monetary relief when it chooses to do so. Echoing Newton’s third law of physics, the defendants advocate for the opposite, extreme position, claiming the FTC can never obtain monetary relief under 13(b).
We disagree with each side; both the law and sound policy reject the extremes before the Court and support a middle ground. Section 13(b) was part of a complex statutory structure that allowed monetary relief only in carefully delineated circumstances, originally considered as a whole, but enacted in two separate bills two years apart in the 1970s.
The FTC’s fraud program recognized the limited availability of using 13(b) in consumer protection cases and respected the limits Congress had imposed, requiring that other parts of the FTC Act be used to obtain monetary relief in more complex cases. These changes to the FTC Act, now at issue before the Court, respected the original policy conception of the FTC that, because the statutory standard was often unclear, the appropriate first sanction was a cease and desist order. Congress allowed the agency to obtain monetary relief only when the violation was clear, and a reasonable person would have known that the conduct was dishonest or fraudulent. The advertising disputes mentioned above, especially when they turn on disagreements among reasonable experts, are decidedly not the kind of case for which Congress contemplated monetary relief. Monetary relief in such cases is likely to chill truthful and useful information for consumers.
How We Got Here
An important part of Woodrow Wilson’s campaign in 1912 was to create an expert body to provide guidance for appropriate marketplace conduct. The FTC Act followed in 1914. Because the statutory prohibition of “unfair” conduct was deliberately vague, the only remedy initially available was a cease and desist order, with monetary relief eventually made available only for violations of that order. For many practices, this approach was wise, because the line between permissible and impermissible conduct was unclear until the Commission had addressed a particular practice. The possibility of imposing monetary relief for the initial conduct could chill otherwise lawful conduct that actually benefits consumers or competition. As we discuss below, that problem exists today, for example, in the application of the Commission’s advertising substantiation doctrine. It is sometimes said, incorrectly, that cease and desist orders are no penalty at all, and violators get “one free bite of the apple.” In fact, legitimate businesses suffer reputational and financial penalties from FTC cease and desist orders and so they are hardly a “free pass.”
By the late 1960s, the agency was widely criticized, for multiple reasons, including its consumer protection focus on largely trivial issues. Two reports, the first by young students under the auspices of consumer advocate Ralph Nader, and the other by a prestigious committee of the American Bar Association with future FTC Chairman Miles Kirkpatrick as its head and another future Chairman Robert Pitofsky as the Commission Counsel, were scathing in their criticism of the FTC. The ABA even concluded that it should be the last of a long series of a similar reports, and recommended “drastic changes . . . to recreate the FTC in its intended image.”
Change followed. Because many argued that the Commission needed stronger remedial powers, by 1973 Congress began working on strengthening the Commission, considering comprehensive legislation to facilitate the Commission’s ability to obtain injunctions, as well as to obtain monetary relief beyond violations of previously existing orders. As we have previously written, this history has received vanishingly little attention in the case law, and as we argue below, is misused by both parties in the current litigation. The less controversial injunction provision was removed from the comprehensive package when an opportunity to attach it to a different legislative vehicle headed for enactment arose in that same year. The enacted language included the second proviso of Section 13(b), the provision now at issue before the Supreme Court: “That in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction.”
Congress continued to work on the original companion provision to expand the availability of monetary relief, rejecting broad use of monetary relief two years later and instead authorizing such relief only in specific circumstances. Section 19 permits the agency to obtain redress in federal court for practices that a reasonable person would have known were “dishonest or fraudulent,” but only after an FTC administrative proceeding determined that violations had occurred. Section 5(m)(1)(B) allows the Commission to obtain civil penalties against a target that commits acts or practices that it knows the Commission has previously found were unfair or deceptive in litigation against third parties.
Although the ABA Commission and others had suggested that the agency act to prevent fraud, it did not do so in the 1970s. Instead, the agency’s principal work that decade was to attempt to become “the second most powerful legislative body in the United States” by proposing numerous industry-wide rules. By the time two of the current authors arrived at the FTC’s Bureau of Consumer Protection in the Fall 1981, the enterprise of crafting such rules to reshape major sectors of the economy had collapsed because of flaws in both implementation and conception. The new agency leadership, in searching for a new foundation for consumer protection, turned to attacking fraud. Fraud is tantamount to theft, distorting the market and limiting the ability of consumers in making informed choices. Fraud also harms legitimate competitors, by reducing the credibility of all advertising, forcing the honest to provide more assurances of performance to overcome consumers’ suspicions.
There was some reluctance within the staff and by some Commissioners to attack fraud systematically. In part, they argued that the Commission should do “more important” work, and that other agencies should solve the fraud problem. The response was that, as the nation’s consumer protection agency, the FTC was best suited to coordinate a nationwide attack on fraud in all its forms. Other agencies, even if they had criminal remedies, often lacked the necessary geographic scope, staff resources, market expertise, and willingness to tackle the problem, given their many responsibilities.
A second objection was more substantial, namely that, unlike the legitimate businesses with which the Commission usually dealt, fraudsters were unlikely to obey legal rules unless forced to do so. Although the Commission lacked criminal authority, we argued that we could attack fraud by depriving its perpetrators of their ill-gotten gains along with strong injunctive relief limiting their ability to strike again elsewhere. To achieve these objectives, a statutory vehicle to obtain effective monetary relief was needed. The 1975 additions to the FTC Act would not work, because the target would hide the money immediately upon notice of the FTC’s interest, long before any order to pay redress.
To attack fraud successfully, the agency needed to freeze assets pending a final judicial determination on the merits. The FTC used the second proviso of Section 13(b), asking, in a single federal district court, for an ex parte order freezing assets and preliminarily enjoining ongoing conduct, then disposing of the case on the merits, ordering, if appropriate, that the frozen assets be returned to consumers while issuing a permanent injunction. This approach became known as the “Section 13(b) Fraud Program.”
The fraud program has been enormously successful, with the agency using investigators trained to uncover fraud, trace assets, develop evidence for trial, and testify in court. These investigators in turn have trained hundreds of local, state, federal, and international criminal and civil law enforcement officials. The agency also created Consumer Sentinel, allowing hundreds of law enforcement agencies to access a complaint database, coordinate attacks on various fraudulent schemes, spot emerging trends, identify bad actors quickly, and locate potential witnesses. The fraud program has become international, with the creation of an International Division and passage in 2006 of the SAFE WEB Act, extending the Commission’s authority in information sharing, investigative assistance, cross-border jurisdiction, and enforcement relationships. The agency has also extended the program to Spanish speakers, with Spanish language consumer education, cases against fraud in the Spanish language media, and outreach to law enforcement officials with large Spanish-speaking populations. Finally, recognizing that some fraudsters should be jailed, the Commission’s Criminal Liaison Unit encourages and works with agencies with criminal authority that otherwise lack the time, expertise, and ability to prosecute fraud.
By early in the Obama administration, eight circuit courts of appeal had blessed the FTC’s fraud program, often with broad language that, read outside of the context of the fraud case before it, appeared to approve an expansive use of Section 13(b). Emboldened by this success, the Obama administration began stretching Section 13(b) monetary remedies well beyond the fraud context of those circuit court decisions, claiming broad authority to seek monetary relief. Today, the agency argues, in effect, that it can use 13(b) whenever it chooses, relegating the 1975 Congressionally enacted remedies merely to alternative choices available, or not, at the Commission’s sole discretion.
13(b) Reaches the Supreme Court
Because of the FTC’s expansive claims of monetary relief powers and because the courts were addressing related issues of the Securities and Exchange Commission’s powers to obtain monetary relief, the FTC’s authority is now in doubt. In two cases, both of which the FTC has styled essentially as fraud cases, the Ninth and Seventh Circuits have taken contradictory positions, with the latter denying that 13(b) authorizes monetary relief. Ironically, the FTC could have used our argument underlying the fraud program, namely that 13(b) was necessary to obtain money for a narrow class of cases for which the 1975 remedial provisions would not work, as we elaborate below. Instead, the Commission now defends the expansive position of the apparent universal availability of monetary relief under 13(b). We call this position “Always,” as shorthand for money is always available under 13(b). The defendants argued for an equally extreme position, which we label “Never,” that Section 13(b) does not permit monetary relief in any circumstances.
We argue for a middle ground to protect the FTC’s ability to fight fraud that would respect the statutory structure and Congressional limits enacted in 1975. Our position is best understood by examining the flaws in the arguments of the parties before the Court. Those arguments raise issues about both the inherent meaning of the word “injunction,” as well as how 13(b) fits within the statutory structure of the FTC.
Not surprisingly, the parties reach contradictory conclusions on the equitable powers implied by 13(b)’s use of “injunction.” The Nevers argue that the SEC statute recently before the Court in Liu provided a stronger basis for obtaining monetary relief than does the FTC Act, and thus contend that injunction means only that, unless Congress has explicitly authorized other remedies, as it sometimes has done for other agencies. The FTC disagrees, finding historical precedent in the power of courts of equity to order restitution or disgorgement.
The parties also disagree about the specific meaning of Liu, in which the Court held that “disgorgement” is an equitable remedy permitted by the Securities and Exchange Act. The Court made clear, however, that disgorgement must be limited to its traditional use in courts of equity. In so ruling, the Court cited favorably its 1946 holding in Porter v. Warner Holding Co., upon which much of the law underlying the fraud program has relied. Moreover, the Court appeared solicitous of protecting the SEC’s powers to proceed against fraudsters, which could well indicate a predisposition to reject the Never argument in the current case.
One issue on which the Never position is especially problematic is the claim that injunctions are forward looking and the award of money is necessarily backward looking. This stilted view ignores the nature of a government enforcement agency in general, and the fraud program in particular. The goal of the fraud program is to deter fraud, an inherently forward-looking task. As a consumer protection agency, returning money to consumers is an important means of doing so, but was hardly the sole goal. As with individuals and businesses, a government agency can pursue multiple goals at once. Of course, other parts of the FTC’s enforcement agenda could also have multiple goals, and thus could support expansive use of 13(b). Our middle ground argument for limiting 13(b) does not lie in the inherent meaning of “injunction” or discussions of the historical meaning of equity, but instead relies on the FTC’s statutory structure.
Our structural argument contends that the remedial aspects of the FTC must be considered as a whole, and, indeed, the crucial statutes at issue, 13(b), which passed in 1973, and Section 19, which passed two years later, began as parts of a single, comprehensive approach. If the FTC’s current argument is correct, Congress would hardly have continued the difficult, controversial struggle to enact Section 19 after two additional years of detailed work if it thought passage of 13(b) made the new statute unnecessary.
It is important to add that this is not an argument based on obscure passages of legislative history of the sort that textualist scholars and judges have come to view with well-deserved suspicion. Rather, it is a bedrock rule of interpretation that “laws dealing with the same subject . . . should if possible be interpreted harmoniously.” As we concluded previously, the circumstances underlying the adoption of these statutes provide the “inescapable inference” that 13(b) did not swallow the monetary relief provisions that followed two years later.
The Middle Ground Solution
Both the Always and Never positions are wrong. Among its other flaws, the Never argument would eliminate the fraud program. The Always advocates ignore the context in which the 1973 and 1975 amendments passed and read “proper case” out of Section 13(b) by asserting that all cases are proper, thus claiming statutory authority the FTC did not believe it had until decades after 13(b) passed. We discuss each position in turn.
The Never Position Ends the Fraud Program.
As a threshold matter, at least some versions of the Never position would not allow injunctions to be used for any purposes related to backward-looking relief. If so, then the asset freezes, upon which the fraud program relies, would be impossible.
Even if the Never advocates retreat from the implications of their logic, and assert that under the FTC’s statutory structure asset freezes would be permissible in service of Section 19, this position would almost certainly reverse the 40 years of success of the FTC’s fraud program. Here, we demonstrate that conclusion by explaining the complete impracticability of building a fraud program relying solely on the 1975 amendments. Because those amendments cannot reach fraud successfully, the FTC can use the equitable powers under 13(b) for that narrow class of cases. This conclusion is consistent not only with the statutory structure, but also with the Congressional determination, reflected in Section 19, that the touchstone for awarding monetary relief in individual cases was conduct that is “dishonest or fraudulent.”
As already explained, successfully attacking true consumer fraud requires obtaining an asset freeze pending a final judicial determination of the merits. Under the traditional fraud program, the FTC files a single federal action under Section 13(b), seeking an ex parte temporary restraining order (TRO) and an asset freeze under Rule 65(b), and the district court typically appoints a receiver to secure and monitor the fraudster’s frozen assets. The fraudster can then contest the asset freeze at a preliminary injunction hearing, and, if the FTC prevails, the court will continue to monitor the receivership while the parties litigate the merits of the FTC’s claim. Upon deciding the case on the merits, the district court will issue a permanent injunction and award consumer relief from the fraudster’s still-frozen funds. (In fraud cases, the FTC almost universally prevails with some variation in injunctive relief over the years.)
Under the Never procedure, the FTC’s only mechanism for pursuing consumer redress against fraudsters—a mechanism we term the “Triple Hybrid” —would require the agency to bring three distinct legal actions and to litigate in at least three (but sometimes four or five) separate fora. Given the necessity of first obtaining an order freezing the fraudster’s assets, the first three steps from the traditional 13(b) procedure would be the start of the Triple Hybrid. But because consumer redress would be unavailable, that is only where the Triple Hybrid would begin.
While the district court monitors the receivership, the FTC would have to issue an administrative complaint under Section 5 and litigate that complaint to judgment before an Administrative Law Judge (ALJ). The ALJ would then issue an initial decision, with an appeal to the Commission as a matter of course. The Commission would then review the ALJ’s findings and enter its own decision, which the respondent could appeal to a federal court of appeals and then the Supreme Court. Finally, after the Commission’s order becomes final, the FTC must file a new federal action, seeking consumer redress under Section 19. The FTC would likewise have to litigate this case to judgment, only then concluding a process that, given the length of FTC administrative proceedings, could easily take multiple years. For the sake of clarity, the following chart compares the steps in the Triple Hybrid to the traditional 13(b) procedure.