The Federal Trade Commission relies upon Section 13(b) of the FTC Act in order to establish federal court subject matter jurisdiction for violations of the FTC Act.
Section 13(b) provides, in pertinent part, that when the FTC has “reason to believe” that an individual or corporate entity “is violating, or is about to violate” a law that the FTC enforces, the agency may initiate formal legal proceedings in federal court in order to “enjoin such acts or practices.” The FTC takes the position that such claims are not subject to a statute of limitations.
So, how does the FTC have the power to recover monetary relief when, at the same time, it purports to seek equitable relief? Well, the FTC takes the position that Section 13(b) provides for equitable disgorgement.
FTC lawyers have attacked this classification for years. Until recently, arguments that the FTC is not authorized to utilize Section 13(b) of the FTC Act to obtain restitution have enjoyed little success.
Consider a 2017 ruling by the United States Supreme Court that resolved a split among various Circuit Courts of Appeals concerning whether the five-year statute of limitations of 28 U.S.C. § 2462 applies to SEC enforcement actions seeking disgorgement. In Kokesh v. SEC, 137 S.Ct. 1635 (2017), the Securities and Exchange Commission initiated an enforcement action, alleging that the petitioner violated various securities laws by concealing the misappropriation of millions of dollars from four business-development companies.
The SEC sought monetary civil penalties, disgorgement and an injunction barring the petitioner from future violations. The Supreme Court unanimously held that in SEC enforcement actions, disgorgement operates as a penalty and is therefore subject to the five-year limitations period.
Despite aggressive efforts by defense attorneys, federal courts were not swayed that the Kokesh decision demonstrates that, in the analogous context of an FTC enforcement action, the FTC is not authorized to obtain monetary relief under Section 13(b) of the FTC Act, or that because SEC disgorgement may “bear all the hallmarks of a penalty,” that restitution sought by the FTC is no different.
For years, FTC attorneys have sought to expand the remedies available under Section 13(b) of the FTC Act without Congressional approval. In doing so, the FTC has consistently relied upon the injunctive remedies available in § 13(b) as the basis for imposing various kinds of monetary “equitable relief,” including restitution, disgorgement, the appointment of receivers and asset freezes.
The FTC has accomplished this expansion of Section 13(b) by convincing courts that “equitable” monetary relief could include expanded forms of “restitution” and “disgorgement” against defendants accused of violating Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices.”
FTC attorneys have recently sought to persuade district courts that their power to award restitutionary remedies pursuant to Section 13(b) should be viewed through a different lens because the Supreme Court in Kokesh arguably rejects the government’s proposition that Section 13(b) can be used to award restitution, suggesting that disgorgement is not equitable or remedial, but rather punitive in nature.
This line of arguments have proven unsuccessful.
Despite what many believe to be clear and persuasive dicta in Kokesh that nullifies the very disgorgement and restitutionary remedies the FTC often seeks, theories on how to attack the FTC’s enforcement power have now been forced to expand – and with some success.
Defendants in FTC lawsuits have now started challenging the agency’s authority to seek injunctive relief based solely on prior conduct when there is no reasonable showing of current or imminent unlawful conduct. Simply stated and whether the FTC is willing to admit it or not, there now exists serious doubt with respect to whether the FTC is able to prosecute cases in federal court on the basis that it believes alleged unlawful conduct is “likely to reoccur.”
Historically, the FTC has concluded that that prior conduct is evidence that a defendant is “about to violate” the law. However, in FTC v Shire ViroPharma, the FTC made a strategic mistake of prosecuting a case that involved conduct that ceased years before its attempt to obtain injunctive relief.
The court was not persuaded that the “is about to violate” language is the same thing as saying that a prior violation of the law is “likely to recur” if “there exists some cognizable danger of recurrent violation.” The court did not buy the FTC’s argument that it plausibly suggested the defendants were “about to violate” the law. The FTC appealed the case, and lost on the grounds that it cannot overcome the language of Section 13(b), which requires the FTC to plead ongoing or imminent conduct.
In FTC v. Hornbeam Special Situations, LLC, a federal court in Georgia had some harsh words when it held the FTC was not entitled to equitable relief, including restitution and disgorgement. The court opined that the FTC’s unchecked reliance on a “likely to recur” standard was not statutorily authorized and expressed concern about the “loose interpretation” of the remedies available to the FTC under Section 13(b). “The FTC must demonstrate by more than conclusory allegations that it has a reason to believe that the laws entrusted to its enforcement are being or about to be violated.” The case is now stayed pending appeal to the Eleventh Circuit.
These rulings have presented interesting opportunities for defendants in FTC enforcement actions, as well as recipients of compulsory process from FTC CID attorneys.
For example, those that may wish to strategically position themselves to take advantage of these recent ruling may want to consider that courts may now be willing to limit the FTC’s ability to obtain monetary damages in federal court to situations involving prospective violations. The implementation of preventative measures designed to identify and remedy arguable unlawful conduct and/or processes should be done with a defensive mindset in order to vitiate potential “about to” violate the law arguments by the FTC.
 28 U.S.C. § 2462 provides for a five year statute of limitations for actions seeking a “civil fine, penalty, or forfeiture.”