Supreme Court limits 13(b) authority under Federal Trade Commission Act

An agency charged with protecting consumers from fraudulent advertising practices has obtained billions of dollars in refunds through a provision of law known as Section 13(b) of the Federal Trade Commission Act.

Thanks to a unanimous ruling published April 22 by the U.S. Supreme Court, the Federal Trade Commission can no longer rely on section 13(b) to obtain monetary relief.

“With this ruling, the Court has deprived the FTC of the strongest tool we had to help consumers when they need it most,” FTC Acting Chairwoman Rebecca Kelly Slaughter proclaimed in a statement.

The Supreme Court’s 9-0 decision in AMG Capital Management LLC et al. v. Federal Trade Commission may have enormous implications for marketers of dietary supplements and other businesses regulated by FTC.

“The FTC over the past few decades has relied heavily on Section 13(b) to leverage high-dollar settlements or immediately bring companies in the dietary supplement space to federal court, and to seek monetary remedies,” John Villafranco, a Washington, D.C.-based lawyer with Kelley, Drye & Warren LLP, explained in an email. “That hammer in the FTC's toolkit is now gone, at least for the time being.”

FTC still can obtain monetary relief under other sections of the FTC Act by first going through an administrative process, which begins with the filing of a complaint and an adjudication before an administrative law judge, said several attorneys—many of whom practice before the commission. But as a matter of general practice, the agency has shown its preference to bring consumer protection actions in federal court.

“It is the exception to the rule in recent history that the FTC would take a dietary supplement company into administrative court as opposed to federal court,” said Katie Bond, a Washington, D.C.-based attorney with Lathrop GPM.

Bond recalled instances in which she has appeared before the commission and sought to reach an agreement through an administrative order rather than a federal court order.

FTC officials have advised Bond they cannot enter monetary settlements in an administrative proceeding, “and I’ve never gotten a good explanation to why that is,” Bond commented in an interview. “But as the Supreme Court pointed out, they seem to have authority to do that, and frankly, they’ve done it.”

For instance, NBTY Inc. and two subsidiaries reached an administrative settlement in 2010 with the commission, which included an agreement to pay $2.1 million and stop making certain claims related to children’s multivitamins.

The commission, in its quest to obtain monetary relief, may face burdens and limitations under sections 5 and 19 of the FTC Act—compared to Section 13(b).

“Congress in §5(l) and §19 gave district courts the authority to impose limited monetary penalties and to award monetary relief in cases where the Commission has issued cease and desist orders, i.e., where the Commission has engaged in administrative proceedings,” Associate Justice Stephen Breyer wrote on behalf of the nation’s highest court in AMG Capital Management. The case was focused on a payday lender who allegedly bilked consumers out of more than $1.3 billion.

Without the ability to seek monetary relief through Section 13(b), the commission has been “declawed quite a bit,” said Jennifer Adams, a Chicago-based attorney with Amin Talati Wasserman LLP, who defends companies in challenges by the commission.

She suggested firms investigated by FTC may now have a greater bargaining chip with the agency and less of an incentive to reach a pre-lawsuit settlement involving monetary relief.

“People might not be as willing to open the purse strings as they’re going through an FTC investigation to reach a settlement,” Adams said in an interview.

Congress’ enactment of Section 13(b) in 1973 gave the commission authority to proceed directly to court to obtain temporary and permanent injunctions. Over the years, FTC has used the provision successfully to seek and obtain monetary relief as well.

“For years, the FTC has maintained that Section 13(b) provides the agency the authority to collect monetary relief in a wide array of consumer protection and antitrust actions, including enforcement actions against dietary supplement companies for alleged marketing and advertising violations of the FTC Act,” Megan Olsen, vice president and associate general counsel of the Council for Responsible Nutrition (CRN), noted in an emailed statement. “The FTC has other paths to collect monetary relief through other sections of the FTC Act, but these will require more agency resources and have been disfavored by the agency in choosing how to enforce consumer protection laws.”

The commission has obtained $11.2 billion in refunds over the last five years through Section 13(b) cases, according to Slaughter. That is until now.

“Several considerations, taken together, convince us that §13(b)’s ‘permanent injunction’ language does not authorize the Commission directly to obtain court-ordered monetary relief,” Breyer wrote. “For one thing, the language refers only to injunctions. It says, ‘in proper cases, the Commission may seek, and after proper proof, the court may issue, a permanent injunction.’ An ‘injunction’ is not the same as an award of equitable monetary relief.”

In the wake of the Supreme Court’s decision—unless the law is amended—the commission will have to change its recent enforcement practices, said Villafranco, whose practice focuses on advertising law matters and consumer protection.

“This has implications not only for future cases, but for the approximately 70 to 80 cases that are currently pending in federal court under Section 13(b),” the lawyer shared. 

Kevin Thompson, an attorney in Tennessee who represents multilevel marketers of nutritional supplements and other products, described the Supreme Court’s recent decision as a “humiliating blow to the FTC” in a blog post. “The Court made it clear that the FTC has other ways, ways that provide more due process for defendants, to extract monetary penalties from companies. The liberal justices, who could have thrown the FTC a bone, basically said ‘Yea, you all took it too far.’”

FTC’s commissioners are expected to advocate aggressively for a change in the law. “We urge Congress to act swiftly to restore and strengthen the powers of the agency so we can make wronged consumers whole,” Slaughter said in her statement.

Some FTC commissioners have connections with powerful members of Congress. Prior to joining the commission, Slaughter served as chief counsel to Sen. Chuck Schumer, a New York Democrat who is the current majority leader of the Senate. FTC Commissioner Noah Joshua Phillips also spent time on Capitol Hill. He worked as chief counsel to U.S. Sen. John Cornyn of Texas, a Republican, on the Senate Judiciary Committee.

Just two days before the Supreme Court published its decision, FTC’s commissioners testified before the U.S. Senate Committee on Commerce, Science and Transportation and submitted testimony on the need for Section 13(b) legislation.

That was the same day Rep. Tony Cárdenas (D-Calif.) introduced the Consumer Protection and Recovery Act, or H.R. 2668. He chairs the Consumer Protection and Commerce Subcommittee within the broader Committee on Energy and Commerce.

According to a news release from Cárdenas’ office, his legislation “will cement the Federal Trade Commission’s ability to retrieve money for victims of fraud and scams.” Cárdenas subcommittee has teed up an April 27 hearing to discuss H.R. 2668, which incorporates provisions that give the commission the right to seek refunds of money, return of property and disgorgement of unjust enrichment.

The Supreme Court, Villafranco concluded, made clear in its decision that “Section 13(b) was not intended to be used in the manner the FTC has employed it.

“Let’s hope that any congressional retooling of the statute provides the FTC with what it needs to combat dishonest or fraudulent conduct, while allowing the administrative process to decide issues of claim substantiation, as originally intended by Congress,” Villafranco said.