Third Circuit Casts Doubt on FTC Disgorgement Authority

As previously blogged about here, here, here and here, the FTC’s authority to seek monetary disgorgement in federal court may be on the ropes.

Breaking News for Digital Marketers

The Third Circuit has just issued an opinion in FTC v. AbbVie, Inc. holding that the FTC is not entitled to seek disgorgement under Section 13(b) of the FTC Act. In August 2019, the Seventh Circuit similarly decided an issue relating to the FTC’s power to seek and obtain monetary relief from defendants in federal court under Section 13(b) of the FTC Act.

What the Court Said

The District Court erred in ordering disgorgement. “The weight of authority . . . supports the conclusion that the grant of authority in section 13(b) to provide injunctive relief includes the full range of equitable remedies, including the power to order a defendant to disgorge illegally obtained funds.” “Reviewing the District Court’s interpretation de novo, we conclude it erred in ordering disgorgement because district courts lack the power to do so under Section 13(b).”

The court ruled that “the FTC has multiple instruments in its toolbox to combat unfair methods of competition” and unfair or deceptive acts or practices. First is the FTC’s “traditional enforcement tool,” Section 5 of the FTC Act. That section allows the FTC to initiate an administrative proceeding to obtain a cease-and-desist order against an unfair method of competition or an unfair or deceptive act or practice. The FTC can then sue in federal district court to get “limited monetary remedies” for violations of the order. A respondent who violates an order is liable for no more than $10,000 per violation.”

The court pointed out that the FTC can also seek “mandatory injunctions” and “such other and further equitable relief” as the court deems appropriate. Violators other than the respondent are also liable for up to $10,000 per violation, but only if they violate the order knowingly.”

Under Section 19 of the FTC Act, the FTC can promulgate rules which define with specificity acts or practices which are unfair or deceptive. Alternatively, the FTC can initiate an administrative proceeding to obtain a cease-and-desist order. In either case, it can sue violators in federal district court.

Importantly, the court stated “if the FTC promulgated a rule, the court can grant such relief as the court finds necessary to redress injury, including but not limited to the refund of money or return of property and the payment of damages. Otherwise, according to the Third Circuit, the FTC can obtain such relief only if it shows a reasonable man would have known under the circumstances his conduct was dishonest or fraudulent.

Also noteworthy is that the court cited Liu v. SEC. “Section 13(b) authorizes a court to ‘enjoin’ … antitrust. It says nothing about disgorgement, which is a form of restitution.” It also cited the Shire decision. “Section 13(b) says that, in order to sue, the FTC must have reason to believe [a violation] is imminent or ongoing. So if a violator’s conduct is neither imminent nor ongoing, there is nothing to enjoin, and the FTC cannot sue under Section 13(b).”

The Court reasoned the requirement makes little sense as applied to a disgorgement remedy. “Disgorgement deprives a wrongdoer of past gains, meaning that even if a wrongdoer’s conduct is not imminent or ongoing, he may have gains to disgorge. If Congress contemplated the FTC could sue for disgorgement under Section 13(b), it probably would not have required the FTC to show an imminent or ongoing violation. That requirement suggests Section 13(b) does not empower district courts to order disgorgement.”

Ultimately, the court concluded Section 13(b) does not implicitly empower district courts to order disgorgement. It opined that Section 13(b) limits the district court’s equitable jurisdiction and powers because it specifies the form of equitable relief a court may order. “The context of Section 13(b) and the FTC Act’s broader statutory scheme both support a necessary and inescapable inference that a district court’s jurisdiction in equity under Section 13(b) is limited to ordering injunctive relief.”

Next Up? The U.S. Supreme Court

The Supreme Court is set to decide this issue. The importance of these matters for digital marketers and those that they do business with cannot be overstated. Contact an experienced FTC defense lawyer to discuss how recent judicial developments potentially impact legal regulatory risk mitigation strategy, if you have received a CID or if you have been named in an FTC enforcement action.

Richard B. Newman is an FTC defense attorney focusing digital advertising and marketing matters at Hinch Newman LLP. Follow him on Twitter @ FTC defense lawyer.

Informational purposes only. Not legal advice. May be considered attorney advertising.