In FTC v. Credit Bureau Center, LLC, the Seventh Circuit recently held that Section 19 of the Federal Trade Commission Act does not allow the FTC to deposit excess funds awarded as restitution under Section 19 in the U.S. Treasury as disgorgement.

In the underlying action, the FTC alleged Credit Bureau Center, LLC (“CBC”) used “negative option features” on its websites which offered visitors a free credit report but automatically enrolled them in a $29.94 monthly membership subscription. CBC’s contractors allegedly drove visitors to its websites by posting fake advertisements for rental properties and directing applicants to CBC’s websites for a free credit score.

The FTC sued CBC, alleging violations of several consumer protection statutes, with the litigation centered on Section 13(b) of the FTC Act, which authorizes the FTC to seek restraining orders, permanent injunctions, or enjoin unfair or deceptive trade practices. In addition to injunctive relief, the FTC had long interpreted Section 13(b) to permit restitution awards. The district court entered a permanent injunction against CBC and ordered it to pay more than $5 million in restitution. On appeal, the Seventh Circuit rejected the FTC’s interpretation and created a circuit split by holding that Section 13(b) does not authorize restitution.

To resolve the circuit split, the U.S. Supreme Court granted certiorari in CBC and in FTC v. AMG Capital Management, LLC, a case from the Ninth Circuit that agreed with the FTC’s interpretation. After the Supreme Court ruled that Section 13(b) does not authorize equitable relief such as restitution and disgorgement, the Seventh Circuit remanded CBC to the district court.

On remand, the FTC moved to amend the judgment, arguing that the district judge should reimpose the restitution award under the Restore Online Shoppers’ Confidence Act (“ROSCA”) and Section 19 of the FTC Act. ROSCA treats a violation of the statute as a violation of a rule under the FTC Act and allows the FTC to seek relief under Section 19. Section 19 allows the court “to grant such relief as the court finds necessary to redress injury to consumers,” including “the refund of money” and “the payment of damages.” The district judge granted the FTC’s motion and reinstated the $5 million restitution award under ROSCA and Section 19.

CBC’s owner then appealed to the Seventh Circuit. The Seventh Circuit rejected the owner’s arguments that the FTC had waived reliance on Section 19 and, even if it had not waived reliance, the FTC could not now shift course after having chosen to rely on Section 13(b) over ROSCA and Section 19 in the first litigation. The Seventh Circuit observed that because the FTC was relying on its established interpretation of Section 13(b) which was “long endorsed” by the appellate courts, it would have been “unnecessary and redundant” for the FTC to pursue the same monetary relief under ROSCA and Section 19. The Seventh Circuit stated:

That route became relevant only after our decision in the first appeal and the Supreme Court’s decision in AMG Capital. The ROSCA violation was established in the first judgment, and we affirmed that liability finding in the first appeal. The Commission moved to amend the judgment—to reflect a permissible alternative basis for the monetary award—on the same day the case returned to the district court. That is not waiver.

The Seventh Circuit also rejected the owner’s challenge to the amount of the restitution award. The district court reinstated the original award of $5,260,671.36, which equaled the revenue the owner obtained through traffic directed to CBC’s websites minus refunds already paid, chargebacks customers obtained, and a settlement paid by the contractors who drove traffic to CBC’s websites. In Liu, the U.S. Supreme Court considered the scope of equitable relief available in an SEC enforcement action and concluded that a disgorgement award could not exceed a firm’s “net profits from wrongdoing.” Relying on Liu, CBC’s owner argued that a monetary award under ROSCA and Section 19 must be limited to net profits that can be traced to the underlying fraud.

Observing that Section 19 permits all forms of redress to make consumers whole, including “the refund of money,” the Seventh Circuit found that the monetary award appropriately refunded to customers the amount that had not yet been returned by CBC’s owners or the contractors. According to the Seventh Circuit, “[b]ecause the monetary award consists of direct consumer redress in the form of refunds—a form of relief expressly permitted by the statute—it need not be measured by net profits and tracing is not required.”

Ultimately, the Seventh Circuit held that the only error in the new judgment was that it provided that any remaining funds after providing consumer redress and paying administrative expenses would be “deposited to the U.S. Treasury as disgorgement.” The Seventh Circuit ruled that because Section 19 is limited to “such relief as the court finds necessary to redress injury to consumers,” disgorgement to the U.S. Treasury exceeded the remedial scope of Section 19.