Section 13(b) requests for asset freezes, receiverships, and disgorgement may no longer be a slam dunk for the FTC.

The Seventh Circuit has ruled that the Federal Trade Commission lacks authority to seek monetary relief from defendants in federal court. In doing so, it broke ranks with numerous circuits and long standing precedent.

The appeal stems from a FTC lawyer lawsuit against Michael Brown and his company, Credit Bureau Center, for offering consumer’s “free” credit reports via online websites, then allegedly automatically enrolling customers in a $29.94 monthly membership to a credit-monitoring service without notice.

A lower court judge entered a permanent injunction against Brown, and ordered him to pay $5 million in restitution to the FTC.

Brown appealed. In doing so, he challenged the FTC’s power to seek “equitable monetary relief.”

Court Ignores Past FTC Enforcement Precedent

“[T]he Supreme Court has clarified that courts must consider whether an implied equitable remedy is compatible with a statute’s express remedial scheme,” Seventh Circuit Judge Diane Sykes wrote for the three-judge panel. “And it has specifically instructed us not to assume that a statute with ‘elaborate enforcement provisions’ implicitly authorizes other remedies.”

Section 13(b) of the Federal Trade Commission Act authorizes FTC lawyers to seek restraining orders and injunctions, but not specifically restitution. The FTC has sought restitutionary remedies under Section 13(b) for years under the theory of “ancillary equitable relief.”

The blistering opinion states that past precedent “requires us to ignore section 13(b)’s text and disregard the FTCA’s ‘elaborate enforcement provisions.” Essentially, the court held that past precedent is “no longer viable.”

Make no mistake, the ruling here conflicts with the consensus of other circuits. However, the court felt compelled to take the rare step of overturning precedent.

In dissent, Chief Judge Diane Wood and Judges David Hamilton and Illana Rovner wrote, “[t]o my knowledge, no court has ever tied the hands of a government agency in the way that the majority has done here, and the majority cites none.”

This decision is a victory for marketers that often find themselves the sudden victims of asset freezes and receiverships, forced to turnover assets in settlement, and left with no ability to pay for necessary living expenses or legal counsel.

The circuit split makes it likely that the FTC will seek Congressional assistance and/or seek certiorari from the Supreme Court.

Promoters of Alleged Chain Referral Cryptocurrency Schemes Settle with FTC

The promoters of recruitment-based cryptocurrency schemes are permanently banned from operating or participating in any multi-level marketing program, as part of a recent settlement with the Federal Trade Commission.

In 2018, the FTC obtained a court order against four individuals, halting their alleged deceptive marketing practices and froze their assets. In doing so, the FTC alleged that three of them falsely promised participants could earn large returns by paying cryptocurrency such as bitcoin or Litecoin to enroll in schemes marketed under various corporate names.

According to FTC lawyers, the corporations were chain referral schemes – a type of pyramid scheme. The FTC alleges that these schemes depend on continual recruitment of new participants to generate revenue.

The fourth defendant allegedly promoted one of the above referenced companies, in addition to a third which allegedly promised participants a fixed rate of return, but failed to deliver on these claims.

According to an FTC lawyer, the defendants promoted the cryptocurrency programs through websites, YouTube videos, social media, and conference calls, claiming, for example, that one entity could turn a payment of the equivalent of just over $100 into $80,000 in monthly income. The FTC alleges, however, that the structure of the schemes ensured that few would benefit. In fact, most participants failed to recoup their initial investments, according to agency.

As part of their proposed settlements with FTC attorneys, one individual will pay $453,932 and another will pay $31,000. Another individual agreed to a $461,035 judgment, which will be suspended upon payment of $29,491, due to his inability to pay the full amount. If he is later found to have misrepresented his finances, he will be required to pay the full amount under an “avalanche” provision in the settlement agreement.

The defendants are permanently prohibited from operating, participating in, or assisting others in promoting or operating any multi-level marketing program, pyramid, Ponzi, or chain referral scheme. They also are prohibited from misrepresenting as part of a business venture or investment opportunity the amount of income that participants will receive or other aspects of the business venture or investment opportunity.

Richard B. Newman represents digital marketers in advertising lawsuits and CID investigations initiated by the Federal Trade Commission. Follow him on Facebook @ FTC Defense Attorneys.

Informational purposes only. Not legal advice.