Bloomberg Law: Courts Should Curb the FTC’s Historic Disgorgement Tactics
When the government is caught stealing, it should be required to return what it took. For the Federal Trade Commission, though, such a simple notion is an affront to the way it has done business for decades. The courts must step in and force the agency to follow the law. For almost 50 years, the FTC obtained so-called disgorgement awards—the return payment of supposedly illegal gains—from individuals and businesses found to have violated federal laws against deceptive trade practices.
The problem was that Congress only gave the FTC the authority to seek injunctions and limited monetary fines. The FTC’s use of disgorgement became so pervasive that in 2019, for instance, courts ordered that $723.2 million be paid to the government in such awards. The US Supreme Court seemingly put that practice to an end in 2021, in AMG Capital Management, LLC v. FTC, when it unanimously held that the statute never allowed the “Commission to seek, and a court to award, equitable monetary relief such as restitution or disgorgement.” Disgorgement was just an illegal power grab.
But what about all those earlier cases where the agency illegally obtained disgorgement awards? Could the FTC keep the money, or, worse, insist that outstanding judgments still be paid? The obvious answer should be no. But that’s not how the FTC sees it. In 2019 the FTC filed a lawsuit against my clients, Elite IT Partners, Inc., and its founder, James Martinos. But it did so ex parte, meaning the suit was kept secret from even the defendants. With no notice or opportunity for them to challenge the agency, the FTC convinced a judge to let it seize the business entirely.
My clients first learned about the lawsuit when a court-appointed receiver arrived with a court order to take possession of the business. The FTC’s case was a shocking mismatch with such overwhelming tactics. The agency simply accused Martinos and his former company of improperly marketing his IT services. Martinos vigorously disputes that claim his company’s services were marketed improperly, and the FTC agrees that the services given to Elite IT’s customers were valuable. Moreover, the FTC has never accused Martinos of even being aware that any improper marketing had taken place.
The FTC merely claimed that, unknown to Martinos, certain employees used tough selling tactics. With punishing fines on the table and threat of essentially unlimited fines, the stakes became truly dire. Without any other reasonable choice, my clients entered into a settlement agreement with the FTC where neither admitted any wrongdoing. But that came with a hefty disgorgement award of more than $13 million, which shuttered the business permanently.
My clients paid all the judgment they could, but still owe part of the award to the FTC. But we know now the FTC never had the power to demand that judgment in the first place.
Like others in similar circumstances, Martinos and Elite IT asked the judge in their case to follow the Supreme Court’s instructions in AMG Capital and vacate the disgorgement award against them. At the very least, the FTC shouldn’t insist that the remaining judgment be paid. In a confounding ruling, the court concluded that, even though the FTC had no right to demand the judgment in the first place, there was no way out for my clients. This is part of a disturbing trend in other cases around the country.
The Supreme Court harshly rebuked the FTC for its decades-long abuse of authority. But as Martinos’ case illustrates, those abuses have lingering consequences. We have now asked the US Court of Appeals for the Tenth Circuit to issue a commonsense ruling that, if nothing else, agencies like the FTC can’t keep money that isn’t rightfully theirs. It’s time for the courts to make sure the FTC, whose mission is to fight unfairness in business, actually plays by the rules.
This op-ed was originally published at Bloomberg Law on June 7, 2023.
