Federal Trade Commission ignores Congress and the Supreme Court to extort unfair, unlawful settlements

In 1914, Congress passed the Federal Trade Commission Act and created the Federal Trade Commission (FTC) to “protect consumers and promote competition.” Congress has amended the law since then and, in 1973, added Section 13(b) to the FTC Act, authorizing the agency to seek permanent injunctions in federal courts to stop or prevent unfair and deceptive practices.

Under Section 13(b), the FTC routinely asked courts to issue injunctions against companies for alleged unfair or deceptive practices, to halt companies’ business operations, and to freeze the companies’ assets—all without notice to the subject companies—to ensure that the FTC could later collect monetary penalties. And, as a former FTC general counsel boasted, the courts did “not hesitate[] to grant” the FTC’s requests.

Because the FTC and the courts may act without providing notice to the subject companies, most of these companies have no idea what’s happening until there’s a knock at the door and a court order to take over the business.

Another problem lurked: Section 13(b) allows only “injunctive” relief—that is, an order from a court compelling a company to do, or refrain from doing, something. But the FTC long used Section 13(b) to obtain huge monetary awards—called “disgorgement”—as punishment for money allegedly gained illegally.

These disgorgement awards would include accused businesses’ gross annual revenues over the life of the companies, not just for the time periods during which the allegedly unlawful conduct occurred. In these situations, customers obtained windfall awards—far more than necessary to compensate them for their (alleged) losses. And, if the FTC found it too difficult to find (allegedly) swindled consumers, the agency either transferred the rest to the U.S. Treasury or distributed it elsewhere.

Faced with the FTC’s virtually unlimited resources and the freezing of their assets, many companies had no choice but to settle under the best terms they could get, which often involved ruinous fines. Disgorgement became the agency’s most significant enforcement tool. Courts ordered $723 million in such awards in 2019, far above and beyond the limited fines permitted elsewhere in the law.

Finally, in 2021, in a case called AMG Capital Management v. FTC, the Supreme Court ruled—unanimously—that Section 13(b) never authorized such extortion. Section 13(b) allows the FTC to seek, and courts to award, only injunctive relief—not monetary awards.

The agency didn’t care. Stung at just the thought of restraint, the FTC publicly complained the Justices were wrong, vowed to get around the ruling, and invoked a different part of the FTC Act, Section 19, to exercise the very same power the Supreme Court said the agency could not seek.

The FTC is wrong again. Section 19 allows the FTC to obtain relief that is “necessary to redress injury to consumers,” but it expressly precludes “the imposition of any exemplary or punitive damages.” The FTC admitted as much when it defended its previous interpretation of Section 13(b). But when the Supreme Court issued its AMG Capital opinion, the FTC chucked its previous understanding of Section 19 and invoked it to demand punitive awards far more than “necessary” to remedy consumer injuries.

Unfortunately, the Supreme Court has not yet addressed the FTC’s sleight-of-hand. As a result, the FTC continues to extract punitive monetary judgments.

PLF represented a company whose owner witnessed the FTC’s deceptive behavior first-hand. In FTC v. Elite IT, PLF attempted to reopen a settlement judgment reluctantly agreed to by Elite IT and Jim Martinos. Jim and Elite IT Partners provided contract IT services for residential customers, mid-sized companies, and municipalities—primarily city governments and local police departments. The FTC decided the firm was involved in illegal marketing and, unbeknownst to Jim, got an injunction from a federal judge, seized the company, halted its operations, and froze all of its assets. Jim had no idea the federal government targeted his business until the receiver showed up at his office with sheriff’s deputies.

Jim flatly denies the FTC’s allegations, but because the court froze his and his company’s assets, he had no way to pay legal costs to defend himself or his company. Faced with enormous fines and potential criminal charges, Jim was essentially forced into a settlement in which he denied wrongdoing but agreed to pay more than $13 million in restitution and disgorgement. Jim liquidated the business’ assets and his personal retirement accounts, but the judgment remains unsatisfied. Thus, he still has the FTC’s hammer hanging over him.

With PLF’s help, Jim sought to unwind the FTC’s illegal settlement, so that he can finally defend himself from the agency’s unfounded accusations. In response to PLF’s arguments—that the FTC’s $13 million penalty was precluded under the Supreme Court’s decision in AMG Capital—the FTC claimed that the penalty was awarded under both Section 13(b) and Section 19. The FTC’s argument was not only false (the penalty was imposed pursuant to Section 13(b) only); it was irrelevant because Section 19 precludes punitive awards. But in January of 2023, a district court found in favor of the FTC in Elite IT’s case. And in January of 2024, the Tenth Circuit affirmed the district court’s ruling and subsequently denied a request for en banc rehearing. In May 2024, Jim appealed the case to the Supreme Court. Unfortunately, the Court declined to hear the case.

The Court’s decision left Jim and other business owners like him stuck with the settlements they agreed to when the FTC was pursuing them for fines it never had the power to impose. Jim has lost his business, its assets, and his retirement savings, and he still owes money to the FTC on top of all that. Thankfully, the FTC is barred from using disgorgement awards in the future to go after people like Jim. But that is cold comfort to those who settled with the FTC before the Supreme Court reined it in.