Open Markets — The Supreme Court Gutted the FTC’s Power to Make Cheating Corporations Pay for Their Crimes

Daniel Hanley of Open Markets Institute writes about how a recent Supreme Court decision has starkly narrowed the FTC’s power to easily return stolen funds to consumers.

The Supreme Court on April 22 released a unanimous opinion that completely gutted an essential power of the Federal Trade Commission to return money stolen from consumers by fraudulent corporations. It is now up to Congress to fix the damage the Supreme Court has caused so the agency can continue to return billions of dollars back to vulnerable consumers.

The FTC is a crucial agency of the federal government. It has a broad mandate to protect the public from corporate practices. In fact, Congress created the agency to enact a fairer, more equitable marketplace. Section 5 of the FTC Act is where the agency draws its most essential enforcement powers. Section 5 prohibits both “unfair methods of competition” and “unfair or deceptive acts or practices.” With such broad language, Section 5 protects the public from practically every conceivable predatory or exclusionary corporate practice. At the time of the FTC’s creation in 1914, Representative Morgan stated that he hoped the agency would “minimize the power of the large industrial corporation to concentrate wealth . . . and secure the people from unjust tribute levied by monopolistic corporations.”

To effectively use its Section 5 powers, the FTC must be able to stop a corporation’s conduct and obtain financial redress from those harmed. Congress provided the agency with such capabilities. Specifically, when seeking monetary redress for consumers, the FTC has three avenues, known as Section 5(l), Section 19, and Section 13(b). Section 5(l) and Section 19 have significant drawbacks that make them effectively useless or at least overly cumbersome for the agency to use when trying to return illegally acquired funds to consumers. Section 5(l) requires the agency to go through a lengthy and laborious administrative process. In the meantime, a potential wrongdoer is free to continue acting; thus, by the time the agency has concluded its administrative proceeding, fraudulently obtained funds may not be available to return to consumers. Section 19, on the other hand, allows the FTC to obtain funds to return to consumers only after the violation of a previously issued order. Therefore, under these methods, any potential violator gets, as one author writes, “one free bite” to fraudulently obtain funds from consumers. Before the Supreme Court’s holding, Section 13(b) provides the FTC an avenue to immediately obtain relief in a federal court to stop fraudulent conduct, freeze assets, and, at the conclusion of a lawsuit, force the return of funds fraudulently or deceptively acquired from consumers. The FTC has used its Section 13(b) authority to return billions of dollars back to consumers deceptively taken from them — such work even became a centerpiece of the FTC’s consumer protection enforcement operations.

But now in AMG Capital Management, LLC v. FTC, Scott Tucker, a now-convicted loan scam artist, deceptively structured payday loans to charge interest rates upward of 1,000% to consumers, enriching himself with billions of dollars extracted from some of the most vulnerable populations. The terms of the payday loans were often buried across multiple documents with deceptive and abstruse wording. He even went as far as to hide his criminal activities by claiming his business was owned and operated by a Native American tribe.

The FTC sought to use its Section 13(b) powers to compel Tucker to return the money he took from vulnerable consumers through his scams. The agency’s ability to compel Scott and other wrongdoers to return illegally obtained funds from consumers is derived from the broad and historical meaning of the word injunction within Section 13(b).

As my employer, the Open Markets Institute, argued in a brief we submitted to the Supreme Court, for more than a century, an injunction has simply meant that a party was prohibited from engaging in a certain action or required to perform a specific action, which included the returning of money and other property to victims who a wrongdoer’s conduct has harmed. The Supreme Court even affirmed most of this understanding in 1946 and in 1960.

In the case, the Supreme Court justified its holding to revoke the FTC’s power based on its subjective belief that “it is highly unlikely that Congress” would have created such a power when other avenues (regardless of their ineffectiveness) are available. The court also said that “taken as a whole,” its holding creates a “coherent enforcement scheme.” This change in how the Supreme Court considers the FTC’s power of injunction is significant and has major repercussions. As a result, the FTC, a powerful agency of the federal government, is now unable to recoup money for vulnerable consumers that corporations deceptively stole from them unless it goes through a lengthy and cumbersome process that will likely not result in funds being returned to consumers.

Perhaps the worst aspect of this case is that since the court has narrowed its previous broad holdings of the meaning of an injunction, other agencies with enforcement powers similar to the FTC are now in jeopardy. In a case last year, the Supreme Court almost gutted a similar power from the Securities and Exchange Commission.

Because of the Supreme Court’s decision in this case, only Congress has the power now to reinstate the FTC’s power to easily return funds stolen from consumers. Fortunately, acting FTC Chair Rebecca Slaughter has already asked Congress to pass new legislation to give the FTC the power it needs to redress blatant consumer harms.

As lawmakers continue to realize the FTC’s broad enforcement powers and its ability to take down monopolistic and predatory corporations, Congress should immediately respond to this decision by passing a law to ensure the FTC can take action against corporate scams and remedy the damage the Supreme Court has done.

Daniel A. Hanley is a policy analyst at the Open Markets Institute. Follow him on Twitter at @danielahanley.

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