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District Court denies request to set aside $120.2 million judgment in Belizean real estate scheme
On August 24, the U.S. District Court for the District of Maryland denied a request to set aside a more than $120.2 million judgment against several defaulted defendants involved in an international real estate investment development scheme. As previously covered by InfoBytes, the FTC initiated the action in 2018 against several individuals and corporate entities, along with a Belizean bank, asserting that the defendants violated the FTC Act and the Telemarketing Sales Rule by advertising and selling parcels of land that were part of a luxury development in Belize through the use of deceptive tactics and claims. In 2019, a settlement was reached with the Belizean bank requiring payment of $23 million in equitable relief, and in 2020, the district court ordered the defaulted defendants to pay over $120.2 million in redress and granted the FTC’s request for permanent injunctions (covered by InfoBytes here and here).
In their motion, the defaulted defendants argued that the U.S. Supreme Court’s decision in AMG Capital Management, LLC v. FTC (which unanimously held that Section 13(b) of the FTC Act “does not authorize the Commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement”—covered by InfoBytes here) nullified the judgment. The district court disagreed, stating that the AMG Capital decision does not render his judgments in the case void and that “[i]n its Opinion rendered before the Supreme Court reached its decision, the Court considered the effect that a decision in AMG Capital adverse to the FTC might have, reasoning that: ‘this Court’s findings of fact and determinations as to liability—including contempt of court and violations of the Telemarketing Services Rule []—would not be affected by a decision in AMG.’” Moreover, the court pointed out that immediate denial of the motion is also warranted because the defaulted defendants failed to comply with a local rule requiring submission of a memorandum of law in support of their motion. The court asked, “In failing to do so, they have skirted among other fundamental questions: What authority do they, as defaulted defendants, involved as part of a common enterprise with virtually all other [d]efendants, have to upset a final and valid judgment against them after willfully defaulting?”
3rd Circuit: Section 13(b) of the FTC Act does not give the agency restitution power
On September 30, the U.S. Court of Appeals for the Third Circuit reversed a district court’s order of $448 million in disgorgement, concluding that disgorgement is not a remedy available under Section 13(b) of the FTC Act. According to the opinion, the FTC brought an action against the owners of a testosterone treatment patent (defendants) for allegedly “trying to monopolize and restrain trade over [the treatment],” in violation of Section 13(b) of the FTC Act. The district court dismissed the FTC’s claims related to the reverse-payment agreement the defendants entered into with another pharmaceutical company but held the defendants liable for the FTC’s sham-litigation allegations and ordered the defendants to pay $448 in disgorgement of ill-gotten gains. The district court denied the FTC’s request for an injunction.
On appeal, the 3rd Circuit concluded, among other holdings, that the court erred by ordering disgorgement, as it lacked the authority to do so under Section 13(b) of the FTC Act. Specifically, the appellate court noted that Section 13(b) “authorizes a court to ‘enjoin’ antitrust violations,” but is silent on disgorgement. The appellate court rejected the FTC’s contention that Section 13(b) “impliedly empowers district courts” to order disgorgement as well as injunctive relief, concluding that “the context of Section 13(b) and the FTC Act’s broader statutory scheme both support ‘a necessary and inescapable inference’ that a district court’s jurisdiction in equity under Section 13(b) is limited to ordering injunctive relief.” Thus the appellate court reversed the order of $448 million in disgorgement.
In reaching this conclusion, the appellate court noted its determination was consistent with the 7th Circuit’s decision FTC v. Credit Bureau Center (covered by InfoBytes here), which also held that the FTC does not have the power to order restitution under Section 13(b). As previously covered by InfoBytes, the U.S. Supreme Court granted consolidated review in Credit Bureau Center and in the 9th Circuit’s decision in FTC v. AMG Capital Management (covered by InfoBytes here). The Court will decide whether the FTC can demand equitable monetary relief in civil enforcement actions under Section 13(b) of the FTC Act.
Court backs FTC’s $120 million settlement in Belizean real estate scheme
On August 28, the U.S. District Court for the District of Maryland granted the FTC’s request for four individuals and the remaining corporate defendants who have not yet settled (collectively, “defendants”) to pay over $120 million in redress to resolve allegations the defendants operated an international real estate investment development scheme. As previously covered by InfoBytes, in November 2018, the FTC initiated the action against the individuals, several corporate entities, and a Belizean bank, asserting that the defendants violated the FTC Act and the Telemarketing Sales Rule (TSR) by advertising and selling parcels of land that were part of a luxury development in Belize through the use of deceptive tactics and claims. The FTC contends that consumers who purchased lots in the development purchased the lots outright or made large down payments and sizeable monthly payments, and paid monthly homeowners association fees, and that defendants used the money received from these payments to fund their “high-end lifestyles,” rather than to invest in the development. In September 2019, the FTC settled with the Belizean bank, requiring the bank to pay $23 million in equitable relief, including consumer redress (covered by InfoBytes here).
Following a trial, the district court has now agreed with the FTC, concluding that the remaining defendants violated the FTC Act and the TSR. The court found the defendants jointly and severally liable for over $120 million in restitution and granted the FTC’s request for permanent injunctions—banning the defendants from any telemarketing activity and banning one defendant, described as “nothing less than the mastermind” of the operations, from “engaging in any kind of real estate activity” in the future.
Supreme Court to review FHFA structure, FTC restitution, and TCPA autodialing
On July 9, the U.S. Supreme Court agreed to review the following cases:
- FHFA Constitutionality. The Court agreed to review the U.S. Court of Appeals for the Fifth Circuit’s en banc decision in Collins. v. Mnuchin (covered by InfoBytes here), which concluded that the FHFA’s structure—which provides the director with “for cause” removal protection—violates the Constitution’s separation of powers requirements. As previously covered by a Buckley Special Alert last month, the Court held that a similar clause in the Dodd-Frank Act that requires cause to remove the director of the CFPB violates the constitutional separation of powers. The Court further held that the removal provision could—and should—be severed from the statute establishing the CFPB, rather than invalidating the entire statute.
- FTC Restitution Authority. The Court granted review in two cases: (i) the 9th Circuit’s decision in FTC V. AMG Capital Management (covered by InfoBytes here), which upheld a $1.3 billion judgment against the petitioners for allegedly operating a deceptive payday lending scheme and concluded that a district court may grant any ancillary relief under the FTC Act, including restitution; and (ii) the 7th Circuit’s FTC v. Credit Bureau Center (covered by InfoBytes here), which held that Section 13(b) of the FTC Act does not give the FTC power to order restitution. The Court consolidated the two cases and will decide whether the FTC can demand equitable monetary relief in civil enforcement actions under Section 13(b) of the FTC Act.
- TCPA Autodialer Definition. The Court agreed to review the U.S. Court of Appeals for the Ninth Circuit’s decision in Duguid v. Facebook, Inc. (covered by InfoBytes here), which concluded the plaintiff plausibly alleged the social media company’s text message system fell within the definition of autodialer under the TCPA. The 9th Circuit applied the definition from their 2018 decision in Marks v. Crunch San Diego, LLC (covered by InfoBytes here), which broadened the definition of an autodialer to cover all devices with the capacity to automatically dial numbers that are stored in a list. The 2nd Circuit has since agreed with the 9th Circuit’s holding in Marks. However, these two opinions conflict with holdings by the 3rd, 7th, and 11th Circuits, which have held that autodialers require the use of randomly or sequentially generated phone numbers, consistent with the D.C. Circuit’s holding that struck down the FCC’s definition of an autodialer in ACA International v. FCC (covered by a Buckley Special Alert).
Maryland Court of Appeals reverses trial court approval of settlement for interfering with CPD action
On March 3, the Maryland Court of Appeals reversed a trial court’s approval of a proposed settlement in a class action based on fraudulently induced assignments of annuity payments. The class members were recipients of structured settlement annuities from lead paint exposure claims who responded to ads by a structured settlement factoring company (company). The class members then transferred the rights to their settlement annuity contracts to the company, which paid the class members lump sums for the rights at a discount. The class filed a lawsuit against the company in 2016, alleging that it had engaged in fraud in procuring the annuity contract transfers. Around the same time, the Consumer Protection Division of the Maryland AG’s Office (CPD) had filed suit against the company alleging violations of the State Consumer Protection Act. Several months after both actions were filed, the CFPB filed a similar suit against the company based on the same alleged misconduct. All three actions sought similar kids of relief with respect to the same individuals, though the bases for seeking relief and the nature and amount of relief sought differed among the actions.
The class and the company proceeded towards a negotiated settlement, to which the trial court signed a proposed final order, certifying the class and approving the settlement, despite CPD’s opposition to both issues. Following the court’s approval, the company moved for summary judgment in its case against the CPD, which the court granted because it held CPD’s claim for restitution for the same individuals was barred by res judicata; CPD’s claim for injunctive relief and civil penalties is still currently awaiting trial.
Following an appeal, the Court of Appeals granted the company’s petition to consider whether “class members [may] lawfully release and assign to others their right to receive money or property sought for their benefit by [CPD] or [CFPB] through those agencies’ separate enforcement actions” under state and federal consumer protection laws, respectively.
The Court of Appeals held that the lower court erred in approving the settlement, stating that consumers “have no authority, through a private settlement, whether or not approved by a court, to preclude CPD from pursuing its own remedies against those who violate . . . [Maryland’s] Consumer Protection Act, including a general request for disgorgement/restitution.” In particular, the Court of Appeals held that the parties cannot preclude CPD from pursuing the remedies of disgorgement and restitution, as that would directly contravene CPD’s statutory authority to sanction the company for wrongful conduct. For this reason, the Court of Appeals concluded that the trial court’s approval of the settlement must be reversed and remanded the case for further proceedings.
States urge Supreme Court to review FTC’s restitution authority
On January 30, a coalition of attorneys general from 22 states, the District of Columbia, and the Commonwealth of Puerto Rico filed an amicus brief in support of the FTC in a U.S. Supreme Court action that is currently awaiting the Court’s decision to grant certiorari. Last December, the FTC filed a petition for a writ of certiorari asking the Court to reverse an opinion issued by the U.S. Court of Appeals for the Seventh Circuit last August, which held that Section 13(b) of the FTC Act does not give the FTC power to order restitution when enforcing consumer protections under the FTC Act. (Covered by InfoBytes here.) The AGs assert, however, that restitution is a critical FTC enforcement tool that provides direct benefits to the amici states and their residents. Arguing that the 7th Circuit’s decision will impede federal-state collaborations to combat unfair and deceptive practices—citing recent FTC restitution amounts that directly benefited consumers in Illinois, Indiana, and Wisconsin—the AGs stress that without the authority to seek restitution, the states “may be forced to redirect resources to compensate for work that would have previously been performed by the FTC.” The AGs also discuss the states’ interest in the “uniform application of federal law.” The 7th Circuit’s decision “upends decades of settled practice and precedent,” the AGs contend, and may provide the opportunity for defendants to “forum shop” as they seek to transfer their cases to take advantage of a decision that may work in their favor. As a result, the decision has created confusion where none previously existed, the AGs claim.
As previously covered by InfoBytes, the FTC filed a brief in a separate action also pending the Court’s decision to grant certiorari that similarly addresses the question of whether the FTC is empowered by Section 13(b) to demand equitable monetary relief in civil enforcement actions. In this case, the petitioners are appealing a 9th Circuit decision, which upheld a $1.3 billion judgment against them for allegedly operating a deceptive payday lending scheme. The 9th Circuit rejected the petitioners’ argument that the FTC Act only allows the court to issue injunctions, concluding that a district court may grant any ancillary relief under the FTC Act, including restitution.
Illinois AG sues credit repair companies for deceptive practices
On January 13, the Illinois attorney general announced that he filed two separate suits in the Circuit Court of Cook County against two credit repair companies and three individuals who allegedly engaged in deceptive and fraudulent practices when promoting credit repair services to consumers and collecting debts in violation of the Consumer Fraud and Deceptive Business Practices Act, the Credit Services Organization Act, and the Collection Agency Act.
In the first complaint, the AG alleges a credit repair agency is not registered in Illinois as a credit services organization, and that it, along with its owner, a co-defendant, has not filed the statutorily required $100,000 surety bond with the Secretary of State’s office. The AG’s complaint alleges that the company charges unlawful upfront fees while making false promises that it will increase consumers’ credit scores. When the defendants fail to live up to these promises, they subsequently refuse to refund the money that consumers paid for the credit repair services they did not receive.
In the second complaint, the AG makes the same allegations against a different credit repair company, its owner, and a former employee. In addition, the second complaint also alleges that the company operates as a debt collection agency, but does not possess the requisite state license as a collection agency. Further, the complaint claims that, among other things, the defendants extract payments for “completely fabricated” payday loan debt from consumers who do not actually owe on the loans by using threats and other abusive and harassing collection tactics.
The AG seeks a number of remedies including injunctive relief prohibiting all defendants from engaging in any credit repair business, and prohibiting the second company and its owner and employee from engaging in any debt collection business; rescission of consumer contracts; and restitution to all affected consumers.
Senate Democrats ask IG to investigate CFPB restitution penalties
On January 13, fifteen Democratic Senators, led by Senators Catherine Cortez Masto (D-NV) and Sherrod Brown (D-OH) sent a letter to the Inspector General of the Federal Reserve Board calling for an investigation into the CFPB’s restitution penalties levied against companies accused of wrongdoing. The Senators claim that the Bureau’s restitution approach “creates a perverse incentive for companies to violate the law by allowing them to retain all or nearly all of the funds they illegally obtain from consumers.” The letter asks the Inspector General to investigate four recent settlements to examine how the Bureau determines restitution awards and whether the applied standard for restitution differs from the standard applied by courts and in prior CFPB settlements.
Included among the examples of actions for which consumers were provided limited to zero restitution is a recent settlement with a debt collector accused of engaging in improper debt collection tactics. As previously covered by InfoBytes, the company agreed to pay $36,878 in redress to harmed consumers, limiting the restitution to “only those consumers who affirmatively ‘complained about a false threat or misrepresentation’” by the company, the Senators wrote. Specifically, the Senators seek to determine the number of consumers who may have been excluded from the settlement because they did not affirmatively complain about the company’s behavior. A second example highlights an action taken against a group of payday lenders that allegedly, among other things, misrepresented to consumers an obligation to repay loan amounts that were voided because the loan violated state licensing or usury laws. (Previously covered by InfoBytes here.) According to the Senators, the settlement “dropped the requests for restitution and other relief for victimized consumers.” The letter also references a report released last October by the House Financial Services Committee (covered by InfoBytes here) following an investigation into these particular settlements, in which the Bureau responded “that it did not seek restitution in these cases because it could not determine ‘with certainty’ which consumers had been harmed or the amount of the harm.”
District Court orders millions in restitution and civil penalties against two foreclosure relief companies
On November 4, the U.S. District Court for the Western District of Wisconsin ordered restitution and disgorgement, civil penalties, and permanent injunctive relief in an action brought by the CFPB against two former foreclosure relief companies and their principals (collectively, “defendants”) for violations of Regulation O. As previously covered by InfoBytes, in 2014, the CFPB, FTC, and 15 state authorities took action against foreclosure relief companies and associated individuals, including the defendants, alleging the use of deceptive marketing tactics to obtain business from distressed borrowers. The CFPB filed three suits, the FTC filed six, and the state authorities collectively initiated 32 actions. Specifically, the CFPB alleged that the companies and individuals (i) collected fees before obtaining a loan modification; (ii) inflated success rates and likelihood of obtaining a modification; (iii) led borrowers to believe they would receive legal representation; and (iv) made false promises about loan modifications to consumers, in violation of Regulation O, formerly known as the Mortgage Assistance Relief Services (MARS) Rule. Among other things, the court order holds company one and its principals jointly and severally liable for over $18 million in restitution, while company two and its same principals are jointly and severally liable for nearly $3 million in restitution. Additionally, the court ordered civil penalties totaling over $37 million against company two and four principals.
7th Circuit overturns precedent, rejects restitution under Section 13(b) of FTC Act
On August 21, the U.S. Court of Appeals for the 7th Circuit held that Section 13(b) of the FTC Act does not give the FTC power to order restitution, overruling that court’s 1989 decision in FTC v. Amy Travel Service, Inc. As previously covered by InfoBytes, in June 2018, the U.S. District Court for the Northern District of Illinois granted the FTC’s motion for summary judgment against a credit monitoring service and its sole owner in an action filed under Section 13(b) of the FTC Act. The court concluded that no reasonable jury would find that the defendants’ scheme of using false rental property ads to solicit consumer enrollment in credit monitoring services without their knowledge could occur without engaging in unfair or deceptive practices. The FTC argued that the defendants’ scheme, which used the promise of a free credit report to enroll the consumers into a monthly credit monitoring program, violated the FTC Act’s ban on deceptive practices. The court agreed, holding that the ad campaign was “rife with material misrepresentations that were likely to deceive a reasonable consumer.” Additionally the court agreed with the FTC that the defendants’ website was materially misrepresentative because it did not give “the net impression that consumers were enrolling in a monthly credit monitoring service” for $29.94 a month, as opposed to defendants’ claim that consumers were obtaining a free credit report. The court also found that the defendants’ websites failed to meet certain disclosure requirements imposed by the Restore Online Shopper Confidence Act. The court entered a permanent injunction and ordered the defendants to pay over $5 million in “equitable monetary relief” to the FTC.
On appeal, the 7th Circuit affirmed the district court’s liability determination, and affirmed the issuance of the permanent injunction. However, the appellate court took issue with the restitution award ordered pursuant to Section 13(b) of the FTC Act. The appellate court noted that the FTC has long viewed Section 13(b) as authorizing awards of restitution, and even acknowledged that the 7th Circuit agreed with the FTC’s position in its decision in Amy Travel. However, subsequent to the Amy Travel decision, the Supreme Court, in Meghrig v. KFC W., Inc., clarified that “courts must consider whether an implied equitable remedy is compatible with a statute’s express remedial scheme.” Applying Meghrig, the 7th Circuit noted that “nothing in the text or structure of the [FTC Act] supports an implied right to restitution in section 13(b), which by its terms authorizes only injunctions.” The panel emphasized that the FTC Act has two other provisions that expressly authorize restitution if the FTC follows certain procedures, but the current reading of Section 13(b), based on Amy Travel, allows the FTC “to circumvent these elaborate enforcement provisions and seek restitution directly through an implied remedy.” Therefore, based on the Supreme Court precedent in Meghrig, the panel concluded that Section 13(b)’s grant of authority to order injunctive relief does not implicitly authorize an award of restitution, overturning its previous decision in Amy Travel and vacating the district court’s award of restitution.