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District Court rules FTC cannot seek monetary relief in false advertising action under Section 19 of the FTC Act
On June 29, the U.S. District Court for the Central District of California granted in part and denied in part parties’ motions for summary judgment with respect to remedies, and in doing so, considered whether the FTC may seek monetary relief under Section 19 of the FTC Act. In 2018, the FTC alleged that the defendants violated the FTC Act, Restore Online Shoppers’ Confidence Act (ROSCA), EFTA, and the Telemarketing Sales Rule by engaging in false advertising and participating in an unauthorized billing scheme. In 2020, the court granted summary judgment in favor of the FTC on all counts, but reserved ruling on the appropriate remedies until after the Supreme Court issued decisions in the consolidated appeals in AMG Capital Management v. FTC. On April 22, the Supreme Court unanimously held that while 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,” nothing in its opinion prohibits the FTC “from using its § 5 or § 19 authority to obtain restitution on behalf of consumers.” (Covered by InfoBytes here.) Following the AMG decision, the FTC stated it was no longer seeking monetary relief under Section 13(b) but argued that it may still seek monetary relief under Section 19 for the defendants’ violations of ROSCA. The defendants countered that remedies for the ROSCA violations were unavailable because the FTC failed to specifically invoke Section 19 remedies in its complaint or timely disclose damage calculations or new witnesses under procedural rules, among other things.
The court observed that Section 19 authorizes the FTC to “seek equitable monetary relief to redress consumer injury resulting from ROSCA violations.” However, the court concluded in this case that the “FTC may proceed to trial on damages for ROSCA violations based only on evidence and witnesses that have been properly disclosed. Because none of the FTC's prior disclosures described its computation of damages for ROSCA violations, however, it appears that the FTC has no evidence to present at trial to support its nascent theory of damages. In the absence of any other theory of monetary relief after AMG, the Court concludes that the FTC cannot recover damages for consumers in this action.” While the court granted the defendants’ motion for summary judgment to the extent that the FTC cannot obtain monetary relief, it stated that “because the FTC has authority to pursue a permanent injunction and has shown the likelihood of recurrence of violations of the FTC Act,” it was granting in part the FTC’s motion for summary judgment “to the extent it seeks a permanent injunction against future enumerated unfair and deceptive acts or practices by the [defendants].”
On June 28, a coalition of 28 state attorneys general sent a letter to Congress in support of H.R. 2668, the Consumer Protection and Recovery Act. The bill would give the FTC authority to seek restitution and disgorgement, among other equitable remedies, for consumer protection and antitrust violations in federal court without first going through a lengthy administrative process. As previously covered by InfoBytes, in April, the U.S. Supreme Court unanimously reversed the U.S. Court of Appeals for the Ninth Circuit’s decision in AMG Capital Management v. FTC, holding 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.” The ruling reversed a $1.3 billion restitution award in a case alleging that payday loan companies had deceived and overcharged customers. The coalition urged lawmakers to reinstate the “essential tools that the FTC needs to combat fraud and anticompetitive conduct and protect an honest marketplace.”
On June 24, the U.S. District Court for the Northern District of California granted a motion to dismiss a putative class action suit, in which the plaintiff alleged that the defendant sent messages using an “automatic telephone dialing system” (autodialer) within the meaning of the TCPA. As previously covered by a Buckley Special Alert, in April the U.S. Supreme Court in Facebook, Inc. v. Duguid narrowed the definition of what type of equipment qualifies as an autodialer under the TCPA, a federal statute that generally prohibits calls or texts placed by autodialers without the prior express consent of the called party. In this district court case, the platform utilized by the defendant to contact the plaintiff allegedly placed calls only to phone numbers supplied by consumers when signing up for the defendant’s services. The plaintiff alleged that the platform nonetheless qualified as an autodialer because it used a “random number generator to determine the order in which to pick from the preproduced list of consumer phone numbers, such that it does qualify as an autodialer.” The plaintiff claimed this feature brought the platform within the TCPA’s definition of an autodialer, referring to a line from footnote 7 of the Duguid opinion. That footnote states that “an autodialer might use a random number generator to determine the order in which to pick phone numbers from a preproduced list. It would then store those numbers to be dialed at a later time.” However, in the order, the district court rejected the plaintiff’s argument as inconsistent with the rationale in Facebook and an “acontextual reading” of the footnote. In rejecting the argument, the court explained that under Facebook’s holding, “to qualify as an autodialer, a device must have ‘the capacity to use a random or sequential number generator to either store or produce phone numbers to be called.” The district court found that defendant’s platform was only texting customers who had already provided their contact information. As a result, the platform did not qualify as an autodialer as a matter of law and the court dismissed plaintiff’s TCPA claim without leave to amend.
On June 29, the U.S. Supreme Court issued a 5-4 decision in Alabama Association of Realtors et al. v. U.S. Department of Health and Human Services et al. denying a request from a coalition of landlords and realtor groups to lift the federal government’s eviction moratorium. In his concurring opinion, Justice Brett Kavanaugh agreed that the CDC “exceeded its existing statutory authority by issuing a nationwide eviction moratorium.” However, he explained his vote to deny the request by pointing out that the moratorium is set to expire on July 31 and keeping it in place until then will allow for a “more orderly distribution of the congressionally appropriated rental assistance funds.” As previously covered by InfoBytes, on June 2, the U.S. Court of Appeals for the District of Columbia denied the group’s motion to lift an administrative stay placed by a district court on its own order, in which it had ruled that the CDC’s nationwide eviction moratorium issued in response to the Covid-19 pandemic exceeded the agency’s statutory authority.
On June 25, the U.S. Supreme Court issued a 5-4 decision in TransUnion LLC v. Ramirez, holding that only a plaintiff concretely harmed by a defendant’s violation of the FCRA has Article III standing to seek damages against a private defendant in federal court. In writing for the majority, Justice Brett Kavanaugh reversed and remanded a 2020 decision issued by the U.S. Court of Appeals for the Ninth Circuit, which found that all 8,185 class members had standing to recover statutory damages due to, among other things, TransUnion’s alleged “reckless handling of information” from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), which, according to the appellate court, subjected class members to “a real risk of harm” when TransUnion erroneously linked class members to criminals and terrorists with similar names in a database maintained by OFAC. (Covered by InfoBytes here.) The 9th Circuit, however, did reduce punitive damages, explaining that, although TransUnion’s “conduct was reprehensible, it was not so egregious as to justify a punitive award of more than six times an already substantial compensatory award.” TransUnion filed a petition for writ of certiorari after the 9th Circuit denied its petition for rehearing.
The Court considered whether federal courts can certify consumer classes where the majority of class members have not alleged the type of concrete injury necessary to establish Article III standing, even if the named plaintiff suffered an injury meeting this bar. The parties stipulated prior to trial that only 1,853 members of the class had misleading credit reports containing OFAC alerts provided to third parties during the period specified in the class definition, whereas the remaining class members’ credit files were not provided to any potential creditors during that period. In applying the standing requirement of concrete harm, the majority concluded that the 6,332 class members whose credit reports were not provided to third parties did not suffer a concrete harm and thus did not have standing as to the reasonable-procedures claim. The majority further determined that even though all 8,185 class members complained about alleged formatting defects in certain mailings sent to them by TransUnion, only the lead plaintiff had demonstrated that the alleged defects caused him concrete harm, thus only he could move forward with those claims. According to the majority, the remaining class members failed to explain how the formatting error prevented them from requesting corrections to prevent future harm.
“The mere existence of inaccurate information, absent dissemination, traditionally has not provided the basis for a lawsuit in American courts,” the majority wrote, adding that while the Court “has recognized that material risk of future harm can satisfy the concrete-harm requirement in the context of a claim for injunctive relief to prevent the harm from occurring, at least so long as the risk of harm is sufficiently imminent and substantial,” in this instance the 6,332 class members have not demonstrated that the risk of future harm materialized.
On June 23, the U.S. Supreme Court issued a split opinion in Collins v. Yellen (previously Collins v. Mnuchin), holding that FHFA’s leadership structure, which only allows the president to fire the FHFA director for cause, is unconstitutional. The Court’s determination follows its decision in Seila Law LLC v. CFPB (covered by a Buckley Special Alert), in which 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. In Collins, the Court stated, “[a] straightforward application of our reasoning in Seila Law dictates the result here. The FHFA (like the CFPB) is an agency led by a single Director, and the [Housing and Economic Recovery Act of 2008 (Recovery Act)] (like the Dodd-Frank Act) restricts the President’s removal power.”
Last July, the Court agreed to review the U.S. Court of Appeals for the 5th Circuit’s en banc decision (covered by InfoBytes here) issued in a 2016 lawsuit brought by a group of Fannie Mae and Freddie Mac (GSEs) shareholders against the U.S. Treasury Department and FHFA. The shareholders claimed that the Recovery Act, which created the agency, violated the separation of powers principal because it only allowed the president to fire the FHFA director “for cause,” and that FHFA acted outside its statutory authority when it adopted a third amendment to the Senior Preferred Stock Purchase Agreements, which replaced a fixed-rate dividend formula with a variable one requiring the GSEs to pay quarterly dividends equal to their entire net worth minus a specified capital reserve amount to the Treasury Department (known as the “net worth sweep”). Following the en banc rehearing, the appellate court reaffirmed its earlier decision that FHFA’s structure violates the Constitution’s separation of powers requirements. However, the opinions differed on the appropriate remedy, with nine judges concluding that the remedy should be severance of the for-cause provision, not prospective relief invalidating the net worth sweep, stating that “the Shareholders’ ongoing injury, if indeed there is one, is remedied by a declaration that the “for cause” restriction is declared removed. We go no further.”
While the split Court agreed with the 5th Circuit that the agency’s structure violates the Constitution’s separation of powers, the justices left intact the net worth sweep. “Although the statute unconstitutionally limited the President’s authority to remove the confirmed Directors, there was no constitutional defect in the statutorily prescribed method of appointment to that office. As a result, there is no reason to regard any of the actions taken by the FHFA in relation to the third amendment as void,” Justice Samuel Alito wrote for the majority. “It is not necessary for us to decide—and we do not decide—whether the FHFA made the best, or even a particularly good, business decision when it adopted the third amendment,” the Court added. “[W]e conclude only that under the terms of the Recovery Act, the FHFA did not exceed its authority as a conservator, and therefore the anti-injunction clause bars the shareholders’ statutory claim.” The Court remanded the case to determine “what remedy, if any, the shareholders are entitled to receive on their constitutional claim.”
Various concurring and dissenting opinions were issued as well. While concurring, Justice Elena Kagan noted that “[s]tare decisis compels the conclusion that the FHFA’s for-cause removal provision violates the Constitution. But the majority’s opinion rests on faulty theoretical premises and goes further than it needs to.” Justice Sonia Sotomayor dissented, writing: “[t]he Court has proved far too eager in recent years to insert itself into questions of agency structure best left to Congress. In striking down the independence of the FHFA Director, the Court reaches further than ever before, refusing tenure protections to an Agency head who neither wields significant executive power nor regulates private individuals.”
Shortly after the ruling, President Biden appointed Sandra L. Thompson as acting FHFA Director, effective immediately. Thompson has served at FHFA since March 2013 as Deputy Director of the Division of Housing Mission and Goals where she oversaw FHFA’s housing and regulatory policy, capital policy, financial analysis, fair lending, as well as all mission activities for the GSEs and the Federal Home Loan Banks. Former Director Mark Calabria issued a statement noting his respect for the Court’s decision and the authority of the president to remove the FHFA director.
District Court, citing Supreme Court in Facebook, says bank’s dialing equipment is not an autodialer
On June 9, the U.S. District Court for the District of South Carolina granted summary judgment in favor of a national bank, ruling that the dialing equipment used by the bank did not fit within the U.S. Supreme Court’s narrowed definition of the type of equipment that qualifies as an autodialer under the TCPA. As previously covered by a Buckley Special Alert, the Supreme Court held that in order to qualify as an “automatic telephone dialing system,” a device must have the capacity either to store or produce a telephone number using a random or sequential generator. The TCPA defines an autodialer as equipment with the capacity both “to store or produce telephone numbers to be called, using a random or sequential number generator,” and to dial those numbers. The question before the Supreme Court in Facebook Inc. v. Duguid was whether that definition encompasses equipment that can “store” and dial telephone numbers, even if the device does not use “a random or sequential number generator.” The Court held it does not, stating that the modifier “using a random or sequential number generator” applied to both terms “store” and “produce.”
In the South Carolina case, the plaintiff argued that the bank used an autodialer when it placed at least 155 debt collection calls without her consent. She sued the bank, alleging, among other things, violations of the TCPA, FCRA, and invasion of privacy. The court ruled in favor of the bank on the FCRA and invasion of privacy claims and directed the parties to refile their motions after the Supreme Court issued its decision in Facebook. Following the Facebook opinion, the plaintiff argued that “the dialer at issue must only have the capacity to store or produce numbers using a random or sequential number generator, and Defendant’s internal documents establish that the [bank’s dialing equipment] has that capacity,” and that, moreover, a footnote in Facebook “leaves open the possibility that the [equipment’s] ability to use a random number generator to determine the order in which numbers are dialed from a preproduced list may qualify it as an ATDS.”
The court disagreed, concluding that even though internal bank documents referred to the dialing equipment as an autodialer and showed that the equipment dialed numbers automatically without the assistance of an agent, the information was insufficient to meet the Supreme Court’s statutory definition. “As we learned from Duguid, the automatic dialing capability alone is not enough to qualify a system as an ATDS,” the court ruled. “The system at issue must store numbers using a random or sequential number generator or produce numbers using a random or sequential number generator to qualify as an ATDS.” According to the court, the bank’s equipment dialed members’ numbers from a pre-created list of targeted accounts. With respect to the plaintiff’s footnote argument, the court found that the plaintiff was taking the footnote in Facebook “out of context.”
Following Supreme Court’s SEC disgorgement authority ruling, defendants required to repay nearly $20.8 million
On June 7, the U.S. District Court for the Central District of California ordered defendants to disgorge more than $20.8 million in net profits in an action concerning money that was collected from investors for a cancer treatment center that was never built. The order follows a 2020 U.S. Supreme Court ruling (covered by InfoBytes here), in which the high court examined whether the SEC’s statutory authority to seek “equitable relief” permits it to seek and obtain disgorgement orders in federal court. The Court ultimately held that the SEC may continue to collect disgorgement in civil proceedings in federal court as long as the award does not exceed a wrongdoer’s net profits, and that such awards for victims of the wrongdoing are equitable relief permissible under § 78u(d)(5). The Court vacated the original $26.7 million judgment and remanded to the lower court to examine the disgorgement amount in light of its opinion.
On remand, the district court held the defendants jointly and severally liable for the $20.8 million amount, noting that it “will not deduct one penny of the exorbitant salaries that [the defendants] paid themselves for perpetrating their fraud on investors.” Of approximately $26 million raised, the SEC alleged the defendants misappropriated approximately $20 million of the funds through payments to overseas marketing companies and to salaries. To calculate the final disgorgement award, the court subtracted legitimate expenses, including $2.2 million in administrative expenses and $3.1 million in business development expenses, from the $26 million raised. However, the court expressed doubt about the legitimacy of those expenses.
On June 8, the U.S. Court of Appeals for the Ninth Circuit issued an order vacating its December 2018 judgment, reversing a district court’s award of equitable monetary relief following the U.S. Supreme Court’s recent decision in FTC v. AMG Capital Management, and remanding the case to the district court for further proceedings consistent with the Supreme Court’s opinion. The decision impacts defendants—a Kansas-based operation and its owner—who were ordered in 2016 to pay an approximately $1.3 billion judgment for allegedly operating a deceptive payday lending scheme and violating Section 5(a) of the FTC Act by making false and misleading representations about loan costs and payments (covered by InfoBytes here). The 9th Circuit previously upheld the judgment (covered by InfoBytes here) by, among other things, rejecting the defendant owner’s challenge, which was based on an argument that the district court overestimated his “wrongful gain” and that the FTC Act only allows the court to issue injunctions. At the time, the 9th Circuit concluded that the defendant owner failed to provide evidence contradicting the wrongful gain calculation and that a district court may grant any ancillary relief under the FTC Act, including restitution. However, as previously covered by InfoBytes, the Supreme Court reversed the 9th Circuit and 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.”
On June 1, the U.S. Court of Appeals for the Ninth Circuit granted Seila Law’s request to stay a mandate ordering compliance with a civil investigative demand (CID) issued by the CFPB. The order stays the appellate court’s mandate (covered by InfoBytes here) for 150 days, or until final disposition by the U.S. Supreme Court should the law firm file its expected petition of certiorari. Last month, Seila Law announced its intention to ask the Court “whether the ratification of the CFPB’s civil investigative demand is an appropriate remedy for the separation-of-powers violation identified by the Supreme Court.” In its motion, Seila Law claimed that the Bureau’s “alleged ratification” was not legally sufficient to cure the constitutional defect and that “an action taken by an agency without authority cannot be ratified if the principal lacked authority to take the action when the action was taken.” Seila Law further argued that the only appropriate remedy is dismissal of the petition to enforce the CID. The Bureau countered that former Director Kraninger’s ratification was valid, emphasizing that the majority of the 9th Circuit denied en banc rehearing last month (covered by InfoBytes here). The Bureau further contended that Seila Law did not demonstrate good cause for the stay or suggest that it would suffer irreparable harm should the motion be denied, pointing out that “equities now weigh overwhelmingly in favor” of requiring Seila Law’s compliance with the CID.
- Jeffrey P. Naimon to provide “Fair lending update” at the Colorado Mortgage Lenders Association Operational and Compliance Forum
- Jonice Gray Tucker to discuss “Justice for all: Achieving racial equity through fair lending” at CBA Live
- Warren W. Traiger to discuss “On the horizon for CRA modernization” at CBA Live
- APPROVED Webcast: Strategy & Technology: A dynamic duo for successful regulatory exams
- Jonice Gray Tucker to discuss "Fair lending" at the Mortgage Bankers Association Regulatory Compliance Conference
- Michelle L. Rogers to discuss “State law regulatory and enforcement trends” at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss “Government investigations, and compliance 2021 trends” at the Corporate Counsel Women of Color Career Strategies Conference
- Max Bonici to discuss “BSA/AML trends: What to expect with the implementation of the AML Act of 2020” at the American Bar Association Banking Law Fall Meeting
- H Joshua Kotin to discuss “Modifications and exiting forbearance” at the National Association of Federal Credit Unions Regulatory Compliance Seminar
- Jonice Gray Tucker to discuss “Fintech trends” at the BIHC Network Elevating Black Excellence Regional Summit
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute