At the end of last month, FTC Commissioner Rohit Chopra and his attorney advisor, Samuel Levine, penned an article, “The Case for Resurrecting the FTC Act’s Penalty Offense Authority.” In the article, the authors posit that, because the FTC’s “ability to seek monetary relief through Section 13(b) is now in jeopardy,” the FTC should “resurrect one of the key authorities it abandoned in the 1980s”—the Penalty Offense Authority under Section 5(m)(1)(b) of the FTC Act. The authors argue that dusting off the FTC’s Penalty Offense Authority would “mitigate the ongoing gamesmanship around Section 13(b), showing the marketplace that the FTC has more than one trick up its sleeve.” Indeed, Commissioner Chopra’s laser focus on mitigating the potential impact of the Supreme Court’s forthcoming decision in FTC v. AMG Capital Management was on display twice last month, as we previously discussed. In related news, all five FTC commissioners recently asked Congress to “clarify” the FTC’s authority under Section 13(b) in light of the Shire, Credit Bureau Center, and AbbVie decisions.
So, what is the FTC’s Penalty Offense Authority? The FTC’s rarely used Penalty Offense Authority authorizes the FTC to seek civil penalties against a defendant in federal court where (1) the FTC has obtained a litigated cease and desist order against another party through an administrative proceeding pursuant to Section 5(b) of the FTC Act; (2) the cease and desist order identifies a specific practice as unfair or deceptive; and (3) a party on notice of the order (i.e., someone with actual knowledge that the practice is unfair or deceptive) then engages in that same violating conduct after the order is final.
In the article, Commissioner Chopra highlights three advantages he believes the FTC’s Penalty Offense Authority has over Section 13(b): increased deterrence, decreased litigation risk, and amplified impact on market players.
First, the article argues that civil penalties available under the Penalty Offense Authority are more likely to deter potential wrongdoers than the equitable monetary relief available under Section 13(b). This is due to the fact that penalties can far exceed the wrongdoers’ return of “ill-gotten gains” under Section 13(b).
Second, the article maintains that pursuing wrongdoers under the Penalty Offense Authority poses less litigation risk for the FTC than litigation under Section 13(b). The authors acknowledge that currently well-counseled defendants leverage smaller-dollar-amount settlements in light of the uncertainty surrounding the FTC’s ability to secure monetary relief under Section 13(b). Setting aside this uncertainty, the authors posit that, in cases where consumer harm is difficult to quantify, defendants can make the process of doing so time consuming and expensive. In contrast, the FTC’s ability to obtain penalties under the Penalty Offense Authority is not at risk of being invalidated by the Supreme Court, and the authors claim that penalties are less difficult to calculate. Whether others at the FTC share these views on relative litigation risk is an open question.
Third, the article maintains that dusting off the Penalty Offense Authority could have market-wide influence on unlawful behavior. Specifically, the authors contend that widespread notice of unlawful practices subject to cease and desist orders would increase compliance and reduce the need for aggressive FTC enforcement action.
The authors conclude by identifying five areas in which they believe Penalty Offense Authority actions would likely be most effective: for-profit college fraud; multi-level marketers/gig economy employee earnings claims; fraudulent online reviews and social media influencers’ conduct; data-harvesting schemes; and unlawful targeted/behavioral marketing. These are all areas where the FTC already has been active.
Furthermore, using the Penalty Offense Authority is no walk in the park for the FTC, which likely demonstrates why the FTC has used it only once in the last twenty years. First, the FTC must litigate the original case and issue an opinion, which is upheld on appeal, that sets forth clear standards of what is a deceptive or unfair conduct. Second, the FTC must then prove that the defendant in the penalty action committed the same conduct and did so with actual knowledge that the practice was unfair or deceptive. The “actual knowledge” standard is a high bar to clear, and proving the conduct is the same may be a litigation morass, as defendants can challenge the FTC’s original determination of unfairness or deception. Commissioner Chopra and his staff may well be understating the litigation risk and resource commitment necessary to implement this strategy.
One thing seems clear: Commissioner Chopra and his staff are keenly aware that the FTC has chosen to use implied authority in Section 13(b) rather than the express authority Congress gave it. Whether the FTC responds by dusting off some of the old but unused tools Congress gave it or convincing Congress to revise Section 13(b) or both remains to be seen.