For decades, the Federal Trade Commission has used Section 13(b) of the FTC Act to get billions of dollars back from companies it believed were defrauding consumers. The FTC has used this provision not just to make companies pay restitution, often taking every dollar the company and its fraudster owners had, but also to get courts to shut a company down before trial, freeze its bank accounts, and appoint a receiver to take over the business.

These are some of the most powerful tools available to a government agency, and the FTC has used them aggressively. During just the last five years, the FTC has put $11.2 billion back into consumers’ pockets.

The Supreme Court Speaks

Many companies targeted by the FTC protested in court that the agency was stretching Section 13(b) too far—that the provision only allowed the FTC to seek a permanent injunction to stop a challenged practice and then only if the practice was ongoing. The companies argued that Section 13(b) did not authorize the court to order consumer redress, require disgorgement of profits, freeze assets, and take other extraordinary measures. But federal courts across the country sided with the FTC every time, until recently.

In 2019, the U.S. Court of Appeals for the Seventh Circuit changed its mind about the FTC’s powers under Section 13(b). While it had previously supported the FTC’s interpretation, it said in a powerful opinion that it had made a mistake. This split in holdings among the Courts of Appeal set the stage for the Supreme Court to settle the difference. That same year, the Third Circuit held that the injunction provision was limited to cases with ongoing or “impending” violations.

On April 22, 2021, in AMG Capital Management, LLC v. FTC, the Supreme Court unanimously decided that the FTC lacked the power under Section 13(b) to seek “equitable monetary relief such as restitution or disgorgement.” This was a landmark decision—and not wholly unexpected. The Seventh Circuit’s 2019 decision in FTC v. Credit Bureau Center, LLC, made a strong case in support of the position now adopted by the Supreme Court.

What This Decision Means for Auto Dealerships

In short, the AMG decision is a game-changer. It strips the FTC of its most powerful remedies for addressing unfair or deceptive practices. And the FTC has always posed the greatest threat to auto dealerships.

The Consumer Financial Protection Bureau has limited authority over auto dealerships, especially franchised auto dealerships. Everyone probably recalls that the Dodd-Frank Act, which established the CFPB, carved out of the Bureau’s jurisdiction any auto dealership that financed or leased cars and had a service department. This left the Bureau with jurisdiction over all buy-here, pay-here dealerships and independents that lack a service department open to the public. As a result, all franchised dealerships, and the independents with service departments, are not accountable to the CFPB. But being accountable to the FTC has been bad enough.

In recent years, the FTC has not shown much interest in auto dealerships, except for an occasional credit advertising case, of the type the FTC has brought for almost 50 years. But Acting FTC Chair Rebecca Kelly Slaughter has recently signaled that the FTC’s interest in auto dealerships is going to the top of her priority list.

In last May’s FTC settlement with Bronx Honda, she wrote, as her opening line: “The automobile-financing market in the United States is profoundly broken.” She said that the “consumer-dealer relationship is fundamentally unequal, and the dealers have had the upper hand for too long.” She compared not protecting consumers who obtain financing from auto dealerships to “throw[ing] them to the wolves.” The future of auto dealerships under the FTC’s new leadership has not looked good.

In fairness, things looked pretty tough for auto dealerships within the CFPB’s jurisdiction. FTC Commissioner Rohit Chopra, who is awaiting an almost-certain confirmation as the CFPB’s next director, has taken an equally hard line with auto dealerships and auto finance.

The big difference is that the FTC’s jurisdiction over auto dealerships is broad, encompassing all auto dealerships and both auto sales and financing transactions. In contrast, the CFPB’s jurisdiction is narrow. The CFPB has no jurisdiction over auto sales practices. Its authority is limited to auto finance transactions and even then for financing by only certain types of dealerships, as noted above.

What’s Left of the FTC’s Powers over Dealerships?

The concern about the FTC taking companies to court has just become much lessened. After the AMG case, the most a court can order a dealer to do is to stop doing something that the FTC can convince a federal judge is deceptive or unfair. If the FTC has a good case (and it usually does), the case will typically settle quickly, without ever going to court.

The FTC Act still has a provision, Section 19, that would allow the FTC to obtain consumer redress in certain cases. But the process is so complicated and potentially time-consuming that, in my memory, the FTC has never used it. Bear with me, as I quickly explain what’s required for the FTC to get consumer redress under Section 19:

• The Commission issues an administrative complaint charging the company with engaging in an unfair or deceptive practice.
• The FTC goes to federal court to seek a temporary injunction to preserve assets for eventual consumer redress. In some instances, the court will require an evidentiary trial before issuing the injunction. The Commission isn’t required to take this step, but without it, the company may continue the challenged conduct during all the following actions and spend all its money or transfer money to others.
• The company can challenge the temporary injunction by appealing to the federal court of appeals and potentially to the Supreme Court.
• Assuming the FTC gets the temporary injunction and wins any appeal, it then litigates its case before an administrative law judge. This is a full trial, and the ALJ issues findings of fact and conclusions of law at the end of the trial.
• If the FTC staff wins, the company can appeal the ALJ’s decision to the Commission. When that happens, there is a new trial, called a trial de novo, in which the five Commissioners sit as judges, and the ALJ’s findings receive no deference.
• If the Commission rules that an unfair or deceptive practice has occurred, the company can appeal this administrative decision to the court of appeals (and, once again, potentially to the Supreme Court).
• If the company doesn’t appeal or the FTC wins the appeal(s), the FTC must then file a new case back in federal district court, seeking redress for consumers.
• To get an order of redress, the FTC must prove that the practices are not simply unfair or deceptive, but they are also dishonest or fraudulent. That’s a significantly tougher standard to meet.
• Finally, if the district court rules that the conduct was dishonest or fraudulent and orders the company to pay redress to consumers, the company can appeal that ruling to the court of appeals (and potentially to the Supreme Court).

You can imagine how many years, from start to finish, this process would take. And if the court that ordered the asset freeze back in the second bullet allowed the company to withdraw money from the frozen assets to pay its lawyers for all this litigation, you can also imagine that its coffers would be empty before any money could be returned to defrauded consumers. Is it any wonder that the FTC is not enthusiastic about using Section 19?

Will Congress Step in?

One might think that the FTC could see a silver lining in this Supreme Court decision. Now that the Commission can only ask a court to order the company to stop the unfair or deceptive practices, but not make the company pay money to consumers or the government, the expected quick settlements would enable the FTC to bring many more cases.

But that’s not how the FTC looks at this development. The Commission wants Congress to “fix” the law and restore the FTC’s authority to obtain restitution for consumers and/or strip wrongdoers of their ill-gotten gains.

And Congress may provide this authority. After all, both Democrats and Republicans are against unfair and deceptive practices, and probably most of them would want money returned to consumers rather than be left in the pockets of fraudsters. Indeed, last year, Senator Roger Wicker, a Republican from Mississippi, introduced a bill that would allow the FTC to use Section 13(b) for “restitution for consumer loss,” “rescission or reformation of contracts,” and “the refund of money or return of property.”

We can expect the FTC to make achieving a legislative fix for the AMG decision a pressing priority. Last October, all five Commissioners then at the agency sent a letter to Congress urging the passage of legislation to “swiftly clarify the statutory text and allow us to continue to protect consumers.” After AMG, there is technically nothing to “clarify”; the current meaning of Section 13(b) has been decided.

The FTC saw this unfavorable ruling coming. Just two days before the AMG decision, the FTC testified before Congress that “if Congress did not act promptly, the FTC’s ability to protect consumers and execute its law enforcement mission will be significantly impaired.” It did not take long for Congress to respond to this plea. That same day, Representative Tony Cárdenas, a Democrat from California, along with 13 co-sponsors, introduced H.R. 2668 to permit the FTC to seek permanent injunctions and other equitable relief for any violations of the FTC Act. Similar action in the Senate is expected soon.

But we know that getting any legislation through Congress can be extremely hard, even if the main goal has broad support. Once proposed legislation to amend the FTC Act is introduced, it is likely to lead to a broader debate on FTC powers. Moreover, some critics who have generally supported the FTC’s use of Section 13(b) for fraud cases oppose what they believe is the use of Section 13(b) remedies in cases in which fraud was not an issue and, indeed, where even the existence of an unfair or deceptive practice was open to debate.

The FTC’s Next Moves

Although we can expect every possible effort from the Commission to get legislation passed that will overturn the AMG decision, even if those efforts succeed, they may not happen fast. The FTC must decide how to deploy its resources in the meantime.

With respect to auto dealerships, one option stands out: adopting a rule that addresses specific unfair or deceptive acts or practices by dealerships. Dodd-Frank grants the FTC the authority to prescribe rules against unfair or deceptive conduct by franchised dealerships and independents with service departments, which Dodd-Frank carved out of the CFPB’s jurisdiction. Further, the law allows the FTC to undertake this rulemaking under the streamlined procedures of the Administrative Procedure Act, rather than the cumbersome procedures of Section 18 of the FTC Act, as discussed below.

A new rule applicable to motor vehicle dealership sales and financing could ban or otherwise regulate dealership practices the FTC doesn’t like. This list could range from dealer participation to alleged deception in the sale of voluntary protection products. Under such a rule, the FTC could seek a civil penalty of up to $43,792 per violation. A penalty like that quickly adds up to real money.

I predict that FTC Acting Chair Slaughter will have a proposed rule for dealerships that were carved out of CFPB oversight at the top of her to-do list. The industry will have its work cut out for it in helping the FTC understand the beneficial role of dealer financing, voluntary protection products, and other issues, such as reasonable advertising claims.

Apart from a rulemaking for dealerships, one of the few other realistic actions the FTC can take in the short term is to identify as many new law violators as it can and seek quick settlements. Quick settlements should be easier to obtain since the FTC will not be seeking consumer redress. Perhaps that tactic may mean focusing resources on cases that have not traditionally generated big consumer refunds.

A third option is to focus on cases that provide a statutory civil penalty for violations of a trade regulation rule or a law that can be enforced as if it were a TRR, such as the Equal Credit Opportunity Act, the Credit Practices Rule, or the Telemarketing Sales Rule. In addition, the Fair Credit Reporting Act gives the FTC civil penalty authority for violations.

Another strategy, which would take a bit longer, would be to litigate an administrative case involving unfair or deceptive dealership practices. If the FTC obtains a final cease and desist order declaring a specific act or practice to be unfair or deceptive, it can send that order to dealerships to put them on notice of the FTC’s prior determination. If a company receiving such notice engages in the practice the FTC challenged in that case, the FTC can seek a civil penalty of up to $43,792 per violation.

A longer-term strategy for the FTC would be to engage in rulemaking under Section 18. Although rulemakings under the Administrative Procedure Act, such as CFPB rules, can sometimes be finalized in a year or two, promulgations of FTC Trade Regulation Rules under Section 18 are laden with unique burdens, such as proving the practice is prevalent, taking oral testimony, and conducting cross-examinations of interested persons at informal hearings.

For now, the Supreme Court’s decision has stopped dead in its tracks the FTC’s efforts to recover money for consumers who have lost money to companies charged with unfair or deceptive practices. Auto dealerships and their advocates must keep their eyes out for two developments that could restore—or even enhance—the FTC’s power to extract a lot of money from a dealership that makes a mistake:

(1) Will Congress overturn the AMG decision by amending the FTC Act, and, if so, will Congress give the FTC everything it wants? and

(2) Will the FTC adopt a rule for dealerships that will declare certain practices to be unfair or deceptive and enable the FTC to seek steep civil penalties for violations?

Now the FTC might seem nearly toothless, but it could soon come back with sharpened fangs. Watch out! 

*L. Jean Noonan is a partner in the Washington, D.C., office of Hudson Cook, LLP.

Based on an article from Spot Delivery. Single print publication rights only to Used Car News

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