Dust off neglected powers, Chopra urges FTC

09 Nov 2020 9:25 am by Kirk Victor

Federal Trade Commission

It seems like a safe bet that Federal Trade Commission member Rohit Chopra is a pessimist.

In the last several weeks Chopra’s written a statement and a policy paper about ways the agency might deal with the fallout if the Supreme Court rules the commission’s authority under an oft-used section of the FTC Act is limited to injunctive relief and not restitution.

Chopra wants rulemaking to trigger redress and damages and boost deterrence. He also says the Penalty Offense Authority, used only rarely over the last 40 years, should be revived to get penalties against companies that knowingly engage in practices that are deemed unfair or deceptive.

While applauding Chopra’s creativity and resolve, some critics worry his proposals have drawbacks because they’re cumbersome, arduous and involve procedural issues that make them far from a panacea.

The commissioner set out his ideas to dust off the agency’s rulemaking powers and revive its Penalty Offense Authority as the high court reviews Federal Trade Commission v. Credit Bureau Center, a decision by the Seventh Circuit Court of Appeals that strikes at the heart of the agency’s enforcement program.

The appellate court held that Section 13(b) of the FTC Act authorizes only injunctive relief — not equitable monetary relief — a blow to agency lawyers who have relied on securing restitution under the provision as part of the commission’s enforcement arsenal.

The timing of Chopra’s paper caused some external chatter that it might give ammunition to the defendants in the Supreme Court case. Perhaps, but the paper was vetted internally, and the defendants have fully briefed the argument that the FTC has other tools to blunt the impact of a ruling limiting the remedies obtainable under Section 13(b).

Though critics might downplay Chopra’s proposals since he wrote them as a minority member, one of two Democrats on a five-member commission, that lineup will change next year. Joe Biden’s election means that Democrats will likely control the commission, and even if they don’t, the new president will choose the chairman. Chopra’s term expired in September, but Biden could nominate him for another term and even select him to be chairman.

In advancing these proposals, Chopra is making himself more visible — and possibly — trying to improve his chances of becoming chairman, according to observers.

David Vladeck, former director of the Bureau of Consumer Protection in the Obama administration, praised Chopra’s ideas in an interview. “He’s suggesting ways to strengthen the commission’s enforcement and better protect consumers. I don’t think this is a partisan proposal.”

Chopra’s three-page statement argues for employing little-used FTC rulemaking powers to secure penalties against fraudsters who claim to have the government’s imprimatur. Noting that such frauds often target the elderly and frequently result in settlements that stop the misconduct but don't provide monetary relief, Chopra advocates rulemaking that could lead to penalties.

His statement says the FTC could issue a rule prohibiting imposter fraud, such as when scammers claim affiliation with the government or say they’re part of a government program or have the government’s approval.

Such a rule that defines specific unfair or deceptive practices, when violated, would enable the commission to seek civil penalties under Section 5(m) as well as a broad range of monetary relief, including damages under Section 19 of the FTC Act, Chopra wrote.

But because those two sections apply only when there’s an outstanding commission order or rule, they are less easy to use than Section 13(b), which can be used to enforce any provision the FTC implements. Its enforcement doesn’t depend on a violation of a rule or order.

Also, because Section 19 is available only for rules passed under the FTC Act, the commission must follow Magnuson-Moss rulemaking procedures, which the agency has shied away from because they are time-consuming and resource-intensive.

Venable’s Leonard Gordon said in an interview that such rulemakings are laborious and difficult. “They need to explain that they have a reason to believe that the practices to be addressed by the rulemaking are prevalent — that may require an industry study.”

“Then they have to have hearings at which interested parties are accorded limited rights of cross-examination,” he added. “It’s a big deal, and then, as with most rulemakings, people who feel like they are being affected by them can challenge whether there is an adequate practical predicate for the rulemaking.”

“Commissioner Chopra’s remarks made it sound like they could snap their fingers and pump these rules out, and I don’t think that is accurate,” Gordon said.

Writing a rule to ban imposter fraud, as Chopra urges, hardly appears to be a step that would generate industry opposition, which, as Gordon noted, can slow down rulemaking.

“Government imposter scams are constant,” Vladeck said. “I think Rohit is starting conversations about how the FTC can be more effective.”

Asked if it’s a heavy lift, Vladeck went further. “It depends — if you’re going after a few discrete scams that no one is going to defend in principle, it’s going to take a lot less time to promulgate a rule than if you’re going after a practice that can be both a service to consumers but also a scam.”

When asked about Chopra’s comment that the FTC has “long been reluctant to codify common-sense rules,” Vladeck said: “I think the FTC for very good reason is wary about rulemaking. On the other hand, the TSM [Telemarketing Sales Rule] has been a very powerful tool for the FTC in large measure because rule violations up the ante for potential violators.”

Chopra’s other pitch in the 48-page policy paper, co-authored with attorney-advisor Samuel Levine, supports resurrecting a section of the FTC Act, 5(m)(1)(B), or the Penalty Offense Authority, to address systemic market problems. It enables the commission not only to recover money that consumers lost in scams but also impose penalties. The paper notes it fell out of use as the agency shifted to using Section 13(b) to shut down small-time scams.

To revive the Penalty Offense Authority requires that the commission issue a cease-and-desist order after an administrative proceeding determines a practice is unfair or deceptive.

When parties engage in that deceptive practice with knowledge that the commission has condemned it, they will be subject to major civil penalties.

But the paper acknowledges defendants in these circumstances have “particularly strong due process protections,” including: a party cannot be held liable unless it has “actual knowledge” of the commission’s determination.

Even if actual knowledge is shown, parties are entitled to a de novo hearing on issues of fact, including to decide whether their conduct is sufficiently similar to the conduct that was previously condemned.

Defendants also can challenge the commission’s earlier decision that the conduct was unlawful — a step requiring the agency to defend its prior ruling.

Noting those protections, Venable’s Gordon wrote in an e-mail: “The targets of the initial litigation are likely to fight back, as are the targets of the follow-on litigation. Showing that the second set of defendants is engaged in the exact same conduct that the litigated order condemned may be challenging.”

Bruce Hoffman, former director of the FTC’s Bureau of Competition in the Trump administration, echoed that view. “The proposal probably identified something where there is some scope to enhance the commission’s remedial agenda, but the limits it faces may keep it from being a dramatic enhancement,” he said in an interview.

The paper lists five areas in which the commission has condemned practices that can be designated as penalty offenses: for-profit college fraud; false earnings claims in which industries lure workers by lying about potential earnings; online disinformation; deceptive data harvesting; and illegal targeted marketing.

By reviving its long-discarded tool, the FTC would reclaim its role as “a vigorous watchdog, detecting and deterring systemic harm instead of playing whack-a-mole against small scams,” Chopra argues.

Hoffman is skeptical about how much of a solution this approach will provide if there’s an adverse Supreme Court ruling. Yet he praised Chopra as “a really creative person who has put a lot of thought into nooks and crannies of the FTC Act that often get overlooked.”

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