Proportionality and Due Process

Published

February 23, 2022

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Executive Summary

The Federal Trade Commission (FTC) enforces a broad range of laws designed to protect consumers and competition. To enforce these laws, the FTC has an array of tools at its disposal, from holding hearings and issuing white papers to seeking injunctive relief and monetary penalties. Recently, the scope of the FTC’s remedial authority has come under significant scrutiny from both the courts and Congress. In early 2021, rejecting years of agency practice, the Supreme Court unanimously held that the FTC lacked the statutory authority to seek monetary penalties for certain violations of consumer protection laws, without first going through deliberative internal administrative processes.

In response, the FTC has sought to expand its authority to impose monetary penalties on alleged wrongdoers. This has touched off a wave of proposals that would grant the FTC the authority to seek disgorgement or restitution directly in federal court, while others would allow the FTC to seek civil fines for alleged violations of both consumer protection and antitrust laws.

As Congress considers these ideas, it should create a framework that balances the need to protect consumers with the principles of fair notice, due process, and proportionality. On one hand, the FTC should have the authority, and efficient available processes, to obtain remedial relief to compensate consumers who are harmed by genuine misconduct. Disgorgement and restitution are examples of equitable relief that can make consumers whole for actual injuries. On the other hand, Congress must ensure that any additional penalties, such as civil fines, are limited to clear instances of misconduct where defendants have had fair notice that their conduct could incur stiffer penalties – in other words, where a defendant violated an established rule, an existing court order, or an order from the FTC.

The FTC should not have the authority to seek civil fines for conduct that arguably results in consumers retaining much of the value from the product or services sold or from instances where there is a close call between anticompetitive harms and procompetitive justification for conduct in question. These instances clearly fall into a gray area. The use of punitive monetary penalties in these instances is likely to discourage innovation and do more harm than good to competition in the market and ultimately harm consumers.

Moreover, any additional penalties, beyond those necessary to compensate consumers, should bear some relation actual consumer harm, sufficient to deter misconduct but still proportional to the damage to consumers. By keeping in mind these principles, Congress should carefully evaluate and propose changes to the FTC’s monetary toolkit to protect both consumers and preserve a healthy competitive landscape.

Key Takeaways

  • Congress intended the FTC to have broad authority to determine on a case by case basis when a company is in violation of Section 5 of the FTC Act. Given the vagueness of the legal standard of what constitutes an unfair or deceptive practice or an unfair method of competition the Congress severely limited the FTC’s ability to seek disgorgement and restitution. It also does not allow the FTC to punish first time violators of Section 5 with civil fines.
  • Congress has only granted the FTC its ability to seek restitution and disgorgement following an administrative proceeding that determines a violation was “dishonest and fraudulent” and a federal court agrees that a reasonable person should have known they were in violation of the law.
  • Beyond this limited circumstance, all other authority for monetary relief is granted by Congress in other statutes the FTC enforces or as part of the FTC’s civil penalty authority for violations of FTC rules or orders.
  • Regardless of the statutory basis, the FTC has a questionable history of trying to seek restitution and disgorgement based on total revenue of the company alleged to be in violation of Section 5. The FTC has not calibrated its claimed monetary remedies to actual harm to consumers.
  • However, when litigated, the courts have routinely rejected the FTC’s outsized claims and award far less, including at times no monetary award.
  • The FTC's over reliance on total revenue is especially unfair to small businesses that may not have the resources to push back against the full weight of the FTC and therefore opt to settle out of court.
  • Congress should:
    • Avoid granting the FTC civil penalty authority for first time violations of the FTC Section 5 Act. This includes prohibiting the practice of the FTC sending blanket warning letters to industry that are not limited to specific, concrete, and established violations of Section 5. Warning letters that amount to little more than pointing to Section 5 for a particular subject of claims circumvent the FTC’s Magnusson-Moss rulemaking authority in an attempt to unlock civil penalty authority that is reserved for clear, well-defined violations of the law.
    • Ensure that any expansion of restitution and disgorgement authority for first time violations of Section 5 should require the FTC to calculate monetary relief based on consumer harm and prohibit the FTC from reflexively targeting total revenue.