In a unanimous decision, the U.S. Supreme Court ruled in April that the Federal Trade Commission (FTC) lacks authority to seek restitution on behalf of consumers and other monetary relief from scammers. Although the Court may be correct purely as a matter of statutory interpretation, unfortunately the decision robs the FTC of one of its most effective tools in redressing consumer fraud.
Today we’ll look at the Court’s opinion and see how it will affect a pending case of the type we’ve addressed many times here on SBM: fake cures for serious diseases. We’ll also look at a legislative fix now before Congress, as well as how the decision might impact the FDA and other federal agencies seeking consumer redress.
A loan shark finds relief
For forty years, the FTC relied on Section 13(b) of the Federal Trade Commission Act (FTC Act) to secure billions of dollars in relief for consumers in cases involving anticompetitive pharmaceutical practices, bogus medical treatments, telemarketing fraud, and data security and privacy scams, among others. Successful cases include Volkswagen’s diesel emission-cheating scandal and Herbalife’s pyramid scheme.
Section 13(b) authorizes the FTC to sue scammers in federal court for violations of the FTC Act, which prohibits, among other things, unfair or deceptive business practices, such as false advertising. It specifically authorizes a court to issue an injunction against scammers’ unlawful practices. For many years, some federal courts interpreted this broadly to mean that courts could award a full range of what are known as “equitable remedies”, including restitution of consumers’ money and disgorgement of ill-gained profits, even though those remedies are not specifically mentioned.
In testimony before Congress, the FTC Commissioners (who head the agency) described Section 13(b) as “a critical tool in support of our enforcement missions” and “the agency’s primary and most effective way of returning money to consumers that was unlawfully taken from them”. There are other provisions of the law giving the FTC the power to seek monetary damages but they are far more cumbersome and it can take years to see results.
One particularly unsavory scammer is loan shark Scott Tucker who, according to a consumer advocacy organization,
made billions exploiting economically disadvantaged consumers by making small, short-term, high-interest, unsecured loans to them, referred to as payday loans, through the internet. Tucker’s lending company, AMG Capital Management, routinely charged interest rates of 600 percent and from at least 2008 to 2012, Tucker’s company collected more than $1 billion in deceptive finance charges from consumers who could ill afford to be scammed.
Tucker was convicted on 14 counts of racketeering, conspiracy, fraud, and making false statements in legally-required disclosures and sentenced to more than 16 years in prison by a judge who described his crimes as “a scheme to extract money from people in desperate circumstances” that “created heartbreak and sorrow … not just a financial loss”. He was also ordered to forfeit the proceeds of his crimes, although whether any of that will ultimately make it into the pockets of his victims is not clear.
In addition to the criminal case, Tucker and AMG Capital were sued by the FTC. This resulted in a permanent injunction and an order to pay consumers $1.27 billion in restitution. Tucker appealed the monetary award all the way to the U.S. Supreme Court, essentially arguing that, while Section 13(b) permits the court to enjoin him from being a loan shark, it can’t make him pay his victims back.
He won. In AMG Capital Management v. FTC, the Court agreed that Section 13(b) “as currently written does not grant the Commission authority to obtain equitable monetary relief” on behalf of consumers, adding that, if the FTC wanted the authority to seek additional remedial relief for the scammed, it needed to ask Congress to amend the law.
Whatever Congress decides to do, in the meantime, the FTC’s authority to get consumers their money back remains hobbled. Take, for example, the FTC’s suit against Golden Sunrise Nutraceutical, its CEO, and Stephen Weis, M.D., its Medical Director, now pending in a U.S. District Court in California. The complaint alleges that defendants have promoted and sold dietary supplements through “plans of care” ranging in price from $23,000 to $200,000, which falsely claim to treat or cure COVID-19, cancer, Parkinson’s disease, Alzheimer’s disease, ALS, schizophrenia, and other serious conditions. Their products carry names like Kemo-Herb, AnterFerron, and ImunStem, obviously crafted to imply equivalency to FDA-approved pharmaceuticals.
In “sciency” gobbledygook that will sound familiar to regular SBM readers, the defendants advertise their supplements as “creating gene rejuvenation” and “improv[ing] Telomeres for cellular rejuvenation which increases overall-health to the body and can increase human longevity”. They falsely claim, for instance, that their “Emergency D-Virus treatment plan” is FDA-approved under a Regenerative Medicine Advance Therapy designation that “acknowledges not only the effectiveness of these herbs, usually only associated with pharmaceutical drugs, but also [that they] caus[e] no side effects, a quality of dietary supplements”. Dr. Meis “strongly recommend[s]” this “treatment plan” as “uniquely qualified to treat and modify the course of the virus epidemic”.
According to the complaint, in another familiar quack sales tactic, two testimonials for Golden Sunrise Nutraceutical products feature a now-deceased NFL player diagnosed with cancer who “claims that Defendants’ Cancer treatment plan is superior to chemotherapy as a cancer treatment”. A testimonial says he experienced “Amazing Results with ImunStem & Aktiffvate for Cancer” and that, after just 3 days, “I don’t feel the tumor anymore”. “We’ve cured cancer”, he claims.
There’s more ruthless exploitation of desperately sick people for profit alleged in the complaint, but we’ll move on to the complaint’s request that the court enter an injunction to prevent current and future violations of the FTC Act by defendants, and
Award such relief as the Court finds necessary to redress injury to consumers resulting from Defendants’ violations of the FTC Act, including but not limited to, rescission or reformation of contracts [allowing consumers, for example, to get out of any obligation to pay defendants for their worthless treatments], restitution, the refund of monies paid, and the disgorgement of ill-gotten monies . . .
The FTC was successful in getting the court to issue a Temporary Restraining Order against defendants. Subsequently, the defendants themselves agreed to a preliminary injunction which, among other provisions, prevents them from claiming that their products prevent, treat, or cure any disease unless they have competent and reliable scientific evidence to support their claims. (Prediction: not going to happen.) Thus, it looks like the FTC has an excellent chance of getting a permanent injunction and, hopefully, putting the defendants out of business for good.
Unfortunately, the Supreme Court’s decision in AMG Capital forecloses the possibility that consumers will get their money back from the “plans of care” costing tens of thousands of dollars or benefit from other financial remedies the FTC seeks on their behalf. The decision also removes a huge financial incentive to settle cases such as this one. Scofflaws now know that, while they may have to shut down their scamming operations, they can keep their ill-gotten gains. As the Acting FTC Chair Rebecca Slaughter warned,
Enforcement actions will slow and redress for consumers will dry up if Congress does not act quickly to affirm our full authority under 13(b) . . .
According to Ms. Slaughter, the FTC has 24 court cases pending based on its Section 13(b) authority, which had the potential to return $2.4 billion to consumers prior to the Supreme Court decision in AMG Capital. In addition to Golden Sunrise Nutraceutical, among those cases is Nerium International (later known as Neora), an alleged pyramid scheme selling dietary supplements, skin creams, and other products. Also included is the antitrust case in which convicted felon and “pharma bro” Martin Shkreli and other defendants are accused of an elaborate scheme to preserve a monopoly for Daraprim, a life-saving drug.
Will Congress act?
A bill has just been introduced in the U.S. House of Representatives, the Consumer Protection and Recovery Act (H.R. 2668), to beef up the remedies the FTC can seek on behalf of consumers, including:
restitution for losses, rescission or reformation of contracts, refund of money, or return of property, [and]
disgorgement of any unjust enrichment . . . obtained as a result of the violation [of the FTC Act]
If passed, the new law would apply to pending as well as future cases and relief would be available for violations going back as far as 10 years.
The bill, introduced by California Rep. Tony Cardenas, has 13 Democratic co-sponsors but no Republicans have signed on as of yet. Some Republicans are pushing back and the U.S. Chamber of Commerce is opposed, although there appear to be grounds for compromise. The possibility (since realized) that Section 13(b) would be limited by the Supreme Court, and the need to address it, was discussed in a Senate hearing as well. Senate Bill 4626, with bipartisan support, would also expand the FTC’s Section 13(b) authority to seek equitable monetary relief, including refunds, for consumers, but it applies only to data privacy and data security cases.
Beyond its effect on the FTC, a law firm specializing in food and drug law has opined that the decision in AMG Capital impacts companies threatened with suit by the FDA for violation of the Food, Drug, and Cosmetic Act (FD&C Act), the provisions of which cover dietary supplements and homeopathic remedies as well as drugs. Like the FTC Act, the FD&C Act, according to the firm, does not specifically permit the FDA to recover monetary sanctions for alleged violations, although the FDA has, until now, done just that, collecting hundreds of millions of dollars. In more bad news for consumers, the firm thinks the FDA and the FTC may not be the only federal agencies negatively impacted by the AMG Capital decision.
They are not optimistic about Congress’s ability to address the problem either:
Congress could decide to implement a “legislative fix” to AMG that would apply to a multitude of federal agencies. Alternatively, as has been the case all too often, Congress may be unable to reach an agreement on how to fix AMG, and the relevant law will remain unchanged.
As if swindlers and quacks needed any more encouragement.