The Supreme Court ruled that the FTC cannot use Section 13(b) to seek monetary relief without due process. Now a new bill is seeking to unravel that decision.
The Federal Trade Commission and the direct selling industry have a complicated relationship.
To be clear, the Federal Trade Commission has said that they see the direct selling channel as a sound and legal business opportunity for consumers. At a recent virtual panel hosted by The College of New Jersey School of Business, former director of the Bureau of Consumer Protection for the FTC, Andrew Smith, told participants, “The U.S. Federal Trade Commission has never said that multi-level marketing is illegal. Direct selling is and should be a legitimate way to distribute products and services directly to consumers.”
Smith went on to describe the direct selling channel as a method that can actually be more advantageous than traditional retail because of its ability to reach consumers and communities who might be underserved.
But the conversation surrounding regulatory compliance language and the ways the FTC has pursued those they deem to be outside the bounds of the law has created tension between the channel and the government agency—a tension that recently escalated all the way to the Supreme Court.
Skipping Over Due Process
In 1914, President Woodrow Wilson created the FTC Act as a way to protect consumers and promote competition. Sections have been added since then to strengthen consumer protection measures and provide guidelines for enforcement, including Section 13(b), which gives the FTC injunctive powers and the ability to swiftly take matters to court following the issuance of a cease-and-desist order.
Since the 1970s, however, the FTC has been relying on Section 13(b) to implement monetary consequences and remedies. Section 19, which was added later, does give the FTC the authority to collect fines, restitution and disgorgement if the administrative adjudications required in Section 5 are followed. In other words, the FTC can freeze a company’s accounts or take possession of assets, but only after the accused company has had its day in court. By misusing Section 13(b), the agency has been skipping over due process and freezing or seizing assets without warning or trial.
“Section 13(b) does not explicitly authorize the Commission to obtain court-ordered monetary relief.”–Justice Breyer, in a Supreme Court opinion
In an opinion authored by Justice Breyer, after a unanimous ruling by the U.S. Supreme Court concerning Section 13(b) in AMG Capital Management v. Federal Trade Commission in April of this year, the court stated that “no one imagined that Section 13(b) of the FTC Act would become an important part of the Commission’s consumer protection program. […] By contrast, the Commission’s broad reading would allow it to use Section 13(b) as a substitute for Section 5 and Section 19…. that could not have been Congress’ intent.” Continuing, Justice Breyer clearly summed up the limitations of Section 13(b) by stating: “Section 13(b) does not explicitly authorize the Commission to obtain court-ordered monetary relief.”
A Section 13(b) Case Study
In August 2015, the FTC was granted a temporary restraining order against then direct selling company Vemma, alleging that the company was operating as an illegal pyramid scheme and was making false earning claims in recruiting new distributors. The order put the company in the hands of a temporary receiver, who within hours of the ruling laid off almost all 300 members of the corporate staff, halted sales and prohibited commission payments to the company’s distributors in the U.S. and 47 countries.
Vemma CEO B.K. Boreyko made his case in court a month later and regained control of his company, but the damage was already done. Much of the salesforce had fled in the interim and securing a merchant bank willing to process credit card payments for the company was almost impossible.
“The FTC can do a lot of damage in a short period of time,” Boreyko told Direct Selling News in 2016. “Fifteen FTC agents and ten Tempe police officers stormed my building, took over my company and froze my bank accounts for three weeks before I even got the opportunity to talk to a judge.”
The Need for a Clear Definition of Compliance
Safeguards and legal actions against bad actors who might enter the channel with intent to harm or defraud consumers are vital for the industry to maintain integrity. It’s why the industry’s trade association, the Direct Selling Association, created the Direct Selling Self-Regulatory Council (DSSRC) in 2019. Administered by the BBB National Programs, the DSSRC monitors the industry for unsubstantiated earnings and product claims and makes referrals to the FTC when companies are in violation of industry standards.
Direct selling leaders are beginning to express concern that the FTC is asking for powers that are meant to belong to Congress.
But the FTC’s definition of “unfair and deceptive” is a subjective line, and since it is determined on a case-by-case basis, direct selling leaders can’t look to past settlements for compliance guidance. One chief executive within the industry, who spoke with Direct Selling News under the condition of anonymity, said this vague language is the critical issue because it can allow the agency to cause
irreparable damage to companies without first proving violation.
“There is never a clear definition for us of what rules we need to follow,” the chief executive said. “We’re always guessing and interpreting. They use words that they don’t define, like ‘typical’ income claims. What’s ‘typical?’ If you make $50, is that OK? Who knows? Because there are no actual rules. Instead, there is this ever-evolving guidance that we’re all trying to interpret.”
The Bill Seeking to Fortify 13(b)
In response to the Supreme Court’s ruling that Section 13(b) did not give the FTC the authority to retrieve money without administrative adjudications, Congressman Tony Cárdenas introduced the Consumer Protection and Recovery Act, which would allow the FTC to return to its four-decade pattern of invoking financial penalties without trial, and pursue restitution, refund of property and other monetary relief.
Included in the bill is the addition of the term “has violated,” which, while it may seem insignificant, would give the FTC the authority to seek injunctions for conduct that is no longer occurring. In particular, this bill would extend the three-year limitation found in Section 19 to ten. Combined with the power to seek monetary relief without administrative adjudication, this could lead companies to be vulnerable to the loss of a decade worth of assets.
“A major problem with the insertion of “has violated” into 13b is the draft language offers no clear statute of limitation for how far back the agency can go to address past conduct that is no longer occurring in the market,” wrote Executive Vice President, Chief Policy Officer and Head of Strategic Advocacy at the U.S. Chamber of Commerce Neil L. Bradley in a letter introduced to the Senate Committee in April.
The new bill introduced by Congressman Cárdenas also erases the phrase “a reasonable man would have known under the circumstances [that the conduct] was dishonest or fraudulent,” which is included in Section 19’s language to set boundaries for its use.
The FTC is seeking to address legitimate concerns through the proposal of this new bill. There is an undertone within their approach to policymaking that suggests the commission is preparing for battles with anti-trust and big data. Creating clear lines in the sand now would slow down the agency’s ability to pursue tech companies known for changing so rapidly that they make laws obsolete. In the meantime, however, direct selling leaders are beginning to express concern that the agency is asking for powers that are meant to belong to Congress.
“There is a rule-making process where Congress can make a law,” the chief executive said. “They want to shortcut that by going straight to 13(b) without allowing any comment or oversight, decide something is wrong and come after companies. Frankly, that’s not the American way.”
From the July 2021 issue of Direct Selling News magazine.
From the Editors: It is important to those in the channel to be educated and aware. DSN will continue to
monitor and observe these rulings. Updates to this article may be posted as needed