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Federal Trade Commission v. Credit Bureau Center, LLC

United States Court of Appeals, Seventh Circuit

August 21, 2019

Federal Trade Commission, Plaintiff-Appellee,
Credit Bureau Center, LLC, and Michael Brown, Defendants-Appellants.

          Argued April 17, 2019

          Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 17 C 194 - Matthew F. Kennelly, Judge.

          Before Manion, Sykes, and Brennan, Circuit Judges.


         Michael Brown is the sole owner and operator of Credit Bureau Center, a credit-monitoring service. (We refer to both collectively as "Brown.") Brown's websites used what's known as a "negative option feature" to attract customers. The websites offered a "free credit report and score" while obscuring a key detail in much smaller text: that applying for this "free" information automatically enrolled customers in an unspecified $29.94 monthly "membership" subscription. The subscription was for Brown's credit-monitoring service, but customers learned this information only when he sent them a letter after they were automatically enrolled. Brown's most successful contractor capitalized on the confusion by posting Craigslist advertisements for fake rental properties and telling applicants to get a "free" credit score from Brown's websites.

         The Federal Trade Commission eventually took notice. It sued Brown under section 13(b) of the Federal Trade Commission Act ("FTCA"), 15 U.S.C. § 53(b), alleging that the websites and referral system violated several consumer-protection statutes. The Commission sought a permanent injunction and restitution. Relevant here, the district judge found that Brown was a principal for his contractor's fraudulent scheme and that the websites failed to meet certain disclosure requirements in the Restore Online Shopper Confidence Act ("ROSCA"). Id. § 8403. The judge entered a permanent injunction and ordered Brown to pay more than $5 million in restitution to the Commission.

         Brown now concedes liability as a principal for his contractor's Craigslist scam. And he doesn't dispute that his own websites failed to meet some of ROSCA's disclosure requirements. So we have no trouble affirming the judge's decision to hold him liable for both. We also affirm the issuance of a permanent injunction. Brown's argument there rests on an erroneous understanding of the Eighth Amendment's Excessive Fines Clause.

         But the restitution award is a different matter. By its terms, section 13(b) authorizes only restraining orders and injunctions. But the Commission has long viewed it as also authorizing awards of restitution. We endorsed that starkly atextual interpretation three decades ago in FTC v. Amy Travel Service, Inc., 875 F.2d 564, 571 (7th Cir. 1989). Since Amy Travel, the Supreme Court has clarified that courts must consider whether an implied equitable remedy is compatible with a statute's express remedial scheme. See Meghrig v. KFC W., Inc., 516 U.S. 479, 487-88 (1996). And it has specifically instructed us not to assume that a statute with "elaborate enforcement provisions" implicitly authorizes other remedies. Id. at 487.

         Applying Meghrig's instructions, we conclude that section 13(b)'s grant of authority to order injunctive relief does not implicitly authorize an award of restitution. Every reason Meghrig gave for not finding an implied monetary remedy applies here. Most notably, the FTCA has two detailed remedial provisions that expressly authorize restitution if the Commission follows certain procedures. Our current reading of section 13(b) allows the Commission to circumvent these elaborate enforcement provisions and seek restitution directly through an implied remedy.

         Stare decisis cannot justify adherence to an approach that Supreme Court precedent forecloses. Accordingly, we overrule Amy Travel and hold that section 13(b) does not authorize restitutionary relief.[1] Because the Commission brought this case under section 13(b), we vacate the restitution award.

         I. Background

         In January 2014 Brown contracted with Danny Pierce to direct customers to his credit-monitoring service. Brown gave Pierce several functionally identical websites with names like "eFreeScore. com" and "" to use for referrals. As their names suggest, these websites invited people to sign up for a "free credit report and score." But signing up for the free score also automatically enrolled applicants in Brown's credit-monitoring service, which charged a monthly subscription fee.

         Brown didn't tell prospective customers about the credit-monitoring service. His websites almost entirely focused on the free credit score and report. Three disclaimers, buried in much smaller font, told consumers that applying for the free offer also enrolled them in an unspecified "membership" subscription that cost $29.94 each month. Customers later learned that this subscription was for credit monitoring when Brown sent them a letter after the automatic enrollment.

         Pierce did nothing to clear up this confusion. Indeed, it's undisputed that his method for drumming up referrals was fraudulent. He subcontracted with Andrew Lloyd, who posted Craigslist advertisements for nonexistent rental properties at bargain prices. Lloyd invited prospective tenants to email the landlord. Posing as the "landlord," he then responded and instructed them to obtain a credit report and score through one of Brown's websites. But once applicants got this "free" information-and were automatically enrolled in the credit-monitoring service-Lloyd stopped replying to emails.

         The plan was effective. Pierce quickly became Brown's most successful recruiter. Over the course of their relationship, Pierce referred more than 2.7 million customers to Brown, generating just over $6.8 million in revenue. Unsuspecting customers were understandably upset. They flooded Brown's customer-service operators, questioning the monthly subscription charge. They complained that the Craigslist advertisements were scams. And many were blindsided by the fact that requesting a free credit score automatically enrolled them in a costly credit-monitoring service. Brown told his customer-service team to deny any involvement with Pierce's operation. And although Brown typically agreed to cancel future charges, he often refused to issue refunds. He also instructed his representatives to offer reduced prices to retain customers. Some customers accepted the offer, but others told their credit-card companies to cancel Brown's charges. Credit-card companies cancelled more than 10, 000 of Brown's charges.

         Consumers complained to the Commission, which opened an investigation. In January 2017 it sued Brown under section 13(b) of the FTCA seeking an injunction and restitution. The Commission alleged that the Craigslist advertisements violated the FTCA's prohibition on "unfair or deceptive acts or practices." 15 U.S.C. § 45(a). The suit also alleged that Brown's websites violated the same provision of the FTCA, as well as ROSCA, id. § 8403; the Fair Credit Reporting Act ("FCRA"), id. § 1681j(g); and the Free Credit Reports Rule, 12 C.F.R. §§ 1022.130-.138.

         On the Commission's motion, the judge issued a temporary injunction, froze Brown's assets, and appointed a receiver to manage his company. Brown and the Commission later filed cross-motions for summary judgment. In addition to contesting liability, Brown argued that section 13(b) doesn't authorize an award of restitution and, alternatively, that it doesn't authorize penalties or legal restitution (as opposed to equitable restitution, which requires tracing a plaintiff's entitlement to a particular account or fund).

         The judge ruled for the Commission across the board, holding that Brown violated the FTCA as a principal for the Craigslist scheme and that the websites violated the FTCA, ROSCA, the FCRA, and the Free Credit Reports Rule. The judge issued a permanent injunction that imposed extensive conditions on Brown's continued involvement in the credit-monitoring industry and ordered Brown to pay $5, 260, 671.36 in restitution. He also denied Brown's motion to unfreeze funds to pay his attorneys.

         II. Discussion

         Brown contests his liability, the permanent injunction, and the restitution award. Different standards of review apply. For liability, we review the summary judgment de novo, viewing the evidence in the light most favorable to Brown and drawing reasonable inferences in his favor. Holloway v. Soo Line R.R. Co., 916 F.3d 641, 643 (7th Cir. 2019). We review the judge's decision to enter a permanent injunction for abuse of discretion. SEC v. Yang, 795 F.3d 674, 681 (7th Cir. 2015). Finally, Brown's challenge to the restitution award raises legal questions, which we review de novo. Breneisen v. Motorola, Inc., 656 F.3d 701, 704 (7th Cir. 2011).

         A. Liability Issues

         The Commission sued under section 13(b) of the FTCA, which by its terms authorizes temporary restraining orders and permanent injunctions to enjoin violations of federal trade law. § 53(b)(1). To impose individual liability on the basis of a corporate practice, the Commission must prove (1) that the practice violated the FTCA; (2) that the individual "either participated directly in the deceptive acts or practices or had authority to control them"; and (3) that the individual "knew or should have known about the deceptive practices." FTC v. World Media Brokers, 415 F.3d 758, 764 (7th Cir. 2005).

         Based on the summary-judgment record, the judge held that Brown violated the FTCA as a principal for the Craigslist marketing scheme contrived by Pierce and Lloyd. He also held that Brown's websites violated the FTCA, ROSCA, the FCRA, and the Free Credit Reports Rule. Finally, the judge concluded that Brown was individually liable for the violations because he owned and operated all aspects of his company.

         While Brown concedes liability for the Craigslist scheme, he challenges his liability for the website violations. He asserts that his websites contained no misrepresentations in violation of the FTCA and satisfied ROSCA's disclosure requirements. He also argues that the Commission must enforce the FCRA and the Free Credit Reports Rule through an internal adjudication. See 15 U.S.C. § 1681s(a)(1) (stating that FCRA violations "shall be subject to enforcement by the Federal Trade Commission under section 5(b) of the Federal Trade Commission Act").

         It's unnecessary to consider every theory of liability. Brown's challenges to the injunction and restitution award do not turn on which statute his websites violated. And section 13(b) permits the Commission to seek relief against Brown for violating "any provision of law" it enforces. § 53(b).

         So we start and end with ROSCA, which restricts the use of a "negative option feature" to sell goods or services on the Internet. § 8403. A negative-option feature is "a provision [in an offer] under which the customer's silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as acceptance of the offer." 16 C.F.R. § 310.2(w); see also § 8403 (incorporating this definition by reference). ROSCA prohibits this feature unless the seller "(1) provides text that clearly and conspicuously discloses all material terms of the transaction before obtaining the consumer's billing information; (2) obtains a consumer's express informed consent before charging the consumer ...; and (3) provides simple mechanisms for a consumer to stop recurring charges." § 8403. ROSCA violations are "unfair or deceptive acts or practices" under the FTCA, so the Commission can use the FTCA's enforcement regime against violators. Id. § 8404.

         There's no dispute that Brown used a negative-option feature to enroll customers in his credit-monitoring service. The only question is whether he complied with ROSCA's disclosure requirements. In the apt words of the district judge, Brown's websites were "virtually devoid of any mention of the [credit-monitoring] service aside from the statement that the customer is to be billed for it." Moreover, Brown concealed this incomplete disclosure behind more prominent language offering a free credit score and report. The judge determined that these partial and obscure disclosures did not "clearly and conspicuously disclose[] all material terms of the transaction" or ensure that customers gave "express informed consent." § 8403(1)-(2).

         Brown focuses on the conclusion that the disclosures weren't conspicuous. He parses font sizes, details his websites' color schemes, and takes a microscope to the Commission's affidavits in an effort to highlight evidence that consumers read and understood the disclosures. But he gives only passing attention to the decisive point: His websites didn't provide certain information that ROSCA requires-namely, that the subscription was for a credit-monitoring service.

         This oversight is fatal to Brown's defense. Setting aside whether his disclosures satisfied the "clear and conspicuous" standard (and on that point we see nothing unsound in the judge's ruling that they did not), Brown violated ROSCA if the disclosures failed to provide "all material terms of the transaction." § 8403(1). The service Brown provided in exchange for the subscription is clearly a material term. See Material Term, Black's Law Dictionary (10th ed. 2014) ("A contractual provision dealing with a significant issue such as subject matter ... or the work to be done."). And the websites did not tell consumers that they were enrolling in a credit-monitoring service. Brown seeks refuge in the form letter that he delivered to new subscribers, which did provide this information. But ROSCA required Brown to disclose the material terms "before obtaining the consumer's billing information." § 8403. Brown protests that he sent the letter "almost instantaneously" upon subscription. But almost instantaneously is still too late under ROSCA.

         Brown next contends that even if corporate liability is established, he should not be held personally liable. But it's undisputed that he controlled the websites and was aware of their content. That's enough to establish personal liability for the ROSCA violations.

         B. The Permanent Injunction

         The judge held that Brown's conduct warranted a permanent injunction, applying our standard under the Securities and Exchange Act. See Yang, 795 F.3d at 681 (asking whether "there is a reasonable likelihood of future violations in order to obtain [injunctive] relief") (quotation marks omitted). The ensuing injunction imposes extensive requirements on Brown if he ever operates a credit-monitoring business again.

         We don't need to decide whether our standard for an injunction under the Securities and Exchange Act also applies to section 13(b) because Brown's challenge doesn't turn on that question. His attack on the injunction rests largely on the Excessive Fines Clause. U.S. CONST, amend. VIII. He contends that the injunction is unconstitutionally harsh and disproportionate. But he skips a necessary step in the analysis-whether the injunction is a "fine" at all. It's not. The Supreme Court has limited "fines" to "cash [or] in-kind payments] imposed by and payable to the government." Dep't of Hous. & Urban Dev. v. Rucker, 535 U.S. 125, 136 n.6 (2002) (quotation marks omitted); see also Zamora-Mallari v. Mukasey, 514 F.3d 679, 695 (7th Cir. 2008) ("The Board's removal order ... is not a 'fine,' and thus the Excessive Fine Clause of the Eighth Amendment does not apply"). Because an injunction isn't a fine, the permanent injunction doesn't implicate the Excessive Fines Clause.

         Brown also offers an assortment of drive-by arguments, all of which are too undeveloped to establish an abuse of discretion. See Roger Whitmore's Auto. Serv., Inc. v. Lake County, 424 F.3d 659, 664 n.2 (7th Cir. 2005) ("It is the parties' duty to package, present, and support their arguments ... ."). We affirm the permanent injunction.

         C. The Restitution Award

         The bulk of Brown's appeal challenges the restitution order. His primary argument is that section 13(b) does not authorize an award of restitution. This is fundamentally a question of statutory interpretation, but it's obscured by layers of caselaw, so bear with us while we untangle the knot. A brief overview of the FTCA's remedial structure is helpful to a proper understanding of section 13(b), so we begin there.

         The FTCA gives the Commission several tools to enforce the Act's prohibition on unfair or deceptive trade practices. Under its "cease and desist" power, the Commission adjudicates a case before an administrative law judge, who can issue an order prohibiting the respondent from engaging in the illegal conduct at issue. See 15 U.S.C. § 45(b). This order becomes final if it survives administrative appeal and judicial review. Id. § 45(g).

         A final cease-and-desist order empowers the Commission to sue the violator for legal and equitable relief, but only if "a reasonable man would have known under the circumstances [that the conduct] was dishonest or fraudulent." Id. § 57b(a)(2), (b). After it becomes final, the order also draws a line in the sand for both the respondent and anyone else who engages in the prohibited conduct. If the respondent later violates the order, the Commission can sue for civil penalties and any equitable relief "the court finds necessary." Id. § 45(/). If anyone else engages in the prohibited conduct after the order becomes final, the Commission can seek civil penalties if it can prove that the violator acted with "actual knowledge" that his conduct was unlawful. Id. § 45(m)(1)(B).

         The Commission has two other enforcement mechanisms at its disposal. First, it can promulgate rules that "define with specificity acts or practices which are unfair or deceptive." Id. § 57a(a)(1)(B). By preemptively resolving whether certain conduct violates the FTCA, rulemaking permits the Commission to pursue "quick enforcement" actions against violators. Nicholas R. Parrillo, Federal Agency Guidance and the Power to Bind: An Empirical Study of Agencies and Industries, 36 Yale J. on Reg. 165, 225-26 (2019). Once the Commission promulgates a rule, it can seek legal and equitable remedies, including restitution, from violators. See 15 U.S.C. § 57b(a)(1), (b). And if it establishes that a violator had "actual knowledge or knowledge fairly implied on the basis of objective circumstances" that his conduct violated a rule, the Commission can also pursue civil penalties. Id. § 45(m)(1)(A).

         The Commission's remaining enforcement mechanism is different. Under section 13(b) of the FTCA, the Commission can forego any administrative adjudication or rulemaking and directly pursue a temporary restraining order and a preliminary or permanent injunction in federal court. § 53(b). As noted, the Commission sued Brown under this provision.

         1. Section 13(b)

         The restitution order against Brown rests on section 13(b)'s permanent-injunction provision, which states that "in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction." Id. Brown's straightforward argument is that section 13(b) doesn't authorize restitution because it doesn't mention restitution.

         We start with the obvious: Restitution isn't an injunction. "Injunction" is of course a broad term. See Injunction, Black's Law Dictionary (10th ed. 2014) ("A court order commanding or preventing an action."). But statutory authorizations for injunctions don't encompass other discrete forms of equitable relief like restitution. See, e.g., Meghrig, 516 U.S. at 484 ("[N]either [a mandatory or prohibitory injunction] contemplates ... equitable restitution.") (quotation marks omitted); Owner-Operator Indep. Drivers Ass'n v. Landstar Sys., Inc., 622 F.3d 1307, 1324 (11th Cir. 2010) ("Injunctive relief constitutes a distinct type of equitable relief; it is not an umbrella term that encompasses restitution or disgorgement."); see also Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 365 (2011) (holding that an equitable order for backpay isn't an injunction); Nken v. Holder, 556 U.S. 418, 430 (2009) ("Whether [a deportation stay] might technically be called an injunction is beside the point; that is not the label by which it is generally known.").

         The Commission doesn't seriously argue otherwise. It instead contends that section 13(b) implicitly authorizes restitution. We endorsed that reading in Amy Travel, 875 F.2d at 571, which Brown asks us to overturn. We'll discuss Amy Travel in a moment, but we begin with a closer look at the FTCA itself. If the Commission's reading is correct, there's no need to reconsider our precedent.

         Section 13(b) provides:

Whenever the Commission has reason to believe-
(1) that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the Federal Trade Commission, and
(2) that the enjoining thereof pending the issuance of a complaint by the Commission and until such complaint is dismissed by the Commission or set aside by the court on review, or until the order of the Commission made thereon has become final, would be in the interest of the public-
the Commission ... may bring suit in a district court of the United States to enjoin any such act or practice. Upon a proper showing that, weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the public interest, and after notice to the defendant, a temporary restraining order or a preliminary injunction may be granted without bond: Provided, however, That if a complaint is not filed within such period (not exceeding 20 days) as may be specified by the court after issuance of the temporary restraining order or preliminary injunction, the order or injunction shall be dis-solved by the court and be of no further force and effect: Provided further, That in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction. ...

         An implied restitution remedy doesn't sit comfortably with the text of section 13(b). Consider its requirement that the defendant must be "violating" or "about to violate" the law. Requiring ongoing or imminent harm matches the forward-facing nature of injunctions. See 11A Charles Alan Wright et al., Federal Practice and Procedure § 2942, at 47 (3d ed. 2013) ("[I]njunctive relief looks to the future and is designed to deter ... ."). Conversely, restitution is a remedy for past actions. See 1 Dan. B. Dobbs, Law of Remedies ยง4.1(1), at 551 (2d ed. 1993) ("Restitution is a return or restoration of what the defendant has gained in a transaction."). Beyond the conceptual tension, this requirement raises an ...

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