A federal appeals panel has upheld a $5.2 million fine federal regulators levied against a firm accused of operating a credit monitoring scam.
But at the same time, the appellate judges refused to let the federal government claim any portion of the penalty remaining after victims of the alleged scam are compensated.
The Aug. 30 opinion from the U.S. Seventh Circuit Court of Appeals is the latest development in a lengthy procedural history that started with the Federal Trade Commission’s 2017 lawsuit against Credit Bureau Center for alleged violations of the FTC Act, the Restore Online Shoppers’ Confidence Act and the Fair Credit Reporting Act.
Diane S. Sykes
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Judge Diane Sykes wrote the panel’s opinion, which she called “the latest chapter in a complicated case that has had a long and winding journey through the federal courts, including a trip to the Supreme Court and back.” Judges Joel Flaum and Michael Brennan concurred.
The underlying allegations are that Credit Bureau Center, operated by Michael Brown, used what marketers call a “negative option feature” through which visitors who apply for a free credit report find themselves automatically enrolled in a $30 monthly subscription. The company also stands accused of posting online advertisements for fake rental properties which direct shoppers to the “free” credit score websites.
U.S District Judge Matthew Kennelly initially entered a permanent injunction and ordered more than $5 million in financial relief. When an earlier U.S. Seventh Circuit Court ruling vacated the restitution, saying the applicable FTC law doesn’t authorize such an award, the FTC went back to Kennelly seeking to have the penalty reimposed under a different section of the same law.
Kennelly said that determination overruled the Seventh Circuit’s own 1989 opinion in FTC v. Amy Travel Services. The U.S. Supreme Court took up the issue, and in a 2021 unanimous opinion, which also analyzed a 2019 U.S. Ninth Circuit Court of Appeals opinion, AMG Capital Management v. FTC, agreed the FTC couldn’t seek restitution or disgorgement. Coming back before Kennelly, the FTC asked to seek monetary relief under FTC Act section 19, to which he ultimately agreed.
On appeal again before the Seventh Circuit, Brown “attacks the amended judgment on multiple grounds,” Sykes wrote. “While numerous, his arguments are mostly meritless.”
However, the panel said Section 19 is remedial in scope, and as such it was wrong for Kennelly to say money left over should be “deposited to the U.S. Treasury as disgorgement.”
Brown argued the Seventh Circuit’s initial vacation of the fine meant the FTC couldn’t obtain any financial award, but Sykes reiterated the decision addressed under which statutory provision recovery might be possible.
The decisions in Amy Travel and AMG Capital “overturned a longstanding — but mistaken — consensus among the circuits” Sykes wrote, which laid the groundwork for a motion to amend the initial judgment.
The panel further rejected Brown’s arguments the FTC forfeited its right to pursue relief under Section 19. It first noted the initial FTC complaint alleged a violation of a part of the Restore Online Shoppers’ Confidence Act that incorporates Section 19, and also said the initial action preceded the AMG Capital ruling that changed the relief framework.
Brown also challenged the amount of the award itself. The panel said the reinstated total, $5,260,671, equals the revenue minus refunds, chargebacks and a settlement from people with whom Brown contracted to drive up web traffic.
“The amended monetary award appropriately refunds to customers the amount that has not yet been returned by Brown or his coconspirators,” Sykes wrote. “Because the monetary award consists of direct consumer redress in the form of refunds — a form of relief expressly permitted by the statute — it need not be measured by net profits and tracing is not required.”
Finally, Brown said the award should be limited because the FTC’s action focused on sites specific to Craigslist allegations, and therefore activated on Dec. 1, 2015, exempting sites active in the preceding 14 months. However, the panel said, Brown’s argument was both underdeveloped and void for not being introduced before a reply brief during the litigation’s first swing through the federal district court.
The panel said the FTC acknowledged excess money couldn’t be deposited in the Treasury as disgorgement, corrected that error and otherwise affirmed Kennelly’s judgment.
Defendants have been represented by attorney Stephen R. Cochell, of Houston.