Ninth Circuit Affirms the FTC’s Authority to Seek Damages After AMG Capital

Last week, the Ninth Circuit Court of Appeals upheld a decision issuing a permanent injunction and over $7 million in sanctions against people engaged in an illegal multilevel marketing scheme. The court’s opinion in Federal Trade Commission (FTC) v. Noland sheds light on the scope of the agency’s power to obtain monetary relief after the Supreme Court restricted the FTC’s authority under Section 13(b) of the FTC Act in a 2021 case, AMG Capital Management v. FTC.

In Noland, the defendants attempted to use the AMG Capital decision to challenge the court’s ability to award compensatory sanctions for contempt and redress under Section 19 for a rule violation. The Ninth Circuit affirmed the district court’s rejection of those arguments.

FTC Sues Individuals Operating Illegal Pyramid Schemes

In 2020, the FTC sued four people who operated two multilevel marketing businesses: Success by Health and VOZ Travel. Both companies encouraged customers to make person-to-person sales by promising “financial freedom” and misrepresenting sellers’ earning potential. Success by Health sold nutraceuticals, and VOZ Travel purported to offer online vacation services. Despite never creating the advertised products, VOZ Travel earned over $1.1 million in revenue.

One of the defendants, James Noland, had settled a similar lawsuit with the FTC in 2002. That settlement prohibited Noland and those acting “in active concert” with him from operating any illegal marketing scheme.

After a bench trial, the district court held that the defendants operated an illegal pyramid scheme in violation of the FTC Act, the 2002 settlement agreement, and two FTC regulations: the Merchandise Rule, which requires sellers to offer refunds for delayed goods, and the Cooling-Off Rule, which requires door-to-door sellers to offer buyers a three-day cancellation window.

The district court imposed an asset freeze, issued a $7 million sanction for contempt and $6,829 in damages for the rule violations, and barred the defendants from participating in any future multilevel marketing business.

On appeal, the defendants did not dispute their liability. They instead argued that the FTC lacked authority under AMG Capital to sue for money damages without first exhausting the administrative process. The defendants asserted that the $7 million contempt sanction and lifetime bar on multilevel marketing were unduly punitive and an abuse of the district court’s discretion.

Ninth Circuit Upholds the FTC’s Remedial Authority

The Ninth Circuit rejected the defendants’ characterization of the contempt sanctions and reaffirmed the district court’s authority to issue civil sanctions that “coerce compliance” with a court order. First, the $7.3 million figure equals the defendants’ net revenue gained in violation of the 2002 settlement. The defendants had the opportunity to provide evidence to support a lower figure and failed to do so. Moreover, the FTC must return any excess funds to the defendants after consumers are compensated, preventing an alleged “windfall” to the FTC.

In appealing the $6,829 damages award, the defendants contended that AMG Capital bars the FTC from obtaining monetary relief in federal court for the rule violations, relying on language in AMG Capital that describes the FTC’s authority under Section 19 to obtain monetary damages “where the Commission has issued cease and desist orders.” The defendants argue that AMG Capital permits money damages under Section 19 only after the FTC engages in administrative proceedings, which the agency did not do.

The Ninth Circuit, through a unanimous three-judge panel, disagreed with the defendants. Section 19 provides the FTC two opportunities to litigate for money damages: under Section 19(a)(1) when a person violates any FTC rule governing unfair practices, and under Section 19(a)(2) when a person has been found liable in an FTC administrative proceeding of conduct that a reasonable person would have known under the circumstances was dishonest or fraudulent. While Section 19(a)(2) requires an administrative proceeding prior to lawsuits, Section 19(a)(1) does not, and the FTC properly relied on Section 19(a)(1) in this matter.

This interpretation aligns with a 2023 decision from the Eleventh Circuit.

Impact on Future FTC Enforcement Efforts

While the court’s opinion in AMG limited the remedies available to the FTC for violations of Section 5 of the FTC Act, the decision did not wipe out the FTC’s remedial authority. The FTC remains aggressive in using statutes and regulations that allow it to invoke its redress authority under Section 19 to attempt to obtain money for consumers.

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The author would like to thank law clerk Michaela R. Bevan for her assistance in writing this post.