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A timeshare company accused of defrauding property owners failed to convince a federal judge to curtail remedies sought by the Federal Trade Commission, offering the first hint at how courts will handle a new legal question going forward.
The Florida court’s decision is the first to address concerns among antitrust lawyers that a recent Supreme Court decision could endanger the FTC’s power to collect restitution and disgorgement, or limit those remedies to just a few years. The impact could be huge. The FTC reported that it collected $11.98 billion in redress and disgorgement during 2016 alone.
The defendants, J. William Enterprises, LLC (JWE) and its officers, tried to extend to the FTC the Supreme Court’s decision, Kokesh v. SEC, which limits the fees the Securities Exchange Commission can collect for wrongdoing. JWE attempted to use the high court decision as a shield against the disgorgement, restitution, refunds, and other remedies the FTC sought.
U.S. District Court for the Middle District of Florida Judge Gregory A. Presnell said he saw no reason why the Kokesh opinion should impact the FTC’s powers under the FTC Act to seek equitable remedies ( FTC v. J. William Enters., LLC , 2017 BL 379561, M.D. Fla., No. Case No: 6:16-cv-2123-Orl-31DCI, 10/23/17 ).
Presnell said Kokesh “provides no basis for this court to disregard decades of precedent” allowing disgorgement and restitution awards to the FTC. He also rejected the idea that Kokesh requires him to limit the restitution amounts to three years of violations, as the defendants requested.
The FTC’s complaint alleges that JWE’s agents called timeshare owners, often claiming to work for the property, and said that they had a renter or buyer for the target’s timeshare. They got an up-front fee from the owners and sent them contracts to advertise the property, rather than contracts to rent or buy it. They strung the timeshare owners along as long as possible, often extracting more fees and never actually selling or renting the property, the FTC said.
The FTC has had a freeze on the defendants’ assets since December 2016. After the Supreme Court decided Kokesh in June 2017, the defendants moved for judgment on the FTC’s claims for disgorgement and other equitable remedies. They argued that the FTC Act and the Telemarketing Rule don’t allow those penalties. They also said Kokesh limits the court’s residual powers to allow disgorgement and restitution when a statute, in this case the FTC Act, doesn’t explicitly allow them.
Legal practitioners predicted that Kokesh could cause problems in both the FTC’s antitrust and consumer protection cases. The Supreme Court held that the SEC’s disgorgement remedy is a “penalty” subject to a five-year statute of limitations. Gibson Dunn & Crutcher lawyers M. Sean Royall and Richard Cunningham noted in a paper for the Washington Legal Foundation that the FTC’s disgorgement and restitution remedies meet all the “hallmarks” of a penalty that the Supreme Court identified in Kokesh. The FTC might therefore also be subject to the five-year limit, they wrote. JWE, in fact, argued that a shorter three-year limit applies to the FTC’s claims.
Other lawyers saw in Kokesh‘s reasoning a more existential threat. If the decision is interpreted broadly, they said, it might leave the FTC without the power to seek disgorgement and restitution at all because the FTC Act doesn’t explicitly grant it. Direct advertising lawyer William Rothbart wrote in a July blog post on the topic for his Los Angeles firm, “The FTC’s power to demand and take money from defendants, for so long thought to be settled law, may not be so settled after all.”
The district court in this case rejected both attacks on the FTC’s power. Presnell held that nothing in Kokesh mandates any change to how courts in the U.S. Court of Appeals for the Eleventh Circuit have always approached the equitable powers of the FTC.
JWE’s arguments didn’t convince Pressnel, but an appeals court might feel differently.
Cunningham, the co-author of the paper on Kokesh‘s implications for the FTC, expects federal courts at all levels over the next few years to flesh out whether a new approach to these old remedies is at hand as a result of Kokesh. “I think this is an issue where there is quite a lot more to be said by the courts,” he told Bloomberg Law Oct. 25.
Defendants in a number of other cases are also advancing arguments based on Kokesh to limit or cut off restitution and disgorgement sought by the FTC. These cases will eventually work their way through the courts and likely back to the Supreme Court for clarification.
To contact the reporter on this story: Eleanor Tyler in Washington at firstname.lastname@example.org
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The court's opinion is at http://src.bna.com/tFE.
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