Consumers’ main federal guardian against unfair and deceptive businesses, the Federal Trade Commission, already has too few teeth when it comes to enforcing the law. On Thursday, a unanimous Supreme Court yanked another molar.
Coming on the heels of the court’s decision weakening the federal law against nuisance robocalls, the ruling might lead you to believe that the current court is virulently anti-consumer. But that’s not the issue; it’s that Congress leaves too many holes for regulatory agencies to fill. The court is identifying problems that lawmakers can easily fix — or, rather, that it could fix if it were functional.
Thursday’s ruling, written by Justice Stephen Breyer, came in the case brought against the FTC by AMG Capital Management, an online payday loan company that the commission successfully took to court in 2012.
Like the typical payday lender, AMG had borrowers sign contracts allowing the company to withdraw money automatically from their bank accounts when the loans came due in a few weeks. But according to the decision, those contracts included noxious fine print: Unless the borrower jumped through a series of hoops to instruct AMG not to renew a loan, it would not be paid off in full when due — even if that was the borrower’s intent — but instead would continue racking up finance charges for months, eventually tripling the borrower’s debt.
Bear in mind that these borrowers tended to be folks with low income or ruined credit, so they couldn’t obtain credit cards, bank loans or other lower-interest solutions. From 2008 to 2012, as the U.S. economy was bottoming out and then ever so slowly recovering, AMG issued more than 5 million of these loans. Payday lending can be a debt trap even if done honestly; AMG’s behavior was yet more predatory.
All that’s just to say that the appellant in this case is not sympathetic — at all. So perhaps it’s understandable why the commission went to court not just to stop the loans but also to try to get some of the borrowers’ money back. A federal District Court in Nevada sided with the FTC, ordering the company to pay the commission $1.27 billion to reimburse AMG’s borrowers. The 9th Circuit Court of Appeals upheld the ruling, teeing up the case for the Supreme Court.
The problem, the justices observed, is that the law doesn’t give the commission the authority to do what it did. Specifically, the court held, if the FTC wants to seek monetary penalties, it can’t go directly to court to obtain them. Instead, it has to seek a cease and desist order from an administrative law judge, then go to court and prove “‘a reasonable man would have known under the circumstances’ that the conduct at issue was ‘dishonest or fraudulent’” — for example, by showing the loans were issued after a cease and desist order. The statute also allows the commission to reach back only three years to address violations.
Prior to Thursday’s ruling, a number of lower courts had upheld the FTC’s practice of going straight to court for monetary penalties alongside injunctions, which has resulted in billions of dollars in reimbursements for defrauded Americans.
The commission, consumer advocates and state attorneys general all had urged the court to let that practice continue, arguing that it’s hard to deter businesses from ripping off consumers if the penalty is an injunction that lets the deceptive operator keep the money.
That’s not the justices’ call, though. Lawmakers gave the FTC sweeping purview over U.S. business practices but were more grudging when it came to the FTC’s power to do anything about the problems it finds. Not only is the process of clawing back the proceeds of deceptive practices cumbersome and hamstrung but the commission also has no authority to create rules, nor can it slap real financial penalties onto lawbreakers until their second offense — that is, until they violate an order issued in response to the first time they broke the law.
As with the robocall decision (which limited the Federal Communications Commission’s reach), the court in the AMG case is telling an independent agency that it can’t fill in the policy gaps left by Congress. It’s long past time for Congress to give the FTC real authority to deter unfair and deceptive practices by businesses, and Thursday’s ruling proved it.
Jon Healey is the deputy editorial page editor of the Los Angeles Times.
