Richard B. Newman Quoted in Bloomberg Law on How SCOTUS Decision in Liu May Have Significant Implications on the FTC’s Monetary Disgorgement Power
Richard B. Newman, an advertising practices and FTC defense attorney at Hinch Newman LLP, was quoted in a Bloomberg Law article on the highly anticipated decision by the U.S. Supreme Court in Liu v. SEC.
On June 22, 2020, the Supreme Court held that the Securities and Exchange Commission can obtain disgorgement as a form of “equitable relief,” but can only do so to the extent the award “does not exceed a wrongdoer’s net profits and is awarded for victims.” The decision and its “net profits” limitation may result in serious consequences with respect to the scope of equitable relief the Federal Trade Commissions can obtain.
“Companies challenging the FTC may now have leverage to reduce a disgorgement amount, especially if the award exceeds net profits,” said Mr. Newman. The decision in Liu enhances the litigation and settlement posture of defendants and respondents facing judicial enforcement actions and investigations, respectively.
While the Supreme Court emphasizes in Liu that its holding is limited to a finding that the SEC possesses disgorgement authority, it signaled that its proper exercise is subject to three restrictions: (i) disgorgement limited to “net profits,” allowing for deduction of legitimate business expenses, rather than of all revenue; (ii) limitation of a defendant’s disgorgement liability to only its net profits, rather than having “joint and several liability” for the net profits of multiple defendants; and (iii) distribution of disgorged net profits to the victims of the wrongdoing, rather than to the federal treasury.
Unless the “entire profit of a business or undertaking” results from the wrongful activity, the Supreme Court stated, legitimate expenses such as rent, equipment, salaries and vendor payments should be deducted in calculating the disgorgement award. In the advertising and marketing context, this could potentially also include advertising, marketing, media, fulfillment, customer service and other expenses not tethered to the alleged unfair or deceptive business practice.
Additionally, the FTC commonly obtains “joint and several” orders of restitution. The Supreme Court’s decision in Liu may limit the FTC’s ability to obtain joint and several awards against multiple defendants, instead requiring separate awards against individual each defendant for the ill-gotten gains attributable specifically to each.
The Liu Court also suggested that monetary awards must be returned to consumers, rather than being deposited into the U.S. Treasury.
In an FTC context, practically speaking, the Liu decision could potentially result in no disgorgement whatsoever if there are no net profits. It will be interesting to see whether the Supreme Court grants certiorari in the Credit Bureau Center matter (Seventh Circuit ruling that that Section 13(b) of the FTC Act does not implicitly authorize an award of restitution) and end the FTC’s authority to seek disgorgement or restitution completely, or if it will simply permit the lower courts decide how to apply the equity principles set forth in Liu, themselves.
Richard B. Newman is an advertising practices attorney at Hinch Newman LLP.
Informational purposes only. Not legal advice. May be considered attorney advertising.