Supreme Court Considers Viability of Disgorgement as Regulatory Remedial Weapon
FTC compliance and defense attorney Richard B. Newman authored an article for the National Law Review titled “All Eyes on Liu as Supreme Court Considers Whether to Restrict Disgorgement as a Regulatory Enforcement Remedy.”
The article examines the Supreme Court case of Liu v. Securities and Exchange Commission where the Court is presently considering whether the SEC may seek and obtain monetary disgorgement from a federal court as “equitable relief.” The article also discusses a flurry of other judicial activity related to limitations on the FTC’s enforcement authority, as well as the Supreme Court’s recent opinion in Kokesh v. SEC. In Koeksh, the Supreme Court held that SEC disgorgement has a primarily punitive purpose.
“It is not difficult to see how, from a digital advertising and marketing standpoint, the outcome in Liu is likely to extend to Federal Trade Commission federal judicial enforcement actions, including strategies during the investigational phase,” Mr. Newman writes. “The FTC wields the threat of disgorging ill-gotten gains as a ‘equitable’ remedial threat. It also routinely seeks awards of ‘equitable’ monetary relief under Section 13(b) of the FTC Act in enforcement actions, as measured by consumers’ loss – in effect, requiring defendants to pay more than they ever actually pocketed.”
Noting that if the Supreme Court strikes down entirely or more narrowly limits the SEC’s authority with respect to disgorgement awards and how such awards are calculated, the FTC may face more aggressive legal challenges to its enforcement authority. Mr. Newman comments, “the FTC may find itself having to reconsider its enforcement policies which, in turn, could result in fewer judicial advertising enforcement actions with relatively large monetary recoveries.
Jun. 22, 2020:
On June 22, 2020, the Supreme Court ruled.
In an 8-1 decision and partial victory for the SEC, the Court upheld the SEC’s power to disgorge ill-gotten gains in civil enforcement lawsuits. Importantly, however, the Court remanded the case to the Ninth Circuit with instructions to reconsider the calculation of the award.
The decision is authored by Justice Sotomayor and limits the SEC’s authority to recover more than the amount of net income generated through unlawful conduct.
Justice Sotomayor stated that “courts have occasionally awarded disgorgement in three main ways that test the bounds of equity practice: by ordering the proceeds of fraud to be deposited in Treasury funds instead of disbursing them to victims, imposing joint-and-several disgorgement liability, and declining to deduct even legitimate expenses from the receipts of fraud. The SEC’s disgorgement remedy in such incarnations is in considerable tension with equity practices.”
“The court holds today that a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under” federal law, said Justice Sonia Sotomayor for the Supreme Court.
The Court also addressed the “Kokesh Issue,” whether or not it effectively decided in that case that disgorgement is necessarily a penalty, and thus not the kind of relief available at equity.
“Not so. Kokesh expressly declined to pass on the question. To be sure, the Kokesh Court evaluated a version of the SEC’s disgorgement remedy that seemed to exceed the bounds of traditional equitable principles. But that decision has no bearing on the SEC’s ability to conform future requests for a defendant’s profits to the limits outlined in common-law cases awarding a wrongdoer’s net gains.”
The Court also considered the Liu petitioners’ equity-based argument related to the failure of the SEC to return funds to victims (instead, depositing a portion of collected funds in the Treasury) and imposition of joint-and-several liability. However, because the parties focused on the broad question whether any form of disgorgement may be ordered and did not fully brief these narrower questions, the Court did not decide them. Rather, the Court discussed principles that may guide the lower courts’ assessment of these arguments on remand.
Justice Clarence Thomas dissented, stating that the SEC has no power to “disgorge” illegal gains from stock frauds.
This decision may bolster the FTC’s enforcement and investigational posture with respect to its authority to obtain equitable monetary relief under Section 13(b) of the FTC Act.. However, it may also embolden defendants and recipients of compulsory process to challenge longstanding FTC remedial theories, including, but not limited to, measuring “equitable” monetary relief under Section 13(b) of the FTC Act by consumers’ loss, alone.
Informational purposes only. Not legal advice. May be considered attorney advertising.