SCOTUS Decision in Liu v. SEC and FTC Implications

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Maybe the FTC Can’t Take That to the Bank: The Supreme Court’s Decision in Liu v. SEC and Its Implications for the FTC’s Ability to Seek Equitable Monetary Relief

by: Thomas Dillickrath, Joy O. Siu of Sheppard, Mullin, Richter & Hampton LLP - Antitrust Law Blog

Monday, July 13, 2020

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On July 9, 2020, the U.S. Supreme Court granted petitions for certiorari in FTC v. Credit Bureau Center and AMG Capital Management, LLC v. FTC, cases that question the Federal Trade Commission’s authority to demand equitable monetary relief such as restitution and disgorgement under Section 13(b) of the FTC Act, which expressly authorizes courts to issue “injunction[s]” without express reference to equitable monetary relief. The Court’s decision in these cases will have sweeping ramifications for the FTC, which has referred to its efforts to obtain disgorgement under Section 13(b) of the FTC Act as “a cornerstone of the FTC’s enforcement program for more than 30 years.”^[1]

The Court’s recent decision in Liu v. SEC^[2] sheds light on how the Court may approach Credit Bureau and AMG. In Liu, the Court held that the Securities and Exchange Commission can obtain disgorgement as a form of “equitable relief”—but only to the extent the award “does not exceed a wrongdoer’s net profits and is awarded for victims” under 15 U.S.C. § 78u(d)(5). There, the SEC brought a civil enforcement action against defendants, who were accused of violating the federal securities laws by misappropriating nearly $20 million of investor funds. The SEC sought disgorgement of $26 million, equal to the full amount defendants had raised from investors. The district court ordered defendants jointly and severally liable for the full amount. In doing so, the court rejected defendants’ contention that they should be permitted to deduct legitimate business expenses from the disgorgement figure, and did not require the SEC to distribute the disgorged funds to the victims of the fraud. The Ninth Circuit affirmed.

On appeal, defendants argued the SEC was not authorized to obtain disgorgement under Section 78u(d)(5), which empowers the agency to obtain only “equitable relief.” Relying on the Court’s 2017 decision in Kokesh v. SEC^[3]—which held that a disgorgement order in an SEC enforcement action constitutes a “penalty”—defendants asserted that disgorgement was a punitive sanction, which, historically, was not considered equitable in nature.

The Court disagreed. However, the Court cautioned that disgorgement should not be awarded in a manner that “test[s] the bounds of equity practice” such as “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 fraud.”

Like the statute in Liu, Section 13(b) does not expressly authorize disgorgement—indeed, it arguably is even more limited than the SEC statute in that it only authorizes the FTC to seek “injunctions.” Notwithstanding this language, however, most courts have interpreted the Act to implicitly authorize equitable monetary relief, including restitution and disgorgement.^[4]

But in 2019, the Seventh Circuit, in a 2-1 decision rejected that interpretation as “starkly atextual” and held in FTC v. Credit Bureau Center, LLC that “[S]ection 13(b)’s permanent injunction provision does not authorize monetary relief.”^[5] On that basis, the court overturned a district court order that required a credit-monitoring service and its principal to pay a $5.2 million award to the FTC under Section 13(b). In so holding, the Seventh Circuit reversed its own decision in FTC v. Amy Travel Serv., Inc., 875 F.2d 564 (7th Cir. 1989), and acknowledged that it was creating a circuit split. Following the FTC’s petition to the Supreme Court for a writ of certiorari, Credit Bureau argued that certiorari should be denied because “the Court’s discussion of equitable practice in Liu corroborates the Seventh Circuit’s straightforward conclusion that ‘[r]estitution isn’t an injunction.’”^[6] However, the Supreme Court has now elected to take on the circuit split and provide well-needed clarity on the scope of Section 13(b).

Regardless of the Court’s decision in Credit Bureau and AMG, Liu already has broad consequences for the FTC, which files dozens of suits each year under Section 13(b) seeking to recover billions of dollars in disgorgement and restitution. First, Liu clarifies that any restitution and disgorged funds must be turned over to consumers, a practice the FTC currently engages in when “practicable.”^[7] However, when the FTC determines such distribution is not practicable, “funds are transferred (disgorged) to the Treasury . . . .”^[8] Second, Liu appears to limit the FTC’s ability to obtain joint and several awards against multiple defendants—a tactic the FTC has employed increasingly over the years—by clarifying that “impos[ing] disgorgement liability on a wrongdoer for benefits that accrue to his affiliates” is “at odds with the common-law rule requiring individual liability for wrongful profits.” Finally, Liu indicates that, going forward, the FTC may only be able to seek “ill-gotten profits[,]” not “net revenues” as it typically seeks under Section 13(b), and as was sought by the SEC in Liu.