On June 22, 2020, the Supreme Court issued its highly anticipated opinion in Liu v. Securities and Exchange Commission. In doing so, the Court rejected the Liu petitioners’ argument that the SEC is not entitled to “equitable” disgorgement of profits from unlawful activity in securities litigation, but provided for deduction of legitimate expenses.
The opinion was authored by Justice Sotomayor for a virtually unanimous bench. Justice Clarence Thomas dissented, stating that disgorgement should be unavailable as a remedy because it “is not a traditional equitable remedy.”
As stated by Sotomayor, a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is permissible equitable relief.
Whether it is called restitution, an accounting or disgorgement, the equitable remedy that deprives wrongdoers of their net profits from unlawful activity reflects both the foundational principle that “it would be inequitable that [a wrongdoer] should make a profit out of his own wrong,” and the countervailing equitable principle that the wrongdoer should not be punished by “pay[ing] more than a fair compensation to the person wronged.”
The Court also notes that courts have also generally awarded profits-based remedies against individuals or partners engaged in concerted wrongdoing, not against multiple wrongdoers under a joint and several liability theory.
The Court states that courts have occasionally awarded disgorgement in ways that test the bounds of equity practice. It opines that the Liu petitioners claim that disgorgement is necessarily a penalty under Kokesh, and thus not available at equity.
But, Kokesh expressly declined to reach that question, the Court stated.
The Liu petitioners claim that the disgorgement awarded against them crosses the bounds of traditional equity practice by failing to return funds to victims, imposing joint and several liability, and declining to deduct business expenses from the award. Because the parties did not fully brief these narrower questions, the Court does not decide them. However, certain principles touched upon by the Court are intended to guide the lower courts’ assessment of these arguments on remand.
The opinion provides ammunition to defendants and recipients of civil investigative demands to challenge the agency’s authority to obtain equitable monetary relief under Section 13(b) of the FTC Act. It will be interesting to see if and how the Supreme Court addresses these issues in the three petitions pending before it that challenge the FTC’s disgorgement powers,
From a consumer protection standpoint, FTC practice attorneys may now be better armed to defend overzealous judicial enforcement actions and civil investigative demands (CIDs).
Richard B. Newman is an advertising practices attorney at Hinch Newman LLP. Follow him on National Law Review @ FTC Defense Lawyer and on Twitter @ FTC Defense Lawyer.
Informational purposes only. Not legal advice. May be considered attorney advertising.