Much-Needed Clarity on Disgorgement from the Supreme CourtJune 24, 2020
A Supreme Court decision this week shows good potential to upend FDA and FTC’s claim that they can without limits seek disgorgement of “profits” from defendants who engage in unlawful activities. In Liu v. Securities and Exchange Commission, the question was whether the SEC could obtain disgorgement of all the money received by a defendant which has engaged in unlawful activity, under the SEC’s general statutory authority to obtain equitable injunctive relief. The lower courts had held that the SEC could force disgorgement as an equitable remedy, but the Supreme Court vacated and remanded that award. Considering the already tenuous grounds that FDA and FTC rely on to demand disgorgement, this case sets the stage for future challenges to these agencies’ ability to obtain disgorgement and restitution pursuant to their authorizing statutes.
Justice Sonia Sotomayor wrote the Opinion in which all the Justices joined except Justice Clarence Thomas, who would have gone further to hold that disgorgement was wholly unavailable because “disgorgement is not a traditional equitable remedy.” The majority Opinion struck a middle ground, however, finding it “inequitable that [a wrongdoer] should make a profit out of his own wrong,” even if the term “disgorgement” has not always been recognized by equity courts. But even if disgorgement is allowable equitable relief, the Court delineated several limits on disgorgement “to avoid transforming it into a penalty” beyond courts’ equitable powers. First, disgorgement is permissible only as a way to return the defendant’s wrongful gains to those harmed. This limitation cast serious doubt on the SEC’s ability to put some or all of the disgorgement award into the U.S. Treasury. (Similarly, the FTC and FDA commonly ask that courts put disgorgement awards into the U.S. Treasury.) Second, the amount of disgorgement should be limited to the profits obtained by an individual defendant, making joint and several liability relief unjustified. And third, disgorgement should generally only apply to “net” profits, taking into account expenses, rather than all revenues from the wrongful acts. Although the Court declined to decide whether the SEC had pursued disgorgement in violation of these limitations, the guiding principles it laid out strongly lean against the disgorgement amount previously awarded being awarded again on remand.
In evaluating whether disgorgement was available in this case, the Court parsed the language of the Securities Exchange Act, 15 U.S.C. § 78u(d)(5): “In any action or proceeding brought or instituted by the Commission under any provision of the securities laws, . . . any Federal court may grant . . . any equitable relief that may be appropriate or necessary for the benefit of investors.” (Emphasis added.) And even with this explicit language giving courts the power to grant “any equitable relief” for securities violations, the Court still vacated the award and remanded for consideration of whether disgorgement here was fashioned pursuant to the limiting principles for equitable relief set forth above.
In contrast, the FDC Act and the FTC Act contain more limiting language about the availability of equitable relief in conjunction with an action brought under these statutes. Indeed, nowhere in the FDC Act is there any mention of equitable relief, such as disgorgement or even restitution. Rather, FDA simply relies on the vague statement that courts can “restrain violations” of the FDC Act to support its demand for disgorgement and/or restitution: “The district courts of the United States and the United States courts of the Territories shall have jurisdiction, for cause shown to restrain violations of section 301 . . . .” 21 U.S.C. § 332(a). There is no doubt that Congress specifically authorized FDA, through DOJ, to bring injunction actions under the FDC Act, but it does not come close to the language in the securities law authorizing courts to grant “any equitable relief” as part of the injunctive remedy. See also Jeffrey N. Gibbs and John R. Fleder, Can FDA Seek Restitution or Disgorgement?, 58(2) Food & Drug L.J. 129 (2003).
And Section 13(b) of the FTC Act similarly suffers from the same problem. It provides that “in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction” in a federal district court. 15 U.S.C. 53(b). But like the FDC Act, it is silent on equitable relief that could include disgorgement or restitution.
We eagerly await the Court’s decision on whether to grant the petition for a writ of certiorari in FTC v. Credit Bureau Center, LLC, a case challenging whether the FTC Act authorizes courts “to enter an injunction that orders the return of unlawfully obtained funds.” See our previous posts here and here for more information about this case.