In January, I wrote about emerging caselaw questioning the long-held view in the federal courts that federal law enforcement agencies, like the Federal Trade Commission and Securities and Exchange Commission, have the legal authority to require violators of their statutes to disgorge their “ill-gotten” gains. (See “Is the FTC’s Most Fearsome Power Now in Peril Before the Supreme Court?”) I discussed two cases in particular that are before the Supreme Court now. In one, FTC v. Credit Bureau Center, the FTC is asking the Court to hear and reverse a decision of the Seventh Circuit Court of Appeals holding that the FTC lacks disgorgement authority under its statute. The Court has not yet decided whether to take the case. In the other, SEC v. Liu, which the Court has accepted, it heard oral argument this month and will be issuing a decision by the end of June. Because of arguable similarities between the SEC’s and the FTC’s statutory schemes, I and other FTC attorneys and observers have been keenly interested in how the Court decides the disgorgement question in Liu because of what it could mean for the FTC’s own disgorgement powers. From the oral argument, we now have our first insights into the justices’ thinking on the issue and perhaps our first clues as to what the decision will be and its implications for the FTC’s disgorgement authority. In my judgment, having listened to the argument, both the SEC and the FTC have more reason to be optimistic about the outcome than the defendants in the two cases.
The SEC statute in question authorizes the agency to seek an injunction against a violation and “any equitable relief that may be appropriate or necessary for the benefit of investors.” It says nothing about disgorgement. The question presented to the Court, therefore, is whether “equitable relief”, as provided for in the statute, includes disgorgement. In SEC v. Kokesh, in 2017, the Supreme Court held that disgorgement was a penalty, thus making it a legal, rather than an equitable, remedy. It did so, however, only in the context of deciding whether a federal statute of limitations, which covers actions seeking penalties, applied to a case in which the SEC was seeking disgorgement. Further, in holding the statute of limitations did apply, it emphasized that it was expressing no view on the underlying issue of whether the SEC possesses disgorgement authority. During argument, Justice Ginsberg was quick to note this disclaimer and the distinction between the two cases, pointedly observing that the fact the Court held that disgorgement is a penalty (thus, not equitable relief) in one context does not mean it would reach the same conclusion in another.
While there was much esoteric argument and questioning about the parameters of “equitable relief” in the statute in light of the historical development of equitable remedies in the law, a number of justices – liberal and conservative alike – honed in on a couple of very practical questions, in a way that suggested they were looking for a solution to save the SEC’s disgorgement power. One was to inquire how often the SEC actually returns disgorged assets to victimized investors, versus simply turning the money over to the U.S. Treasury. This led to some justices suggesting that the SEC, as a condition of obtaining disgorgement, be required to return recovered funds to victims wherever feasible. The other was to ask how the disgorgement calculation worked in actual practice, specifically, what if any business expenses were excluded from the calculation. The justices seemed to show an interest in narrowing the profits to be disgorged by permitting deduction for expenses except those that directly contributed to the securities violation (i.e., expenses associated with making misrepresentations about an investment). It is always hazardous to predict an outcome in a case based on oral argument, but several members of the Court certainly seemed to be looking for a practical way to save the SEC’s disgorgement authority, while placing limits on it.
Like the SEC’s statute, the FTC’s authorizes injunctions, but unlike it, makes no provision for “equitable relief.” Because of this difference, how the Court interprets “equitable relief” in the SEC statute vis a vis disgorgement may tell us very little about how it would construe the FTC’s statute on the same question, since it does not contain those two important words. Without the “hook” of those words, the Court, should it hear Credit Bureau Center or another case challenging the FTC’s disgorgement authority, conceivably could have a harder time finding that authority in the FTC’s statute than it did in Liu. As a matter of statutory interpretation, it could come down to whether the single word “injunction,” an equitable remedy employed to prevent future harm, encompasses disgorgement, a tool used to redress past harm. If so, and if it were to be as determined to save the FTC’s disgorgement powers as it seems to be to save the SEC’s, the Court could look for inspiration to the dissenting opinion in the 7th Circuit decision in Credit Bureau Center. It argues that injunctions come in many varieties, mandatory as well as prohibitory; they are flexible enough to contain a disgorgement component for equitable restitution; and disgorgement of ill-gotten gains has a forward-looking purpose of deterrence, not just a backward-looking function of redress.
Pending the Court taking up Credit Bureau Center or a similar FTC case directly, a decision in Liu upholding but limiting the SEC’s disgorgement authority could circumscribe the FTC’s disgorgement authority in the same way. The FTC, like the SEC, has complete discretion whether to return disgorged assets to harmed consumers or give the money to the Treasury, and frequently opts for the latter. It also routinely seeks disgorgement not just of a defendant’s illicit profits, but its entire gross revenue from the challenged business activity, less chargebacks and credits. A decision in Liu limiting the SEC’s discretion in disposing of disgorged assets, by mandating their return to victims whenever feasible, and requiring deduction of business expenses not directly incurred in furtherance of the illegal scheme in the disgorgement calculation, appropriately should carry over to the FTC as well. While this would not represent the total victory that opponents of the FTC’s disgorgement authority might want, it could make a meaningful difference to FTC defendants in individual cases, and certainly provide fresh legal ammunition to their counsel as they oppose disgorgement, or seek to limit its impact on their clients.