Post-Liu, The Whittling Away of the FTC’s Monetary Authority Begins

As reported here (“Did the Supreme Court Just Save the FTC’s Disgorgement Authority,” June 2020), in June the Supreme Court, in Liu v. SEC, saved the Securities and Exchange Commission’s disgorgement authority, permitting it to continue to force securities law violators to cough up their “ill-gotten gains,” but also placed two potentially crippling limitations on that authority. The decision directs lower courts, in applying Liu, to: (1) limit disgorgement to “net profits” rather than sweeping in all revenue to be returned to victims of wrongdoing; and (2) limit a defendant’s disgorgement liability to only its net profits, rather than having “joint and several liability” for the net profits of multiple defendants.

While Liu is an SEC case, its principles arguably apply to other law enforcement agencies which claim to possess equitable monetary remedies such as disgorgement.  One, obviously, is the Federal Trade Commission.  Wasting no time, in a ruling last month, a federal district court has now applied the Liu disgorgement restrictions in a case involving the FTC, and extended its reach beyond disgorgement to restitution, the FTC’s other claimed equitable monetary power.   

In FTC v. Electronic Payment Solutions of America, in federal district court in Arizona (“EPS”), the FTC sued payment processors and their principals for facilitating a fraudulent business opportunity scheme perpetrated by a merchant-client and is seeking equitable monetary relief, including restitution and disgorgement.  Relying on Liu, defendants moved for summary judgment to limit any equitable monetary liability to their “net profits” and to bar joint and several liability for consumer losses.

On the first question, defendants contended that while the FTC styled its monetary claim to include restitution as well as disgorgement, its claim is actually for disgorgement and therefore, as an equitable remedy, is limited to each defendants’ net profits.  The FTC countered that disgorgement is not the sole remedy it seeks; disgorgement need not be limited to an individual defendant’s net profits; and Liu is inapplicable to the FTC because it decided only the question of the SEC’s statutory authority to award equitable relief.

The court resolved the question in defendants’ favor. While the law recognizes that disgorgement and restitution are distinguishable – the former aimed at preventing unjust enrichment and the latter at compensating victims – the court found that restitution and disgorgement operate in the same manner in a “court of equity,” which seeks fairness, not punishment, a conclusion supported by Liu.  Quoting Liu, the court observed that while equity practice has “long authorized courts to strip wrongdoers of their ill-gotten gains…to avoid transforming an equitable remedy into a punitive sanction, courts restricted the remedy to an individual wrongdoer’s net profits to be awarded for victims…. Thus only a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible” under the SEC’s statute. (emphasis added)  In short, a disgorgement order, to be an equitable form of relief, must be “restitutionary,” for the benefit of victims.  Because Liu reached this conclusion by relying on “equity jurisprudence generally, as opposed to relying on SEC jurisprudence specifically,” its holding – that a disgorgement award must be limited to a defendant’s net profits – is not “cabined” to SEC proceedings. Thus, to the extent the FTC is entitled to a disgorgement award, the court held, it must be limited to defendants’ net profits and awarded to victims.  In so holding, the court noted that its conclusion differs from those of two other district courts in the Ninth Circuit, F.T.C. v. Noland (D. Ariz.) and F.T.C. v. Cardiff (C.D. Cal.), which held that Liu is inapplicable to the FTC.

On the question of joint and several liability, defendants argued that under Liu they could now be held collectively liable only if they were “partners engaged in concerted wrongdoing,” an allegation the FTC had not made. The FTC argued that all defendants involved in consumer losses are held jointly and severally liable in the Ninth Circuit and that Liu did not foreclose its ability to seek joint and several liability.  Again siding with defendants, the court said while the Ninth Circuit has broadly held all defendants jointly and severally liable for consumer losses, under Liu joint and several liability is now limited as a permissible form of equitable relief to “partners engaged in concerted wrongdoing.” Again, because the rationale articulated in Liu was not specific to the SEC but was based on common law joint and several liability principles generally, the court held that Liu was equally applicable to the FTC.  Thus, to hold defendants jointly and severally liable for consumer losses, the FTC would be required to prove at trial that defendants were partners engaged in concerted wrongdoing.                  

Because the difference between net profits and total revenue can be so obviously enormous (in EPS, $63,000 vs. $4.67 million), the stakes of post-Liu FTC litigation are enormous.  This ensures that until the Supreme Court directly addresses the question of the FTC’s own equitable authority in the two cases it will hear this term – FTC v. Credit Bureau Center and F.T.C. v. AMG Cap. Mgmt – that squarely present the issue, the applicability of Liu to the FTC will continue to be a hotly litigated issue, as EPS, which came out one way, and two other decisions in the same circuit the other, vividly illustrate.

Talking about Direct Response, FTC, Online Marketing

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