In a case that may have significant implications for the remedies available to the FTC, the Supreme Court issued its opinion yesterday in Liu v. SEC. We’ve written previously about Liu and several cert petitions now pending at the Court. The Court held that the SEC may only obtain disgorgement from defendants as equitable relief under 15 U.S.C. § 78u(d)(5) to the extent the disgorgement is limited to the defendant’s net profits gained from the defendant’s unlawful conduct. This decision is poised to impact the FTC’s authority to obtain disgorgement under Section 13(b) of the FTC ACT, which like Section 78u(d)(5) only provides for “equitable” forms of relief. Indeed, the Court’s decision may have a particularly dramatic impact on parties other than the actual advertiser litigating against the FTC, such as payment processors, whose net profits from alleged unlawful conduct are typically dwarfed by the alleged gross losses to consumer for which the FTC seeks to hold the defendant responsible.
Out of the gate, the Court declined to extend its prior opinion in Kokesh v. SEC to hold that disgorgement is always a penalty, and thus beyond the statute’s authorization for equitable relief. Ultimately, the Court stood by long-standing precedent that a federal agency’s ability to strip wrongdoers of ill-gotten gains constitutes an equitable remedy—provided certain boxes are checked.
First, and most significant, the Court stated that disgorgement is only equitable relief if the defendant’s ill-gotten gains are calculated based on the net profits the defendants gained from the unlawful conduct. The FTC increasingly seeks to hold defendants jointly and severally liable for the gross losses that consumers suffered, rather than the net profits defendants gained from allegedly illegal conduct. In the FTC context, the Liu decision would seem to require that the FTC show some connection between the profits and the illegal conduct. The Court did note that when the entire profit of a business results from wrongdoing, lower courts may not need to account for expenses. How the lower courts interpret all of this in the FTC context will likely provide fodder for litigation for a bit.
Second, in order for disgorgement efforts to qualify as equitable, the Court held that the disgorged funds must be returned to investors, where feasible. This is based, in part, on the long-standing equity principle of constructive trust, where wrongful gains are returned to wronged victims. Although the Court noted that Section 78u(d)(5) is silent as to whether depositing disgorged funds into the U.S. Treasury satisfies appropriate relief for investors, it held that disgorgement as an equitable remedy must do more than benefit the public at large.
In addition to creating a better definition regarding what transforms disgorgement from an equitable remedy to a punitive measure, the Court also indicated that seeking joint and several liability for disgorged funds from certain parties may transform otherwise equitable disgorgement into an unauthorized penalty. Indeed, the Court appeared to acknowledge that joint and several liability for ill-gotten gains should be appropriately limited to those “partners engaged in concerted wrongdoing.” Opinion at 18. This limitation could significantly impact the FTC’s efforts to hold payment processors and other service providers jointly and severally liable for those losses suffered by those customers with whom the service provider did business, and would seem to overrule the 11th Circuit’s opinion in FTC v. Universal Processing Services.
Given the parallels between the SEC’s and FTC’s disgorgement authority, the Liu decision will likely impact the FTC’s ability to seek disgorgement under Section 13(b). We expect to see aggressive challenges to the FTC’s calculation of disgorgement under Section 13(b), as well as its authority to hold defendants jointly and severally liable for the profit gained by others. In addition, there are still two certiorari petitions pending at the Court that challenge the ability of the FTC to obtain disgorgement. How the Liu case impacts the Court’s treatment of those petitions remains to be seen. Continue to check-in here as the wake of Liu will quickly develop.