Richard Newman Authors Article for mThink on Supreme Court Limitation of Regulatory Disgorgement Remedy
FTC compliance and defense lawyer Richard B. Newman recently authored an article for mThink titled “Supreme Court Limits Regulatory Right to Disgorgement in Judicial Enforcement Actions.”
The article examines the June 2020 Supreme Court opinion in Liu v. Securities and Exchange Commission. The article discusses how 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 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.
Mr. Newman states, “[t]he opinion was authored 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.”
Mr. Newman notes that the opinion states that courts have 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 also considers the Liu petitioners’ equity-based argument related to the failure of the SEC to return funds to victims (instead, depositing a portion of collected funds in the Treasury).
However, the parties focused on the broad question whether any form of disgorgement may be ordered and did not fully brief these narrower questions. Thus, the Court did not decide them. Instead, the Court discussed principles that may guide the lower courts’ assessment of these arguments on remand.
Mr. Newman concludes that the opinion in Liu could “bolster the agency’s enforcement and investigational posture with respect to its authority to obtain equitable monetary relief under Section 13(b) of the FTC Act.” “[I]t may also embolden defendants and recipients of civil investigative demands (CIDs) to challenge longstanding FTC remedial theories, including, but not limited to, measuring “equitable” monetary relief under Section 13(b) of the FTC Act by consumers’ loss, alone.”
Mr. Newman also comments that “if the disgorgement calculation is challenged by defendants, the FTC may conceivably argue that the entire profit of a business or undertaking results from wrongdoing, and that no equitable deductions are warranted. The agency could also conceivably argue that a profits-based remedy is inconsistent with the equitable principles underlying the FTC Act.”
Time will tell if the FTC’s aggressive imposition of joint and several to disgorge funds from multiple defendants for profits that were only realized by others is now also vulnerable to attack.
The National Law Review has also featured an article by Mr. Newman covering the Liu decision.
If you are interested in learning more about the implications of the Liu opinion or are the target of an FTC action, consult with an experienced FTC practice attorney that defends regulatory lawsuits and investigations.
Richard B. Newman is an advertising practices attorney at Hinch Newman LLP.
Informational purposes only. Not legal advice. May be considered attorney advertising.