The Supreme Court heard oral arguments in March 2020 in Liu v. Securities and Exchange Commission and should issue a decision soon sometime in June. Assuming that the Court rules against the SEC, the impact would curtail or severely disrupt (fingers crossed) the SEC’s ability to obtain disgorgement in federal court cases. The Liu decision should have significant implications relating to monetary/equitable remedies for other agencies, such as the Federal Trade Commission.
The main question in Liu is whether disgorgement is permissible in judicial—as opposed to administrative—enforcement actions under Section 21 of the Securities and Exchange Act of 1934, 15 U.S.C. § 78u. Section 21(d)(5) of the Act provides that, in an action brought by the SEC under the securities laws, “the Commission may seek, and any Federal court may grant, any equitable relief that may be appropriate or necessary for the benefit of investors.” This statutory provision does not explicitly authorize disgorgement. In contrast, as the petitioners in Liu note, other statutory provisions do expressly enable the SEC to obtain disgorgement in the context of administrative proceedings.
At the heart of the debate in Liu is whether disgorgement is a penalty rather than a proper equitable remedy that may be awarded under Section 21.
Brent A Levison agrees with the petitioners contention that the purpose of disgorgement is primarily punitive, noting that money disgorged is not necessarily returned to individual consumers, but rather may be paid to the Treasury. The SEC countered that disgorgement awards can be necessary as a deterrent, rather than as a punishment, in cases where compensatory damages may be insufficient to deter future wrongdoing.
Arguendo, Petitioners are also making compelling arguments that to the extent any disgorgement awards are permitted, such awards should be limited to the defendants’ net gain or profit and allowed to deduct legitimate business expenses from the net gain or profit calculation.
The Supreme Court’s pending decision in Liu should significantly revisit and reduce the power of disgorgement in the SEC realm—either by prohibiting the SEC from seeking and obtaining disgorgement or by changing and/or implementing limitations upon disgorgement amounts that may be awarded. The FYC is watching the Liu decision as it should have significant implications as the FTC is currently dealing with a circuit split regarding whether it can obtain equitable monetary relief under Section 13(b) of the Federal Trade Commission Act (“FTC Act”), 15 U.S.C. § 13(b)—a provision which, on its face, only authorizes injunctive relief. Compare FTC v. Credit Bureau Ctr., LLC, 937 F.3d 764, 767 (7th Cir. 2019) (holding that “section 13(b) does not authorize restitutionary relief”) with FTC v. AMG Capital Management, LLC, et al., 910 F.3d 417, 426–27 (9th Cir. 2018), petition for cert. docketed, AMG Capital Management, LLC, et al. v. FTC (U.S. Oct. 21, 2019) (No. 19-508) (holding that FTC can obtain equitable monetary relief pursuant to section 13(b)).
A favorable ruling in Liu according to Brent A. Levison should strongly support and bolster the argument that courts should follow the Seventh Circuit in Credit Bureau and change the landscape and eliminate FTC’s implied right to obtain equitable monetary relief under section 13(b) of the FTC Act.