Mergers & Antitrust Law News

INSIGHT: The SEC Survives Liu, but FTC Is on Deck

July 10, 2020, 8:01 AM

In Liu v. SEC, the U.S. Supreme Court confronted the question whether the Securities and Exchange Commission’s authority in civil enforcement actions to obtain “any equitable relief that may be appropriate or necessary for the benefit of investors” includes the ability to order defendants to repay any funds that the defendants received from purported victims.

Observers wondered whether the court might hold that such punitive disgorgement awards are not an appropriate form of “equitable relief” under the SEC’s authorizing statute. But the court reached a middle ground: it upheld the SEC’s authority to seek disgorgement of ill-gotten gains, but imposed potentially significant limitations on the scope of that remedy.

One observer keenly following the Liu case has been the Federal Trade Commission. In fact, a group of former senior FTC officials filed an amicus brief in Liu, urging the Supreme Court not to issue a ruling in that case that could curtail the FTC’s enforcement authority.

Restitution and Disgorgement: A Cornerstone of FTC Enforcement Efforts

Like the SEC, the FTC historically has pursued expansive restitution and disgorgement awards based on an authorizing statutory provision that does not appear, on its face, to contemplate such relief. Indeed, pursuing such monetary remedies has become a cornerstone of the FTC’s enforcement efforts.

Over just the last few years, the FTC has relied on the provision to obtain equitable relief totaling billions of dollars.

Section 13(b) of the Federal Trade Commission Act authorizes the FTC to bring an action in federal court against any person who “is violating, or is about to violate, any provision of law enforced by” the FTC in order to “enjoin any such act or practice” and obtain a “permanent injunction.” (15 U.S.C. § 53(b).)

While this section only explicitly authorizes the FTC to seek restraining orders and injunctions to prevent ongoing misconduct, the courts of appeals had uniformly held for several decades that a district court’s authority to grant a “permanent injunction” under Section 13(b) includes the authority to require wrongdoers to return money that they illegally obtained. Those courts generally relied on two prior Supreme Court decisions—Porter v. Warner Holding (1946) and Mitchell v. Robert DeMario Jewelry (1960)—that broadly construed the powers courts may exercise pursuant to equitable jurisdiction granted by Congress, unless Congress specifically provides otherwise.

But in its August 2019 decision in FTC v. Credit Bureau Center LLC, the Seventh Circuit reversed its own long-standing precedent and split with seven other circuits to hold that Section 13(b) “does not authorize restitutionary relief.” (937 F.3d 764, 767.)

In reaching its conclusion, the court pointed out that the plain text of Section 13(b) does not expressly mention the authority to seek restitution; noted that other statutory provisions do authorize the FTC to pursue such relief; and relied upon the Supreme Court’s “more limited understanding of judicially implied remedies” in recent years. The Seventh Circuit accordingly rejected the FTC’s argument that, when Congress empowered the agency to seek an “injunction,” it implicitly included the authority to seek restitution.

Unsurprisingly, the FTC has petitioned the Supreme Court to review the Credit Bureau decision, arguing that the decision “threatens the FTC’s ability to carry out its mission by eliminating one of its most important and effective enforcement tools.” The FTC noted that it brings dozens of cases each year seeking injunctions that return funds to consumers under Section 13(b). As of mid-2019, 55 such cases were pending in district courts.

On July 9, the Supreme Court granted the FTC’s petition in Credit Bureau. The court will hear the case next term and issue a decision by June 2021.

Liu May Give FTC Cause for Concern

On its face, the Supreme Court’s opinion in Liu does not dictate the outcome of the issue presented in Credit Bureau—a point on which all parties in the Credit Bureau case and two other related cases agreed. That is because the authorizing statutory language that the court analyzed in Liu (“equitable relief”), differs from Section 13(b)’s operative language (“permanent injunction”).

But the court’s analysis of what historically constitutes “equitable relief”—a term that would seem broader than “permanent injunction”—may give the FTC cause for concern.

To determine whether the SEC’s authority to seek “equitable relief” included disgorgement, the Liu court examined the categories of relief that traditionally were available in courts of equity. The court explained that scholars and courts had used “various labels” to describe the equitable practice of “stripp[ing] wrongdoers of their ill-gotten gains.” But the court did not mention “injunctions” as one of those labels. On the other hand, the Liu court cast no doubt on its prior decision in Porter, but rather cited that decision favorably in upholding the SEC’s authority to seek disgorgement.

Even if Section 13(b) authorizes restitutionary relief in general, the restrictions that Liu imposed on the SEC’s disgorgement authority may limit the FTC’s continued ability to obtain large awards. The Liu court made clear that disgorgement applies only to the wrongdoer’s net profits after deducting legitimate business expenses (as opposed to gross revenues received from purported victims).

And the court explained that, outside the context of partners engaged in concerted wrongdoing, historical equity courts had refused to impose disgorgement on a joint-and-several liability basis, which would make individuals liable for profits they never received.

Together, these limitations imposed in Liu may support the Second Circuit’s approach limiting the amount of restitution recoverable under Section 13(b) to “the benefit unjustly received by the defendants” (see FTC v. Verity Intl. Ltd., 443 F.3d 48, 66, 68 (2d Cir. 2006)), whereas other circuits allow the FTC to seek the full amount of loss to consumers as restitution, including on a joint-and-several-liability basis.

Finally, the Liu opinion casts some doubt on whether “disgorgement” funds may simply be deposited into the U.S. Treasury, instead of being returned to those harmed. Like the SEC, the FTC historically has often been unable to distribute the full amount of a defendant’s restitution payment to actual victims, and has reverted the money to the U.S. Treasury.

Although the Liu court’s analysis of this issue focused to some extent on specific language in the SEC statute, the opinion may lead courts to press the FTC to limit any future restitution awards to amounts that can actually be returned to victim consumers.

In short, whether or not the FTC’s authority to seek any restitution survives after Liu, the FTC may expect this decision to have a profound impact on what it described as “one of its most important and effective enforcement tools.”

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Alex Willscher is a partner in Sullivan & Cromwell’s Litigation Group and the deputy managing partner of the firm’s Criminal Defense and Investigations Group.

Judd Littleton is a partner in Sullivan & Cromwell’s Litigation Group and co-head of the firm’s Appellate Practice.

Karl Bock is an associate in Sullivan & Cromwell’s Litigation Group.

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