In an 8-1 decision, the U.S. Supreme Court ruled this past Monday in Liu v. SEC that a disgorgement award that does not exceed a wrongdoer’s net profits and is used to compensate victims is “equitable relief” that the SEC can seek in civil actions. At its conference tomorrow, the Supreme Court will be considering the FTC’s for a writ of certiorari in FTC v. Credit Bureau Center, LLC, in which the Seventh Circuit reversed its own precedent and created a circuit split by holding that the FTC does not have authority under Section 13(b) of the FTC Act to seek the return of money that was wrongfully obtained.
The section of the Securities Exchange Act at issue in Liu authorizes the SEC to seek civil penalties and “equitable relief” in civil actions. In its 2017 decision in Kokesh v. SEC, the Supreme Court held that disgorgement was a penalty for purposes of the five-year statute of limitations in 28 U.S.C. §2462 that applies to actions for the enforcement “of any civil fine, penalty, or forfeiture.” In rejecting the petitioner’s attempt in Liu to rely on Kokesh to support its argument that disgorgement could not constitute “equitable relief,” the Supreme Court indicated that it had not addressed whether a Section 2462 penalty could nevertheless qualify as “equitable relief” for purposes of the SEC’s enforcement authority. The Supreme Court found that its prior decisions “confirm that a remedy tethered to a wrongdoer’s net unlawful profits, whatever the name, has been a mainstay of equity courts.” It concluded that disgorgement is “equitable relief” available to the SEC provided it is limited to net profits from wrongdoing after deducting legitimate expenses and the relief is for the benefit of investors (which generally means that the wrongdoer’s profits are disbursed to the victims).
At issue in the FTC case is Section 13(b) of the FTC Act which authorizes the FTC to enforce Section 5 of the FTC Act by bringing civil actions in federal court seeking “a permanent injunction.” Prior to the Seventh Circuit’s decision, the circuit courts had uniformly held that a district court’s authority to grant a permanent injunction under Section 13(b) includes the authority to require disgorgement of unlawful gains. Overruling its own precedent, the Seventh Circuit concluded that Section 13(b) does not authorize monetary relief.
In its certiorari petition, the FTC argues that “it has long been understood that an injunction can provide for restitution or other forms of monetary relief to undo harm caused by the defendant’s conduct.” When citing to the circuit court decisions that have held Section 13(b) authorizes monetary relief, the FTC quotes language from those cases indicating that the injunctive authority granted to district courts by Section 13(b) includes the authority to grant all equitable remedies. If the Supreme Court grants the FTC’s petition and adopts this expansive view of Section 13(b) authority, its holding in Liu that disgorgement can be a form of equitable relief (and is not necessarily a “penalty”) would support the conclusion that Section 13(b) allows a district court to order disgorgement. However, it is questionable whether such an expansive view of Section 13(b) can be reconciled with the Court’s plain meaning approach to interpreting statutory text as most recently applied in its decision in Bostock interpreting the meaning of “sex” in Title VII.
Following the decision in Liu, the respondents in FTC v. Credit Bureau Center, LLC, filed a Supplemental Brief with the Supreme Court in which they argue that nothing in Liu provides a reason for the Court to grant the FTC’s certiorari petition and, on the contrary, Liu confirms that the Seventh Circuit’s interpretation of Section 13(b) is correct.