A&B ABstract:   

For decades, the FTC has pursued defendants allegedly engaged in “unfair or deceptive acts or practices in or affecting commerce” in violation of the FTC Act.[i]  Specifically, the FTC has used Section 13(b) of the FTC Act to file dozens of lawsuits in federal court each year and recover billions of dollars in disgorgement against such defendants.  The FTC recently referred to its efforts to obtain disgorgement under Section 13(b) as “a cornerstone of the FTC’s enforcement program for more than 30 years.”[ii]  Depending on how the Supreme Court rules on forthcoming cases, the FTC may lose this “cornerstone” absent future Congressional action.

Discussion:

Section 13(b) of the FTC Act provides that, where the FTC “has reason to believe” that a person “is violating or is about to violate” the FTC Act or a law enforced by the FTC, it can pursue a preliminary or permanent injunction in federal court.[iii]  The text of Section 13(b) mentions only injunctive relief, and does not mention disgorgement or restitution.  Courts for years, however, have held that Section 13(b) provides a broad grant of equitable authority, which included disgorgement as an equitable remedy.[iv]  As one district court described it, “[t]his is not supported by the plain text of the statute, but has been read into it by well-meaning judicial efforts to effect the ‘purpose’ of the statute.”[v]  Just a few years ago, the FTC obtained its largest ever disgorgement award in a litigated case – $1.27 billion in FTC v. AMG Capital Mgmt., LLC.[vi]  And, until August 2019, the circuit courts were unanimous in allowing the FTC to obtain disgorgement in actions under Section 13(b).

FTC v. Credit Bureau Center, LLC

On August 21, 2019, the Seventh Circuit in FTC v. Credit Bureau Center, LLC, overturned prior precedent and held for the first time that “[S]ection 13(b)’s permanent injunction provision does not authorize monetary relief.”[vii]  The court “recognize[d] that this conclusion departs from the consensus view of our sister circuits,” but nonetheless held that the “plain text” of Section 13(b) does not provide for disgorgement.  To date, the FTC has not sought Supreme Court review of this decision, although it stated that it and the Office of the Solicitor General “are currently evaluating whether to file a petition for a writ of certiorari.”[viii] The FTC recently obtained an extension until December 19, 2019 to file a petition for a writ of certiorari.

FTC v. AMG Capital Mgmt., LLC

The Seventh Circuit’s decision in Credit Bureau Center followed a December 2018 concurring opinion in the Ninth Circuit case of FTC v. AMG Capital Mgmt., LLC, where two of the three judges on the panel urged the court to rehear the case en banc to overturn the circuit’s prior precedent allowing the FTC to obtain disgorgement under Section 13(b).[ix]  Rehearing was denied, and as a result, the FTC’s $1.27 billion disgorgement award was affirmed.

The FTC’s decision whether or not to seek Supreme Court review in Credit Center Bureau will be informed by the fact that AMG Capital has made its way onto the Supreme Court’s certiorari petition docket.  On October 18, 2019, the defendants in AMG Capital filed their petition for a writ of a certiorari with the Supreme Court.^[x]  The petitioners relied on the Seventh Circuit’s decision in Credit Center Bureau and the text of Section 13(b).  The petitioners argued that Section 13(b) “nowhere mentions monetary relief” and the statute stands in stark contrast to Section 19 of the FTC Act.  That section specifically allows for, among other things, “the refund of money or return of property, [and] the payment of damages” (1) when the FTC shows that the conduct at issue violates an existing FTC rule or (2) when the defendant violates a prior cease-and-desist order.[xi]  The FTC requested an extension until December 20, 2019 to file its response to this certiorari petition.  Therefore, the FTC has some significant decisions to make in the coming few weeks.

Liu v. SEC

Regardless of whether the Supreme Court reviews either the Seventh Circuit decision in Credit Bureau Center or the Ninth Circuit decision in AMG Capital, the Supreme Court is set to review the question of whether disgorgement constitutes “equitable relief” in the context of a securities law violation.  On November 1, 2019, the Supreme Court granted certiorari in the case of Liu v. SEC and will determine whether the Securities and Exchange Commission can obtain disgorgement as an equitable remedy in an enforcement action.[xii]  A decision in Liu is expected by June 2020.

While Liu involves the SEC and its enforcement statutes, and not the FTC and the FCT Act, the decision in Liu is nonetheless likely to impact the FTC’s ability to obtain disgorgement under the FTC Act.  Much like the FTC, the SEC has for many years sought disgorgement in enforcement proceedings.  “Beginning in the 1970’s, courts ordered disgorgement in SEC enforcement proceedings in order to deprive …defendants of their profits in order to remove any monetary reward for violating securities laws and to protect the investing public by providing an effective deterrent to future violations.”[xiii]  Courts have done so, even though by statute, the SEC can only obtain injunctive relief, equitable relief or civil monetary penalties.[xiv]

Kokesh v. SEC

Liu follows the Supreme Court’s 2017 decision in Kokesh v. SEC.[xv]  In that case, the Supreme Court held that “SEC disgorgement … bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate.  The 5-year statute of limitations in [15 U.S.C.] § 2462 therefore applies when the SEC seeks disgorgement.”[xvi]  The Supreme Court, however, was careful to note in a footnote that “[n]othing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or whether courts have properly applied disgorgement principles in this context.”[xvii]

The Supreme Court will now specifically answer that question in Liu and determine whether disgorgement constitutes an equitable remedy following its holding that disgorgement is a “penalty.”  The oral argument from Kokesh showed that five Justices at the time questioned the statutory authority for the disgorgement remedy given that the enforcement statutes do not specifically provide for such a remedy.

Justice Gorsuch – “Well, here we don’t know [when the disgorged money goes to the victim], because there’s no statute governing it.  We’re just making it up.”

Chief Justice Roberts – “[T]he SEC devised this [disgorgement] remedy or relied on this remedy without any support from Congress.”

Justice Alito – “[I]t would certainly be helpful and maybe essential to know what the authority for [disgorgement] is.”

Justice Sotomayor – “Can we go back to the authority? …[I]f they’re not doing restitution, how could that be the basis of disgorgement?”

Justice Kennedy – “Is it clear that the district court has statutory authority to do this? …[I]s there specific statutory authority that makes it clear that the district court can entertain this remedy?”[xviii]

In addition, then Circuit Judge Kavanaugh wrote in Saad v. SEC that Kokesh “overturned a line of cases from [the D.C. Circuit] that had concluded that disgorgement was remedial and not punitive” and “the Court’s reasoning in Kokesh was not limited to the specific statute at issue there.”[xix]  All of this suggests that there is a likelihood that the Supreme Court will hold that disgorgement – in the SEC context – which has already been held to be a “penalty,” does not constitute “equitable relief.”

Takeaways:

The Supreme Court’s acceptance of the appeal in Liu would seem to increase the chance the Supreme Court accepts the pending certiorari petition in AMG Capital given the similarity between the disgorgement issues in the context of the SEC and the FTC.  Similarly, as a result of Liu and the pending certiorari petition in AMG Capital, the FTC may elect to seek certiorari from the Seventh Circuit’s decision in Credit Bureau Center.  Therefore, there is at least an increased likelihood that the Supreme Court will specifically take an appeal on the direct issue of whether the FTC can obtain disgorgement under Section 13(b).  Given the Supreme Court’s holding in Kokesh that disgorgement is a penalty for statute of limitations purposes and the Justices comments at oral argument, such an appeal creates a risk to the FTC that the Supreme Court will similarly rule that disgorgement under the FTC Act is also a penalty, and thus does not fall within the scope of equitable relief allowed by Section 13(b).

Even if the Supreme Court does not take the appeal in AMG Capital (or Credit Bureau Center, if a petition is filed), a ruling in Liu that the SEC cannot seek and obtain disgorgement as “equitable relief” would nonetheless have consequences for the FTC and its ability to obtain disgorgement under the FTC Act.  Indeed, the FTC has recognized that the SEC statutory framework is similar to the FTC Act in that neither expressly mention monetary relief, but courts have nonetheless allowed disgorgement as a remedy.  Thus, an adverse ruling in Liu in the SEC context would provide defendants with arguments in the district courts and circuit courts that prior precedent allowing disgorgement as a form of equitable relief to the FTC is no longer tenable.  In such a case, the lower courts would have a new legal basis upon which to follow the Seventh Circuit’s lead from Credit Bureau Center and foreclose the FTC from continuing to use disgorgement as the “cornerstone” of its enforcement program.  The strength of such arguments will be determined in the next several months as these cases get decided.

[i] 15 U.S.C. § 45(a)(1).

[ii] Motion to Stay the Mandate at 5, FTC v. Credit Bureau Ctr., LLC, No. 18-2847, ECF No. 61 (7th Cir. Sept., 17, 2019).

[iii] 15 U.S.C. § 53(b).

[iv] See, e.g., FTC v. Commerce Planet, Inc., 815 F.3d 593 (9th Cir. 2016); FTC v. Gem Merch. Corp., 87 F.3d 466 (11th Cir. 1996); FTC v. Bronson Partners, LLC, 654 F.3d 359 (2nd Cir. 2011); FTC v. Freecom Commc’ns, Inc., 401 F.3d 1192 (10th Cir. 2005); FTC v. Direct Mktg. Concepts, Inc., 624 F.3d 1 (1st Cir. 2010).

[v] FTC v. Hornbeam Special Situations, LLC, No. 1:17-cv-3094, 2018 WL 6254580 (N.D. Ga. Oct. 15, 2018).

[vi] https://www.ftc.gov/news-events/blogs/business-blog/2016/10/record-13-billion-ruling-against-scott-tucker-others-behind; FTC v. AMG Capital Mgmt., LLC, 910 F.3d 417 (9th Cir. 2018).

[vii] 937 F.3d 764 (7th Cir. 2019).

[viii] Motion to Stay the Mandate at 3, Credit Bureau Ctr., No. 18-2847, ECF No. 61 (7th Cir. Sept., 17, 2019).

[ix] AMG Capital, 910 F.3d at 421.

[x] AMG Capital Mgmt., LLC v. FTC, No. 19-508 (U.S.).

[xi] 15 U.S.C. § 57b(a).

[xii] Petition for a Writ of Certiorari, Liu v. SEC, No. 18-1501 (petition granted, Nov. 1, 2019).

[xiii] Kokesh v. SEC, 137 S.Ct. 1635, 1640 (2017).

[xiv] 15 U.S.C. §§ 77t(b), (d), 78u(d)(1), (3) and (5).

[xv] Kokesh, 137 S.Ct. at 1635.

[xvi] Kokesh, 137 S.Ct. at 1644.

[xvii] Kokesh, 137 S.Ct. at 1642 n3.

[xviii] Petition for a Writ of Certiorari at 9, Liu v. SEC, No. 18-1501 (citing oral argument transcript at 7-9, 13, 31, 52, Kokesh v. SEC, No. 16-529 (Apr. 18, 2017)).

[xix] Saad v. SEC, 873 F.3d 297, 305 (D.C. Cir. 2017).

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