Supreme Court Decision in Liu v. SEC Will Put Even Greater Focus on FTC’s Enforcement Authority
On Monday, the Supreme Court released a decision in a highly watched case, Liu v. SEC, which will have potentially far-ranging impacts on the Federal Trade Commission’s (FTC) ability to obtain monetary relief in federal court enforcement actions. The decision affirms the ability of the Securities and Exchange Commission (SEC) to obtain disgorgement as an equitable remedy, but places limits on the extent of that relief. The decision’s reasoning bears directly on the FTC’s ability to obtain similar kinds of monetary remedies – and is likely to lead to further challenges to the agency’s authority.
What the Court Held
In Liu, the challengers – who had been sued by the SEC under the Securities Act for misappropriation of funds – argued that the SEC did not have the ability to obtain disgorgement of the full amount of their profits nor to hold them jointly and severally liable for that amount. While the SEC has the authority under the Securities Act to obtain “equitable relief” in civil actions, the challengers argued that the disgorgement here was a penalty rather than equitable relief.
In an 8-1 decision, the Court held that the SEC did have the power to seek disgorgement as an equitable remedy, but that it was constrained by three factors. First, the Court reasoned that “[t]he equitable nature of the profits remedy generally requires the SEC to return a defendant’s gains to wronged investors for their benefit,” as “the Government . . . pointed to no analogous common-law remedy permitting a wrongdoer’s profits to be withheld from a victim indefinitely without being disbursed to known victims.” Second, the Court held that imposing joint and several liability on co-defendants could be “sometimes seemingly at odds with the common-law rule requiring individual liability for wrongful profits.” Third, the Court held that courts “must deduct legitimate expenses before ordering disgorgement” under the Securities Act, though it left open the possibility that “wholly fraudulent” expenses could be included in the judgment amount.
Ultimately, the Supreme Court remanded the case for the lower court to parse through these factors in the context of the facts of the case. At the same time, the Court is faced with a number of cert petitions that cover many of the same kinds of issues about equitable relief, but in the context of the FTC.
What does Liu mean for the FTC?
Liu’s holding will directly impact the FTC. The FTC has very limited civil penalty authority – primarily in policing order and rule violations and enforcing specific statutes like the Children’s Online Privacy Protection Act – and often seeks equitable monetary relief using theories similar to the interpretation of the Securities Act rejected in Liu. Consequently, the FTC’s authority to seek these remedies will be under fire after the Court’s decision in Liu. Indeed, each of Liu’s three points of guidance appear to implicate the FTC’s enforcement practices.
First, the FTC does not always return the equitable monetary relief it collects to consumers – a practice criticized in Liu. This can occur for a variety of reasons, such as an inability to identify consumers who suffered injury, infeasibility of a redress program, or because consumers did not suffer a specific monetary injury. The Court’s analysis in Liu on this point focused significantly on specific language in the Securities Act limiting equitable relief to that which “may be appropriate or necessary for the benefit of investors,” but was also grounded in equitable principles. Ultimately, it left the lower courts to work out how to apply the principle that permissible equitable relief should be returned to consumers.
Second, the FTC seeks joint and several liability of defendants as a matter of course. While Liu suggests there may be some cases in which this is appropriate – the defendants in Liu were married for example – the Court suggested that joint-and-several liability may be inappropriate in a large swath of cases.
Third, the FTC typically focuses on revenues from allegedly unlawful conduct in seeking relief – it does not limit relief to profits and does not account for business expenses. The Liu decision throws that approach into question, particularly in cases where the agency can’t claim that the entire enterprise was fraudulent.
The Liu Decision Comes Among Other High-Profile Challenges to the FTC’s Enforcement Authority
The Liu decision adds complexity to the FTC’s authority to seek equitable relief as other high-profile challenges to FTC authority have advanced to the steps of the Supreme Court. The Court currently has three different cert petitions before it – including one filed by the FTC in FTC v. Credit Bureau Center – which seek review of the FTC’s authority to seek monetary relief in a wide range of cases.
In FTC v. Credit Bureau Center, the Seventh Circuit held that the FTC Act’s “grant of authority to order injunctive relief [in federal court] does not implicitly authorize an award of restitution” – limiting the ability of the agency to get monetary relief in federal court actions. At issue is section 13(b) of the FTC Act, which authorizes the agency to bring suit for violations in federal district court and seek a “permanent injunction.” Unlike the Seventh Circuit, many courts have broadly read this provision as implicitly authorizing courts to grant any equitable relief for FTC Act violations – not just an injunction – including remedies like disgorgement. The FTC itself has thus sought review of Credit Bureau Center in the Supreme Court to resolve this circuit split. In two other cases, AMG Capital Management v. FTC and Publishers Business Services v. FTC, petitioners who lost in the Ninth Circuit have sought Supreme Court review of the FTC’s imposition of monetary awards, using a similar argument to the one accepted by the Seventh Circuit. The Supreme Court is expected to act on those petitions soon, possibly as early as Monday.
Even if the Supreme Court takes those cases for argument in the next Term, challenges to the FTC’s authority under Liu will certainly continue in the meantime. And if the cases are remanded, we can expect significant litigation to continue on the limits of the FTC’s authority to obtain monetary awards. The FTC often does not precisely categorize the bases on which it seeks monetary relief under the FTC Act, but with newfound scrutiny, the agency will be forced to explain – and defend – its approach in more detail.