On Close Review, Supreme Court Decision in Liu v. SEC Strikes a Major Blow to FTC’s Federal Court Restitution Program

Background on Liu v. SEC

In Liu, the defendants were accused of violating the federal securities laws by spending $20 million of investor funds on marketing and salaries when they promised only amounts collected from a “small administrative fee” would be spent on such items. The SEC brought a civil enforcement action, and the district court adjudicated liability and then ordered the defendants to disgorge the full $26 million they raised in the fraudulent investment scheme. The district court did not permit the defendants to deduct the more than $16 million they spent on legitimate business expenses from this disgorgement figure, and did not require the SEC to distribute the disgorged funds to the victims of the fraud.

The Ninth Circuit Court of Appeals affirmed the district court, and the defendants sought the Supreme Court’s review. The defendants argued that the SEC lacked the authority to obtain “disgorgement” under statutory authority to obtain “equitable relief,” 15 U.S.C. §78u(d)(5), because disgorgement is punitive and equity historically excludes punitive sanctions.

The Supreme Court disagreed. It held that the SEC can obtain disgorgement or restitution as a form of equitable monetary relief as long as it is limited to the form of those remedies that were historically permitted at equity. This limitation, as discussed below, imposes significant restrictions on what monetary relief agencies can obtain under the guise of equitable claims.

The FTC’s Restitution Program

Like the SEC, in recent years the FTC has sought (and at times obtained) significant restitution awards in federal court. The FTC Act, however, does not expressly authorize disgorgement, restitution or equitable relief. Instead, Section 13(b) of the FTC Act authorizes only “injunctions.” Although most courts of appeals interpreted the FTC Act to implicitly authorize restitution and disgorgement, the Seventh Circuit recently held that section 13(b) of the FTC Act does not “implicitly authorize an award of restitution.” FTC v. Credit Bureau Center, LLC (7th Cir. 2019). This created a circuit split and threatened longstanding FTC enforcement practice. The FTC petitioned the Supreme Court for a writ of certiorari, and a decision regarding that petition is expected shortly.

While that decision could end the FTC’s authority to seek disgorgement or restitution altogether, the Liu decision already has curtailed the FTC’s authority in the following ways.

1. The FTC can seek only profits, not total revenues.

When bringing cases under Section 13(b), the FTC most often seeks restitution of “net revenues,” as the SEC did in Liu. This approach was authorized by the Ninth Circuit in FTC v. Commerce Planet, Inc., where the court held that “[u]njust gains in a case like this one are measured by the defendant’s net revenues ... not by the defendant’s net profits.” Following this practice, the FTC has sought and obtained significant settlements and judgments.

Liu should end this FTC practice. The Supreme Court held that total revenues is not the proper measure of restitution under “longstanding principles of equity.” “Accordingly,” the Court concluded, “courts must deduct legitimate business expenses before ordering disgorgement,” unless the agency can prove that the “entire profit of a business ... results from the wrongdoing.” Thus, restitution is limited to the “net profits from unlawful activity.”

This requirement will create significant burdens on the FTC’s ability to seek and obtain large monetary awards.

2. The FTC must identify and return all funds collected to consumers.

The Supreme Court has imposed an additional impediment, requiring that all restitution funds be returned to consumers.

In past years, the FTC has deposited millions of dollars into the U.S. Treasury rather than refunding that money to consumers affected by business practices the FTC sued to enjoin.

3. The FTC can no longer obtain “joint and several” awards against multiple defendants but must obtain separate awards against each defendant for the ill-gotten gains attributable specifically to that defendant.

Another tactic the FTC has increasingly used in recent years is to name corporate officers or employees and to seek monetary relief from multiple defendants jointly and severally.

The Supreme Court’s decision in Liu will limit the FTC’s ability to do this. The Court held that equity requires “holding defendants ‘liable to account for such profits only as have accrued to themselves.’” Thus while the FTC can still name multiple defendants, it will not be able to obtain joint and several orders of restitution. This too will limit common FTC practice.

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We are closely watching how the Supreme Court will address the cert petitions in Credit Bureau and other cases that challenge the FTC’s authority to seek restitution at all under Section 13(b). But even if the FTC maintains its authority, Liu imposes new and substantial limitations on FTC enforcement actions and its ability to obtain equitable monetary relief.