Liu v. SEC: Foreshadowing a Challenge to the FTC’s Disgorgement Authority

In Liu v. Securities & Exchange Commission,¹ the Supreme Court upheld, but circumscribed, the Securities and Exchange Commission's (SEC's) disgorgement authority by holding 8-1 that the SEC may seek disgorgement through its equitable relief power only if the award does not exceed a wrongdoer's net profits and is awarded to victims. Although this decision is important in its own right, the Court's underlying reasoning also has significant ramifications on a similar question regarding the Federal Trade Commission's (FTC's) power to obtain equitable monetary relief under 15 U.S.C. § 53(b) (Section 13(b) of the FTC Act).

Liu comes in the wake of the Court's recent decision in Kokesh v. Securities & Exchange Commission,² which held that disgorgement is a penalty for the purposes of assessing whether a statute of limitations bars a claim³ but left open the question of whether courts possess the authority to order disgorgement in SEC enforcement proceedings.⁴ Liu resolved that question by holding that disgorgement is an available equitable remedy, but only where disgorgement is based on net profits and where disgorged funds are distributed to victims.⁵

In reaching its holding, the Liu Court began by examining the text of the statute.⁶ The provision in question states that "In any action or proceeding brought or instituted by the Commission under any provision of the securities laws, … any Federal court may grant … any equitable relief that may be appropriate or necessary for the benefit of investors."⁷ The Court noted that Congress did not define what remedies fell under the term "equitable relief," and thus an examination of past precedent was warranted.⁸ Based on its analysis of prior case law, the Court held that disgorgement is clearly an equitable remedy.⁹ To avoid transforming a disgorgement award into something other than an equitable remedy, however, the award must not exceed a wrongdoer's net profits and must be awarded to victims.¹⁰

The decision in Liu is instructive in assessing the strength of legal challenges to the scope of similar statutory authority granted to the FTC. Section 13(b) of the FTC Act provides that "in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction."¹¹ The FTC and courts have historically interpreted this provision to authorize the award of all available equitable remedies, including disgorgement and restitution.

In FTC v. AMG Capital Management, LLC the Ninth Circuit noted that they have "repeatedly held that §13(b) empowers district courts to grant any ancillary relief necessary to accomplish complete justice, including restitution."¹² The court noted that, as a three-judge panel, they were unable to overturn their existing precedent unless it was "clearly irreconcilable with the reasoning or theory of intervening higher authority," ultimately holding that such threshold was not met.¹³ Notably, two judges wrote a concurring opinion asserting that the Ninth Circuit's precedent "wrongly authorizes a power that the statute does not permit" and recommended rehearing the issue en banc to overrule it.¹⁴

More recently, however, in FTC v. Credit Bureau Center, LLC, the Seventh Circuit struck a $5.2 million restitution award, finding that the FTC's 13(b) powers do not provide for restitution.¹⁵ The court noted that 13(b), which authorizes injunctive relief, does not explicitly or implicitly authorize a restitution remedy.¹⁶ It also noted that the precedent the FTC relied on to overcome the plain language of 13(b) was founded on cases that took a "capacious view of implied remedies."¹⁷ The court stated that that view has been abandoned in light of recent Supreme Court precedent that now grounds interpretive questions about...