Will “Kokesh v. SEC” Put a Kink in the Federal Trade Commission’s Disgorgement Hose?

Featured Expert Column: Antitrust & Competition Policy — Federal Trade Commission

06633 - Royall, M. Sean ( Dallas )By M. Sean Royall, a Partner with Gibson, Dunn & Crutcher LLP, with Richard H. Cunningham, Of Counsel in the firm’s Denver, CO office.*

Ed. Note: This is Mr. Royall’s debut column as the WLF Legal Pulse‘s new Antitrust & Competition Policy, FTC “Featured Expert Contributor.” WLF recognizes and appreciates former FTC Featured Expert Contributor Andrea Murino‘s four years of serving in that pro bono position.

On June 5th, 2017, the Supreme Court held in Kokesh v. SEC that disgorgement is a “penalty” subject to a five-year statute of limitations under 28 U.S.C. § 2462.  With that ruling, the Court explicitly rejected the long-standing assertion of the Security and Exchange Commission (SEC) that it possesses authority to reach back indefinitely when seeking the disgorgement of ill-gotten gains.  While the Kokesh opinion explicitly limits its holding to disgorgement “as it is applied in SEC enforcement proceedings,”1 the Court’s logic extends to disgorgement actions brought by other agencies proceeding under analogous statutory authority, including the Federal Trade Commission (FTC).

Overview of Kokesh v. SEC

A June 7, 2017 WLF Legal Pulse post provides a comprehensive background discussion of the case and the Court’s ruling.  In petitioning the Court after the US Court of Appeals for the Tenth Circuit upheld a $34.9 million disgorgement judgment against him, Mr. Kokesh argued that SEC disgorgement actions constitute either a “penalty” or a “forfeiture” subject to § 2462’s five-year statute of limitations.

The Kokesh Hallmarks for Determining That Disgorgement Is a “Penalty” Subject to § 2462’s Five-Year Statute of Limitations

Writing for a unanimous Court, Justice Sotomayor identified three “hallmarks of a penalty” that together demonstrate that SEC’s disgorgement remedy in Kokesh constitutes a “penalty” as that term is used in § 2462, a statute that imposes a five-year statute of limitations.2 First, the Court noted that the disgorgement was imposed as a matter of public law, because the “action may proceed even if the victims do not support or are not parties to the prosecution.”3 Second, the Court concluded that the disgorgement was imposed for punitive purposes, because “sanctions imposed for the purpose of deterring infractions of public laws are inherently punitive.”4 Third, the Court identified that the disgorgement is not solely imposed to compensate victims, because as “courts and the Government have employed the remedy, disgorged profits are paid to the district court, and it is within the court’s discretion to determine how and to whom the money will be distributed. … Some disgorged funds are paid to victims, other funds are disbursed to the United States Treasury.”5

Based on this analysis, the Court rejected SEC’s argument that its disgorgement actions were remedial and non-punitive.  The Court also noted that having fixed dates for ending exposure to government enforcement actions was “vital to the welfare of society” because “even wrongdoers are entitled to assume that their sins may be forgotten.”6

FTC’s Use of Disgorgement Satisfies the Kokesh “Hallmarks”

Like SEC, FTC has for years successfully taken the position that it is authorized to obtain the disgorgement of ill-gotten gains as an equitable remedy.  Indeed, disgorgement is one of FTC’s primary mechanisms of obtaining monetary remedies, and the agency regularly touts the size of its disgorgement awards.  For example, the first “highlight” in FTC’s own 2015 “Performance Snapshot” is the agency’s collection of $707 million in disgorgement.7

FTC has routinely sought disgorgement of funds received by the defendant more than five years prior to FTC’s complaint.  But we are not aware of an FTC enforcement target arguing that § 2462 time-bars the disgorgement of profits accrued more than five years prior to the FTC commencing the action.  That may well change going forward, as each of the Kokesh “hallmarks” would also appear to apply to FTC’s use of equitable disgorgement.  As the government observed in its brief before the Court, the “adverse practical consequences of construing Section 2462 to encompass disgorgement would not be confined to securities-law cases, since the government regularly seeks disgorgement in other contexts as well,” citing the FTC Act as one of those other contexts.8

FTC seeks disgorgement as a matter of public law.  FTC seeks disgorgement for the public interest, and is not required to stand in the shoes of any particular victim when seeking disgorgement as a remedy.  As the Second Circuit noted in an FTC enforcement action, “disgorgement is a distinctly public-regarding remedy … a regulatory agency seeking disgorgement need not identify specific victims to whom payment is due … as it would be required to do if seeking to impose a constructive trust.”9

FTC seeks disgorgement for a punitive purpose.  Kokesh held that SEC’s use of disgorgement was punitive in nature because deterring future violations was a primary purpose of the action rather than merely being an incidental side effect.10 FTC also pursues disgorgement for a deterrent purpose.  A 2003 agency policy statement explicitly described disgorgement as having a different purpose than pure restitution, with disgorgement intended for deterring future violations rather than simply restoring victims.11 The courts have also concluded FTC’s use of disgorgement serves a deterrent purpose, with the Tenth Circuit describing an FTC disgorgement as “a remedy that serves two purposes … stripping the wrongdoer of ill-gotten gains and deterring improper conduct.”12

FTC seeks disgorgement that is not solely compensatory.  Kokesh held that SEC’s disgorgement actions were not solely compensatory because the payments went to the government, and although the government could distribute the funds to the victims, it was under no statutory command to do so.13 Multiple circuits have recognized that FTC disgorgement operates in exactly the same fashion, with the Seventh Circuit noting, “the FTC often requests orders directing equitable disgorgement of the excess money to the United States Treasury.”14

Thus, each of the “hallmarks” the Supreme Court identified as indicating that a disgorgement remedy constitutes a “penalty” subject to § 2462’s five-year statute of limitations arguably apply to FTC’s use of disgorgement as well.

Could Kokesh Pose a Future Problem for FTC?  In Short, Yes.

FTC has been ramping up the frequency with which it pursues disgorgement,15 and an informal survey of FTC’s recent disgorgement actions suggests that application of § 2462’s five-year statute of limitations pursuant to Kokesh would impact a sizable portion of the matters in which the Commission seeks disgorgement.

Several of the nine antitrust actions in which FTC has pursued disgorgement since 2000 have included allegations of anticompetitive harm occurring at least in part outside of the five-year statute of limitations set forth in § 2462.16  One striking example is the Commission’s ongoing enforcement action against Shire ViroPharma.  In Shire ViroPharma, FTC has accused the defendant of maintaining an unjust monopoly over the market for a specific drug by repetitively filing meritless claims with the Food and Drug Administration to delay entry of a generic into the market.17 FTC is asserting the unjust monopoly cost consumers “hundreds of millions of dollars,”18 and is seeking disgorgement of those unjust profits.19 The asserted monopoly is alleged to have been in place between March 2006 and April 2012,20 and FTC did not file its complaint until February 2017.  As such, only two months of the alleged six-year monopoly profits period fall within § 2462’s five-year statute of limitations.

Applying the rationale of Kokesh to FTC appears likely to have an equally significant impact on the Commission’s use of disgorgement in its consumer-protection enforcement program.  In FTC v. Volkswagen USA, FTC sought, inter alia, the disgorgement of profits accrued from deceptive business practices related to the environmental testing of vehicles.21 The agency filed its complaint in March 2016 seeking the disgorgement of profits alleged to have accrued as far back as 2008.22 Application of § 2462’s five-year statute of limitations would have cut the period of time permissibly included in the disgorgement calculations by approximately three years.  Given that Volkswagen settled with FTC for over $10 billion (plus an additional $4.7 billion with other agencies),23 cutting three years from the disgorgement period would likely have reduced Volkswagen’s monetary exposure by several billion dollars.

Volkswagen is far from the only recent consumer-protection action in which FTC has sought disgorgement for profits accrued more than five years in the past.  In the Commission’s pending action against DirecTV the agency filed a complaint in 2015 that seeks the disgorgement of funds related to alleged deceptive advertising dating as far back as 2007.24 Similarly, in FTC v. DeVry, the Commission sought the disgorgement of profits DeVry made through allegedly deceptive advertising going as far back as 2008, though the complaint was not filed until 2016.25 DeVry settled its suit for $100 million, with $49.4 million as disgorgement to FTC and $50.6 million set aside as student debt relief.26 Under the reasoning of Kokesh, the profits both DirecTV and DeVry accrued during the first three years of their allegedly deceptive advertising would be beyond the statute of limitations for seeking disgorgement, significantly reducing each company’s monetary exposure.

Other recent examples of FTC stretching beyond five years when seeking disgorgement include FTC v. LearningRx Franchise Corp., where the defendants agreed to a $200,000 disgorgement settlement for a 2016 complaint alleging deceptive business practices starting in 2002,27 and FTC v. Lunada Biomedical, Inc. where a $250,000 disgorgement settlement resolved allegations in a 2015 complaint relating to deceptive business practices starting in 2007.28

Conclusion

Like SEC, FTC has been criticized for inconsistency in its pursuit of disgorgement and other monetary remedies.29 Applying § 2462’s statute of limitations would impose a simple, hard-and-fast limit on the timeframe for disgorgement calculations.  Additionally, based on our cursory review of some of the Commission’s recent disgorgement actions, it appears that this limit would significantly affect the dollar amount of FTC’s disgorgement remedies in a material number of cases.

Notes

  1. Kokesh v. SEC, WL 2407471 (2017) at *9.
  2. Kokesh at *8.
  3. Id. at *7.
  4. Ibid.
  5. Id. at *8 (internal citations omitted).
  6. Id. at *5 (quoting Gabelli v. SEC, 568 U.S. 442, 449 (2013)).
  7. Fed. Trade Comm’n, FTC 2015 Snapshot.
  8. Brief for the Respondents at 48, Kokesh v. SEC, WL 1162421 (Mar. 27, 2017).
  9. FTC v. Bronson Partners, LLC, 654 F.3d 359, 372-373 (2d Cir. 2011).
  10. Kokesh at *7.
  11. See Policy Statement on Monetary Equitable Remedies in Competition Cases, 68 Fed. Reg. 45820-45823, 45821 (Aug. 4, 2003) (“Disgorgement is an equitable monetary remedy designed to deprive a wrongdoer of his unjust enrichment and to deter others from future violations. … Restitution is also an equitable remedy, serving different but often complimentary purposes. Restitution is intended to restore the victims of a violation to the position they would have been in without the violation.”) (internal citations omitted). This policy was withdrawn on other grounds. See Notice of Withdrawal of Commission Policy Statement (Aug. 7, 2012).
  12. FTC v. LoanPointe, LLC, 525 Fed. App’x. 696, 702 (10th Cir. 2013) (unpublished) (emphasis added). See also FTC v. Gem Merchandising Corp., 87 F.3d 466, 470 (11th Cir. 1996) (“We conclude that section 13(b) permits a district court to order a defendant to disgorge illegally obtained funds. To hold otherwise would permit … unjust enrichment and undermine the deterrence function of section 13(b).”).
  13. Kokesh at *8.
  14. FTC v. Febre, 128 F.3d 530, 537 (7th Cir. 1997); see also FTC v. Bronson Partners at 373 (“agencies may, as a matter of grace, attempt to return as much of the disgorgement proceeds as possible, [however] the remedy is not, strictly speaking, restitutionary at all, in that the award runs in favor of the Treasury, not of the victims”); FTC v. Gem Merchandising Corp. at 470 (“because it is not always possible to distribute the money to the victims of defendant’s wrongdoing, a court may order the funds paid to the United States Treasury”); FTC v. LoanPointe at 698 (“government agencies are not required to return disgorged profits to the victims of a scheme”).
  15. See Maureen K. Olhausen, Comm’r, Fed. Trade Comm’n, Dollars, Doctrine, and Damage Control: How Disgorgement Affects the FTC’s Antitrust Mission, at p. 7 (Apr. 20, 2016), (noting that between 2012-2016, FTC pursued as many antitrust disgorgement actions as it had over entire the twenty years prior).
  16. See, e.g., FTC v. Perrigo Co., No. 1:04-cv-01397 (D.D.C. 2004) (complaint filed in Aug. 2014 to disgorge unjust monopoly profits accrued starting June 1998); FTC v. Shire ViroPharma Inc., No. 1:17-cv-00131 (D. Del., filed Feb. 7, 2017) (complaint filed in Feb. 2017 to disgorge unjust monopoly profits accrued between Mar. 2006 and Apr. 2012).
  17. Complaint for Injunctive and Other Equitable Relief at 1-2, FTC v. Shire ViroPharma Inc. (D. Del. 2017).
  18. Id. at 2.
  19. Id. at 45.
  20. Id. at 14.
  21. FTC v. Volkswagen Group of America, Inc., No. 3:16-cv-01534 (N.D. Cal. Mar. 29, 2016); see also Partial Stipulated Order for Permanent Injunction and Monetary Judgment, In Re: Volkswagen “Clean Diesel” Marketing, Sales Practices, and Products Liability Litigation, No. 3:15-md-02672 (N.D. Cal. Oct. 25, 2016).
  22. Complaint for Permanent Injunction and Other Equitable Relief at 5, FTC v. Volkswagen USA (N.D. Cal. Mar. 29, 2016).
  23. See Press Release, Fed. Trade Comm’n, Volkswagen to Spend up to $14.7 Billion to Settle Allegations of Cheating Emissions Tests and Deceiving Customers on 2.0 Liter Diesel Vehicles (June 28, 2016).
  24. See Complaint for Permanent Injunction and Other Equitable Relief at 6, FTC v. DirecTV, No. 3:15-cv-01129 (N.D. Cal. Mar. 11, 2015).
  25. See Complaint for Permanent Injunction and Other Equitable Relief at 6, FTC v. DeVry Education Group, No. 2:16-cv-00579 (C.D. Cal. Jan. 2016).
  26. See Press Release, Fed. Trade Comm’n, DeVry University Agrees to $100 Million Settlement with the FTC (Dec. 15, 2016).
  27. Complaint for Permanent Injunction and Other Equitable Relief, FTC v. LearningRx Franchise Corp., No. 1:16-cv-1159 (D. Colo. May 18, 2016) (alleging deceptive business practices and false advertising in the sale of a product for improving cognitive functioning); Press Release, Fed. Trade Comm’n, Marketers of One-on-One ‘Brain Training’ Programs Settle FTC Charges That Claims about Ability to Treat Severe Cognitive Impairments Are Unsupported (May 18, 2016).
  28. . First Amended Complaint for Permanent Injunction and Other Equitable Relief, FTC v. Lunada Biomedical, Inc. No. 2:15-cv-03380 (C.D. Cal. Dec. 2, 2015) (alleging deceptive business practices and false advertising in the sale of a weight loss and menopause-relief product); Press Release, Fed. Trade Comm’n, Marketers of Dietary Supplement Amberen Settle FTC Charges Regarding Misleading Weight-Loss and Menopause Relief Claims (May 20, 2016).
  29. Letter from R. Bruce Josten, Exec. Vice Pres., U.S. Chamber of Commerce, to FTC Chairman Jon Leibowitz regarding FTC Disgorgement, at 1 (Aug. 22, 2012).

*The authors thank Philip Axt for his help in preparing this posting.

One thought on “Will “Kokesh v. SEC” Put a Kink in the Federal Trade Commission’s Disgorgement Hose?

  1. Pingback: SCOTUS Report: A Fruitful Term for Free Enterprise, the Rule of Law—and WLF – The WLF Legal Pulse

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