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Kokesh v. SEC: Potential Impact of Supreme Court Decision on FTC’s Restitution Practices

The FTC has increasingly relied on equitable monetary remedies (such as disgorgement based on gross revenues less returns) to avoid the applicability of an analogous statute of limitations defense.  The Supreme Court’s recent decision in Kokesh v. SEC  may change that practice.

The FTC has increasingly relied on equitable monetary remedies (such as disgorgement based on gross revenues less returns) to avoid the applicability of an analogous statute of limitations defense.  The Supreme Court’s recent decision in Kokesh v. SEC  may change that practice.

In Kokesh, the Supreme Court placed significant restrictions on the Securities and Exchange Commission’s (SEC) enforcement actions. Specifically, the Supreme Court held that that SEC disgorgement is a penalty, and is therefore subject to the five-year statute of limitations prescribed in 28 U.S.C. § 2462. Disgorgement is the repayment of funds that were received through illegal or unethical practices. The SEC attempted the skirt the five year statute of limitations that applies to civil penalties by framing disgorgement as neither a penalty nor a forfeiture. Rather, the SEC asserted that disgorgement is merely a remedial sanction that “operates to restore the status quo,” requiring a defendant to return the money that her or she received through improper means. The Supreme Court rejected this argument, instead opining that disgorgement does constitute a penalty. In reasoning this categorization, the Supreme Court stated that disgorgement is used as a consequence for the violation of public laws as opposed to being a response to a suit brought by an individual, disgorgement is imposed for punitive purposes, and the proceeds of disgorgement do not automatically and therefore do not always in their entirety go to aggrieved parties. With these characteristics in mind, the Supreme Court held that SEC disgorgement meets the definition of a civil penalty.

In finding that SEC disgorgement constitutes a civil penalty to which a five year statute of limitations applies, the door has been left open for courts to view other federal agency’s enforcement actions through a similar lens. In particular, the Federal Trade Commission (FTC) has used Section 13(b) of the Federal Trade Commission Act, which allows “temporary restraining orders and preliminary injunctions” to obtain payments labeled as “restitution.” The FTC has repeatedly taken the position that the Federal Trade Commission Act, including the restitution remedy, is not subject to any statute of limitations. The Supreme Court’s opinion in Kokesh, however, casts doubt as to the likelihood that the FTC will be able to continue to recover restitution payments without being bound by a statute of limitations into the future. The Supreme Court in Kokesh declined to speak to whether disgorgement principles are “properly applied” under the SEC Act, therefore leaving it unclear as to whether disgorgement is permitted in SEC cases where the governing statute fails to expressly grant the SEC the right to recover monies through disgorgement.

Indeed, commentators and Supreme Court amici have argued that the characteristics of SEC disgorgement that rendered the practice a penalty are also present in FTC restitution. It follows that FTC restitution may be considered a penalty limited by a five-year statute of limitations. If FTC restitution is challenged in a way similar to that of SEC disgorgement, the Kokesh decision could likely be used in support of the position that FTC restitution is a penalty as opposed to an equitable remedy. In addition, given the Act Chairman’s stated position at least in the context of competition cases, perhaps the agency will look to apply a limitations period to disgorgement actions.  

TAKEAWAY: The potentially widespread effect of the Kokesh decision remains to be seen. However, there are apparent similarities between SEC disgorgement and FTC restitution, and those similarities may negatively affect the FTC’s enforcement power if challenged in subsequent litigation. At a minimum, FTC’s attempt to obtain disgorgement beyond the five year period applicable to FTC civil penalty claims will be subject to challenge.