Seyfarth Synopsis: A recent Supreme Court decision on federal securities law may hold ramifications for ERISA practitioners by addressing whether disgorgement is an equitable remedy.
ERISA’s civil enforcement provisions generally allow the federal courts to award appropriate “equitable” relief. A permissible equitable remedy is disgorgement, which, in the ERISA context, is restoration to the affected plan of fiduciary profits that were illegally earned with plan assets.
Not much has been written about disgorgement, but Liu v. SEC, 591 U.S. ___, No. 18-1501 (June 22, 2020), a Supreme Court decision interpreting the federal Securities and Exchange Act, offers some insight on its meaning. (The Court has already ruled that ERISA equitable relief does not permit extra-contractual or punitive damages. See Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985). So, a disgorgement remedy cannot include extra-contractual or punitive damages.)
In Liu, an 8-1 majority held that “disgorgement” is a permissible equitable remedy in securities’ cases. The Court observed that disgorgement can be seen as imposing a constructive trust or an accounting, and is equitable in nature even if not specifically mentioned in a statute. The Court added that disgorgement is not joint and several, and is not limited to cases involving fiduciary breaches. The Court held that district courts thus may enter disgorgement awards as part of equitable relief, as long as they target net profits, after deducting legitimate expenses.
Justice Thomas dissented, writing that disgorgement is not a traditional form of equitable relief. He added that a disgorgement remedy, if ordered, must go to the plan participants victimized by the breach, and not to the government.
Notably, Justice Thomas cited ERISA for the proposition that the Supreme Court has never considered general statutory grants of equitable authority as giving federal courts a freewheeling power to fashion new forms of equitable remedies. He said that the contours of equitable relief were transplanted to our country from the English Court of Chancery in 1789, in contradistinction to remedies at law, which turn on the words used in statutes.
It thus is worth noting that the parameters of ERISA’s equitable relief provisions will continue to be defined by the federal courts. But it is now clear that disgorgement is an equitable remedy, even if not specifically mentioned in the statute, as long as it is net of legitimate expenses. Look for more litigation in an appropriate case on the meaning of “profits” and “legitimate expenses.” And attorneys for plans and plan sponsors should expect the ERISA plaintiff bar to seek disgorgement whenever possible. Finally, ERISA practitioners should continue to pay close attention to securities’ decisions from the Supreme Court, as the Court continues to address the overlap between the two statutes. See Retirement Plans Committee of IBM v. Jander, 573 U.S. __, No. 18-1165 (Jan. 14, 2020) (ERISA stock drop decision).