Application of the Double Jeopardy Clause to Disgorgement Orders Under the Federal Trade Commission Act ( 1998 )

Application of the Double Jeopardy Clause to Disgorgement
Orders Under the Federal Trade Commission Act
In a civil suit brought by the Federal T rade C om m ission challenging unfair trade practices, the Double
Jeo p ard y C lause o f the F ifth A m endm ent is not im plicated by a judgm ent requiring restitution
an d o rd erin g that, in the event restitution is im practicable, the defendant pay m oney to the U nited
S tates T reasury.
April 9, 1998
M e m o r a n d u m O p in io n f o r t h e U n it e d S t a t e s A t t o r n e y
for th e C e n t r a l D is t r ic t o f C a l if o r n ia
This memorandum responds to your request1 for an opinion whether, in a civil
suit brought by the Federal Trade Commission ( “ FTC” ) challenging unfair trade
practices, the Double Jeopardy Clause of the Fifth Amendment to the Constitution
is implicated by a judgment requiring restitution and ordering that, in the event
restitution is impracticable, the defendant pay money to the United States
Treasury. We conclude that the provision you describe raises no double jeopardy
concerns.
I. Background
Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b) (1994),
authorizes the FTC to seek, and federal district courts to grant, preliminary and
permanent injunctions against practices that violate any of the laws enforced by
the FTC. The Courts o f Appeals uniformly have held that this authority to issue
injunctions carries with it the authority to impose the full range of equitable rem­
edies, including rescission, restitution, and the like. See, e.g., FTC v. Gem Mer­
chandising Corp., 87 F.3d 466, 468-69 (11th Cir. 1996) (holding that Section
13(b) empowers district courts to order disgorgement); FTC v. Security Rare Coin
& Bullion Corp., 931 F.2d 1312, 1314 (8th Cir. 1991) (holding that section 13(b)
empowers district courts to order restitution); FTC v. Amy Travel Serv., Inc., 875
F.2d 564, 571-72 (7th Cir.) (same), cert, denied, 493 U.S. 954 (1989); FTC v.
H.N. Singer, Inc., 668 F.2d 1107, 1113 (9th Cir. 1982) (holding that section 13(b)
empowers district court to order rescission of contract and freezing of assets);
FTC v. Southwest Sunsites, Inc., 665 F.2d 711, 717-18 (5th Cir.) (holding that
section 13(b) empowers district courts to order placement of funds in escrow),
cert, denied, 456 U.S. 973 (1982). For purposes of this memorandum, we will
assume that the district court’s equitable authority extends to ordering the wrong­
doer to disgorge ill-gotten gains even where it is not possible to reimburse the
1 See Letter for Dawn Johnsen, Acting Assistant Attorney General, Office of Legal Counsel, from Nora M. Manella,
United States A ttorney (Apr. 3, 1997)
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Application o f the Double Jeopardy Clause to Disgorgement Orders Under the Federal Trade
Commission Act
consumers who were injured by the defendants’ wrongful conduct. See Gem M er­
chandising Corp., 87 F.3d at 470 (concluding that disgorgement is an appropriate
remedy under section 13(b); “ Further, because it is not always possible to dis­
tribute the money to the victims of defendant’s wrongdoing, a court may order
the funds paid to the United States Treasury.” ); see also FTC v. Pantron I Corp.,
33 F.3d 1088, 1103 & n.34 (9th Cir. 1994) (directing district court to order appro­
priate monetary relief; noting that, if reimbursement of all consumers is imprac­
tical or impossible, district court may order another remedy that requires defendant
to disgorge its unjust enrichment), cert, denied, 514 U.S. 1083 (1995).
You have informed us that the FTC “ routinely” includes the following provi­
sion in settlements or judgments in civil cases brought under section 13(b):
If the Commission, in its sole discretion, determines that redress
is wholly or partially impracticable, any funds not so used shall
be deposited in the United States Treasury.
An Assistant United States Attorney in your office has expressed concern that
such a provision might create a double jeopardy problem if the United States
Attorney’s office later brings a criminal prosecution against the defendant based
on the same conduct. We accordingly turn to that issue. The analysis that follows
assumes that the monetary judgment imposed on the defendant is measured solely
by the amount of money obtained by the defendant in violation of the Federal
Trade Commission Act.
II. Discussion
The Double Jeopardy Clause provides that no “ person [shall] be subject for
the same offence to be twice put in jeopardy of life or limb.” U.S. Const, amend.
V. The Supreme Court has interpreted the clause to prohibit successive criminal
punishments as well as successive prosecutions for the same criminal offense.
See Hudson v. United States, 522 U.S. 93, 98-99 (1997); United States v. Ursery,
518 U.S. 267, 273 (1996); United States v. Dixon, 509 U.S. 688, 696 (1993).
The question is whether an order that requires a defendant to disgorge ill-gotten
gains is or can be “ criminal punishment” for purposes of the Double Jeopardy
Clause.
Prior to the Supreme Court’s recent decision in Hudson, two lines of authority
created some uncertainty as to when a nominally civil penalty constitutes a
criminal punishment for double jeopardy purposes. Under the approach of United
States v. Ward, 448 U.S. 242 (1980), and its progeny, a court’s first task is to
determine whether the legislature, “ in establishing the penalizing mechanism,
indicated either expressly or impliedly” whether the penalty should be considered
criminal or civil. Id. at 248. If the legislature “ ‘has indicated an intention to
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establish a civil penalty, [the court must] inquir[e] further whether the statutory
scheme [is] so punitive either in purpose or effect’ as to ‘transform ] what was
clearly intended as a civil remedy into a criminal penalty.’ ” Hudson, 522 U.S.
at 99 (quoting Ward, 448 U.S. at 248-49, and Rex Trailer Co. v. United States,
350 U.S. 148, 154 (1956)) (last alteration in original). In determining whether
Congress provided a sanction so punitive in purpose or effect as to transform
a civil remedy into a criminal penalty, the Ward Court treated several factors
identified in Kennedy v. Mendoza-Martinez, 372 U.S. 144 (1963), as useful guide-
posts. See Ward, 448 U.S. at 248—49. Those factors include whether the sanction:
(1) “ involves an affirmative disability or restraint” ; (2) “ has historically been
regarded as a punishment” ; (3) “ comes into play only on a finding of scienter” -,
(4) will, in operation, “ promote the traditional aims of punishment-retribution and
deterrence” ; (5) applies to behavior that is already a crime; (6) may rationally
be connected to an alternative purpose; and (7) “ appears excessive in relation
to the alternative purpose.” Kennedy, 372 U.S. at 168-69. The Ward Court
emphasized that “ only the clearest p ro o f’ would suffice to transform what Con­
gress intended to be a civil remedy into a criminal penalty. 448 U.S. at 249(internal quotation marks omitted).
A second and somewhat inconsistent line of cases is based on United States
v. H alper, 490 U.S. 435 (1989). In Halper, the respondent had first been convicted
under the criminal false claims statute, 18 U.S.C. §287 (1994) for submitting 65
inflated Medicare claims, resulting in a total loss to the government of $585. The
government then sought penalties under the civil False Claims Act, 31 U.S.C.
§§3729-3731 (1994), for the same conduct. Because the statute in question
required a penalty of $2000 for each claim, plus double damages, the total civil
penalty exceeded $130,000. In analyzing the respondent’s claim that the penalty
constituted punishment for double jeopardy purposes, the Court minimized the
importance of the fact that the penalty was imposed in a nominally civil pro­
ceeding. 490 U.S. at 447 (in a court’s assessment whether penalty constitutes
punishment, “ the labels ‘criminal’ and ‘civil’ are not of paramount importance” ).
Instead, the Court focused on whether the penalty served the “ familiar” goals
of punishment: retribution and deterrence. Id. at 448. Because the penalty was
“ overwhelmingly disproportionate” to the damage caused by the respondent’s
conduct, and therefore could not b e characterized as serving a purely remedial
purpose, the Court concluded that the penalty constituted “ punishment” for
double jeopardy purposes. Id. at 449.
The Supreme Court recently revisited the issue of when a nominally civil pen­
alty can constitute criminal punishment for double jeopardy purposes. In Hudson
v. United States, 522 U.S. 93, the Court considered whether monetary penalties
and occupational debarment orders imposed following an administrative pro­
ceeding for violations of federal banking statutes would bar later criminal prosecu­
tion of the same underlying conduct. The Court concluded that neither the mone-
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Application o f the Double Jeopardy Clause to Disgorgement Orders Under the Federal Trade
Commission Act
tary assessments nor the occupational debarment orders implicated the Double
Jeopardy Clause, because neither type of penalty constituted a “ criminal punish­
ment.” Hudson, 522 U.S. at 104-05. In the course of its analysis, the Court largely
reaffirmed the Ward approach and abandoned the Halper approach. The Hudson
Court concluded that H alper had deviated from Ward's “ longstanding double
jeopardy principles,” first by failing to evaluate the statute on its face to determine
whether the legislature intended to establish a civil penalty, and second by ele­
vating one of the Kennedy factors— whether the sanction appears excessive in rela­
tion to its nonpunitive purposes— “ to dispositive status.” Hudson, 522 U.S. at
101.
Under the principles of Ward as reaffirmed in Hudson, an order disgorging
funds obtained by a defendant in violation of the Federal Trade Commission Act—
even one requiring the deposit of some or all of the funds in the United States
Treasury— would not implicate the Double Jeopardy Clause. First, section 13(b)
authorizes the FTC to invoke a district court’s equitable powers. Nothing in sec­
tion 13(b) denominates the available remedies as “ civil,” but a district court exer­
cises its equitable powers within the context of a civil action. See Fed. R. Civ.
P. 2 and advisory committee note 2; SEC v. Palmisano, 135 F.3d 860, 865-66
(2d Cir.) (rejecting, in light of Hudson, claim that disgorgement order violated
double jeopardy; concluding that “ [t]he disgorgement remedy, which has long
been upheld as within the general equity powers granted to the district court [under
the securities laws], has not been considered a criminal sanction” ) (internal cita­
tions omitted), cert, denied, 525 U.S. 1023 (1998).
Second, applying the Kennedy factors that are of relevance here, there is little
evidence, let alone the “ clearest p ro o f’ required by Ward, 448 U.S. at 249, and
Hudson, 522 U.S at 104-05, that an equitable disgorgement order is so punitive
in purpose or effect as to render it criminal. First, disgorgement has not historically
been viewed as punishment. Palmisano, 135 F.3d at 865-66; see also Hudson,
522 U.S. at 104 (noting that “ the payment of fixed or variable sums of money
is a sanction which has been recognized as enforceable by civil proceedings since
the original revenue law of 1789” ) (internal quotation marks and alterations
omitted). Second, restitution may be ordered without proof of scienter, that is,
without proof of the defendant’s subjective intent to defraud. Amy Travel Serv.,
875 F.2d at 573-74. Third, while a district court’s power to require disgorgement
does promote one of the traditional aims of punishment—namely, deterrence—
this remedy only puts the offender back in the status quo ante. As the Court
noted in Hudson, deterrence “ may serve civil as well as criminal goals.” 522
U.S. at 105 (internal quotation marks omitted). Fourth, while the defendant’s con­
duct may be criminal as well as in violation of the civil provisions of the Federal
Trade Commission Act, this is not necessarily so. In any event, in Ward, the
Supreme Court found the fact that the conduct in question was criminal as well
as subject to civil penalties insufficient by itself to demonstrate a punitive purpose
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or effect. See 448 U.S. at 249-50; see also Hudson, 522 U.S. at 105 (concluding
that, although the conduct for which monetary penalties and debarment orders
were imposed “ may also be criminal,” “ [t]his fact is insufficient to render the
. . . sanctions criminally punitive” ). Fifth, a disgorgement order may rationally
be connected to nonpunitive purposes. An order of disgorgement redresses dam­
ages sustained by the government or the public or ensures that a defendant not
profit from his illegal acts. Finally, because the sanction is necessarily measured
by the harm to the government or public, it cannot be excessive in relation to
its nonpunitive purposes.
A number of Courts of Appeals have concluded in other contexts that a
disgorgement order is not “ criminal punishment” for double jeopardy purposes.
See, e.g., Palmisano, 135 F.3d at 865-66 (concluding, post -Hudson, that
disgorgement order issued under securities laws is not criminal punishment);
United States v. Gartner, 93 F.3d 633, 635 (9th Cir.) (reaching same conclusion
prior to Hudson), cert, denied, 519 U.S. 1047 (1996); SEC v. Bilzerian, 29 F.3d
689, 696 (D.C. Cir. 1994) (same); United States v. Rogers, 960 F. 2d 1501 (10th
Cir.) (same), cert, denied, 506 U.S. 1035 (1992). We have found no case to the
contrary and do not believe that the Supreme Court, particularly after Hudson,
would arrive at any other conclusion. Since the rationale of these cases is that
depriving a defendant of money obtained in violation of the law is not criminal
punishment, it does not matter for double jeopardy purposes that the FTC is not
able to provide restitution to the victims of the fraud. “ [0]nce disgorgement is
selected as the method of sanction, the amount must be reasonable, i.e. approxi­
mately equal to the unjust enrichment.” H ateley v. SEC, 8 F.3d 653, 656 (9th
Cir. 1993). We conclude that, as long as this condition obtains, the provision in
FTC judgments you have described does not implicate the Double Jeopardy
Clause.
DAWN E. JOHNSEN
Acting Assistant Attorney General
Office o f Legal Counsel
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