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(Article from Securities Law Alert, May 2017) 

For more information, please visit the Securities Law Alert Resource Center

During Justice Gorsuch’s first two days on the Court, the Supreme Court heard oral arguments on two significant securities law cases: California Public Employees’ Retirement System v. ANZ Securities (No. 16-373) (CalPERS), in which the Court is considering whether American Pipe tolling[1] applies to the three-year statute of repose set forth in Section 13 of the Securities Act of 1933; and Kokesh v. SEC (No. 16-529), in which the Court is weighing the question of whether SEC actions for civil disgorgement are subject to the five-year limitations period set forth in 28 U.S.C. § 2462.

Justices Question What Constitutes an “Action” within the Meaning of Section 13’s Statute of Repose 

On April 17, 2017, the Court heard oral arguments in CalPERS on the question of whether the filing of a class action tolls Section 13’s statute of repose as to all asserted members of the class pursuant to the American Pipe doctrine.[2] Section 13 of the Securities Act provides in relevant part that “[i]n no event shall any . . . action be brought” under Sections 11 or 12(a) of the Securities Act more than three years after the offering or sale of the security.

At issue in the case before the Court is the timeliness of an individual opt-out suit brought after the expiration of Section 13’s three-year statute of repose. During oral argument, Petitioner contended that the suit was timely because the original class action had been filed within the three-year period, and the filing of the class action tolled its claims pursuant to the American Pipe doctrine.

Justice Kennedy suggested that Petitioner’s argument appeared to be “an attack on statutes of repose generally.” He expressed the view that “[i]f you have a statute of repose, everybody will have to sue within [a specified number of] years. That’s exactly the point of the statute . . . [and] the whole reason they passed it.” Justice Breyer similarly noted that the Court has previously “made a big distinction” between statutes of repose and statutes of limitations, and, among other things, held that “you cannot toll” statutes of repose.

Petitioner argued that the operative word in Section 13 is “action.” In Petitioner’s view, the American Pipe doctrine holds that “the class action complaint commences the action on behalf of each unnamed class member, and in the wording of Section 13, it brings the action on behalf of every unnamed class member.”

Justice Gorsuch questioned Petitioner’s approach on textual grounds. He stated, “when I see the word ‘action,’ I think of lawsuit, traditionally, and ‘claim’ as the claims within the lawsuit.” He observed that, “the laws often distinguish between actions and claims,” and “[t]he securities laws do, routinely.” Justice Gorsuch asked why the Court should not simply “follow the plain language and the traditional understanding of the term ‘action’?”  He noted, “Congress could have use[d] [the word] ‘claims,’” and that the case before it concerned “the same claims” “but . . . a different action.”

Justice Alito similarly pressed Petitioner to explain “the definition of action” in Section 13. He expressed skepticism with respect to Petitioner’s contention that the word “action” encompasses the claims of every unnamed class member and asked Petitioner, ”you think Congress had all of this in mind . . . but it thought it was also clear it didn’t need to spell it out.” Petitioner responded that, “what [Congress] had in mind was letting the other side know that the claim had been asserted against it, and that the class action does.”

Respondent argued that Section 13 sets forth a statute of repose after which no new lawsuits may be filed. Justice Sotomayor pressed Respondent to explain why the term “action” would not encompass the claims of unnamed class members who subsequently brought a separate suit.  She explained that, under Respondent’s theory, “action means new complaint, new complaint number, . . . [e]ven though it’s asking for the same relief . . . [b]y the same party.” Justice Breyer similarly stated that the “action” in question here “was brought when [the original named plaintiffs] filed the class action.” He explained, “this is the same action. It is not a different action.”

Justice Kagan questioned Respondent’s position that “there’s only one view of the word ‘action.’” She stated, “[l]et’s just suppose that ‘action’ is a word that sometimes it’s used one way, and sometimes it’s used another way, and we should look a little bit as to the practical consequences” of the definition. Justices  Kagan, Breyer, and Ginsburg suggested that defining the term “action” as a lawsuit would result in the filing of motions to intervene in every class action. Justice Kagan stated, “this is a rule that’s kind of guaranteed to create make-work for district courts.” She observed that such a rule would “be essentially irrelevant for large investors,” but it could cause “small investors to lose their claims” since they might not have “the faintest idea” of the need to file a timely motion to intervene to preserve their claims.

The Court is expected to issue a decision in CalPERS later this term.

Justices Probe Whether Civil Disgorgement Is a Penalty or Forfeiture for Purposes of Section 2462 

On April 18, 2017, the Court heard oral arguments in Kokesh on the question of whether civil disgorgement is a “fine, penalty, or forfeiture” governed by a five-year statute of limitations under 28 U.S.C § 2462 or is remedial in nature and therefore not subject to any statute of limitations. [3]

The oral argument focused on each party’s claims that disgorgement is or is not a “penalty” or “forfeiture” under § 2462. Petitioner argued that the Court should apply the ordinary definition of “forfeiture.” According to Petitioner, a forfeiture is “an order requiring turnover of money or property to the government as a result of wrongdoing,” encompassing civil disgorgement. Petitioner also contended that remedies containing both remedial and punitive elements should be considered penalties. In Petitioner’s view, the purpose of disgorgement is to impose consequences on a defendant as a result of wrongdoing and, therefore, to punish the defendant. Additionally, Petitioner argued that disgorgement is not categorically remedial or compensatory because disgorged funds are not distributed to victims except at the discretion of the government.

The U.S. government, however, urged the Court to construe each word of § 2462 narrowly and to find that civil disgorgement is neither a “penalty” nor a “forfeiture.” The government argued that disgorgement is not a penalty because it is intended only to remedy unjust enrichment and put a defendant back where he or she would have been had he or she committed no wrongdoing. According to the government, penalties and forfeitures may require a person to give up something to which he or she is rightfully entitled, but disgorgement only deprives a person of money to which he or she never had any rightful entitlement. The government also argued in response to Petitioner that discretion over distribution of disgorged funds actually lies with courts, not the government. According to the government, a court ultimately decides whether to require disgorgement and how to distribute disgorged funds, though the SEC may make a recommendation.

During oral argument, the Justices asked many questions and posed several hypotheticals to test the parties’ definitions of “penalty” and “forfeiture” and to better understand the actual use and implications of civil disgorgement. For example, Justice Sotomayor posed a hypothetical to Petitioner in which she committed a crime but gave half of the proceeds to Justice Breyer, asking whether it would be a penalty to require her to disgorge the full amount. Justice Kennedy posed a similar hypothetical involving a person who misappropriated $100,000 and gave $90,000 to a co-conspirator. Justice Kennedy then asked whether the government could recover a total of $190,000 from the co-conspirators and whether that could be called disgorgement. Justice Breyer asked the government to list characteristics of disgorgement shared by neither fines nor forfeitures. He also likened the government’s argument to claiming that a houseboat should not be subject to a tax imposed by a city on both houses and boats. Chief Justice Roberts asked either party to tell him in what percentage of civil disgorgement cases the funds were actually distributed to victims.

Chief Justice Roberts, Justice Alito, and Justice Kennedy asked both parties multiple times about a lack of Congressional authorization for civil disgorgement. Chief Justice Roberts and Justice Alito also asked the parties to explain what time limits would apply to disgorgement and where they would come from, if § 2462 does not apply. Chief Justice Roberts quoted former Chief Justice John Marshall to say that it is “utterly repugnant” to our laws to have a penalty remedy without a time limit.

Justice Gorsuch questioned both parties repeatedly about comparisons between criminal law and the case at hand. He suggested that criminal forfeiture is considered punitive, even though forfeited funds are sometimes distributed to victims just as with civil disgorgement. He also asked both parties whether the difference between criminal and civil remedies is simply their label.

Justice Kennedy suggested that although both parties argued in favor of a categorical rule applying to all civil disgorgement claims, the Court might do best to eschew such a broad rule and instead give guidance as to when civil disgorgement is a penalty and when it is not.

The Court is expected to issue a decision in Kokesh later this term.