Two victories for federal agencies and one for makers of generic drugs.
Two victories for federal agencies and one for makers of generic drugs
W e had three Supreme Court decisions this morning, all of them business-related cases. They were nearly unanimous except for one dissent by Justice Clarence Thomas. Two marked victories for the power of administrative agencies to punish businesses; the third was a win for makers of generic drugs sued for patent infringement. The results, however, may have been less sweeping than they appear.
One of the two administrative-law cases, Sripetch v. Securities and Exchange Comm’n, involved the scope of available sanctions: specifically, the power of the Securities and Exchange Commission (SEC) to seek disgorgement of ill-gotten gains from wrongdoers without proving monetary harm to investors. The other, Federal Communications Comm’n v. AT&T, Inc., involved the process: the power of the Federal Communications Commission to impose forfeiture as a sanction in administrative proceedings. In both cases, Thomas wrote separately to defend the importance of the Seventh Amendment’s guarantee of a jury trial when civil money damages are sought.
Hand Over the Profits
The federal securities laws are supposed to be written laws enacted by Congress, but they haven’t always developed that way. The single largest source of private litigation, for example, comes from civil lawsuits under a statute that never authorized private suits; the courts just made it up, and Congress eventually accepted this situation and made rules for the suits without ever defining them in the first place. Some of the SEC’s own powers have developed in similar fashion. As Justice Neil Gorsuch observed in his opinion for a unanimous Court in Sripetch, Congress originally gave the SEC no power to seek monetary relief, but in 1990 it added the power to “seek monetary penalties,” and in 2002 in Sarbanes-Oxley, it empowered the commission to pursue “any equitable relief that may be appropriate or necessary for the benefit of investors.” But by then, the courts since the 1970s had already been giving the SEC awards of disgorgement — i.e., making a defendant hand over its profits from the violation — under the aegis of the traditional equitable powers of courts.
Identifying the actual source of the SEC’s powers matters for a number of reasons. First, Congress has statutorily authorized the SEC to pursue some kinds of cases and remedies in court, some before its own administrative tribunals, and in some cases, allows it a choice between the two. Second, the Constitution limits some of those choices: As the Court held in Securities and Exchange Comm’n v. Jarkesy (2024), some cases — those that resemble traditional suits for damages at law, rather than remedies at equity — must be brought before a jury in order to satisfy the Seventh Amendment. Third, there are other legal consequences in identifying the source of the SEC’s power, such as what statute of limitations applies (on that score, too, Congress has been less than clear).
Thus, in Kokesh v. SEC, (2017), the Court applied the general five-year limitations period for government suits seeking “any civil fine, penalty, or forfeiture” when the SEC seeks disgorgement. And in Liu v. SEC, (2020), the Court concluded that the Sarbanes-Oxley statutory language supported the disgorgement power, but because it did so by reference to the general principles of equity, disgorgement was available only if it respected two limits: Defendants could be made to disgorge only profits (rather than net revenues) from wrongdoing, and the SEC couldn’t keep the money; it had to distribute it to wronged investors. The Court sidestepped the question of what happens if there’s money that can’t be given to any particularly harmed investor — exactly the kind of problem at issue in other situations that create sue-and-settle slush funds. After that decision, Congress finally gave the SEC the explicit power to seek “disgorgement . . . of any unjust enrichment,” as well as providing more clarity regarding the statutes of limitations.
Sripetch arose from a classic scheme to “pump and dump” penny stocks (i.e., drive up their price artificially and then sell high), and the factual record presented some knotty problems of proving exactly who lost money as a result. The Court ducked the question of whether the post-Liu amendment gives the SEC any powers of disgorgement that are not limited by Liu: “We can simply assume without deciding that disgorgement under §78u(d)(7) remains an equitable remedy—so that it must comply with traditional equitable rules, including the rule that disgorgement must be awarded for victims.”
That assumption itself ducks some pretty big questions. If suits for disgorgement are equitable in nature, they are not subject to the Seventh Amendment under Jarkesy. The Court warned the SEC that if it tries to go beyond Liu in other cases, it could have a Jarkesy problem:
Should the government seek to depart from traditional equitable principles and attempt to use §78u(d)(7) [the 2020 amendment] to secure penalties, it would of course proceed beyond what Liu held §78u(d)(5) [the 2002 amendment] tolerates. . . . That development would raise questions about whether and to what degree §78u(d)(7) permits deviation from equitable principles, and it would invite other questions too. See, e.g., SEC v. Jarkesy. . . . [Citations omitted.]
Thomas, however, argued that this particular Rubicon had already been crossed:
The Seventh Amendment requires a jury trial when the SEC seeks disgorgement because Congress has now made disgorgement a legal remedy, not an equitable one. . . . SEC disgorgement does not resemble any traditional equitable remedy. It does not correspond to the most common forms of equitable relief that involved returning money—constructive trusts and equitable liens. . . . Nor does SEC disgorgement correspond to the “accounting for profits” equitable remedy, as some have argued. . . . Disgorgement more closely resembles legal restitution than any equitable remedy. . . . Congress’s decision to enumerate disgorgement as a remedy in the Exchange Act further suggests that it is now a legal remedy.
Thomas noted that a circuit split already exists on this question, so it should be coming to the Court soon. But Gorsuch’s reasoning in Sripetch does not bode well for a majority accepting Thomas’s view: “Traditional equitable principles associated with disgorgement do not require proof of pecuniary loss,” in “contrast . . . with the legal remedy of damages” because “generally, the final award to the plaintiff is not measured by his loss but by the defendant’s gain attributable to his wrongdoing against the plaintiff.” The Court cited examples of trespasses on land, in which courts ordered the defendant to give back profits from the trespass without showing exactly how the landowner was harmed.
Not So Fast
The Seventh Amendment, which loomed behind Sripetch, was front and center in FCC v. AT&T, and Thomas ended up alone in dissent as a result. The Communications Act creates an unusual structure aimed at preserving the right to a jury trial: The FCC can find violations and impose a monetary “forfeiture penalty” through an informal administrative process that not only doesn’t involve a jury; it doesn’t even provide a hearing — everything is done on the basis of written submissions. The regulated party can appeal to a federal court of appeals if it thinks its best defenses are legal arguments, but if the FCC wants to actually enforce the forfeiture, it has to go back to square one and file a civil suit in court and prove its case to a jury.
There’s also a separate process in the statute that lets the FCC hold a formal administrative hearing without recourse to a jury, but the FCC didn’t even attempt to defend this as constitutional in this case. The question was the two-step process. The telecom companies basically argued that giving a jury trial later in the game isn’t enough, because the process is the punishment when a regulated company is told by its own regulator that it is guilty. Chief Justice John Roberts, writing for an 8–1 majority, disagreed:
Forfeiture orders issued under §503(b)(4) do not definitively resolve the parties’ legal obligations. And the Commission’s factual findings are not conclusive. It thus does not offend the Constitution for the Commission to issue forfeiture orders without the involvement of a jury. . . .
The statute nowhere gives the Commission the authority to execute on a forfeiture order; it cannot, for example, seize the carriers’ assets or obtain liens on their property. . . .A recipient of a forfeiture order incurs no penalties for nonpayment, and interest does not accrue on the sum. . . . The Commission cannot hold the existence of a notice of liability or an order of forfeiture against a regulated party unless the forfeiture has been paid or a court has ordered payment. . . . The Commission’s factual findings have no effect in a subsequent enforcement suit. [Quotations and citations omitted.]
To Roberts, the objections by the telecom carriers to these protections amounted to “refusing to take yes for an answer.” The “reputational and practical harms” caused by an adverse finding, to the Court, are not protected by the Seventh Amendment, which by its text applies to suits “where the value in controversy shall exceed twenty dollars.” Process harms didn’t persuade the majority, which thought that “the carriers are not impermissibly coerced into forgoing their right to a jury,” and added:
Reputational harm may befall any party in the preliminary stage of a legal proceeding. The filing of a complaint may trigger negative press. So too may the filing of an indictment against a criminal defendant. And plaintiffs or prosecutors might dismiss the complaint or indictment before the case proceeds to a trial. Yet this has never been thought to pose a Seventh Amendment problem.
Thomas argued, essentially, that the process is not really what it seems, illustrated by the carriers’ paying under protest before filing this court challenge. But he didn’t really dispute that the process, as Roberts described it, would solve the Seventh Amendment problem going forward: “The Commission’s orders have no legal import except as preconditions for a future suit. . . . I agree with the Court that this interpretation of the Act should govern future proceedings so as to bring the Commission’s enforcement practices into harmony with the Constitution.”
Note that the two-step process in FCC v. AT&T put the jury trial second. That, too, avoids a potential collision with the Seventh Amendment’s rule that “no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.”
Very Generic
The third decision, Hikma Pharms. USA Inc. v. Amarin Pharma, Inc., didn’t involve either administrative agencies or rights to a jury trial, but rather a patent infringement dispute between two pharmaceutical companies. The basic question was what a generic-drug maker can get away with when the original patent is still in effect. Under the law, the generic maker can be sued if it “actively induc[es] infringement.”
The case asked the Court to decide whether Amarin, the patent holder, had alleged enough facts in its complaint to show that Hikma, the generic maker, had crossed that line into active inducement, rather than just pocketing the profits from infringing uses that it knew were happening. As Justice Ketanji Brown Jackson’s opinion for a unanimous Court noted, every state has laws that permit — or in some cases require — the substitution of generics in order to provide price competition with the patented drug (a scheme that, whatever its economic benefits, directly undermines the whole point of the patent process). Given the ubiquity of these laws, as Jackson observed, “generic manufacturers surely know (and perhaps even expect) that their products will be put to infringing use.”
Two elements of infringement are easy to prove: that the generic drug is used in infringing ways, and that the generic maker knows it. The hard question is what amounts to “active steps” to make that happen. The Court emphasized that a patent holder has to show “affirmative, as opposed to passive, steps” that are more than just “ordinary acts incident to product distribution.” Merely alleging advertisements or product labels that “could stimulate others” to engage in infringing uses isn’t the same as those “designed to stimulate others” to do so (emphasis in original). And the web of regulations matters: Hikma convinced the Court that some of its decisions in what to put in its product label were required by law.
That left a wink and a nod, which isn’t enough, and neither was simply the assumption that doctors would dig into unrelated statements in the generic maker’s financials:
With a healthy stretch of the imagination, one might believe that some medical providers could read between the lines and draw improper conclusions [from the drug’s label and marketing materials]. . . . Viewed in that light, the statements in the leaflet (a warning and a disclaimer, really) are implausibly roundabout ways to induce medical providers to infringe. Treating them otherwise would turn any statement extraneous to the unpatented method of use—even one warning people against the patented method of use—into active inducement of infringement. Our case law leaves generic manufacturers more breathing room than that.
This is bad news for patent holders and good news for generic manufacturers and their customers. Whether that’s a good result on the whole is another question about the economics of Big Pharma.