Monday, June 29, 2020

Disgorgement as an Equitable Remedy

Last week the U.S. Supreme Court handed down an opinion in Liu v. Securities and Exchange Commission (8-1 decision, majority opinion by Justice Sotomayor, dissent by Justice Thomas).  Normally I wouldn't comment on a securities law decision on this blog--it's hardly my field of expertise--but this one has some overlap with patent law, interestingly enough.  The question presented was whether "the SEC may seek 'disgorgement' in the first instance through its power to award 'equitable relief' under 15 U. S. C. §78u(d)(5)."  The majority concludes that it does, as long as the award "does not exceed a wrongdoer's net profits," and is awarded to the victims of the fraud.  The patent hook is that--as Professor Amy Landers pointed out on Twitter, and Professor Dmitry Karshtedt on the IP Profs listserv--in reaching this conclusion, the Court cites a large number of I.P. cases:  twelve patent, two copyright, and a trademark case.  (All of the patent cases are pre-1946, when Congress abolished this remedy for the infringement of utility patents.)  The main point of contention between the majority and the dissent is whether "disgorgement" is a traditional equitable remedy.  The dissent says no, it's a twentieth-century invention, whereas the majority says that although the term "disgorgement" wasn't commonly used until more recent times, nineteenth century cases (patent cases in particular) frequently awarded the defendant's net profits attributable to the infringement--and this was considered an equitable remedy.  Terminology aside, as long as the court in a securities fraud case abides by the traditional limitations on accountings of profits--the award goes to the victim, the defendant (usually) gets to deducts its expenses, etc.--this is a traditional equitable remedy available to the SEC.

The contemporary relevance to patent law in the U.S. is that, if disgorgement (or whatever you want to call it) of an infringer's profits is an equitable remedy, that would seem to lead to the conclusion that in a design patent case, where this remedy persists, there is no constitutional right to have a jury decide how much profit the defendant should disgorge (or account for, or whatever you want to call it).  I have noted this issue before (see, e.g., here and here; see also here, bottom paragraph).  So far, to my knowledge, courts deciding design patent cases haven't taken this issue up.  And maybe there is something different in the design patent realm, where the defendant (following Samsung v. Apple) must disgorge the entire profit attributable to the relevant "article of manufacture."  Maybe that's a departure from traditional equitable practice, or maybe there's an argument to be made that a litigant has a constitutional right to have a jury decide the preliminary question of what the relevant article of manufacture is.  I would tend to be skeptical of those arguments, though I hasten to add that I claim no special expertise on Seventh Amendment matters.  Seems like it's just a matter of time before someone does raise them in a design patent case, though.        

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