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Securities: Supreme Court Rules Disgorgement Claims Are Subject to a Five-Year Statute of Limitations

The US Supreme Court unanimously held in Kokesh v. Securities and Exchange Commission that a five-year limitations period applies to disgorgement claims brought by the United States Securities and Exchange Commission (SEC) in enforcement proceedings. In particular, the Court held that "SEC disgorgement constitutes a penalty" within the meaning of 28 U.S.C. § 2462, which provides that government actions seeking a "civil fine, penalty, or forfeiture" are subject to a five-year limitations period.

While the SEC has acknowledged the applicability of § 2462 to civil penalties, it has long taken the position that disgorgement of ill-gotten gains is not subject to any limitations period because disgorgement is a remedial measure that prevents unjust enrichment by violators of the securities laws. The Supreme Court has now squarely rejected this position, resolving a circuit split on the applicability of the five-year limitations period to SEC disgorgement claims.  Our firm has written an Advisory discussing how this decision may impact the manner in which the SEC conducts investigations as well as the approach it takes to remedies it seeks for violations of the securities laws.

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Standing: Supreme Court Holds Intervenors Must Establish Article III Standing If Seeking Different Relief Than Plaintiff

In a closely watched decision that ultimately rested on narrow grounds, the Supreme Court held in Town of Chester v. Laroe Estates that an "intervenor-of-right" under Federal Rule of Civil Procedure 24(a)(2) must establish its own standing under Article III of the Constitution in order to pursue relief that a plaintiff has not sought in the underlying litigation.

Town of Chester involved a claim for a regulatory taking (among others) brought by a land developer against a New York municipality whose "red tape" prevented him from completing a planned subdivision. Before bringing suit, the developer's financing issues led him to obtain funding from Laroe Estates, secured by a mortgage on the underlying property. When the project went south and the developer sued the municipality for damages, Laroe intervened under Fed. R. Civ. P. 24(a)(2). Laroe predicated its intervention on having an "equitable interest" in the property for which it sought compensation directly in the form of money damages.

The Supreme Court observed that Laroe's briefing in the appellate courts had wavered on whether it sought the same damages as those sought in the developer's underlying suit, or separate compensation based on its own interest in the property. But the Court did not hold, as some expected, that a Rule 24 intervenor must always have independent Article III standing. The Court instead adopted a more cautious, narrow view that an intervenor must independently have and establish constitutional standing if it seeks relief that is distinct from the relief the plaintiff seeks.  The Court remanded for findings on whether Laroe had, in fact, sought different relief, and as a result needed to establish its own independent standing to maintain its claims.

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Patent Litigation: Federal Court Transfers Case in Light of TC Heartland Decision

In one of the first decisions to apply the Supreme Court's recent ruling on proper venue in patent litigation, a federal district court in Stuebing Automatic Machine Co. v. Gravonsky granted a defendant's motion to transfer a patent dispute from the Southern District of Ohio to the Southern District of Texas.

The Supreme Court's recent decision in TC Heartland LLC v. Kraft Foods Group Brands LLC, published on May 22, 2017, held that 28 U.S.C. § 1400(b) provides the exclusive standard for venue in patent litigation, and that as a result venue in patent cases is only proper "in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business." TC Heartland is widely viewed as severely limiting forum shopping in patent cases. (Arnold & Porter Kaye Scholer provided an analysis of TC Heartland in its June 1, 2017, Advisory.)

Applying TC Heartland, the court in Stuebing first held that the defendants did not reside in the judicial district (the Western Division of the Southern District of Ohio), notwithstanding that one defendant owned a vacant piece of land there. The court reasoned that both defendants primarily kept homes in Texas, and that in any event the vacant piece of land owned by one defendant could only even potentially establish that defendant's residency in the Western Division.

The case for venue in the Western Division did not fare any better under the second prong of § 1400(b). First, the plaintiff only offered unsupported allegations of sales of infringing goods in the Western Division, which the court found insufficient to establish that the defendants had "committed acts of infringement" there. Second, the court found that the defendants operated their business in Texas, and that their only contacts with the Western Division were in the nature of emails to customers and shipping products to customers in the area. Without more—such as a permanent employee based in the judicial district—the court ruled that the defendants did not have a "regular and established place of business" in the Western Division.

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