SEC’s ‘Obey-the-Law’ Injunction: Is it Ever Possible To Vacate?

January 6, 2017Articles New York Law Journal

'Obey-the-law" injunctions, favored by regulators such as the U.S. Securities and Exchange Commission (SEC), are incredibly powerful devices that create an albatross hanging over the head of any defendant subjected to them. The purpose of this article is to examine the ability to vacate "obey-the-law" injunctions when they are no longer equitable. In short, a court in its discretion may vacate a permanent injunction if it is no longer equitable due to changes in decisional law, factual circumstances, or the passage of time.

Problematic History

"Obey-the-law" injunctions have been the primary enforcement tool utilized by the SEC since the agencies' creation. The language of an "obey-the-law" injunction, typically, tracks the SEC's governing statutes and regulations; once entered by a federal district court, a defendant is permanently enjoined (along with any agent or person acting in concert, directly or indirectly, with one or more of the defendant's agents) from violating federal securities laws. These injunctions prohibit acts or omissions—identified or unidentified—found to be contrary to any stated provision of the federal securities laws. "Obey-the-law" injunctions impose a limitless, permanent, prohibition on future conduct that may violate a federal securities statute or regulation, regardless of time, place, manner, or relation to the violations initially charged.

Not surprisingly, this type of injunction has been the subject of legitimate criticism from both courts and the public. Significantly, the U.S. Court of Appeals for the Second Circuit has doubted the propriety of "obey-the-law" injunctions when there is only a single incident of misconduct. (See, e.g.,SEC v. Militano , 101 F.3d 685 (2d Cir. 1996)). Several courts have questioned the SEC's use of "obey-the-law" injunctions because they contravene the specificity required by Federal Rule of Civil Procedure (FRCP) 65(d), while other courts have held that their use violates certain constitutional rights and the separation of judicial and executive powers.

FRCP 65(d) requires injunctions to state with specificity, among other things, the reasons for issuance, specific terms, and reasonably detailed descriptions—without referring to the complaint or other document—of the act or acts sought to be restrained or required. The specificity requirement prevents any uncertainty or confusion for court when called upon to enforce them if necessary, and the defendant to avoid potential contempt.1 FRCP 65(d) has, thus, made courts reluctant to enforce "obey-the-law" injunctions since these general injunctions may leave both the subject and enforcing courts unclear regarding their dictates.2

"Obey-the-law" injunctions and their enforcement also raise significant constitutional concerns, particularly when the SEC files a motion for contempt based upon a violation of an "obey-the-law" injunction, rather than prosecuting another case. (Smyth, 420 F.3d at 1279). In fact, one court found that—although prosecuting contempt proceedings may make the SEC's life easier—such proceedings may flout a defendant's constitutional Fifth and Seventh Amendment rights. ( Sky Way Global , 710 F. Supp. 2d at 1279-1280; see also Bazerman v. Feaver , 293 Fed.Appx. 635, 639 n. 11 (11th Cir. 2008)). "Obey-the-law" injunctions and subsequent contempt proceedings allow the SEC to use its significant power to avoid the well-developed and constitutionally required judicial processes currently in place.

"Obey-the-law" injunctions also raise concerns involving the principle of separation of powers. When Congress created the authority to issue an injunction, it created appropriate rules, requirements, and sanctions relating to a potential violation of federal securities laws. ( Sky Way Global , 710 F. Supp. 2d at 1282; see also Chandler v. James , 180 F.3d 1254, 1271 (11th Cir. 1999)). "Obey-the-law" injunctions, essentially, circumvent statutory authority, and replace it with a mechanical focus on if the new conduct violated the previous injunction. (Id.) Thus, to hold a defendant in violation of the federal securities laws, only requires a contempt hearing. (Id.) Accordingly, the statutory authority of, including, among other things, civil monetary penalties, and criminal referrals to the Department of Justice, is ignored in favor of the SEC's use of contempt proceedings. (Id.; see also Chandler, 180 F.3d at 1272 & n. 14).

Difficulty in Overturning

FRCP 60(b)(5)-(6) provides that a court may, in its discretion, vacate a permanent injunction if: "the judgment has been satisfied, released, or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or (6) any other reason that justifies relief." By utilizing this procedure, "obey-the-law" injunctions may be vacated if they are no longer equitable for a variety of reasons. ( Agostini v. Feltoni , 521 U.S. 203, 215 (1997); Railway Employers v. Wright , 364 U.S. 642 (1961)). However, to obtain the extraordinary judicial relief of FRCP 60(b), the movant must present "exceptional circumstances," requiring relief to avoid "extreme and undue hardship."3

Courts have found that the nature of "obey-the-law" injunctions creates a situation where the extreme and undue hardship required by FRCP 60(b) will never exist because said injunctions merely require a party to follow the law. Similarly, the passage of time without further violations may not weigh upon the analysis since, again, the law (and the injunction) expects compliance. (See Bausch & Lomb, 82 F.R.D. at 53; Samuel H. Sloan & Co., 1991 WL 173730).

When an "obey-the-law" injunction arises out of a consent decree, the nature of a consent decree is often considered to be a factor weighing against its vacatur. (See e.g., Sampson v. Radio Corp. of Am., 434 F.2d 315, 317 (2d Cir. 1970)). The Supreme Court has explicitly held that consent decrees are to be construed "basically as a contract," rather than a judgment made after a trial, adding to the heavy burden of a FRCP 60 movant. ( United States v. ITT Cont'l Baking Co. , 420 U.S. 223, 238 (1975)).

For example, in U.S. v. Bank of New York , 14 F.3d 756, 758 (2d Cir. 1994), the defendant pled guilty to a drug crime and subsequently settled a civil forfeiture action relating to it. Subsequent to the settlement, his conviction was overturned since his conduct was found not to be prohibited by the statute. (Id.). When the defendant moved to vacate his civil forfeiture, however, the Second Circuit refused to vacate a voluntary, consent agreement, despite the fact that the underlying criminal conviction had no basis in law. (Id. at 760).

An Approach for Change

In analyzing a motion to modify a judgment under FRCP 60(b), courts exercise discretion in an equitable manner by weighing "the severity of the alleged danger which the injunction was designed to eliminate against the continuing necessity for the injunction and the hardship brought by its prospective application." ( SEC v. Warren , 76 F.R.D. 405, 408 (W.D. Pa. 1977)). "Where there is little necessity for continuing an injunction, hardships such as the stigma associated with an injunctive order, the damage an order can do to business relationships, and the psychological burden imposed by the injunction warrant that injunctive order be vacated." (Warren, 583 F.2d at 122; SEC v. Wong , 369 F. Supp. 646 (D.P.R. 1974)). The disclosure of an injunction "acts as a screen and a flag … . In fact, one witness characterized the effect as the same as taking the Fifth Amendment. They (the investing public) automatically think there is something wrong." (Warren, supra at 411; See also Wong, supra at 647).

Courts consider multiple equitable factors to determine if an injunction should be vacated, including: the passage of time; the history of violations prior to the permanent injunction; changes in factual circumstances; changes in career; and low danger of recidivism. (Warren, 583 F.2d at 122 n.11; SEC v. Thermodynamics , 464 F.2d 457 (10th Cir. 1972)). If these factors demonstrate that the injunction is no longer equitable in light of the significant hardships stemming from its continued existence, the injunction should be vacated.

Understandably, certain factors are more important to the analysis than others. For example, the Supreme Court held that, where an injunction was created by consent, a court may still be forced to vacate or modify it if legal or factual circumstances change. ( Rufo v. Inmates of Suffolk County Jail ,502 U.S. 367, 380, 384 (1992); Railway Employees v. Wright , 364 U.S. 642, 647 (1961)). Even a voluntary judgment cannot be permitted to stand, if it rests upon a legal principal no longer sustainable. (Agostini, 521 U.S. at 238). Thus, continued enforcement of a permanent injunction is not necessary solely to refrain a defendant from violating a law that no longer exists, or if they require nothing more than compliance with already existing law.4 Further, certain Second Circuit precedent even suggests that the passage of time may be enough to vacate an "obey-the-law" injunction, however, one district court refused to vacate an "obey-the-law" injunction based upon good behavior and the passage of time alone.5

Finally, FRCP 60(b)(6) "permits reopening when the movant shows 'any … reason justifying relief from the operation of the judgment' other than the more specific circumstances set out in Rule 60(b)(1)-(5)." ( Gonzalez v. Crosby , 545 U.S. 524, 528-29 (2005); Alexander, 2013 WL 5774152 (E.D.N.Y. 2013)). The power of a court of equity to modify injunctions is broad, flexible, and long-established, and the Second Circuit has consistently recognized the necessity for liberal modification of final judgments. ( New York State Ass'n of Retarded Children v. Carey , 706 F.2d 956, 967-70 (2d Cir. 1983); Chance v. Board of Examiners , 561 F.2d 1079, 1086 (2d Cir. 1977)). If a court is convinced that the purposes of the injunction have been achieved or are no longer necessary, then it should exercise its power to vacate the decree.6

Conclusion

In sum, an "obey-the-law" injunction may be challenged in the future on both procedural and constitutional grounds, and, potentially, be vacated if its application is no longer equitable and the circumstances justify said relief.

Endnotes:

1. Id.; See Hughey v. JMS Dev. , 78 F.3d 1523, 1532 n. 12 (11th Cir. 1996); see also Burton v. City of Belle Glade , 178 F.3d 1175, 1201 (11th Cir.1999); Am. Red Cross v. Palm Beach Blood Bank , 143 F.3d 1407, 1411-12 (11th Cir. 1998); Int'l Longshoremen's Ass'n v. Phila. Marine Trade Ass'n, 389 U.S. 64, 73-74, 88 S.Ct. 201, 19 L.Ed.2d 236 (1967).

2. See Daniels v. Woodbury County, Iowa , 742 F.2d 1128, 1134 (8th Cir. 1984); Epstein Family P'ship v. Kmart , 13 F.3d 762, 771 (3d Cir. 1994); see also City of Belle Glade , 178 F.3d at 1200-01; Smyth, 420 F.3d at 1233 n. 14.

3. Nemaizer v. Baker , 793 F.2d 58, 61 (2d Cir. 1986); Mendell v. Gollust , 909 F.2d 724, 731-32 (2d Cir. 1990); Matarese v. Le Fevre , 801 F.2d 98, 106 (2d Cir. 1987); Samuel H. Sloan & Co., 1991 WL 173730.

4. See Warren, 583 F.2d at 121; Patterson v. Newspaper & Mail Deliverers' Union of New York & Vicinity , 797 F. Supp. 1180, 1184SEC v. Warren , 583 F.2d 115 (3d Cir. 1978).

5. CFTC v. Kelly , 736 F. Supp. 2d 801, 803 (S.D.N.Y. 2010); S.E.C. v. Alexander, 2013 WL 5774152 (E.D.N.Y. Oct. 24, 2013); But c.f., SEC v. Bausch & Lomb , 82 F.R.D. 50, 53 (S.D.N.Y. 1979): SEC v. Samuel H. Sloan & Co., 1991 WL 173730 (S.D.N.Y. 1991).

6. See United States v. United Shoe Machinery , 391 U.S. 244, 248 (1968); see also Rufo , 502 U.S. 367; Board of Education of Oklahoma City Public Schools v. Dowell, 498 U.S. 237 (1991).

Reprinted with permission from the January 6 issue of The New York Law Journal. (c) 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.