In many advertising cases, the FTC seeks disgorgement as equitable monetary relief.  We previously wrote about the history of and basis under which the FTC seeks that remedy.  Last week, a decision of New York’s highest court may have changed the landscape on whether there is insurance coverage for advertisers faced with FTC disgorgement claims.  The case concerned J.P. Morgan’s suit against its insurers for coverage for disgorgement paid to the SEC.  In 2006, two years before J.P. Morgan acquired it, Bear Stearns was being pursued by the SEC for a slew of securities law violations.  The SEC sought over $700 million from the failing firm.  Bear Stearns opted not to fight.  Despite their claim that they only kept $16.9 million of their ill-gotten gains, Bear Stearns agreed to settle the case with a payment including $160 million in disgorgement.  J.P. Morgan now claims that its insurance should have covered that disgorgement payment.

Bear Stearns had insurance covering it for liabilities incurred by wrongful acts, but when J.P. Morgan came knocking, the insurance company wouldn’t give them a dime.  The insurers claimed this was not an insurable loss for public policy reasons.  The Appellate Division agreed and dismissed the case, noting that disgorgement wouldn’t be much of a deterrent if insurance companies pick up the tab.  But the Court of Appeals got caught up in a different matter: the fact that Bear Stearns only made a fraction of the money it was forced to cough up to the SEC.  The rest went to its customers.  The court was bothered by the lack of precedent for disgorgement payments that include restitution for money that landed in someone else’s pocket.  Given the increasingly wide net that the FTC casts in its cases in naming as defendants various entities involved in the allegedly illegal conduct, and the effort to hold those entities jointly and severally liable for equitable monetary relief, this decision may provide ammunition for those companies in having their insurers pick up some or all of the tab for disgorgement paid to the FTC.

Emma Wischusen*

*Emma is a Venable summer associate and not admitted to practice law.