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disgorgement

Disgorgement for WRONGDOING

Posted by David Adelstein on January 27, 2019
Trial Perspectives / Comments Off on Disgorgement for WRONGDOING

What is disgorgement and what are the proper measure of damages when seeking disgorgement?  If you have ever asked yourself these questions, the case of Bailey v. St. Louis, 44 Fla.L.Weekly D128a (Fla. 2d DCA 2019), answers both in a bitter dispute with two appeals dealing with awarded damages associated with claims for breach of fiduciary duty, defamation, conspiracy, slander per se, tortious interference, and violation of Florida’s Deceptive and Unfair Trade Practices Act.  You name it, this case seemed to include it!  Applicable here, however, is the damages associated with disgorgement which is designed to prevent a wrongdoer from profiting from his/her/its own wrongdoing or illicit conduct. 

In the first appeal, the appellate could held that the trial court’s award of disgorgement damages to the plaintiff was inadequate.   On remand, the trial court entered the same award mistakenly believing the appellate court thought that the damages were inadequately explained as opposed to just inadequate.  The trial court tried to explain the damages it found for disgorgement focusing on the plaintiff’s lack of business skills (or unsophistication) as a means to limit the disgorgement damages.  But, this was wrong as best explained by the appellate court in a subsequent appeal discussing disgorgement (including the citations that help explain the purpose of disgorgement and corresponding damages):

The trial court’s focus on the appellants’ supposed lack of business skills as a basis to limit disgorgement shows a complete misapprehension of the principles applicable to disgorgement. Disgorgement is a remedy designed to deter wrongdoers by making it unprofitable to engage in the wrongful behaviorSee Duty Free World, Inc. v. Miami Perfume Junction, Inc., 253 So. 3d 689, 698 (Fla. 3d DCA 2018) (“‘Disgorgement is an equitable remedy intended to prevent unjust enrichment.’ ” (quoting S.E.C. v. Monterosso, 757 F. 3d 1326, 1337 (11th Cir. 2014))); Restatement (Third) of Restitution and Unjust Enrichment § 1 (Am. Law Inst. 2011) (“A person who is unjustly enriched at the expense of another is subject to liability in restitution.”); Restatement (Third) of Restitution and Unjust Enrichment § 3 (“A person is not permitted to profit by his own wrong.”). The point of disgorgement is to deter wrongdoers by stripping them of the gains from their conduct:

Restitution requires full disgorgement of profit by a conscious wrongdoer, not just because of the moral judgment implicit in the rule of this section, but because any lesser liability would provide an inadequate incentive to lawful behavior. If A anticipates (accurately) that unauthorized interference with B’s entitlement may yield profits exceeding any damages B could prove, A has a dangerous incentive to take without asking — since the nonconsensual transaction promises to be more profitable than the forgone negotiation with B. The objective of that part of the law of restitution summarized by the rule of § 3 is to frustrate any such calculation.

Id. § 3 cmt. c; see also § 51 cmt. e (“The object of the disgorgement remedy — to eliminate the possibility of profit from conscious wrongdoing — is one of the cornerstones of the law of restitution and unjust enrichment.”).

***

However, the measure of damages for disgorgement is not the profits the appellants might have made absent the wrongdoing — the measure of damages for conscious wrongdoing is the appellees’ “net profit attributable to the underlying wrong.” Restatement (Third) of Restitution and Unjust Enrichment § 51(4); see also Duty Free, 253 So. 3d at 698 (“The equitable remedy of disgorgement is measured by the defendant’s ill-gotten profits or gains rather than the plaintiff’s losses.”). “When the defendant has acted in conscious disregard of the claimant’s rights, the whole of the resulting gain is treated as unjust enrichment, even though the defendant’s gain may exceed” the claimant’s loss.” Restatement (Third) of Restitution and Unjust Enrichment § 3 cmt. c. In fact, disgorgement may be awarded even if the claimant has not sustained any loss. Restatement (Third) of Restitution and Unjust Enrichment § 3, reporter’s note a. (“[I]t is clear not only that there can be restitution of wrongful gain exceeding the plaintiff’s loss, but that there can be restitution of wrongful gain in cases where the plaintiff has suffered an interference with protected interests but no measurable loss whatsoever.”).The trial court’s comments regarding the appellant’s business acumen are misplaced in determining a disgorgement award.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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