SEC's 'Obey-the-Law' Injunction: Is It Ever Possible To Vacate?

Originally published by the 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...