ContractsProf Blog

Editor: Jeremy Telman
Valparaiso University Law School

Wednesday, June 24, 2020

Sid DeLong, The Room Where it Happened: Bolton’s Pyrrhic Victory and the Ironies of Disgorgement

DelongTo update the previous post by Hila Keren, District Court Judge Royce Lamberth denied the government’s motion for a preliminary injunction enjoining John Bolton (below left), who formerly served as National Security Advisor in both the George W. Bush administration and the Donald Trump administration, from publishing The Room Where it Happened: A White House Memoir. Applying the four-part test announced by the Supreme Court in Winter v Natural Resources Defense Inc., 555 U.S. 7 (2008), following an in camera review, the court found that Bolton breached his contract by disclosing classified information and by failing to obtain pre-publication approval. But it also found that granting the injunction would not prevent irreparable injury, not because the injury was not irreparable but because it had already been suffered. So the first irony is that the government might have obtained the preliminary injunction if only its lawyers had filed a timely motion.

BoltonBolton’s victory at the injunction hearing may prove to be Pyrrhic, however, because of Judge Lamberth’s findings that he breached his contract and that some of the information he disclosed was classified. These findings would support the government’s far more significant claim against Bolton, which is for disgorgement of all of his proceeds from the publication, including his $2 million advance and all the future royalties on the thousands of books that will be sold. Bolton signed a contract assigning to the U.S. all publication rights to any work that did not receive pre-approval as provided in the contract. If the court’s finding that he lacked pre-approval applies at the trial of the disgorgement claim, then under this theory, the U.S. would have an ordinary claim for “money had and received.”

The more interesting ground for restitution, based either on contract or statutory grounds, would seek disgorgement of the same money on the theory of unjust enrichment. Modern conceptualizations of unjust enrichment see it as eliminating a wrongdoer’s incentives rather than as rectifying the effects of a past injustice. Restitution does not require calculation of harm to the plaintiff, which can be difficult or impossible in cases of disclosure of classified or otherwise confidential information, whether in a commercial or governmental context.

Snepp BookFor these reasons, the Supreme Court recognized the disgorgement remedy in cases like Bolton’s in Snepp v United States, 444 U.S. 507 (1980). An ex-CIA agent, bound by a contract requiring agency prepublication clearance of any publication of information about his work, published Decent Interval, a whistle-blower account of some aspects of the Vietnam War, without securing the required approval. For purposes of the lawsuit, the U.S. conceded that the book did not disclose any classified information and that it would have received agency approval if it had been submitted. Snepp argued that publication caused the government no harm, a position taken by the dissent.

The majority, however, found that the publication was a breach of fiduciary duty as well as a breach of contract. It also found that disgorgement of all the proceeds of the publication of Decent Interval was the only way to deter breach without being disproportionately punitive.   The court’s order was limited to Snepp’s profits and did not prevent his publisher from selling them. Ironically, the order thus entitled the government to Snepp’s future royalties, making Decent Interval a source of revenue for the U.S.

Snepp 2Unbowed by this defeat, Snepp later obtained the necessary pre-approval for several other books and, showing admirable resourcefulness, also published Irreparable Harm, giving an account of his lawsuit over Decent Interval. Details may be found in Douglas Laycock’s Modern American Remedies 539-43 (Concise 5th Edition).

For purposes of the appeal, the government conceded that Snepp had not disclosed classified or harmful information and that it would have approved his book had it been submitted. The Court found that the government nevertheless suffered reputational harm to the CIA resulting from its failure to enforce its policies. By contrast, Judge Lamberth found that Bolton disclosed some classified information and deliberately breached his contract by publishing before receiving final approval. If these findings are upheld at trial, the government’s case for disgorgement of his past and future revenues from publication will be stronger than the case was against Snepp.

Meanwhile, Bolton’s profits from the sale of The Room Where it Happened will mount up, profits to which the government will assert a claim. What can it do to secure that claim? The Snepp court awarded the government a constructive trust over Snepp’s proceeds, although as Laycock pointed out, there was no identifiable fund on which to impose the trust. In Snepp, therefore, a simple damages award would have been sufficient to effect disgorgement.

But in Bolton, the government might seek a constructive trust over his future royalties as they are paid, which would constitute an identifiable fund. Why would it do so if it would be entitled to a damages award in any event? Because a constructive trust would give the government an equitable ownership interest in these funds and priority over competing, unsecured creditors of Bolton, such as his civil and criminal attorneys. Ironic, no?

In addition to the Snepp theory of disgorgement for breach of a contract-based fiduciary duty, disgorgement of Bolton’s publication proceeds would also be appropriate under Restatement (Third) of Restitution § 39, which authorizes the contract remedy of disgorgement of a breaching party’s gains from breach. Disgorgement is warranted when the damages remedy for breach would be “inadequate,” which it would be in Bolton, and when the breach is “opportunistic”, meaning that it is more profitable for defendant to breach and pay damages than to perform. Section 39 applies to cases that would have justified an order of specific performance if it had been timely, which is precisely Bolton’s case.

Thus, the Bolton remedy may be yet another example of the perils of efficient breach of contract: Bolton not only loses all profits from his breach but incurs very significant expenses of attorneys’ fees, not to mention potential criminal liability if the disclosures also violate federal law. It may be that he needed better legal advice from a lawyer familiar with contract law rather than national security or the First Amendment, but that is just my opinion.

In a final irony, because the government was dilatory and failed to enjoin the sale and distribution of The Room Where it Happened, then if it obtains the disgorgement remedy, the U.S. will receive a windfall from the book’s sales that would not have occurred if the injunction had entered. Indeed, the more the book sells, the more money the Government makes. Since all the harm of disclosure has already been suffered and the U.S. may as well maximize the fruits of Bolton’s labor. Is it inequitable for the government to profits from its attorneys’ delay if it resulted from incompetence rather than design? Inequitable, maybe: ironic certainly.

Did I say “final irony”? The publisher was not enjoined and will presumably maximize sales of the book. But after the publisher has received its percentage of the net proceeds of the sale of The Room Where it Happened, it should expect the government to file an action seeking disgorgement of its profits because of the tortious inducement of Bolton’s breach of contract. Here, however, the windfall from Bolton will surely mitigate the tort damages.

Bad lawyering all around.

Quelles ironies.

https://lawprofessors.typepad.com/contractsprof_blog/2020/06/sid-delong-the-room-where-it-happened-boltons-pyrrhic-victory-and-the-ironies-of-disgorgement.html

Commentary, Current Affairs, In the News, Recent Cases | Permalink

Comments