The court also affirmed FERC’s ability to order disgorgement of unjust profits despite the FPA not including it as an authorized remedy—but concluded that, consistent with a recent Supreme Court case addressing disgorgement in securities enforcement cases,2 disgorgement may still be subject to the statute of limitations to the extent it constitutes a penalty.
Brief Background on the Case
The Powhatan case is one of several manipulation cases FERC has brought or settled concerning allegedly fraudulent trading of “Up-To Congestion” virtual trading products in the PJM Interconnection, L.L.C. (PJM) wholesale electricity market.3 In short, FERC claims that for approximately two months in 2010, defendants manipulated the PJM market by placing large volumes of offsetting, riskless virtual trades for the purpose of collecting excessive volumes of transmission rebates that were distributed based on transaction volumes. FERC has sought to recover more than $34 million in total civil penalties and disgorgement against four defendants (three trading firms and an individual trader).
Statute of Limitations Decision
Enforcement actions under the FPA are subject to the “catch-all” five-year statute of limitations for claims by the government provided for under 28 U.S.C. § 2462.4 Under § 2462, the government (here, FERC) must bring its claim “within five years from the date when the claim first accrued . . . .” While in many cases it is easy to determine when a claim “accrues,” it is not so clear under the FPA’s unique procedural enforcement scheme. Section 31 of the FPA allows subjects in enforcement cases to elect between two procedures: (i) a traditional agency adjudication (i.e., a hearing before an administrative law judge (ALJ), Commission review of the ALJ decision and a right of appeal to a U.S. Circuit Court of Appeals); or, alternatively, (ii) a district court adjudication in which FERC “promptly” assesses a penalty without a hearing and, if the subject does not pay within 60 days, FERC files an enforcement action in federal district court to affirm the penalty, where the court conducts a de novo review of the case.5 Defendants here elected the de novo review option (as have all defendants in FPA market manipulation enforcement cases).
Defendants argued FERC’s claims were largely time-barred since most of the allegedly fraudulent activity occurred more than five years before FERC filed its enforcement action in district court. FERC argued its claims did not accrue at the time of the trading, but rather when defendants failed to pay the assessed penalty within 60 days—since, under the FPA, FERC could not have filed its district court enforcement action until then.
The court sided with FERC, finding that FERC’s position “conforms to the plain meaning and accepted definition of ‘accrue.’”6 But the court reached this decision reluctantly, observing that the § 2462 statute of limitations works well with traditional administrative procedures but “fits imperfectly” with the FPA’s unique de novo review procedural scheme.7 The court also found that while FERC’s position best conforms to the plain language of the catch-all statute of limitations, defendants’ position conformed well with the overall structure of the FPA’s enforcement scheme since a de novo adjudication in district court “flows directly from the alleged violations, making it commonsensical that the claim would accrue at the time of the violation.”8 The court expressed concern that FERC’s interpretation could contravene the purpose of the statute of limitations since no statute or regulation specifically governs how “prompt[]” FERC’s penalty assessment (which triggers the claim accrual) must be once a subject elects de novo review procedures.9 In short, while the court ultimately concluded that FERC’s position was best supported by the plain language of the statute of limitations, the court found it to be a difficult issue and clearly had reservations about the implications of its decision. Therefore, the court took the unusual step of staying further proceedings so that defendants could consider pursuing an interlocutory appeal to the Fourth Circuit pursuant to 28 U.S.C. § 1292(b).
Disgorgement Decision
Defendants argued FERC did not have statutory authority under the FPA to order disgorgement of unjust profits (which accounted for approximately $1.2 million of the approximately $34 million defendants were ordered to pay). The court rejected this argument, finding that while FERC did not have explicit authority to order disgorgement, the “inherent equitable powers” of federal courts include the ability to require the equitable remedy of disgorgement.10 Consistent with the Supreme Court’s recent decision in Kokesh v. SEC,11 the court found that disgorgement is subject to the five-year statute of limitations to the extent it is punitive in nature, but that whether FERC’s requirement of disgorgement here constituted a penalty, as opposed to being purely remedial, was “a highly fact-intensive inquiry” that could not be resolved at the motion to dismiss stage.12
Implications and Takeaways
- Applying the statute of limitations to FPA “de novo review” cases is messy—and an appellate decision on the issue would be welcome.
Courts have understandably struggled with applying the catch-all statute of limitations to the FPA’s unique enforcement scheme. There have now been three district court decisions on the issue, and while two of the three cases came out in favor of FERC, all three cases analyzed the issue differently.13 And the court, in this most recent case, made it clear that the correct legal answer did not fit easily within any of the statute of limitations decisions cited by either party and was unsatisfying on policy grounds. Because the court allowed defendants to pursue an interlocutory appeal, this case presents the first prospect of an appellate decision on the issue.
- Absent greater clarity from the courts or statutory reform, FERC will be forced to move investigations more quickly—something that will also be welcome.
Regardless of the ultimate outcome of the Powhatan case, FERC will likely recognize that, absent substantially greater clarity from the courts or statutory changes, it faces litigation risk on statute of limitations grounds in future de novo review cases if it files its enforcement action more than five years after the alleged wrongdoing. In order for FERC to be able to conclude its prerequisite administrative processes more quickly, its Office of Enforcement will need to conduct investigations more quickly. Practitioners and subjects have found FERC enforcement investigations to be long and burdensome (for reasons beyond the scope of this blog post). One likely practical effect of uncertainty in how courts will apply the statute of limitations in de novo review enforcement cases, though, is the Office of Enforcement concluding FPA investigations more quickly.
- Will Congress or FERC—as the Powhatan court urges—do anything to address this issue?
The court noted that “the atypicality of [the FPA de novo review scheme] has confounded a series of courts as to the proper route for judicial review,” and that “[i]t would seem advisable for Congress or FERC to clarify the expected procedure, including addressing whether an internal statute of limitations would provide guidance to affected parties.” While much of the confusion flows from the FPA itself, which only Congress can amend, there are some things FERC could do to provide greater clarity; for example, formalizing how “prompt” its penalty assessments under the de novo review procedure will be and committing internally, for purposes of efficiency and fairness, to filing district court enforcement actions within five years of the alleged wrongdoing. Absent FERC taking decisive action on its own, Congress could act to provide FERC, subjects, and the courts greater clarity.
If Congress did consider statutory reforms to FERC enforcement provisions, there may well be broad support for wholesale process changes to allow FPA enforcement cases and Natural Gas Act enforcement cases—which now, unlike FPA cases, are adjudicated only before FERC ALJs—to be adjudicated in federal district court without prerequisite agency penalty assessment processes.
- The disgorgement decision is likely not that significant since civil penalties drive most enforcement cases and FERC rarely seeks disgorgement beyond five years.
As previously explained here, the practical effect of courts following Kokesh in FERC cases is limited as FERC has rarely sought disgorgement beyond five years. Moreover, in most enforcement cases, the civil penalties are much more significant than disgorgement amounts, and FERC will want to make sure that its claim for civil penalties is timely irrespective of its claim for disgorgement.
1 Mem. Opinion, FERC v. Powhatan Energy Fund, LLC, No. 3:15cv452 (E.D. Va. Sept. 24, 2018).
2 Kokesh v. SEC, 137 S. Ct. 1635 (2017).
3 See, e.g., In re PJM Up-To-Congestion Transactions, 142 FERC ¶ 61,088 (2013); City Power Mktg., LLC, 160 FERC ¶ 61,013 (2017); FERC v. Coaltrain Energy, L.P., No. 2:16-cv-732 (S.D. Ohio filed July 27, 2016).
4 Under 28 U.S.C. § 2462, the generic five-year statute of limitations applies unless Congress has provided a different, more specific limitations period. The FPA contains no independent statute of limitations.
5 16 U.S.C. § 823b(d).
6 Opinion at 19.
7 Id. at 18-19.
8 Id. at 19.
9 Id. at 19-20.
10 Id. at 10-11, 22-23.
11 137 S. Ct. 1635 (2017).
12 Opinion at 24.
13 In FERC v. Barclays Bank PLC, No. 13cv02093, 2017 WL 4340258, at *15 (E.D. Cal. Sept. 29, 2017), the court held that the statute of limitations in a de novo review case runs from the time of the underlying violation. In FERC v. Silkman, 177 F. Supp. 3d 683, 700-01 (D. Mass. 2016), the court held that there were two applicable statutes of limitations periods—one five-year period from the date of the conduct during which FERC must initiate administrative proceedings (i.e., the penalty assessment process), and a second five-year period to enforce the penalty in district court following the defendant’s failure to pay.
