In the past year, the Federal Energy Regulatory Commission (“FERC”) issued over five orders directing various companies and individuals to show cause why they should not be sanctioned for allegedly manipulating energy markets. In each case, FERC’s Office of Enforcement is seeking not only the disgorgement of the profits realized by the companies and individuals from the allegedly manipulative schemes, but also the imposition of substantial civil penalties, ranging from $1 million up to $435 million.
Given the stakes, it is not surprising that the respondents in the show cause proceedings are aggressively contesting the allegations of market manipulation. What is surprising, however, is that none of the respondents appears to have challenged the penalties as violating the Eighth Amendment prohibition against excessive fines.
A constitutional challenge is not a fool’s errand. First, FERC cannot dispute that the civil penalties are punitive in nature, thereby making the Eighth Amendment applicable. Indeed, FERC’s own Penalty Guidelines characterize the civil penalties it imposes as partly intended to punish wrongdoers.
Second, under the standards set forth by the U.S. Supreme Court in United States v. Bajakajian, 524 U.S. 321 (1998), the penalties appear to be grossly disproportionate to the gravity of the alleged offense and thus unconstitutional. Here the penalties sought by FERC range from 5 to 45 times the amount of profits earned by the respondents from the alleged manipulation.
FERC undoubtedly would defend the penalties by noting that (1) courts typically defer to legislative judgments on appropriate sanctions, (2) Congress has authorized penalties up to $1,000,000 for each day the violation of the tariff or rule continues, and (3) the penalties FERC proposes in these cases are less than the statutory maximum. Those arguments may have often (but not always) carried the day in other cases, but such cases all involved relatively modest fines. Moreover, FERC cannot credibly argue that Congress envisioned that FERC’s civil penalty authority would be used as proposed here. Although Congress instructed FERC to take the seriousness of the offense into account in setting penalties, it did not state (in contrast to other statutes) that FERC could impose damages that are many multiples of the damage actually sustained or the profits realized.
To the contrary, Congress’ setting of much more modest penalties for criminal violations suggests that multi-million dollar civil penalties should be the exception, not the rule. FERC’s position, if sustained, would produce the strange result of the respondents paying civil penalties that are far greater than the maximum criminal penalties that FERC could assess for even more egregious conduct. There also is little support for the notion that Congress intended for FERC to both extract a remedy, in the form of disgorgement of profits, and to impose a multi-million dollar civil penalty that exceeds the amount of disgorgement many times over.