Last week, a federal district judge ruled for the first time that the “review de novo” promised by section 31(d) of the Federal Power Act (“FPA”), 16 U.S.C. § 823b(d), will be “treated as an ordinary civil action requiring a trial de novo.” FERC v. Maxim Power Corp., Civ. No. 3:15-30113-MGM, at 2 (D. Mass. Jul. 21, 2016). This issue has been hotly debated in several of the market manipulation cases FERC is currently litigating, without any court issuing a definitive ruling on the scope and meaning of review de novo, as discussed previously here. For example, courts in California and Massachusetts—the only two courts with an opportunity to make such a ruling—had only touched on what a review de novo might entail without definitively deciding what procedures would be followed.
The FPA provides that once a party under investigation receives an Order to Show Cause and Notice of Proposed Penalty, that party has the option to have its case heard by an administrative law judge with an evidentiary hearing (which the Maxim court called “Option 1”), or to receive an immediate penalty assessment, with the opportunity for a federal district judge to review the facts and law de novo (which the Maxim court called “Option 2”). See 16 U.S.C. § 823b. In Maxim, as in the other market manipulation cases, the targets of the investigation chose Option 2, an immediate penalty assessment followed by “review de novo” in a federal district court. After 60 days had passed without Maxim paying its penalty, FERC filed a petition seeking an order affirming its civil penalty assessment, and Maxim moved to dismiss. In addition to substantive arguments about the alleged fraud and “duty of candor” claims, FERC and Maxim disagreed as to what procedures the court should follow, specifically whether FERC’s “petition” should proceed as a standard civil lawsuit.
To resolve the question of de novo review, the court analyzed the language of the statute, FERC’s prior positions and interpretations of the statute (and similar language in parallel statutes), and the lack of binding precedent from other courts, concluding that FERC’s petition to affirm its civil penalty assessment should proceed as any normal civil action would, complete with a trial de novo by jury if necessary.
The court also weighted the due process concerns of both parties, applying the test from Mathews v. Eldridge, 424 U.S. 319, 333 (1976). The court concluded that, while FERC’s interests were strong, the scale tipped in favor of Maxim and proceeding as an “ordinary civil action with a de novo trial.” Central to the court’s reasoning was the fact that the additional process which FERC made available to Maxim after Maxim’s election of an immediate penalty assessment was not required by the FPA and, more importantly, did not offer a truly “adversarial proceeding.” If the court were to accept FERC’s arguments, litigants choosing between an administrative hearing and a review de novo would not have a “meaningful choice.” The conclusion reached by the court offers such a meaningful choice: an evidentiary hearing before an Administrative Law Judge, or an immediate penalty assessment followed by a de novo trial conducted by a district court.
Critical to the court’s conclusion was the fact that within the framework of a “standard” civil action, a judge is given significant discretion to tailor fact discovery to the needs of the case. In Maxim, the court noted that it would allow some additional factual discovery, but hinted that the presence of the voluminous administrative record, and the fact that most of FERC’s allegations were based on documents and data provided by Maxim, would likely reduce the scope of discovery.
The court also denied Maxim’s motion to dismiss, finding that FERC had pled the allegations of fraud and a violation of FERC’s regulation involving a “duty of candor” with sufficient particularity. The court also agreed with FERC’s interpretation of the word “entity”, finding that “entity” could mean individuals for the purposes of holding individuals liable for violations of the FPA’s manipulation prohibitions.
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Should other courts follow Maxim’s lead and treat the petition for affirmation of a civil penalty assessment as a standard civil action, FERC may decide to reduce the amount of process it provides to investigation targets, for example, in the time period following the issuance of the Order to Show Cause and Notice of Proposed Penalty to avoid duplicating efforts. This would allow FERC, as well as the investigation target, to conserve resources until the case proceeds to the district court, instead of spending so much time and effort between the issuance of the Order to Show Cause and the Order Assessing Civil Penalties. It may also impact how FERC chooses to resolve cases based on, for example, the amount of resources it may be required to expend on court cases, the reduced control by FERC over the timing of ultimate resolution, or the possibility that it FERC will receive less deference to its positions in the district court than it might have enjoyed under other adjudicative processes. Such a shift would seem likely to impact the subject’s decision-making process when faced with a FERC investigation.