The U.S. Supreme Court agreed last week to address whether the five-year statute of limitations set by 28 U.S.C. § 2462 applies to disgorgement orders issued by federal agencies. Section 2462 provides that unless Congress otherwise states, any action for the enforcement of any civil fine, penalty, or forfeiture must be commenced within five years. The statute applies to several agencies, including the ones most likely to penalize energy companies: the FERC, CFTC, and SEC.
All three agencies have recognized that under § 2462 they must impose penalties within five years of the wrongful conduct. By contrast, the agencies have taken the position that requiring parties to disgorge the monetary gains realized from the wrongful conduct should not be considered a penalty or forfeiture. According to the agencies, disgorgement orders are not subject to any limitations periods.
Until recently, courts generally agreed with the agencies that disgorgement is an equitable remedy that can be ordered at any time. Last year, however, the Eleventh Circuit held in SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016), that disgorgement is more akin to a forfeiture and thus falls within § 2462. Later in the year, the Tenth Circuit reached the opposite conclusion in SEC v. Kokesh, 834 F.3d 1158 (10th Cir. 2016), creating a Circuit split that the Supreme Court will resolve.
A Supreme Court ruling that disgorgement orders are outside the scope of § 2462 would not cause any material change in the behavior of enforcement staff at the FERC, CFTC, or SEC. In their eyes, the status quo would continue. On the other hand, a ruling that disgorgement orders are subject to § 2462 may force the termination of some pending investigations if the Court’s ruling is effective immediately. An adverse ruling for the agencies also would likely trigger some changes in how they handle future investigations.
The first change could be in the cases the agencies investigate. Agencies often do not learn of potential violations until months or years after the fact. Under the Supreme Court’s decision in Gabelli v. SEC, 133 S. Ct. 1216 (2013), however, the five-year clock for imposing a penalty or forfeiture starts running on the date of the conduct, not on the date of the discovery of the wrongdoing. If the FERC, CFTC, or SEC learn of wrongdoing after the five-year clock has expired, or when the clock is close to expiring, they may see little reason to investigate further, given their inability to impose any penalty or disgorgement. Only if the conduct is ongoing would the agencies likely act.
Companies fearful of investigations that often drag on for years might hope that another change triggered by a Supreme Court ruling against the agencies would be faster investigations, as agencies try to avoid bumping up against the five-year deadline. Unfortunately, a more likely consequence is that enforcement staff at the agencies will rely even more on tolling agreements to stop the running of the statute of limitations clock, so they can continue to investigate at their preferred pace. In that event, subjects of investigations would have to weigh whether the perceived benefits of agreeing to a tolling agreement offset the disadvantage of removing any time pressure on the agency.
Federal agencies might also react to a negative Supreme Court decision by trying to induce companies under investigation to voluntary disgorge ill-gotten gains, even if the five-year period under § 2462 has expired or is close to expiration. Agencies might use the threat of seeking injunctions or imposing onerous compliance plans—which courts have viewed as remedial steps not subject to § 2462—to force companies to agree to disgorgement. Any disgorgement agreement that waives the protection of the statute of limitations probably would be enforceable, for the same reasons that tolling agreements are. In short, agencies may find several ways to navigate around an unfavorable Supreme Court ruling on the scope of § 2462.