On December 28, 2017, the U.S. District Court for the Eastern District of Virginia issued an opinion finding that a “trial de novo governed by the Federal Rules of Civil Procedure and the Federal Rules of Evidence” shall be given to Powhatan Energy Fund, LLC, to review FERC-assessed civil penalties and disgorgements for alleged violations of Section 222 of the Federal Power Act (FPA) and FERC’s Anti-Manipulation Rule. The Powhatan opinion rejects FERC’s argument that a federal district court may limit parties’ discovery rights and restrict judicial review to the “administrative record” compiled during the administrative investigation.
The district court’s opinion is a substantial procedural victory for Powhatan, and may increase the likelihood of settlement, as FERC may seek to avoid lengthy litigation in exchange for a stipulated result. More broadly, the holding is consistent with recent decisions of other federal district courts in several judicial circuits analyzing the same issue, such as in FERC v. Barclays Bank, PLC and is part of a growing consensus of federal districts courts (subject to review by one or more circuit courts of appeal and the U.S. Supreme Court) that de novo review under the FPA requires a plenary trial, and endows penalized parties with full rights to conduct discovery, separate and apart from the record compiled during the underlying FERC investigation.
Background: The FPA’s “Two Procedural Pathways”
The district court’s opinion follows briefing on the nature of district court review under Section 31 of the FPA, which permits a penalized party to seek review by either of two procedural paths. Under the “Default Option,” Section 31(d)(2), the penalized party is entitled to a full evidentiary hearing before an Administrative Law Judge (ALJ). FERC issues a final order based on exceptions to the ALJ’s recommended decision. A party may then appeal FERC’s final order to the appropriate federal circuit court of appeals, consistent with “a traditional form of judicial review of agency action . . .”
By the “Alternate Option,” Section 31(d)(3), FERC must “promptly assess” the civil penalty without evidentiary hearing, upon finding a violation. If the party does not pay the civil penalty within 60 days, FERC:
[S]hall institute an action in the appropriate district court of the United States for an order affirming the assessment of the civil penalty. The court shall have the authority to review de novo the law and the facts involved . . .
This “Alternate Option . . . sets out a less familiar path” in which “no procedural requirements apply to the order assessing penalties except that it be promptly assessed.”
In Powhatan, Respondents selected the Alternate Option. The issue before the District Court was one of first impression: whether the Alternate Option entitled Respondents to de novo trial, including full rights to discovery. In briefing, the parties offered divergent interpretations of FPA procedural requirements. FERC argued that the reviewing district court has “flexibility to craft a limited but effective procedure to conduct its review,” including limited discovery on discrete issues. Respondents “claim[ed] entitlement to a de novo trial” subject only, as any other district court action, to the requirements of federal procedural and evidentiary rules.
De Novo Trial Required
The district court agreed with Respondents, following a textual analysis of the statutory phrases contained in Section 31(d)(3). De novo review of the “law and facts involved,” as set forth in Section 31(d)(3) “requires an ordinary civil action governed by the Federal Rules of Civil Procedure and the Federal Rules of Evidence,” based on the following factors listed below.
Textual Differences Between the Alternate and Default Options Suggest Legislative Intent For A Plenary Trial Under Section 31(d)(3)
The district court held that although both Default and Alternate Options use the phrase “institute an action” to describe the initiation of review proceedings, the nature of the “action” varies. Under the Alternate Option, the “action” amounts to more than a mere review of FERC’s prior fact-finding. The district court based this finding on five textual differences between the procedural paths. First, while the Default Option provides for review of FERC’s penalty assessment in the U.S. Court of Appeals, the Alternate Option requires judicial review in a district court, “where factual development through discovery is the norm.” Second, and consistent with appellate process, the person against whom FERC assessed a penalty initiates the action in the Default Option. In the Alternate Option, however, FERC files its complaint in district court, “consistent with how normal civil trials unfold in a district court: the party seeking affirmative relief institutes the action.” Third, the Default Option requires that “attorneys who specialize in appellate litigation shall represent” FERC under the Default Option. The Alternative Option includes no such requirement. Fourth, Section 31 expressly provides that the Administrative Procedures Act (“APA”) shall govern any appeal under the Default Option. In contrast, the Alternate Option includes no reference to judicial review of agency action, and instead refers to “an action” in “district court.” Fifth, unlike the Default Option, the Alternate Option does not permit the reviewing court to remand the proceeding to the federal agency for additional action. “[T]he absence of such a an option . . . supports the interpretation of the Alternate Option as providing for a trial de novo in the district court in which the district court conducts additional fact-finding.”
FERC’s Arguments Regarding the “Administrative Record” Are Unpersuasive
The district court rejected FERC’s argument that review de novo “should be limited to a review of the Commission [Penalty Order] based on the administrative record” where the content of that record included “materials filed by the Commission’s enforcement litigation staff and by Respondents in the Show Cause Proceeding as well as the Commission’s orders issued in that proceeding.” The FPA provides no definition of “administrative record” consistent with FERC’s interpretation. FERC’s interpretation argument would inappropriately limit the record before the District Court to materials compiled during FERC’s administrative investigation, during which time the Respondents lacked reciprocal or adversarial discovery rights.
FERC’s Interpretation of the Alternate Option Violates Respondents’ Due Process Rights
FERC’s argument that the District Court should limit its review to the “administrative record” may also improperly limit Respondents’ “opportunity to be heard at a meaningful time and in a meaningful manner,” in violation of their rights to due process. Although Respondents submitted legal arguments and statements in response to FERC’s underlying investigation, and FERC submitted “many, if not all” of such submissions as part of the “so-called administrative record,” Respondents have had no opportunity to (1) compel witnesses or documents; (2) cross-examine FERC’s witnesses; or (3) test the reliability of FERC’s evidence. Consistent with prior rulings by other federal district courts, the District Court held that “absent applicability of the Federal Rules of Civil Procedure” the Alternate Option “could lead to fundamental fairness concerns” and rejected FERC’s argument that by choosing the Alternate Option, Respondents had knowingly waived a “full adversarial hearing” before an ALJ.