United States: Federal District Court Blocks FERC's Path To Disgorgement And Joint And Several Liability

In a significant and decisive jurisdictional decision, the United States District Court for the Southern District of Ohio held on November 29, 2021 that it had no statutory authority to review the Federal Energy Regulatory Commission's ("FERC" or "Commission") order imposing joint and several liability and disgorgement of unjust profits against Coaltrain Energy, L.P. and the individual defendants (collectively, the "Defendants").¹ FERC argued that section 309 of the Federal Power Act ("FPA") authorizes it to impose joint and several liability and to require disgorgement. Defendants contended that FERC has no such authority. Side-stepping the question of whether the Commission has authority under Section 309 to issue an order imposing joint and several liability and disgorgement, the court held that it lacked authority to review FERC's order assessing those remedies under FPA section 31(d).² Because the court's decision turned on its analysis of the FPA, FERC litigants are likely to argue that the decision bars district court review of any remedy other than civil penalties in actions to enforce penalty assessments under FERC's anti-manipulation rule using the procedures in FPA section 31(d).³

In this client alert, we first describe the statutory basis for the procedures used by FERC to impose penalties, disgorgement, and joint and several liability. Second, we explain the court's reasoning and decision. Third, we discuss the significant implications of the court's decision.

Statutory and Procedural Background

In order to understand the court's decision, it is important to recognize the structure of the statutory provisions under which FERC's assessment order came before the court for review. The FPA authorizes FERC to impose civil penalties for violations of the anti-manipulation provisions of the FPA by using the procedures in FPA section 31(d). Section 31(d) requires FERC to provide notice of the proposed penalty and permit the respondent thirty days to choose one of two pathways to challenge liability. A respondent may elect: (1) to have FERC's allegations adjudicated before an Administrative Law Judge ("ALJ");⁴ or (2) to require FERC "promptly" to assess civil penalties and, if the civil penalty is not paid, file a complaint seeking de novo review in federal court (the "De Novo Review Option").⁵

To pursue the De Novo Review Option's penalty assessment, FERC chose to use an Order to Show Cause ("OSC") process in which FERC issues the statutorily required notice of proposed penalty and opportunity to elect procedures simultaneously with an OSC.⁶ The OSC attaches the allegations of the Office of Enforcement and requires the respondents to answer the allegations. FERC asserts that it considers the allegations, answer, and staff's reply, and then renders a neutral decision in the form of a penalty assessment order.

In Coaltrain, FERC issued an Order to Show Cause and Notice of Proposed Penalty on January 6, 2016.⁷ Defendants elected the De Novo Review Option, which led to FERC's Order Assessing Civil Penalties ("Penalty Assessment") on May 27, 2016.⁸ The Penalty Assessment imposed civil penalties of $26,000,000 against Coaltrain (jointly and severally with defendants Peter Jones and Shawn Sheehan); $5,000,000 against P. Jones; $5,000,000 against Sheehan; $1,000,000 against Robert Jones; $500,000 against Jeff Miller; and $500,000 against Jack Wells.⁹ In addition, the Commission directed Coaltrain, P. Jones, and Sheehan to disgorge, jointly and severally, unjust profits, plus applicable interest, pursuant to section 309 of the FPA, in the amount of $4,121,894.¹⁰ The Defendants did not pay the penalties or disgorgement, triggering FERC's July 27, 2016 Complaint petitioning the court to review, affirm, and enforce its Penalty Assessment.¹¹

Footnotes

1 Opinion and Order, FERC v. Coaltrain Energy, L.P., No. 2:16-cv-732 (S.D. Ohio Nov. 29, 2021) (the "Coaltrain Order").

2 16 U.S.C. § 823b(d).

3 FERC's anti-manipulation rule is found in 18 C.F.R. § 1c.

4 16 U.S.C. § 823b(d)(2).

5 See 16 U.S.C. § 823b(d)(3)(B).

6 The OSC process is not mentioned in the statute, and some, including us, have argued is not required by it. See, e.g., Defendants' Memorandum of Law at 17, FERC v. Powhatan Energy Fund, LLC, No. 3:15-cv-00452-MHL (E.D. Va. Dec. 31, 2015) (in which defendants argued that "the language creating judicial procedures under section 31(d)(3) never refers to . . . an 'adversarial Order to Show Cause process.'"). Courts generally have agreed that the respondents are entitled to a full trial de novo under the Federal Rules of Civil Procedure, as opposed to the truncated federal action advocated by FERC.

7 Coaltrain Energy, L.P., 154 FERC ¶ 61,002, at P 1 (2016).

8 Petition for an Order Affirming FERC's May 27, 2016 Order Assessing Civil Penalties at PP 50, 52, FERC v. Coaltrain Energy, L.P., No. 2:16-cv732 (S.D. Ohio July 27, 2016) (the "Complaint").

9 Coaltrain Energy, L.P., 155 FERC ¶ 61,204, at P 1 (2016).

10 Id.

11 Complaint at 1.

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