FERC v. Maxim Power Corp. - Court Rejects FERC's Interpretation of Penalty Review Procedures

In a July 21, 2016 order, a federal district court for the first time in a FERC enforcement matter held that review of an assessed civil penalty pursuant to Section 31(d)(3) of the Federal Power Act (“FPA”) entails an “ordinary civil action requiring a trial de novo.”[1]  In FERC v. Maxim Power Corp. (“Maxim”), the District of Massachusetts, departing from recent precedent and rejecting FERC’s position, ruled that the FERC-penalized respondents may seek discovery, depose and present witnesses, and argue the case before a jury, subject only to the court’s approval of an efficient discovery plan.  This holding is a substantial procedural win for the Maxim respondents, and will serve as significant although non-binding precedent for other federal district courts’ review of FERC-assessed civil penalties.

In Maxim, FERC seeks enforcement of civil penalties of $5M and $50,000 against Maxim Power Corporation and several affiliates, the owners and operators of a power plant in Massachusetts, and Kyle Mitton, a Maxim employee, respectively, for alleged wholesale energy market manipulation and for submitting false or misleading information to ISO-NE, the FERC-approved operator of the New England wholesale energy market.   With respect to FERC’s allegations, the July 21, 2016 order denied respondents’ motion to dismiss.  The parties will litigate the issues on the merits.

From a procedural perspective, however, the order is less favorable to FERC.  Under the FPA, a party may contest an assessed civil penalty by pursuing one of two procedural paths.  Under the first, Section 31(d)(2), the party is entitled to a full evidentiary hearing before a FERC  Administrative Law Judge (“ALJ”), after which the Commission decides the matter based on exceptions to the ALJ’s recommended decision.  FERC’s ruling is appealable to the appropriate circuit court of appeals.  Under the second, Section 31(d)(3), FERC must, upon finding of a violation, “promptly assess” the civil penalty without evidentiary hearing.  If the penalized party does not remit payment to FERC within sixty days, the Commission must seek enforcement of the assessed civil penalty in a federal district court, where the court “has the authority to review de novo the law and the facts involved . . .”[2] The Maxim respondents selected the procedures of Section 31(d)(3).  The “root” of the parties’ procedural disagreement was the nature of de novo review pursuant to Section 31(d)(3).[3]  Contrary to FERC’s position, the Court concluded that its authority to review de novo the law and the facts of a penalty assessment is subject to the Federal Rules of Civil Procedure.  The matter will proceed as an “ordinary civil action” that preserves the respondents’ access to all features of due process.[4]

The Court based its decision on a penalized party’s right to receive a “trial de novo” under analogous provisions of the Natural Gas Policy Act (“NGPA”), as well as relevant but not wholly on-point federal district court precedent.  In large part, however, the Court based its holding in due process concerns.  Because the FPA requires that FERC “promptly assess” penalties under Section 31(d)(3), the underlying FERC administrative proceeding may not ensure a party’s due process, including the right to conduct fact finding.  The Court held that “[i]n order to comport with due process, [Section 31(d)(3)] must provide those rights at the district court stage instead.”[5] 

Maxim departs from recent orders in Barclays and Silkman[6] regarding the procedures of Section 31(d)(3), which, subject to the presiding judge’s review of the underlying administrative record, found that the respondents may not be entitled to fact-finding or “trial-like proceedings” in federal district court.[7]  Maxim guarantees such due process for respondents, subject to the parties’ joint development of a tailored discovery plan that “balances [r]espondents’ (and the court’s) need for information about FERC’s investigation with the need for efficient penalty administration that is not bogged down at the discovery stage.”[8]  The order is the first substantial procedural ruling to reject FERC’s interpretation of appropriate federal district court procedures to review Commission-assessed civil penalties for alleged market manipulation, and will provide persuasive authority for similarly-situated respondents in ongoing and future matters.

For answers to questions regarding the latest order in FERC v. Maxim, penalty administration and review procedures under the FPA, or any other energy issue, please contact Jared S. des Rosiers at jdesrosiers@pierceatwood.com or 207.791.1390.