Supreme Court Clarifies Federal Statute of Limitations And Restricts Civil Penalty Actions

Supreme Court Clarifies Federal Statute of Limitations And Restricts Civil Penalty Actions

On Feb. 27, 2013, the United State Supreme Court issued a unanimous and important decision clarifying the statute of limitations applicable to most federal government civil penalty enforcement cases. The Court held that the five-year limitations period under 28 U.S.C. § 2462 begins to run when the government's civil penalty claim accrues, i.e., when the defendant's conduct that gives rise to the civil penalty claim occurs or is complete. The statute does not allow the government to delay the triggering of the five-year limitations period based on the so-called "discovery rule."
 
The Supreme Court's ruling in Gabelli has significant implications for companies and individuals often faced with federal enforcement actions under a variety of environmental statutes. Most federal environmental statutes do not contain their own statutes of limitations. For example, the Clean Air Act, the Clean Water Act, the Resource Conservation Recovery Act and the Toxic Substances Control Act, do not contain limitations periods for civil penalty enforcement by the government or by citizen suits. Thus, all of these myriad enforcement authorities are governed by the general five-year limitation period of Section 2462. For years, the Environmental Protection Agency and other federal agencies have relied on the discovery rule to justify the filing of civil penalty enforcement claims more than five-years after the defendant's actions occurred or were concluded.  Most agencies argued, in very simplistic terms, that they could not be reasonably expected to have known of the defendant's actions until the agency actually discovered them pursuant to an inspection or investigation. All such arguments have now been swept away by the Supreme Court's ruling in Gabelli. Subject to a possible exception for fraudulent concealment by a defendant (which the Supreme Court did not address) or further Congressional action, federal agencies must now generally bring their civil penalty enforcement actions within five years following the underlying conduct. 
 
The case, Gabelli v. Securities and Exchange Commission, No. 11-1274, involved an SEC claim for civil penalties against two investment advisers for allegedly defrauding their clients under 15 U.S.C. §§ 80b-6(1), (2). The SEC alleged that the defendant's fraudulent actions occurred from 1999 through 2002, but it waited until 2008, more than five years after the last alleged misconduct, to file suit. The district court dismissed the SEC's claim pursuant to Section 2462 but the Second Circuit Court of Appeals reversed. It held that the discovery rule is read into the Section 2462 limitations period for claims sounding in fraud. The discovery rule has been applied to some statutes of limitation to delay the accrual of the underlying action until the plaintiff discovers, or in the exercise of reasonable diligence should discover, the fraud.
 
The Supreme Court reversed the Second Circuit and reinstated the district court's dismissal holding that the discovery rule does not apply to civil penalty actions governed by Section 2462. That section bars claims for civil fines, penalties or forfeitures "unless commenced within five years from the date when the claim first accrued" subject to extension if the person or property to be penalized is not within the United States in order to effect service. In reaching this result, the Supreme Court restated the general rule that a cause of action accrues when the defendant's conduct giving rise to the action occurs or is complete. Slip. Op., 4-5. The Court also recited the important societal functions of statutes of limitations, including the need for repose, elimination of claims for which evidence may have been lost and certainty as to plaintiffs' and defendants' rights.  Id., 5.
 
While the Supreme Court acknowledged its own precedent applying the discovery rule in fraud actions where an injured plaintiff seeks compensatory damages, see Merck & Co. v. Reynolds, 559 U.S. ___ (2010), it found significant differences between those actions and a government agency action to collect a civil penalty. Slip Op., 7-10. First, parties injured by fraud are not constantly investigating for evidence of the fraud, whereas government agencies, like the SEC, commonly have the investigation and enforcement of the law as part of their central mission.  Second, the relief is different. The former seeks compensation for an injury whereas the latter involves penalties going beyond compensation to punish the defendant's pocketbook as well as his reputation. The Supreme Court also observed the difficulties inherent in applying the discovery rule to a government agency. It would require courts to identify when the agency discovered or should have discovered a violation, which would be difficult given the number and layers of employees at most agencies and the shifting of agency priorities and funding for investigative and enforcement activity. Finally, the Court observed that Congress has expressly adopted the discovery rule for some statutes of limitations but usually combines it with an absolute period of repose, which is absent from Section 2462. Considering all these factors, the Court concluded that "[a]pplying a discovery rule to Government penalty actions is far more challenging than applying the rule to suits by defrauded victims, and we have no mandate from Congress to undertake that challenge here." Slip. Op., 11.
 
If you have questions about this important decision, please contact Tom Dimond at 312-726-7125 or thomas.dimond@icemiller.com, or any other member of Ice Miller's Environmental Group.
 
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.