Before Gabelli, the discovery rule was rarely, if ever, applied to Section 2462. Many circuit courts that have considered the discovery rule in this context have rejected it, including a recent Fifth Circuit decision, which (contrary to Gabelli) held that Section 2462 does not include a discovery rule. Although some lower federal courts have inferred a discovery rule when a statute of limitations is silent, the Supreme Court has rejected the general application of an implied discovery rule.
The circuit split alone is enough to raise interest at One First Street. But the federal significance here goes beyond that split. Unless carefully cabined, a Supreme Court decision siding with the SEC could make the discovery rule universally applicable in Section 2462 cases, unleashing an avalanche of unintended consequences.
THE BROADER CONTEXT
Section 2462 is explicit: Unless Congress sets forth a different limitations period, the five-year period applies to any administrative action seeking civil fines, penalties or forfeitures. In many cases Congress has created an exception: Section 2462 does not apply to taxpayers who falsify a tax return, for example, because Internal Revenue Code Section 6501 sets forth a different limitations period.
But in many cases Congress has not specified a different period, and future legislative action on this point is hardly guaranteed. So Section 2462 applies (and will likely continue to apply) to many administrative actions seeking civil penalties in court or in administrative proceedings, making Gabelli broadly relevant to the entire federal government.
How broadly? Section 2462 applies to the U.S. Department of Justice in civil actions such as forfeiture actions. It applies to the Environmental Protection Agency in bringing actions under the Toxic Substances Control Act, Clean Air Act, Clean Water Act and Energy Policy and Conservation Act. It applies to the Department of Transportation in bringing actions under the Federal Aviation Act, and to the Federal Trade Commission in bringing certain actions under the Clayton Act and Federal Trade Commission Act. It affects a slew of professionals, because it applies to the IRS Office of Professional Responsibility in bringing disciplinary proceedings against tax professionals, to the Federal Deposit Insurance Corp. in expelling bankers from the industry, and to the Patent and Trademark Office in excluding attorneys from practicing before it.
If the Second Circuit's decision in Gabelli is broadly upheld, all of these agencies (and more) would be free to "discover" wrongdoing years after it occurred, and then seek civil penalties. Finality would become illusory across a broad swath of the economy, eviscerating the very purpose of a federal statute of limitations.
The pernicious effects could reach to quite unexpected and unwelcome places. Historically, courts have rejected the "discovery rule" in Federal Election Commission actions for campaign finance violations. But if the Supreme Court broadly upholds Gabelli, the FEC would be permitted to "discover" that a politician committed campaign finance fraud any number of years ago, and launch civil actions accordingly. The FEC is structured to be politically balanced no more than three commissioners from the same political party, and four votes are required for an official action. But if just one commissioner crossed party lines, a future FEC could "discover" wrongdoing relating to Paul Ryan's campaign for the House of Representatives in 1998, or Nancy Pelosi's House campaign in 1987. The potential for abuse is acute.
In 1805, Justice John Marshall wrote that it would be "utterly repugnant to the genius of our laws" to allow the government to have no statute of limitations for a penalty action, when "not even treason can be prosecuted after a lapse of three years." His wisdom should guide the Supreme Court today.
The court should reject the notion of an unwritten "discovery rule" in Section 2462. Congress has dictated that if administrative agencies, which should actively monitor their regulatory terrain, fail to notice wrongdoing for five years, no civil penalties may be assessed. If the Supreme Court does affirm the Second Circuit, it should do so narrowly, confining its ruling to SEC actions involving fraud. Otherwise the court may unwittingly let loose a flood of claims by the federal government that should have been brought or laid to rest long ago.
Eliot Lauer is a partner, and Jason Gottlieb a counsel, in the New York office of Curtis, Mallet-Prevost, Colt & Mosle. Ellen Tobin, an associate at the firm, assisted in writing this article.