Limitations on Bringing Federal Civil Penalty Claims: Federal Agencies Subject to a Stricter Reading

A decision issued last year by the U.S. Supreme Court has ramifications that affect property owners. The case, Gabelli v. Securities and Exchange Commission, No. 11-1274 (“Gabelli”), involved an enforcement action filed by the SEC against two investment advisers for actions that allegedly took place more than five years earlier.  28 U.S.C. Section 2462 applies a 5 year statute of limitations to most federal civil penalties enforcement cases, including the SEC. Because most federal environmental statutes do not contain a statute of limitations clause, they are subject to Section 2462 as well. 

Not surprisingly, disagreements arise as to when the clock starts running on the 5 year statute of limitations. Section 2462 provides that the statute of limitations starts running when the action accrues. However, governmental agencies in the past, including the EPA, have argued that they can’t be expected to know about the actions of the defendants until they uncover the alleged violations during an inspection or investigation, and therefore the 5 years statute of limitations should start running only upon discovery of the alleged conduct, not when it occurred. This is often called the “discovery rule.” 

In the Gabelli case, the SEC argued, and the court of appeals agreed, that the discovery rule should be read into Section 2462 because of the allegations that form the basis of the SEC claims against the defendants were sounded in fraud.  The US Supreme court disagreed, holding that the discovery rule doesn’t apply to civil penalty claims that fall under Section 2462. The court distinguished its decision from fraud actions brought by an injured plaintiff (i.e., not a governmental agency) where the discovery rule might apply. 

This ruling pulls the rug out from under the EPA and other federal agencies that have relied on the discovery rule in the past. Landowners should obtain some protection from the narrower reading of the statute of limitations that the EPA and other federal agencies will have to observe. 

In recent months, as a result of the Supreme Court’s ruling, I’ve encountered purchase agreements where the seller wants to limit all of its environmental representations and warranties to the past 5 years. This is overreach on the part of sellers and buyers need to be aware.  This ruling does not impact private party actions, criminal actions or actions by state or local agencies (Ohio EPA penalty or administrative actions are subject to a more liberal statute of limitations). 

Overall, the effect of the Gabelli decision is good for property owners but needs to be kept in perspective.



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