Over-the-Top

Likely, you learned in high school civics or government class that the United States Constitution and the various state constitutions prohibit “cruel and unusual punishments.” Thus, the government may not torture prisoners or inflict upon convicts punishment that is arbitrary or  “degrading to human dignity.” The Eighth Amendment to the United States Constitution also disallows “excessive fines” by the government.

Until recently, there was a debate whether the excessive fines language in the federal constitution applied to state and local governments when imposing penalties for regulatory violations or other civil infractions. While some state supreme courts had dealt with the question under their state constitutions, the Supreme Court of the United States had not squarely resolved the issue. Based on the absence of explicit Court direction, state and local governments continued to argue about their power to impose truly debilitating fines or other extractions on businesses and individuals.

On February 20, 2019, the Court decided Timbs v. Indiana, concluding that the excessive fines clause was an incorporated due process protection afforded all persons under the Fourteenth Amendment. The decision eliminates further room for local and state government agencies to avoid challenges to over-the-top civil regulatory penalties and fines, as well as civil forfeiture actions.

So what does this mean for the business and industry when facing agency complaints and contested cases where regulators pursue out-sized penalties and fines? A regulated company can now battle these extractions where two tests are satisfied.

• Is the fine, penalty or forfeiture imposed by the government in whole or part as punishment. If so, the fact that the extraction also serves a remedial and deterrence objective, or recovers a governmental expenditure associated with misconduct by a regulated person, is not relevant.
• Is the government extraction grossly disproportionate to the gravity of the offense.  If so, the fine, penalty of forfeiture must be disallowed as unconstitutional.

Cases resolved in California and Nevada illustrate when courts will conclude that a fine is grossly disproportionate to the gravity of a businesses misconduct.  The results may be a surprise.

For example, in 1978, the California Supreme Court invalidated a state law imposing a daily $100 fine on a landlord for cutting off utility service to a tenant to leverage an eviction for non-payment of rent.  The Court found that the statute providing for ever accruing penalties that escalated to $17,300 resulted in fines that were excessive compared to the misconduct involved.  Notably, the Court compared other California regulatory penalty systems, finding a fine is excessive if inconsistent relative to the norms set by the legislature across a variety of situations.  Of particular interest was that other more grave misdeeds than disrupting utility services were sanctioned by less onerous fines.  Similarly, the Court was critical of the statute for mechanically applying the penalty each day without mandating regulators to weigh aggravating and mitigating factors.

In 1989, the Nevada Supreme Court considered a municipal law offensive under the Nevada Constitution because no maximum penalty was set for violations of a business licensing regulation.  Thus, the Court decided revoking a business license and imposing a $50,000 fine for misrepresentations on an application form was improper because the ordinance gave too much discretion to the city council, thereby posing a risk of an excessive fine.

How federal and state courts will apply and perhaps extend the Timbs decision will be of continuing interest. An immediate impact of renewed attention to the excessive fines prohibition is improved leverage for businesses to resist outsized demands for civil penalties.  This same pressure point can apply to regulator’s insistence for punitive reimbursement of the government’s investigative and legal costs.  Agencies will need to be able to demonstrate that a fine is neither unduly harsh given the relative normative standards set by the legislature nor constitutionally oppressive.

References

U.S. Const. amend VIII; Nev. Const. art. 1, § 6; Timbs v. Indiana, 586 U.S. —, 139 S.Ct. 682 (2019); Austin v. United States, 509 U.S. 602 (1993); Furman v. Georgia, 408 U.S. 238 (1972); Hale v. Morgan, 22 Cal. 3d 388 (1978); City of Las Vegas v. Nevada Industries, 105 Nev. 175, 772 P.2d 1275 (1989).