                                                          April 11, 1977


77-19     MEMORANDUM OPINION FOR THE
          ASSISTANT ATTORNEY GENERAL,
          CRIMINAL DIVISION

          Interpretation of the Grandfather Clause in 18
          U.S.C. § 709—Use of Word “Federal” in Name of
          Insurance Company


  This memorandum is in response to a request for this Office to
resolve a difference of opinion within the Criminal Division concerning
the correct interpretation o f 18 U.S.C. §709. For the reasons stated
hereafter, we have concluded that the grandfather clause enacted as
part of the predecessor o f § 709 should be construed narrowly to
protect only the proprietary interest already in existence in 1926 with
regard to the full name of a firm.

    I.   Background
   A dispute documented in various memorandums submitted to this
office has arisen with regard to whether an insurance company present­
ly using the word “Federal” in its name may continue the use of the
word “Federal” in the name given to the corporate entity to be created
after the merger or consolidation of the insurance company with an­
other company. This new name would not be identical to the insurance
company’s present name. T he Criminal Division has, in the past, issued
letters to various institutions declaring that such name changes as the
one contemplated here are not in violation of 18 U.S.C. §709, which
reads, in pertinent part, as follows:
    W hoever . . . uses the words “national” , “Federal”, “United
    States”, “reserve”, or “deposit insurance” as part of the business or
    firm name of a business entity engaged in the . . . insurance . . .
    business [shall be punished as a misdemeanant].


    This section shall not make unlawful the use of any name or title
    which was lawful on the date of enactment o f this title.
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  The essence of the difference appears to be whether the grandfather
clause applies to all name changes where both the new and old names
contain one or more of the prohibited words.

   II.   The Pertinent Statute and Its Legislative History
   Although the various memorandums generated within the Criminal
Division, as well as correspondence from the insurance company’s
counsel, focus to a great extent on the language and meager legislative
history of 18 U.S.C. §709, we think that focus is somewhat misplaced.
   Section 709 is a conglomerate provision assembled from other stat­
utes as part of the 1948 revision of the Federal Criminal Code. Being
part of that 1948 revision, interpretation of § 709 is governed by princi­
ples laid down by the Supreme Court in Muniz v. Hoffman, 422 U.S.
454 (1975). The basic principle established by Muniz relevant here is
that the 1948 code revision did not change the substance of any legisla­
tion that was placed in the criminal code by that revision. Id. at 468-70.
   Thus, we proceed to analyze the question on the assumption that the
relevant law is not strictly § 709 as it presently reads, but rather its
predecessor, which was enacted in 1926. Section 2 of the 1926 Act, 44
Stat. 628, provided, in pertinent part:
    That no . . . firm . . . engaged in the . . . insurance . . . business
    shall use the word “Federal”, the words “United States”, or the
    word “reserve”, or any combination of such words, as a portion of
    its corporate, firm or trade name or title . . . . Provided, however,
    that provisions of this section shall not apply to . . . any . . . firm
    . . . actually engaged in business under such name or title prior to
    the passage of this Act.
   The question is whether the grandfather clause was intended by
Congress to exempt from the prohibition established by § 2 changes in
the name of an institution or business covered by that section so long as
the old name contained one of the prohibited words. We believe that
the answer to this question turns upon the meaning to be ascribed to
the words “actually engaged in business under such name or title prior
to the passage of this A ct.”
   With regard to this critical language in § 2, we think that the most
natural reading of the words “such name or title” is that they refer to
the complete name of an entity that contained in 1926 one or more of
the words prohibited from future use by § 2. If Congress in 1926 had
intended to exempt not only existing names but new and different
names, so long as the new name was created by an entity previously
bearing an exempted name, it could have done so in language much
more explicit than the language it used. Indeed, if the exemption was
intended to go to the entity, rather than the name, language appropriate
to achieve that result could easily have been used.
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    We also think that the language actually used must be interpreted in
 context, i.e., as part of a grandfather clause exempting certain conduct
 from criminal sanctions that would otherwise be subject to sanctions.
    As a general proposition, grandfather clauses are designed to pre­
 serve the rights of persons who would otherwise be divested of those
 rights by the operation of a new law.1 Although they may be included
 by a legislature to avoid any constitutional “taking” problem with
 regard to new legislation, they may also be simple acts of grace on the
 part of a legislature or represent otherwise rational policymaking on the
 part of the legislature. See, generally. City o f New Orleans v. Dukes, 96
 S. Ct. 2513 (1976).
   The position might be taken that the grandfather clause in § 2 was
included by Congress because Congress did not wish to deprive exist­
ing enterprises of the goodwill attached to their names, and probably
could not do so without compensation. Whether this was the reason for
the inclusion of the grandfather clause in 1926 cannot be gleaned from
the legislative history of the Act, but the legislative history does sup­
port the proposition that the overall intent of the Act was to prevent
the exploitative use of certain words by companies as well as to prevent
the public from being misled by the use of such words. See H.R. Rep.
No. 1065, 69th Cong., 1st Sess. (1926); S. Rep. No. 514, 69th Cong., 1st
Sess. (1926).
   Given this overall intent, we think that several assumptions may be
made concerning the grandfather clause. First, Congress, even though
condemning the then current exploitation and deception associated with
the use of the prohibited words, was, for whatever reason, willing to
permit firms already engaged in such conduct to continue to do so.
Second, Congress, by including the grandfather clause, did not implicit­
ly approve of such continued use of the prohibited words; Congress
merely tolerated the continued use of those words by firms already
using them.
   Thus, unlike situations in which a grandfather clause permits activity
to continue that is not malum in se or malum prohibitum, the activity
permitted to continue by the grandfather clause here in question is, at a
minimum, malum prohibitum .2 Although we have been able to find no
case law directly on point, we think that any grandfather clause sanc­
tioning the continuance of activity found by the legislature to be harm­
ful to the general public should be given the narrowest construction



    'W h e th e r a nam e change occurs as part o f a m erger or consolidation o r simply because
o f a business decision m ade by a com pany, is irrelevant to the operation o f § 2.
   “T h e re can be no doubt on this point. In the Senate and House reports on the 1926
A ct, supra, there appear in detail exam ples of the abusive and deceptive practices that
m ade th e legislation necessary. Y et, under the grandfather clause the very situations
docum ented in support o f the legislation w ere perm itted to continue unabated.

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possible consistent with the overall purposes of the Act in which it
appears. We therefore conclude that the words “such name or title”
should be read to include only those full names or titles that were in
existence in 1926 when that provision was adopted.
                                              L   eon   U   lm an
                               Deputy Assistant Attorney General
                                              Office o f Legal Counsel




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