April 11, 1977

Interpretation of the Grandfather Clause in 18

U.S.C. § 709—Use of Word “Federal” in Name of

Insurance Company

77-19 MEMORANDUM OPINION FOR THE

ASSISTANT ATTORNEY GENERAL,

CRIMINAL DIVISION

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 of § 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 presently 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 another company. This new name would not be identical to the insurance 

company’s present name. The 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 of 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 statutes as part of the 1948 revision of the Federal Criminal Code. Being 

part of that 1948 revision, interpretation of § 709 is governed by principles 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 legislation 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 Act.”

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 preserve 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 of 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 existing 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 support 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 implicitly 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 sanctioning the continuance of activity found by the legislature to be harmful to the general public should be given the narrowest construction

'W hether a name change occurs as part o f a m erger or consolidation or simply because 

o f a business decision m ade by a com pany, is irrelevant to the operation of § 2.

“T h ere can be no doubt on this point. In the Senate and House reports on the 1926 

A ct, supra, there appear in detail examples of the abusive and deceptive practices that 

m ade the legislation necessary. Yet, under the grandfather clause the very situations 

docum ented in support o f the legislation were 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 e o n U l m a n

Deputy Assistant Attorney General

Office o f Legal Counsel

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