Clean Water Act Enforcement Settlement May Be Harbinger For Rest Of Coal Industry

In April 2008, Judge Copenhaver of the U.S. District Court for the Southern District of West Virginia approved a settlement agreement between the United States and A.T. Massey Coal Company that resolved allegations of substantial violations of the Clean Water Act ("CWA") across many of the company's facilities. The action focused on the company's wastewater discharge practices, which are regulated by National Pollutant Discharge Elimination System ("NPDES") permits. Massey paid $20 million in civil penalties, one of the largest CWA penalties ever collected by the federal government, and certainly the largest ever collected against a coal mining company. The original complaint filed by the Department of Justice ("DOJ") in May 2007 alleged over 60,000 separate violations of the Act and the underlying NPDES permits, which totaled nearly $2 billion in potential penalties. In addition to paying the civil penalty, Massey must implement various environmental auditing programs, such as an electronic tracking system for its numerous discharge monitoring reports ("DMRs"), and undertake supplemental environmental projects, including 20 stream remediation projects and conservation easements for 200 acres of land.

Other coal companies should take notice of Massey's experience, because the U.S. Environmental Protection Agency ("EPA") typically engages in industry sector enforcement initiatives, starting with the largest companies in a particular sector for maximum enforcement visibility. We expect EPA to move to other coal companies next for further investigations and enforcement actions, and indeed, there are indications that it already has. Companies should take the opportunity now to assess NPDES compliance at their facilities. Only then can the company take the necessary steps either to approach EPA voluntarily (pursuant to EPA's voluntary disclosure policy), or, if enforcement is already under way, to decide on defenses and strategy for upcoming negotiations with EPA and/or DOJ. We highlight below some of the issues to consider when working through a CWA enforcement investigation, negotiation, or other similar action with the federal government.

Section 308 Requests
A company's first notice of falling under EPA's radar will likely be a CWA § 308 information request letter. These letters should be taken seriously, but companies are usually able to discuss with EPA the exact timing and scope of a response. Keep in mind that EPA has broad authority under § 308, but is limited to requests that are reasonable. For example, is it reasonable for EPA to demand that a company not only turn over all of its DMRs, but also analyze, synthesize, and summarize the data for EPA in an easy-to-read spreadsheet? Arguably, a company should only be required to turn over the data it maintains in the ordinary course of business and not be required to create EPA's enforcement work product. That argument is untested thus far in the courts, and a company will have to balance the costs of complying with EPA's onerous request with the risks of litigating whether EPA has overstepped § 308's limit on reasonableness.

Three other aspects of § 308 requests also warrant mention. First, EPA will not disclose confidential business information ("CBI") submitted under § 308 to third parties. This is valuable protection for companies targeted by private organizations that seek to delay, halt, or frustrate the company's activities. Second, § 308 is not self-enforcing. If a company refuses to comply with a
§ 308 request, EPA must seek enforcement in federal district court. Thus, should a company refuse to comply with certain unreasonable portions of EPA's request, EPA must also balance whether to acquiesce or expend its resources on litigating the issue. EPA has no automatic enforcement option in § 308. Finally, EPA has authority under § 308 to seek and act upon an ex parte administrative search warrant.

Administrative Compliance Orders
Not all CWA enforcement matters become civil or criminal cases involving DOJ, as occurred with Massey. Often, EPA chooses to handles enforcement internally, utilizing the tools and authority granted in CWA § 309. Under § 309(a), EPA has discretion to issue an administrative compliance order ("ACO") for violations of the CWA. ACOs are orders that declare a CWA violation has occurred, demand compliance with the Act, and impose various affirmative obligations, including costly compliance initiatives. Failure to comply with an ACO can trigger civil penalties of up to $32,500 per day per violation.

There is a fundamental legal flaw in the ACO statutory scheme – ACOs are issued without adjudication or meaningful judicial review. In other words, the liability determination lies solely with EPA, and there is no opportunity for a company to contest the facts or the law underlying the allegations of a violation. What's more, ACOs can be issued on the basis of "any information" available to EPA – from the media, anonymous tips, or other sources – well short of a probable cause standard. If a company disagrees with whether a CWA violation occurred or whether EPA has CWA jurisdiction over the matter set forth in the ACO, there is no opportunity for judicial review of the legal or factual underpinnings of the order. If a company wants to challenge an ACO, it must violate or fail to implement it and draw the agency into court through a subsequent enforcement proceeding. And the resulting adjudication over penalties will only review whether the ACO was violated, not whether the ACO was properly issued in the first instance.

The constitutional infirmities here are obvious – companies are denied full due process before having to incur substantial penalties for violating an ACO. While courts have not yet had opportunity to rule on the legality of the CWA's scheme, the ACO scheme under the Clean Air Act, which is nearly identical to the CWA civil scheme, has been ruled unconstitutional in TVA v. Whitman. No case has yet been decided that definitively extends the TVA analysis to the CWA ACO scheme.

In April 2008, a case was filed in Idaho district court that may provide the proper framework for a decision on the constitutionality of ACOs under the CWA. In that case, EPA determined that plaintiffs' wetlands were subject to CWA jurisdiction, that plaintiffs violated the CWA by filling those wetlands, and that plaintiffs must immediately begin "substantial and costly restoration work, including removal of the fill material, replanting, and a three-year monitoring program during which the property must be left untouched." Plaintiffs filed suit seeking a declaration that their wetlands are outside CWA jurisdiction and that the ACO violates their procedural and substantive due process rights for failing to give them an opportunity to contest the factual and legal basis for the ACO. This case may produce the result that CWA-regulated entities have been seeking.

Referral to the Justice Department – Consent Decree or Trial?
If EPA determines based on its review of the § 308 information and other evidence that there have been significant violations of the CWA at a facility, it may refer the case to DOJ for civil or criminal enforcement. EPA is more likely to refer a case if it detects a pattern of significant noncompliance at multiple facilities. The steps in a civil enforcement case are:

1. Issuance of a notice letter outlining the alleged violations and the potential civil penalty the government could seek if the case goes to trial. The letter will invite the company to negotiate a settlement usually under a compressed schedule.
2. Assessment of liability and defenses, followed by determination of strategy. Companies should assume a litigation posture regarding document retention policies, privilege and confidentially issues, and engage counsel and other consultants.
3. Settlement negotiations - the government will seek:
   • (a) a compliance program that it will embody in a consent decree to ensure that compliance improves in the future;
   • (b) stipulated penalties for future violations of the consent decree; and
   • (c) a civil penalty, the amount of which will be based in part on EPA's "Clean Water Act Civil Penalty Policy," discussed below.
4. Settlement - filing of a complaint and lodging of the proposed consent decree in a U.S. district court. DOJ will next publish the proposed settlement in the Federal Register and will give the public 30 days to comment.

DOJ will instruct the court not to take action on the complaint until after the public comment period has expired. After the comment period has ended, DOJ will file a statement with the court summarizing those comments and will move for entry of the consent decree as an order of the court.

EPA's Clean Water Act Civil Penalty Policy
EPA's "Clean Water Act Civil Penalty Policy" establishes a framework for calculating a "bottom line" settlement amount it will accept in CWA enforcement actions. The minimum penalty generally seeks to recapture the violator's economic benefit of noncompliance plus an additional gravity-based component to serve as a deterrent for future behavior. The principal factors that EPA will consider in calculating the minimum settlement amount include:

1. the economic benefit of noncompliance;
2. the significance of the violations;
3. whether the violations present actual or potential harm to human health or the environment; and
4. any history of recalcitrance.

If an enforcement action proceeds to trial, EPA will not use its penalty policy as the basis for the penalty amount it seeks. EPA will instead seek penalties that are higher than what it would have accepted in settlement, as it did in the Massey federal district court complaint.

Penalties at Trial –Statutory Civil Penalty Factors
In assessing a civil penalty, courts typically begin by calculating the statutory maximum penalty by multiplying $32,500 (the current maximum per day per violation civil penalty) by the number of days of violation for each category of violation. Courts then use the following six statutory factors under § 309(d) to calculate an actual penalty given the specific facts and circumstances of each case:

1. the seriousness of the violation;
2. any economic benefit gained through noncompliance with the law;
3. the defendant's history of CWA violations;
4. good faith efforts at compliance;
5. the potential economic impact of the penalty on the defendant; and
6. such other matters as justice may require.

This calculus is performed using one of two principal techniques: (1) a "top down" method or (2) a "bottom up" method." The "top down" method uses the statutory maximum penalty as the "departure point" and then reduces the civil penalty as appropriate based on the six factors. The "bottom up" method uses the economic benefit factor from § 309(d) to establish a baseline penalty and then adjusts that penalty upward based on the five remaining factors.

Regardless of the method of calculation, CWA civil penalty cases clearly demonstrate that the statutory maximum often bears little resemblance to the final civil penalty assessment, as the federal courts have substantial discretion when imposing civil penalties under CWA § 309(d). For example, in one case the maximum penalty was $63,249,000 but the court assessed a penalty of $5,749,000. In fact, it is not unusual for courts to impose penalties at a fraction of what the statutory maximum provided. In one case, a court imposed a penalty of $186,070 out of a maximum penalty of $40,225,000; in another case, the court imposed $450,000 out of a maximum $25,830,000.

Settlements with State CWA Regulators
In the wake of the Massey settlement, some companies have entered into consent settlement agreements with their state regulators, asserting that such settlements will protect them from EPA and citizen enforcement. Unfortunately, the response to that assertion is limited to a "maybe." In CWA § 402(i), EPA retains authority to enforce permits in states that administer their own delegated or approved NPDES programs. Thus, it is critical when negotiating a settlement with a state regulator to be sure that the penalty amount is substantially adequate in light of the scope of violations subject to the settlement. If EPA perceives a "sweetheart deal," it will not hesitate to pursue its own action for penalties, particularly in an industry sector subject to an enforcement initiative.

Finally, a word about the interaction of settlements with state regulators and private citizen suits. While it is true that citizens are barred from enforcing violations that have been diligently prosecuted by EPA or the state, and courts will work from a strong presumption of diligence, a consent settlement agreement with the state will not always qualify as "diligent prosecution" if the court finds the negotiated penalties and/or injunctive relief inadequate. It is vital that companies analyze the adequacy of settlement agreements against the standards that both EPA and the courts will utilize, paying particular attention to the relationship between the penalty paid and the economic benefit enjoyed from the CWA violations.

[Editors' Note: This article is excerpted from a chapter that will appear in Volume 29 of the Proceedings of the Energy & Mineral Law Institute.]

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