On February 14, 2018, the U.S. Fifth Circuit Court of Appeals in U.S. v. Citgo Petroleum Corp., No. 16-30515, handed down an unpublished but blockbuster decision on the judicial assessment of civil penalties under the Clean Water Act—specifically, the calculation of economic benefits of noncompliance under 33 U.S.C. § 1321(b)(8). In its opinion, the Fifth Circuit affirmed the lower court’s penalty calculation, which was based on a “least costly alternative” approach. Because it may signal the judicial acceptance of a new standard for calculating economic benefits, the Fifth Circuit’s recent decision is noteworthy.

Procedural History

In 2006, a severe rainstorm caused two wastewater storage tanks at a Lake Charles refinery to fail. As a result, over two million gallons of oil flooded surrounding waterways. Marshes, habitats, fish, and wildlife were adversely impacted. The United States, among others, sought civil penalties for the spill under 33 U.S.C. § 1321(b)(7). Under that section, the court must consider the seriousness of the violation, culpability, economic benefit of noncompliance to the violator, prior history of mitigation efforts, the violator’s efforts to mitigate the effects of the discharge, the economic impact of the penalty on the violator, and other matters in the interests of justice. Citgo conceded liability but contested the penalty amount.

In 2011, finding Citgo’s acts leading to the spill to be ordinarily negligent, the district court assessed a $6 million civil penalty for the spill on a per-barrel basis ($111 times approximately 54,000 barrels). Although the district court generally considered the penalty factors under § 1321(b)(8) in its calculation of damages, the court’s finding that the magnitude of the rainstorm (rather than Citgo’s negligence) was a major cause of the spill factored heavily into its penalty award.

On appeal, the U.S. Fifth Circuit in 2013 held that the district court erred in not considering all the Clean Water Act penalty factors more fully, including in particular the statutory factor of economic benefit of noncompliance. The Fifth Circuit also required the lower court to reconsider its conclusions with respect to the extent of Citgo’s negligence, which had influenced the final penalty amount.

On remand, the district court in 2015 found Citgo grossly negligent for knowingly failing to take adequate measures to prevent a common occurrence and reassessed the penalty at $81 million ($1,500 times 54,000 barrels)—approximately $10 million below the $91.7 million amount the court found Citgo had benefited as a result of its noncompliance. To arrive at that $91.7 million number, which is below the statutory maximum of $3,000 per barrel under subsection § 1321 (b)(7)(D), the district court calculated the costs of Citgo providing two additional wastewater tanks, an aeration filter, and an API separator. The court adjusted its final penalty downward after considering the remaining § 1321(b)(8) penalty factors. All parties appealed again.

Finding the judicial weighing of penalty factors to be “highly discretionary,” the Fifth Circuit in 2018 reviewed the district court’s decision on an abuse-of-discretion standard.

Citgo’s Argument on Appeal

In its most recent appeal, Citgo contended that in its economic benefit calculation, the lower court should have considered the “least costly alternative” of providing only one additional storage tank instead of the two additional storage tanks plus an aeration tank and an API oil/water separator that the government’s experts had justified to the district court. Although Citgo had argued to the court below that the government is required as a matter of law to contemplate a least costly alternative when calculating its penalty, the least costly alternative approach does not appear to be an established legal standard for calculating the economic benefit of noncompliance under § 1321(b)(8). Without discussing the legal foundation of Citgo’s least costly alternative argument, the district court accepted the proposed standard but found that the “least costly alternative to avoid this inevitable disaster . . . would have been to provide adequate [storage] capacity” in 1996 at the latest, which was when Citgo was aware of the inadequacies in its wastewater management system. United States v. Citgo Petro. Corp., Civ. Action No. 08-893, 2015 WL 9692957, at *5 (W.D. La. Dec. 23, 2015). Accordingly, the district court accepted the government’s proposed least costly alternative.

The Fifth Circuit similarly rejected Citgo’s proposed least costly alternative, finding that it relied on a “best-case-scenario” that did not reflect the realities of how Citgo actually ran the plant. For example, the court noted, Citgo failed to maintain its existing storage tanks adequately, which allowed them to fill with sludge and waste. This resulted in lower storage capacity, which in turn made additional storage tanks necessary. The Fifth Circuit found no error in the lower court’s agreement with the government’s experts.

Citgo also contested the government’s use of a 10.04 percent weighted average cost of capital, which reflects the present value of economic benefit of noncompliance saved over time ("around" 2000 to 2015 in this case). The district court deferred to the government’s expert, and the Fifth Circuit affirmed.

The Government’s Arguments on Appeal

The government contested the district court’s downward adjustment of $10 million from the full economic benefit calculation, resulting in a final penalty of $81 million. The Fifth Circuit again held the determination of a penalty amount as “highly discretionary” and found no abuse in the district court’s calculation. The Fifth Circuit presumed that the downward adjustment reflected the $65 million Citgo had spent on cleanup costs.

Next, the Fifth Circuit addressed the adequacy of the district court’s explanation of its penalty award. While the district court did not explicitly describe the exact effect each factor had on reaching a downward penalty calculation, the Fifth Circuit held that the district court did not need to do so, stating that the “calculation of penalties is not an exact science … .”

Judge Clement’s Dissent

Judge Edith Brown Clement dissented in part from the court’s calculus. With respect to the lower court’s determination that Citgo had required an API separator and an aeration tank in addition to the two additional storage tanks to prevent the spill, which the Fifth Circuit affirmed, Judge Clement explained that although having that additional equipment may be “good practice,” those items were not shown by the lower court to be relevant to the prevention of the Clean Water Act violation.

Takeaway

This case demonstrates how a court assesses civil penalties under 33 U.S.C. 1321(b)(8), that is, by considering the penalty factors, including economic benefit of noncompliance, and making a judgment call. Rather than attach a calculation to each factor, courts may use a more general approach called “top down” or “bottom up.” Top down begins with the statutory maximum and reduces the figure, if warranted, based on the respondent’s mitigation. A bottom-up approach begins with the economic benefit of noncompliance and then proceeds to adjust upward or downward based on the various factors. The Fifth Circuit in this case reviewed a bottom-up approach (and downward adjustment) used by the district court. Other environmental statutes, including the Clean Air Act, RCRA, etc., use a similar penalty assessment model, and this case may inform the analyses performed under those models as well.

The primary lesson here is that penalty calculations are highly discretionary as long as the statutory factors are reasonably addressed. Most liable respondents would likely benefit from a bottom-up approach. With respect to the least costly alternative method of calculating the economic benefit of noncompliance under § 1321(b)(8), this case should be monitored for any further clarifications on that approach should it proceed to the next level of review.