LAW OFFICE OF GARY B. COHEN 1730 K SlRJZJST. N.W. Sum3 304 WASHINGTON. D.C. 20006 (202) 887-8299 FAX (202) 887-8217 cnvlriawerols.com ENFORCEMENT ISSUES - LEGAL PROOF by Gary B. Cohen, Esq. North Carolina Pretreatment Workshop 1998 August 17-18, 1998 Asheville, North Carollina
' ENFORCEMENT ISSUES - LEGAL PROOF by Gary B. Cohen, Esq. Case law decisions, by federal district courts and the EPA Environmental Appeals Board impact the ability of federal, state, and local governments to implement and enforce pretreatment requirements. Such cases often serve to define the scope of the legal obligations of the regulated community under the pretreatment program. In addition, cases addressing direct dischargers establish legal principles applicable to indirect dischargers. In the past few years there have been record penalties imposed upon direct and indirect dischargers. Following is selected case law for discussion. SELECTED CASE LAW 1. m n TownshiD and Dean Dairy Products Conmany, Inc. d/b/a Fairmont Products, No. l:cv-94-0621 (M.D. Pa. Dec. 1995). This decision addresses the legal liability of an industrial user. The POTW had settled with the federal government. a. Challenae to DMRs - Industry is bound by its discharging monitoring reports ( "DMRs") -- it cannot challenge the accuracy of the DMRs for purposes of challenging permit effluent violations. The industrial user contract with the POTW provided for the POTW to conduct the analyses and reserved the right of the industrial user to verify any analysis by concurrently testing a portion of the sample. Inasmuch as the industrial user did not avail itself of such right, it cannot challenge the accuracy of the POTW results. b. Interference - In order for interference to occur, the industrial user discharge must be a cause of the POW'S NPDES permit violation; it need not be the sole cause. Plaintiff's expert witness report maintains that the industrial user caused interference with the POW. One of defendant's expert reports had acknowledged that BOD in incoming wastewaters were among numerous factors contributing to interference. c. BOD as Cause of Interference - The court rejects the industrial user's argument that, by definition, it is impossible for compatible, conventional pollutants to interfere with a POW. Furthermore, the industrial user cannot challenge the accuracy of sampling results as a defense to interference. -.
2. United States of America v. The Municipal Authoritv of Union Township and Dean Daiw Products Company, Inc. d/b/a - Fairmont Products, 929 F.Supp. 800 (M.D. Pa. 1996). This decision addresses the penalty phase. a. $4 Million Penaltv - Dean Dairy was found to be liable for a penalty of $4,031,000. At that time, it was the largest judgment ever won in a Clean Water Act case that had gone to trial. b. "TOD Down" Amroach Denied - The court rejected the federal government's argument that a penalty calculation should start with the statutory maximum and the figure lowered only if mitigating factors are present (i. e., the "top-down" approach). c. Economic Benefit - Although the parties stipulated there was no economic savings due to delayed capital improvements, the court, nevertheless, determined that there was an economic benefit of over $2 million due to the industry's failure to reduce production volume. d. Parent Companv's Financial Condition - The economic impact of the penalty was evaluated against the assets of the parent company. The court found that Dean Dairy and its parent company were so closely interconnected that for the purposes of the lawsuit they should be treated as a single entity. e. POTW Liabilitv - In contrast, the POW, Union Township Municipal Authority, settled the lawsuit with EPA for $20, 000. 3. United States of America v. The Municipal Authority of Union Township and Dean Dairv Products ComDany, Inc. d/b/a Pairmont Products, 1998 WL 401490 (3d Cir., 1998). This decision addresses the legal issues on appeal. a. Calculation of Economic Benefit - Dean Dairy's appeal asserts that the district court erred as a matter of law in using a "wrongful profits" approach to determine whether Dean Dairy received any "economic benefit" from its violations. The Clean Water Act, in requiring the economic benefit to be considered in assessing a penalty, does not define how "economic benefit" should be determined. b. Reasonable Apmoximation of Economic Benefit - The intent of the penalty is to prevent the violator from profiting from its wrongdoing. Assessment of economic benefit need not be precise -- a reasonable approximation is sufficient. 2
c. Deference to Trial Court - Due to the imprecise nature of calculating penalties, an appeals court will accord the lower court award of a penalty wide discretion even though it represents an approximation. 1 d. "TOD Down" versus "Bottom UR" ADDroach - A court is free to use its discretion in choosing between a "top down" penalty calculation approach or a "bottom up" approach (i.e., start with the economic benefit and adjust it upward or downward based upon the remaining five factors). e. Or>tions For Calculatina Economic Benefit - The determination of economic benefit based upon "wrongful profits" is unusual. Usually, there is an economic benefit associated with delayed compliance costs. Cost avoidance, however, is not the only permissible method of determining the amount a polluter has gained from violating the law. f. Wronaful Profits ApDroach Is Justifiable - The Court of Appeals concludes that the district court's approach is not in conflict with the Clean Water Act. The fact that noncompliance may have been more costly to the discharger than compliance is no basis to mitigate the penalty. Under these unusual circumstances, there is no legally significant difference in measuring the economic benefit achieved by avoiding the costs of antipollution equipment, and the economic benefits achieved by failing to reduce the volume of pollution created. g. Parent Company's Finances - Dean Dairy's appeal also contends that it was legal error for the district court to consider the financial condition of it's parent company. The Court of Appeals rejects the argument, noting that it was only Dean Dairy, not the parent company, Dean Foods, that was penalized. The financial condition of Dean Foods, however, was relevant to assure that the penalty was not higher than Dean Dairy could pay. This was not a case whereby the parent was held liable for the actions of a subsidiary. 4. U.S. v. Smithfield Foods Inc. ("Smithfield Ill), 965 F.Supp. 769 (E.D. Va. 1997), motion for reconsideration denied, 969 F.Supp. 975 (E.D. Va. 1997) - This decision addresses the liability phase in response to EPA's motion for partial summary judgment motion. a. NPDES Permit/SDecial Orders - Smithfield Foods' NPDES permit was modified in early 1990 to include a compliance schedule for phosphorus. Smithfield's appeal of the requirements resulted in a 1990 Special 3
Order of the State Water Control Board. Subsequent Special Orders and amendments thereof addressed the situation wherein Smithfield would connect to the HRSD POW rather then undertake construction activities to meet the NPDES permit effluent limitations. The court agrees with EPA that the NPDES permits control over any Special Order issued by the Board. The 1992 NPDES permit did not incorporate, nor was it conditioned, revised, or superseded by the Special Order. Since EPA was not a party to the Special Orders and never agreed to be bound by the Special Orders, it is not binding upon EPA. b. Liabilitv of Smithfield Foods, Smithfield Packina and Gwaltnev: Smithfield Foods, Inc. owns and operates two pork processing and packing plants: Smithfield Packing Company, Inc. and Gwaltney of Smithfield, Ltd. Smithfield Foods operates two wastewater treatment plants that treat the wastewater from Smithfield Packing and Gwaltney. Although the NPDES permit is only in Smithfield Foods' name, the court also held Smithfield Packing and Gwaltney of Smithfield liable stating that, by generating the wastewater discharged into the treatment plant, these entities actively caused the violations. c. Late ReDortinq: The Court found that reporting of the averaae loadins for TKN was 58 days late and that the annuai toxics Ganagement plan was- 106 days late. Defendants, however, asserted that the loading information could have easily been calculated from the flow and concentration information provided. 5. Y.S. v. Smithfield Foods Inc. ("Smithfield"), 972 F.Supp. 338 (D.C.'Va. 1997): This decision addresses the penalty phase. a. Penaltv Calculation for Effluent Limitations - Each violation of a monthly average concentration or massbased limit is a violation for every day of the month in which the violation occurred. If multiple violations occur on the same day, a permittee is liable for a separate day for each violation of the Permit, including the daily maxi", monthly average concentration and monthly average mass limitations for each pollutant. The court indicated that different pollutants and their daily maximum, monthly average concentration and monthly average loading limitations are included in the Permit for different reasons and that, therefore, each limit is a separate, distinct requirement which can be violated. The maximum penalty 4
on a day may, therefore, exceed $25,000. The court found 5,919 days of effluent violations. b. Missing Records - The NPDES permit required the permittee to maintain for a period of three years records of the collection and analysis of samples used in generating the DMRs. Smithfield Foods, however, had destroyed certain records resulting in a two year, five month period (i.e., 884 days) in which the permittee did not have three years of records. Smithfield argued that the records were destroyed on a single day and should only be a single day of violation. The court held that there were 884 days of violation. c.. Total Violations Effluent violations Late Reporting - Submission of inaccurate DMR data - Failure to Maintain Records - Total d. Penaltv Factors 5,919 days 164 days 15 days 884 days 6,982 days (1) Seriousness of the Violation - The court found the effluent violations were frequent (based upon the percentage of time noncompliance occurred) and severe (based upon the magnitude of the exceedance). The court also noted a "cavalier" attitude by defendants to the effluent violations. The court found the violations to have had a severe and significant impact on the water quality of the Pagan River and further found that the overall environment and human use had been. effected by the eutrophication and degradation of the Pagan River, to which defendants significantly contributed with their permit violations. Economic Benefit - A reasonable approximation of economic benefit suffices. The court evaluated expert testimony for calculating how much money defendants made on funds they should have spent to achieve compliance. The court determined that defendants had an economic benefit of approximately $4.2 million from avoided and delayed compliance. This includes costs associated with installation of a chemical addition system at the dissolved air flotation system and additional aeration capacity. (3) Historv of Violations - This includes an evaluation of the duration of current violations, 5
(4) whether similar violations were committed in the past, and the duration and nature off all of the violations. The court determined that the violations were of significant duration and perpetual. Furthermore, defendants had been subject to a prior enforcement action under the Clean Water Act. Good-faith Efforts to ComDly - This includes an evaluation of whether defendants took action to decrease the number of violations or mitigate the environmental impact. The court noted that there were some good faith efforts by the defendant by connecting to HRSD to eliminate future discharges. However, the court believed that the defendants could have done more to facilitate the connection to HRSD or to reduce their discharge in the interim, e.g., curtail production to achieve compliance. Furthermore, defendants should have instituted safeguards to prevent late reporting, the reporting of inaccurate data, and to safeguard records. This included employing another plant operator or supervisor to perform recordkeeping and reporting requirements and, instituting random spot-checking of reports to prevent falsification of information. (5) Economic ImDact of the Penaltv on the Violator - A multi-million penalty would have a material, but not detrimental effect on the company's financial condition. e. (6) Other Matters as Justice Mav Reauire - The court's evaluation included defendant's attitude, a lack 'of bad faith, the fact that defendant could have complied by reducing production or updating equipment, and the assistance defendant provided the Town of Smithfield in connecting to the HRSD system. Furthermore, the court took notice that the defendants may have thought they were in compliance with state requirements. Penalty Calculation - Instead of starting with the maximum penalty (i.e., $174.55 million) and adjusting downwards based upon the penalty factors, the court used a "bottom-up" approach. This entailed starting with the economic benefit (i.e., $4.2 million) and adjusting the figure upwards or downwards based upon the factors. The court imposed a $12.6 million penalty. 6
6. United States of America v. Sheyenne Toolina and Manufacturinu Co., 952 F.Supp. 1420 (D.N.D.! 1996) - This case involved an EPA enforcement action against a CIU for failure to meet categorical standards, failure to submit timely and complete reports, and a failure to sample and analyze its regulated discharge. a. Economic Benefit: The court rejected the opinion of the EPA expert that the economic benefit was $236,000. Instead, the court found the economic benefit to be $46,000, stating that the principle of "leveling the playing field" means that the defendant must be held to the conditions of his field, not that of larger or more wealthy players. The EPA expert used averages and, generalizations which were not compatible with the applicable conditions. The defendant's playing field, according to the court, was a small playing field in a sparsely-settled community. b. Environmental Harm: An EPA witness, who had never inspected the plant or the drainage system, testified to a theoretical level of damage to the environment which could result from defendant's plating operation. Another EPA witness, who had not inspected the area, testified that the IU discharge had the potential of causing toxicity effects to the aquatic life in the receiving stream. The penalty assessment by the court did not consider any environmental harm. c. Penalty: The court imposed a penalty as follows: 3,650 days of violation - $3,650 Economic Benefit - $46,000 Addition for deliberate/malicious act - 0 Penalty for failure to obey regulations - $10,000 Penalty for continuing to electroplate - $500 TOTAL PENALTY $60,150 7. In Re B.J. Carnev Industries, Inc., CWA Appeal No. 96-2 (EAB, 1997) - This is an appeal of an EPA administrative penalty action against a categorical industrial user. The issue was whether the IU was subject to the categorical standard for the timber products industry, wood preserving subcategory, which has a no discharge requirement for process wastewater pollutants. a. Facts: The facility neither used water nor introduced water into its treatment process. The IU did not believe it produced any "process wastewater" and that the federal categorical standards did not apply to contaminated groundwater or surface water runoff. 7
Tanks, which were partially underground, were used to treat utility poles in an oil/pcp solution. A depression surrounded the tanks which occasionally collected ground water and precipitation contaminated by oil/pcp solution spills, boil overs, etc. Approximately 150 gpd of contaminated water was removed by a sump pump, to an oil/water separator, where the water effluent (contaminated with PCP) was discharged to the sewer system. b. C. d. EPA Environmental ADpeals Board ("EAB") Decision Process Wastewater - The EAB determined the discharge was process wastewater. The EAB reasoned that, as part of the IU's "process," PCP came to rest in the soil around the treatment tanks and was collected and removed by pumping the groundwater to the POTW. The IUrs process required that the PCP-contaminated groundwater be collected and removed. Eauitable EstopDel - EPA had directed the POTW to issue an individual control document ("ICD") addressing the discharge. The ICD, contrary to the federal categorical standard, allowed for the discharge of PCP contaminated groundwater. EPA did not object to the ICD and waited approximately five years before initiating the enforcement action. The EAB stated that "[wlhile the Region's failure to object to the [ICD] when it was issued is regrettable," it is not a defense. Retroactive Amlication of CWA 5 309(gl - The EAB held that 309(g) administrative penalties can apply to pre-february 4, 1987, violations as long as the conduct continued after such date. 1 - The EAB held that EPA only needed to establish on the record a "reasonable approximation" of the economic benefit. Even if the full economic benefit could not be determined on the record, the administrative law judge ("ALJ'') erred in not recovering the partial benefit which clearly could be reasonably approximated. Statute of Limitations - The EAB remands the case to the ALJ to determine what economic benefit the IU enjoyed within the five year statute of limitations period. The initial calculation by EPA had extended from 1984 (i.e., the date compliance with categorical standards was required) to 1993 (i.e., when the penalty hearing was held). 8
e. Endina Date for Economic Benefit - The EAB also determined that the ALJ erred in calculating the economic benefit to the date compliance was achieved, instead of the hearing date. Although other cases have not addressed the distinction, the EAB held that a violator's economic benefit ends when the benefit is disgorged, even if that occurs well after compliance is achieved. 8. U.S. v. Hartsell, 127 F.3d 343 (4th Cir. 1997) - This decision addresses the appeal of the criminal conviction of Cherokee Resources, Inc., its president and vice-president, pertaining to pretreatment activities. a. Backaround: An IU operated a wastewater treatment and oil reclamation business. The POW and FBI cooperated in the investigation of the illegal activities. The IU bypassed treatment and monitoring devices and was found to have dumped untreated wastewater and oil into the sewer system. Following a jury trial, the appellants were convicted of numerous violations of the Clean Water Act. Among other things, the court imposed a $50,000 fine on Cherokee, and sentenced the president and vicepresident to 51 months and were ordered to pay individual fines and special assessments. They appealed the convictions and sentences, raising dozens of challenges. The federal Court of Appeals affirmed the convictions. b. Subject Matter Jurisdiction: The court rejected the appellants argument that the Clean Water Act only applies to discharges into navigable waters and does not apply to discharges into a sewer system. c. Vaaueness and Strinaencv: The court rejected the appellants arguments that the Clean Water Act and its regulations are unconstitutionally vague and that the discharge permits issued to the IU were too stringent. 9