By Gerald George

On an appeal of a penalty determination in the first oil spill case to be tried under the civil penalty provisions enacted after the Exxon Valdez catastrophe in the Oil Pollution Act of 1991,[1] the 5th Circuit Court of Appeals reversed and remanded the case for reconsideration of the penalty, despite holding that penalty decisions were “highly discretionary” and subject to reversal only for “clear error.”  The court’s evaluation of the penalty determination is instructive, both on the standard to be applied and the degree of deference allowed.  One conclusion:  district courts have a great deal of discretion in the determination of penalties under the Clean Water Act—maybe even broader than might have been thought—but that discretion is not unfettered.

In 2006, two wastewater storage tanks at CITGO’s Lake Charles refinery failed after a severe rainstorm, spilling over two million gallons of oil into the surrounding waterways.  The cause of the spill was uncontested.  As recited in detail in a recent decision of the 5th Circuit Court of Appeals,[2] CITGO had failed for a decade to respond to warnings that its stormwater systems and maintenance were inadequate.   As the first oil spill case to be tried under the civil penalty provisions enacted after the Exxon Valdez catastrophe, the CITGO case provided a test of the government’s aggressive positions when seeking oil spill penalty settlements.[3]  At trial, the district court made a number of findings adverse to CITGO regarding the severity of the spill and CITGO’s failure to properly maintain its systems.  However, it did not accept the US estimate of the volume of the spill, concluded that CITGO had not been grossly negligent, and held that the amount of any penalty assessed should take into account the importance of the refinery to the surrounding community.  Accordingly, it assessed a civil penalty of $6 million ($111 a barrel), rather than the $247 million sought by the government.

The central issue for the appellate court was the district court’s failure to consider a reasonable estimate of the “economic benefit” CITGO received by not addressing its stormwater treatment systems for a decade.  The appellate court declined to decide whether the maximum penalty or the economic gain should be the “starting point” for calculating a penalty amount, but it held that no matter where the analysis started, the economic benefit was a central factor that had to be considered.  It held that the lower court committed clear error in saying it could not decide where the economic benefit lay in the range between the US estimate of $83 million and the company’s estimate of $719, because in doing so it had simply taken that factor out of the penalty analysis.  The court also reviewed other penalty factors, finding the lower court’s determination in error in some instances, acceptable in others.  Most significantly, it upheld the lower court’s consideration of the importance of the facility to the community.  The court also affirmed the lower court’s acceptance of the lower spill volume estimate offered by CITGO’s expert.  On the factor of gross negligence, however, the appellate court declined to affirm or reverse.  After reciting the facts, the court remanded the case to the district court for reevaluation of the gross negligence finding, stating further that the lower court had “the obligation on remand to re-analyze the civil penalty award,” and “should reconsider all of its findings with respect to CITGO’s conduct.”

[1] The maximum civil penalty is now an inflation-adjusted $1100 a barrel, increased to $4100 a barrel where the party is guilty of gross negligence or willful misconduct.
[2] United States v. CITGO Petroleum, ___ F.3d ___, No. 11-31117 (5th Cir. July 17. 2013).
[3] Over the last twenty-two years, leaving aside the Deepwater Horizon settlements, the United States has typically obtained “per barrel” settlements in the range of $250-$300, with total penalties of $25 million to $35 million obtained in a handful of major cases.