Weighing the Costs and Risks of Litigation

Citgo Petroleum received a Valentine’s gift of sorts from the 5th Circuit Court of Appeals on February 14, in United States v. Citgo Petroleum Corporation. The Court affirmed an $81MM civil penalty assessed by the district court for a spill at the company’s Louisiana facility. The “gift” was the Court’s determination that the lower court did not err when it assessed a penalty $10MM less than what had been determined to be the economic benefit to Citgo from its non-compliance, despite the fact that the lower court had also found Citgo to be grossly negligent.

There are parallels between Citgo’s approach to Clean Water Act (CWA) penalty litigation, and that of Anadarko, a passive owner of a 25% share in the BP lease associated with the massive Gulf Spill. In both cases, a defendant took an aggressive approach to litigation over the penalty amount, forcing the matter to trial.

Prior to the initial Citgo trial, no CWA penalty case for an oil spill had ever been litigated to a conclusion, so pushing hard against hefty government demands was not irrational. That decision at first seemed to work quite well for Citgo, when the district court assessed only a $6MM penalty after trial.  But that was reversed on appeal, and an $81MM penalty imposed on remand.

Anadarko’s position was buttressed by the added fact that prior to the Gulf Spill, the government had only once sought recovery of a penalty from a non-operating owner in a spill situation – and in that case, which settled, the pipeline operator did not appear to have sufficient assets to cover the penalty. But Anadarko fought its liability through discovery, a three stage trial, and a liability appeal, and refused to settle even after BP resolved its own liability. The district court then assessed a penalty of nearly $160MM against Anadarko, about twice what another passive owner paid to settle well before discovery and trial.

Was it worth several years of litigation to end up with these results? The penalty sought by the government at trial in both cases was vastly larger than the court outcome, but we are not privy to the government’s pre-trial settlement positions. What we do know is that both parties also incurred years of litigation costs, and have now established precedent that they and the rest of us will have to deal with. With no court precedents to rely on, the pre-trial dickering over penalty amounts was a crap shoot. But in negotiations, the threat of trial is just leverage. The government now has a couple of big benchmarks to put on the board in their negotiations, even if there is still a lot of room to argue over the details. If a party ultimately decides to follow through on its threat to litigate, courts, at least in the 5th Circuit, have shown they are not afraid to assess big numbers, even on a party who is a passive investor, if the spill involves major environmental impacts and bad behavior.