Economic Benefit Must be Considered in Assessing Clean Water Act Penalty

The Fifth Circuit Court of Appeals has vacated and remanded a civil penalty imposed against CITGO Petroleum Corporation ("CITGO") in the Western District of Louisiana, finding clear error in the District Court's calculation of the appropriate penalty for violations of the Clean Water Act ("CWA") arising from a 2006 oil spill.  United States v. Citgo Petroleum Corp., No. 11-31117 (5th Cir. July 17, 2013). 

The government's case against CITGO arose from the failure of two (2) wastewater storage tanks at CITGO's Lake Charles, Louisiana refinery as a result of a severe rainstorm.  The failure caused more than two (2) million gallons of oil to flood into the surrounding waterways.  The Louisiana Department of Environmental Quality cited CITGO for violations of water quality laws as a result of the spill, and the United States sought civil penalties and injunctive relief under the CWA.  Following a two (2) week bench trial, the District Court found that CITGO had been negligent and, after considering the penalty factors of the CWA, imposed a penalty of USD 111.00 per barrel spilled into the waterways, for a total civil penalty of USD 6 million.   CITGO and the government each appealed the District Court's decision, CITGO arguing that the District Court lacked jurisdiction and the government arguing that the penalty imposed by the District Court was inadequate.

On appeal, the Fifth Circuit first rejected CITGO's argument that the District Court lacked jurisdiction, finding that there was no diligent prosecution by the State of Louisiana and that the CWA did not bar federal prosecution.   The Fifth Circuit then turned to the government's contentions that the penalty assessed by the District Court was unreasonably low and inconsistent with its analysis of the factors set forth in the CWA to be considered by District Courts in assessing the amount of civil penalties to be imposed.  The Fifth Circuit acknowledged the "highly discretionary" nature of the District Court's analysis of these factors, and noted that the District Court's factual findings in support of its penalty calculation should be reviewed for "clear error".   Although no error was found in the District Court's consideration of most of the factors, the Fifth Circuit determined that the District Court's failure to quantify the economic benefit to CITGO that resulted from its violation(s) was clear error and grounds for vacatur and remand for re-calculation of the penalty.  The Court cited this factor as a "critical" factor, "integral to arriving at an appropriate damage award", particularly in view of CITGO's history of avoiding corrective actions at its refinery.  The Fifth Circuit further concluded that a District Court's finding on the amount of economic benefit is "central to the ability of a district court to assess the statutory factors and for an appellate court to review that assessment" and that re-evaluation of this factor (as well as a renewed look at all factors in light of the new findings on this factor) was required.

Finally, the Fifth Circuit considered whether the District Court erred in finding ordinary negligence, and not gross negligence, in CITGO's failure to adequately manage its wastewater systems.  The Court concluded that the District Court had applied the correct legal standard in its gross negligence analysis, and made no finding as to whether CITGO was, indeed, grossly negligent.  However, the Court directed that, on remand, the District Court should reconsider all its findings with respect to CITGO's conduct, "giving special attention to what CITGO knew prior to the oil spill and its delays in addressing recognized deficiencies." The Court found no error in the District Court's reliance on CITGO's expert's estimate of the number of barrels spilled into the waterways.

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