High Profile Case Demonstrates Difficulty in Predicting Environmental Civil Penalties

High Profile Case Demonstrates Difficulty in Predicting Environmental Civil Penalties

James E. Smith

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The judge in the Deepwater Horizon multidistrict litigation recently determined that Anadarko should pay a civil penalty under the Clean Water Act (“CWA”) of $159.5 million.  The judge assessed Anadarko a penalty of $50 per barrel of oil released from the Macondo Well, and calculated the total penalty based on his earlier determination that 3.19 million barrels of oil discharged into the Gulf of Mexico from that well.

Anadarko owned a 25% non-operating interest in the well.  As such, the judge determined that Anadarko was an owner of an offshore facility (the well) from which the oil discharged, but not an operator.

The CWA makes owners of these facilities subject to a civil penalty for oil discharges, with the amount of payment based on the number of days of violation (which the judge did not use) or the number of barrels released.  When based on the released oil amount, the CWA mandates a civil penalty of up to $1,100.00 per barrel of oil released.  Thus, the maximum penalty under this approach would have been over $3.5 billion.

The CWA identifies eight factors for determining the civil penalty: the seriousness of the violation; the economic benefit to the violator; the degree of culpability; other penalties for the same incident; any history of prior violations; the violator’s mitigation efforts; the economic impact that the penalty will have on the violator; and any other matters that justice requires.

Both Anadarko and the government agreed that the violation was extremely serious.  The judge’s determination included a few key facts about this violation, including that it was the largest spill in American waters.  Undoubtedly, this was a major factor in the judge’s determination of the penalty, although the judge did not appear to make any specific analysis of how seriousness affected the calculation of the penalty amount.

In many CWA penalty cases, the estimate of the economic benefit from failing to take the necessary preventive steps is the most important factor.  However, in this case, the judge found an economic benefit to Anadarko of only $3.4 million, or approximately 2% of the penalty eventually assessed.  He also noted that Anadarko and the government largely agreed on the estimated economic benefit.

Most of the other factors appeared to weigh in Anadarko’s favor.  Anadarko did not operate the well and had no right to direct the operator’s actions.  Anadarko’s history of violations did not appear to be significant.

A factor that did appear significant was the other penalties for the same incident.  The judge noted that the assessed penalty was approximately equivalent to the penalty that MOEX, another non-operator owner, agreed to pay in a separate settlement.

I cannot help but wonder what the judge would have assessed had the MOEX settlement amount not been available.  Anadarko’s penalty was nearly fifty times the economic benefit.  The CWA’s goals for penalties certainly could have been satisfied with a penalty closer to the economic benefit; it is hard to see what purpose is served by the additional penalty.  This is especially so, as the judge noted, when Anadarko has already paid $4 billion to settle compensatory claims arising from this spill.

For a copy of the judge’s ruling click here.

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