ExxonMobil’s Good Faith Consideration of Required Factors Defeats PHMSA Order

When agency regulations require that a company employ a process for detecting and responding to threats of leaks, the company satisfies those regulations by employing that process in good faith, even if doing so failed to prevent a serious accident.  An agency’s after the fact criticisms of how the company employed the process will not support an assessment of a penalty, as long as the company employed the required process in good faith.

ExxonMobil’s Successful Challenge of a PHMSA Order

In ExxonMobil Pipeline v. U.S. Dep’t of Transportation, the 5th Circuit Court of Appeals considered ExxonMobil’s challenge to an Order issued by the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) of the Department of Transportation.  The PHMSA Order assessed a penalty of $2.6 million, based on findings that ExxonMobil violated several PHMSA regulations.  In essence, the PHMSA Order concluded that ExxonMobil’s leak detection program did not meet regulatory requirements, and that these violations led to the 2013 rupture of a pipeline near Mayflower, Arkansas that released several thousand barrels of oil.

The 5th Circuit reversed most of the PHMSA Order, and remanded the matter for PHMSA to recalculate the penalty.  When recalculating, PHMSA must consider that the 5th Circuit reversed most of the violations found; PHMSA must also consider that while the 5th Circuit upheld one violation, the 5th Circuit specifically determined that this violation did not cause the Mayflower release.

PHMSA’s Regulations Did Not Have Specific Standards

PHMSA’s regulations require pipeline operators to develop an integrity management plan (“IMP”), in order to minimize leaks.  The regulations require operators to consider several factors as part of an IMP, but the regulations do not always give specific standards for how operators are to asses those factors.  In this case, the regulations required operators to assess several key factors based on industry standard.

Compliance with “Shall Consider” Type Regulations Requires Good Faith, Not Perfection

With this ruling, the 5th Circuit implicitly rejected the proposition that releases of this magnitude can only happen when a rule has been violated.

PHMSA’s Order had concluded that ExxonMobil did not properly consider certain factors, and thus concluded that ExxonMobil violated PHMSA regulations.  ExxonMobil challenged PHMSA’s conclusions.  ExxonMobil presented evidence that it considered the required factors in good faith and in accord with industry standard.  In fact, as to a key industry standard used by ExxonMobil known as the Baker Report, PHMSA itself had identified this as an appropriate industry standard.

The Court evaluated ExxonMobil’s steps in complying with PHMSA’s regulations, and determined that ExxonMobil in good faith considered the required risk factors.  PHMSA argued that ExxonMobil’s reliance on the Baker Report was unreasonable, but the 5th Circuit said that PHMSA gave no indication before this accident that companies should not use the Baker Report.

When the regulations require companies to “consider” certain factors, companies may not be penalized as long as they consider the factors in good faith, even if after an event it appears that other actions might have been better.

For a copy of the 5th Circuit Opinion click here.

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