Last month, in U.S. v. CITGO Petro. Corp., 711 Fed. Appx. 237 (5th Cir. 2017), the United States Court of Appeals for the Fifth Circuit affirmed an $81 million civil penalty assessment under the federal Clean Water Act (“CWA”) against CITGO Petroleum Corp. (“CITGO”), for unpermitted wastewater discharges from its plant in Lake Charles, Louisiana when a severe rainstorm caused two storage tanks to fail and over 2 million gallons of oil to be discharged into local waterways. In the underlying case before the United States District Court for the Western District of Louisiana, CITGO conceded liability, and therefore, the only issue for trial was the total penalty to be assessed. After a two-week bench trial, the District Court determined that CITGO had failed to properly maintain its wastewater storage tanks and allowed sludge and waste oil to accumulate in the tanks, which lessened their total storage capacity and ability to withstand a storm surge. The District Court ultimately assessed a $6 million civil penalty against CITGO, which EPA appealed.

In the first appeal to the Fifth Circuit, EPA argued that the $6 million civil penalty was too low, and that the District Court abused its discretion because it did not properly evaluate and apply the eight penalty factors listed in section 1321(b)(8) of the CWA, which include the “economic benefit to the violator, if any, resulting from the violation.” The CWA also allows a court to impose a higher civil penalty if the violation was “the result of gross negligence or willful misconduct.” EPA argued that the economic benefit to CITGO was substantial, because it delayed necessary repairs to its facility that would have prevented the tanks from leaking, escaping containment, and ultimately prevented the oil from reaching waterways, and that avoiding these repairs constituted gross negligence.

The Fifth Circuit agreed with EPA, and remanded the case to the District Court to evaluate the economic benefit to CITGO by avoiding the repairs. On remand, the District Court determined the economic benefit to CITGO was $91.7 million and that CITGO had acted with gross negligence by avoiding the repairs. But, after reviewing all eight penalty factors listed in the CWA, the District Court decided to depart downward, and ultimately imposed a civil penalty of $81 million on CITGO.

In yet another round of this appellate ping pong match, the case went back up to the Fifth Circuit, when both CITGO and EPA appealed the $81 million civil penalty that the District Court assessed after remand.

In this second appeal to the Fifth Circuit, CITGO argued that the $81 million penalty was too high, and that the District Court erred because it did not properly consider the least costly alternatives to prevent the discharge of oil from its facility, which CITGO argued was equal to the cost of installing only one more storage tank. The Fifth Circuit rejected CITGO’s argument, crediting EPA’s expert testimony presented during the trial which demonstrated that CITGO’s calculations were based on a “best-case scenario [that] does not conform to the realities of running the plant.”

Not surprisingly, EPA argued the $81 million penalty was too low, and that the District Court erred by assessing a civil penalty that was below the $91.7 million determined to be the economic benefit to CITGO from avoiding the repairs to the facility. The Fifth Circuit disagreed, finding that a trial court’s determination of a civil penalty under the CWA is “highly discretionary,” and that it was apparent that the District Court took into consideration CITGO’s $65 million effort to clean up the spill. The Fifth Circuit also rejected EPA’s argument that the District Court failed to sufficiently describe the basis for its downward departure penalty calculation.

The CITGO case, which culminated in an unusually large civil penalty award, adds to a growing body of case law on how federal District Courts assess civil penalties under the Clean Water Act, and presents a cautionary tale for facilities that avoid costly repairs.