On August 14, the U.S. Court of Appeals for the Fifth Circuit issued its opinion in the case of ExxonMobil Pipeline Company v. U.S. Department of Transportation. In May of 2013, ExxonMobil Pipeline Company’s (ExxonMobil) Pegasus Pipeline spilled several thousand barrels of oil near Mayflower, AK. The Pipeline and Hazardous Materials Safety Administration (Administration) cited Exxon for several violation of the pipeline integrity and safety rules (49 C.F.R. Parts 190-199), and levied a fine of $2.6 million and ordered the company to take corrective actions to ensure compliance with these rules.

On appeal, the Fifth Circuit held that the Administration’s findings were arbitrary and capricious. This is an important regulatory and administrative law decision, and it will be interesting to see how the Administration and the pipeline industry react to this ruling.

This at-issue segment of pipeline was constructed with what the Court of Appeals describes as a certain type of pipe known as “pre-1970 low-frequency electric resistance welded steel pipe.” This type of pipe is known to be have a higher risk of seam failure. Accordingly, Exxon conducted frequent tests of the pipeline with the assistance of outside experts and available guidance, and concluded that it was not susceptible to longitudinal seam failure.

After the spill occurred, the Administration conducted its own investigation and decided that Exxon’s determination that the pipeline was not susceptible to such spills was erroneous and that the operator had failed to properly assess the integrity of the pipeline. Exxon then filed its petition for review.

The Court of Appeals acknowledged that the pipeline safety rules are a “complex and highly technical regulatory program,” which it reviewed in some detail. Nevertheless, it concluded that Exxon had carefully considered all of the regulatory factors set forth in the rules and had reasonable applied them. Consequently, the Administration’s findings to that extent were arbitrary and capricious.

With respect to the Administration’s argument that its interpretation of these rules finding Exxon in violation of their requirements (in particular 49 CF.R. § 195.452(e) (1)) was entitled to Auer deference by the courts (Auer v. Robbins), the Court of Appeals held that the rules at issue were not ambiguous and therefore not entitled to Auer deference. Moreover, Auer deference would not apply if the defendant did not have “fair notice” of an interpretation the Administration was advancing in an enforcement action.

As a result, the Court of Appeals vacated several alleged violations, and remanded the matter to the Administration to reevaluate the appropriate penalty in view of its disposition of these issues.