Eight Factors That Helped Reduce a Potential $3.5B Civil Penalty to $159.5M

Everyone potentially exposed to civil penalties available under the Clean Water Act (CWA), 33 U.S.C. § 1321(b)(7), should familiarize themselves with the eight factors a court will consider when deciding what penalty should be assessed. In the case known as “Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20, 2010,” for Anadarko Petroleum Corporation, these factors made the difference between a penalty in the millions and one in the billions.

Upon consideration of the first six factors set forth in Section 1321(b)(8) of the CWA for the assessment of a civil penalty, on November 30, 2015, Judge Carl Barbier of the U.S. District Court for the Eastern District of Louisiana issued a ruling finding Anadarko Petroleum Corporation, a “co-owner” of the Macondo Well, liable to the United States for civil penalties in the amount of $159.5 million. The maximum penalty that could have been assessed was $3.5 billion, but Judge Barbier concluded, after weighing the eight factors, that a civil penalty of $159.5 million would be appropriate because, as a non-operating co-owner, Anadarko’s penalty should be limited to $50 per barrel, and not $1100 per barrel. 

Anadarko was a co-owner of the well, but only BP Exploration & Production, Inc. (BPXP) was designated in their working agreement as the operator of the well; BPXP had “the exclusive right and duty to conduct (or cause to be conducted) all activities or operations under this Agreement.” Under the CWA, however, any person who is the owner, operator or person in charge of a facility from which oil is discharged without a permit is subject to a civil penalty. The District Court noted that, under the law, Anadarko could in theory be assessed a penalty of $3.5 billion, based on an assessment of the maximum penalty of $1100 per barrel applied to the release of  3,190,000 barrels of crude oil into the Gulf of Mexico. However, the law requires that penalties be assessed on the judge’s consideration of the eight statutory penalty assessment factors; however, it  does not prescribe a specific method for determining the civil penalty.

The eight factors the District Court considered are:

“[1]  the seriousness of the violation or violations,

[2]  the economic benefit to the violator, if any, resulting from the violation,

[3]  the degree of culpability involved,

[4]  any other penalty for the same incident,

[5]  any history of prior violations,

[6]  the nature, extent, and degree of success of any efforts of the violator to minimize or mitigate the effects of the discharge,

[7]  the economic impact of the penalty on the violator, and

[8]  any other matters as justice may require.”

As part of its analysis of factor one, the District Court noted: (a) as mentioned above, that 3.19 million barrels of oil were spilled; (b) between 45,000 and 68,000 square miles of surface water were “oiled”; (c) 1100 miles of coast were “oiled” to some extent; (d) 88,522 square miles of fishing grounds were closed as a result of the spill; (e) over 2000 birds were killed; (f) $14 billion was spent in response to the spill; (g) at its peak, the response effort utilized 48,000 workers; and (g), the response required the use of 6300 vessels.  It further noted that “the fact that this spill was not as bad as it could have been and may be eclipsed by a future catastrophe does not diminish the seriousness of this spill.” With respect to the second factor, it found that “a reasonable approximation of Anadarko’s economic benefit resulting from the violation is $3.4 million.”

With respect to the third and fourth factors, the District Court concluded that “Anadarko is not culpable, in the traditional tort sense, for the discharge” and Anadarko had not yet paid any penalties for the incident. For the fifth factor, the parties stipulated that Anadarko has at least ten prior CWA violations between 2004 and 2010. 

With respect to the sixth factor, although the District Courted said that the “response effort was unprecedented in size and complexity,” and it also noted that “Anadarko played a very minor role in response activities.” The District Court recognized, however, its “limited participation was largely due to the fact that Anadarko did not have authority under the Incident Command System to force its involvement in response efforts [and] that Anadarko communicated to BP and the Secretary of the Department of the Interior its willingness to assist.” Anadarko paid $4 billion to BP for the Coast Guard’s invoices, and  this “payment likely did help mitigate some of effects of the oil spill.”  The District Court did “not fault Anadarko for its limited role in the response [but, at the same time, the Court finds that Anadarko’s limited participation does not warrant a reduction of the penalty.” Anadarko also donated $1.1 million to a memorial fund that was established to assist the families of the 11 men who died on the Deepwater Horizon, and “provided $21,855,000 to establish a fund for Gulf Coast communities, which distributed $20 million to 125 support organizations serving distressed communities directly affected by the disaster.” Ultimately, the District Court found that “Anadarko’s efforts to minimize or mitigate the effects of the discharge were, at best, adequate. Perhaps Anadarko did not shirk its responsibilities, but it could hardly be called a willing participant in the response. Anadarko’s strongest point on this factor is the $4 billion it paid in settlement, but any relief provided by this amount was indirect and delayed.”

With respect to the seventh factor, the District Court noted that the statutory maximum civil penalty that could be imposed was $3.5 billion and that the U.S. was seeking a penalty “substantially less than $3.5 billion.” The District Court found that the maximum civil penalty would not be ruinous or disabling to Anadarko and, therefore, the economic impact factor did “not warrant a reduction of the penalty.”

With respect to the final factor, the District Court discussed the overarching purpose of the CWA civil penalty is “to achieve the result of clean water as well as to deter conduct causing spills,” and the other purpose of the civil penalty, including “to punish polluters and deter future oil spills by the violator and potential violators.” Another purpose noted by the District Court is to place the “‘financial burden for achieving and maintaining clean water upon those who would profit by the use [of] our navigable waters and adjacent areas, and who pollute same’; i.e., the ‘polluting enterprise.'” Ultimately it concluded that “it seems clear that punishment and deterrence are the penalty’s major objectives.”  To that end, it further confirmed that “severe penalties should be reserved for those circumstances when punishment and deterrence are strongly desired. When the goal is not to punish or deter, the remedial/regulatory purposes of the CWA will still support a civil penalty, but are insufficient to justify a severe penalty.”

In determining the appropriate penalty, the District Court exercised its discretion and elected to use the “top-down method” — Under this method, “the maximum penalty is set ($3.5 billion in this case), and then the penalty is reduced as appropriate considering the other factors.” Factors one weighed in favor of a higher penalty; factor two weighed in favor of a lower penalty, and factors three, four, five, six were, for the most part, neutral. At this juncture of the decision, before reviewing the seventh and eight factors, the District Court noted:

“Because Anadarko bears no culpability, in a traditional tort sense, for this incident, there is seemingly no reason to punish Anadarko. Likewise, a high penalty against a non-culpable, non-operating co-owner of an offshore oil well might deter only more investment in offshore mineral operations by non-operators, which is not an outcome Congress or the CWA necessarily desires. On the other hand, a substantial penalty might make Anadarko and other non-operators more selective when choosing an operator with whom to invest, which is consistent with the goal of deterring conduct causing spills. On balance, Anadarko’s lack of culpability largely, though not entirely, negates the punishment and deterrence functions of the penalty.”

Considering the first six factors, the District Court determined that Anadarko should be assessed a penalty of $50 per barrel, or $159.5 million.  Upon review of the seventh and eight factors, the District Court concluded that no further reduction was warranted.

That is how a penalty potentially in the billions ended up on the modest end of millions, and why any company that could be exposed to a civil penalty under the CWA needs to pay close attention to the eight factors that would come into play should one be incurred.

Photo:  Andreanna Moya, Eight, Taken August 31, 2008