By Greg Johnson and Stephen Wiegand

In a July 17, 2013 decision, the United States Court of Appeals for the Fifth Circuit vacated a $6 million dollar penalty levied under the Clean Water Act (“CWA”) against CITGO Petroleum Corporation (“CITGO”) and remanded the matter to the Western District of Louisiana for further consideration. See U.S. v. CITGO Petroleum Corp., Case No. 11-31117 (5th Cir. July 17, 2013) (pdf).

The case relates to a 2006 oil spill which occurred at CITGO’s Lake Charles, Louisiana, refinery. After a two-week bench trial, the District Court found that CITGO was merely negligent (rather than grossly negligent) under the CWA; that approximately 54,000 barrels of oil had spilled; and that a penalty of $111 per barrel was reasonable in light of the evidence presented, for a total penalty of $6 million.

The Fifth Circuit vacated the District Court’s penalty determination, finding that the District Court failed to adequately quantify the economic benefit that CITGO realized from the spill as required under the CWA. The District Court determined that quantifying the economic benefit to CITGO was almost impossible given the conflicting evidence presented. The District Court concluded that the economic benefit was in the range of less that $83 million as argued by the government but more than $719 as argued by CITGO. The Fifth Circuit reasoned that consideration of economic benefit is integral to arriving at an appropriate damage award under the CWA penalty analysis, therefore, the District Court was required to make an actual estimate of economic benefit, even if it was difficult to do so in light of the conflicting evidence. The Fifth Circuit concluded that the broad range set by the District Court in actuality “left economic benefit as s non-factor.” Opinion, p. 7. Thus, the District Court erred in its penalty calculation.

The Fifth Circuit did not expressly reverse the District Court’s determination that CITGO was merely negligent rather than grossly negligent. However, the Court noted that on remand, the District Court “should reconsider all its findings with respect to CITGO’s conduct, giving special attention to what CITGO knew prior to the oil spill and its delays in addressing recognized deficiencies.” Opinion, pp. 13-14.

This opinion from the Fifth Circuit is likely to have wide-ranging effects on CWA penalty cases. At a minimum, it appears that a calculation of economic benefit will be a required element of any penalty determination by a district court. The CITGO case may continue to provide insight as it progresses on remand and any subsequent appeals.