Filed: Apr. 28, 2004
Latest Update: Mar. 02, 2020
Summary: Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit 4-28-2004 USA v. Allegheny Ludlum Precedential or Non-Precedential: Precedential Docket No. 02-4346 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004 Recommended Citation "USA v. Allegheny Ludlum" (2004). 2004 Decisions. Paper 735. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/735 This decision is brought to you for free and open access by the Opinions of t
Summary: Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit 4-28-2004 USA v. Allegheny Ludlum Precedential or Non-Precedential: Precedential Docket No. 02-4346 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004 Recommended Citation "USA v. Allegheny Ludlum" (2004). 2004 Decisions. Paper 735. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/735 This decision is brought to you for free and open access by the Opinions of th..
More
Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
4-28-2004
USA v. Allegheny Ludlum
Precedential or Non-Precedential: Precedential
Docket No. 02-4346
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004
Recommended Citation
"USA v. Allegheny Ludlum" (2004). 2004 Decisions. Paper 735.
http://digitalcommons.law.villanova.edu/thirdcircuit_2004/735
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 2004 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
ROBERT H. MILLER
PRECEDENTIAL JOHN SITHER
KATHRYN E. KOVACS (Argued)
IN THE UNITED STATES COURT OF U.S. Department of Justice
APPEALS Environment & Natural Resources
FOR THE THIRD CIRCUIT Division, Appellate Section
_________________________ P.O. Box 23795 L’Enfant Plaza Station
Washington, DC 20026
NO. 02-4346
_________________________ KERRY NELSON
LORI G. KIER
UNITED STATES OF AMERICA U.S. Environmental Protection Agency
Office of Regional Counsel
v. 1650 Arch Street
Philadelphia, Pennsylvania 19103
ALLEGHENY LUDLUM
CORPORATION, Counsel for Appellee
Appellant H. WOODRUFF TURNER (Argued)
__________________________ JOHN E. BEARD, III
THOMAS J. SMITH
On Appeal from the United States TODD R. BROWN
District Court Kirkpatrick & Lockhart, LLP
For the Western District of Pennsylvania Henry W. Oliver Building
(D.C. No. 95-cv-00990) 535 Smithfield Street
District Judge: Honorable Robert J. Pittsburgh, Pennsylvania 15222
Cindrich
__________________________ Counsel for Appellant
Argued December 16, 2003 ____________________________
Before: ALITO, FUENTES and OPINION OF THE COURT
BECKER, Circuit Judges ____________________________
(Filed April 28, 2004)
BECKER, Circuit Judge.
This is an appeal from an order of the
THOMAS L. SANSONETTI
District Court granting judgment for the
Assistant Attorney General
plaintiff United States and against defendant
JOHN T. STAHR
Allegheny Ludlum Corporation (“ALC”) in
NANCY FLICKINGER
an action brought for violations of the Clean
Water Act (“CWA” or the “Act”) at five of ensure that polluters will take responsibility
AL C’s We ste r n P e n n sy lv a n ia for ensuring the correct and precise
manufacturing facilities. The judgment is measurements of their waste (which they are
multifaceted, flowing from: (1) pretrial obliged to certify), we do not believe that a
legal determinations by the Court; (2) a laboratory error defense—where the error
jury verdict on a number of liability issues; resulted in overreporting—is inconsistent
and (3) determinations by the Court with this regime. Rather, inasmuch as the
following a penalty hearing. The jury penalty imposed is for an unlawful
verdict was mixed; each side prevailed on discharge and not for faulty reporting, we
a number of issues, and ALC’s appeal think that deprivation of the defense would
leaves unchallenged significant portions of not advance the purpose of the CWA and
the judgment against it. However, the that it would be grossly unfair, especially in
appeal does challenge major aspects of the view of the presence of companion
judgment and also of the civil penalty provisions of the CWA imposing liability
assessment leveled against ALC for the for monitoring and reporting violations. We
alleged violations in the sum of will therefore vacate the judgment in part
$8,244,670. and remand so that the laboratory error
defense can be considered and adjudicated
The first important question
with respect to the affected claims.
presented by the appeal concerns the
viability of the so-called “laboratory error The appeal also requires us to
defense.” The CWA operates under a self- determine whether the District Court made
monitoring and reporting system whereby either a mistake of law or abused its
the discharger of toxic waste measures and discretion in calculating the economic
reports to the Environmental Protection benefit that ALC obtained from those
Agency (“EPA”) the volume of its violations that are unchallenged on appeal.
discharge. ALC maintains that the EPA Section 1319(d) of the CWA requires that
predicated certain aspects of the violation the District Court, when determining the
upon reports submitted by ALC that were amount of a civil penalty under the CWA,
tainted by laboratory error caused by a consider “the economic benefit (if any)
contaminated reagent resulting in resulting from the violation,” so as to “level
overreporting of the amount of the toxic the playing field.” The District Court’s
zinc discharge. The District Court calculation here was an agglomeration,
declined to allow the laboratory error based on a number of factors. The largest
defense on the grounds that it had not been single factor was the 12.73% interest rate
recognized in the Third Circuit, and that to used by the government and the District
allow such a “new defense” would Court to compute interest from the date of
contravene the CWA. violation to the date of the judgment so as to
calculate the total economic benefit to ALC.
Although the CWA operates under
This rate was predicated largely on a
a regime of strict liability, designed to
2
calculation of ALC’s weighted average District Court’s application of the other
cost of capital (“WACC”). Noting that it legally required factors to calculate ALC’s
was uncontested at trial that ALC had an economic benefit—the least costly method
actual rate of return on capital that was of compliance and the periods of non-
less than half the 12.73% rate used by the compliance—were supported by the record.
District Court, ALC contends that the In the course of this determination, we
12.73% rate is excessive. clarify that the proper method for
determining economic benefit is to base the
We conclude that the application of
calculation on the least costly method of
the 12.73% rate may so vastly overstate
compliance. On the issue of economic
the economic benefit to ALC of its
benefit, we therefore vacate and remand
improper discharges, that it does not “level
with respect to the interest rate issue.
the playing field,” and that it constitutes an
abuse of discretion. As a prelude to Finally we must decide whether, in
making this determination we explore the compiling the number of violations for the
potential ramifications of the notion of purpose of assessing a penalty, the District
economic benefit under § 1319(d). We Court erred by counting violations of
conclude that there are two possible monthly averages as violations for each day
approaches to calculation of economic of the month. We, of course, follow our
benefit: (1) the cost of capital, i.e., what it precedent in Natural Resources Defense
would cost the polluter to obtain the funds Council, Inc. v. Texaco Refining &
necessary to install the equipment Marketing Inc., 2 F.3d 493 (3d Cir. 1993),
necessary to correct the violation; and (2) that the daily average limit is computed by
the actual return on capital, i.e., what the averaging effluent levels only for days on
polluter earned on the capital that it which the facility operated. Although some
declined to divert for installation of the Courts—most notably the Fourth Circuit in
equipment. Because these factors are so Chesapeake Bay Foundation, Inc. v.
varia ble, depending upon market Gwaltney of Smithfield, Ltd.,
791 F.2d 304
conditions and the financial soundness of (4th Cir. 1986), vacated on other grounds,
the polluter, we leave it to the District
484 U.S. 49 (1987)—have held that a
Court, in the sound exercise of its violation of a monthly average parameter
discretion, to decide which approach to constitutes a violation for each day of the
apply and how to apply it (there are a month, we find this approach incomplete.
variety of models). However, we explain We adopt Gwaltney insofar as it establishes
why the District Court’s application of the an absolute upper bound on the penalty that
WACC in this case was, at a minimum, can be assessed for a monthly average
unsupported by the evidence, and needs to violation. However, permit limits can be
be recalculated should the District Court exceeded in many different ways, both by
on remand elect to pursue that approach. very large, isolated discharges and by
m o d e r a t e c o n t i n uo u s d i s c h ar g e s .
In contrast, we conclude that the
3
Furthermore, daily and monthly average a considerable amount of pollution. ALC’s
limits are designed to avoid distinct steel-making process uses water from
environmental harms. As a result, in some adjacent rivers. The water is used as
cases a violator’s wrongful conduct will process water and as non-contact cooling
merit punishment for both daily and water. Process water is used directly in the
monthly violations, while in others, the process of making steel, and makes contact
conduct will have been sufficiently with steel or steel-making equipment. Non-
punished by penalties for daily violations contact cooling water cools the steel-making
alone. We hold that district courts have equipment without actually touching the
discretion to determine, on the facts of steel. ALC operates six on-site wastewater
each case, how many violation days should treatment plants (“WWTPs”) at these
be assessed for penalty purposes for the facilities. The three WWTPs at the
violation of a monthly average limit, based Brackenridge facility discharge to the
on whether violations are already Allegheny River, pursuant to a National
sufficiently sanctioned as violations of a Pollution Discharge Elimination System
daily maximum limit. In this case, the ( “N PDES”) perm it issued by the
District Court did not have the benefit of Pennsylvania Department of Environmental
this standard, so we will vacate its penalty Protection (“PADEP”). The two WWTPs at
assessment and remand for further the West Leechburg facility discharge to the
proceedings. Kiskiminetas River pursuant to another
NPDES permit. The Vandergrift WWTP
We will therefore affirm in part,
discharges treated process waters to the
vacate in part, and remand for further
Kiski Valley Water Pollution Control
proceedings consistent with this opinion.
Authority (“KVW PCA”) pursuant to
I. Facts and Procedural History permits with it. After applying further
treatment, KVWPCA discharges to the
ALC manufactures steel and owns
Kiskiminetas River.
and operates five plants comprising three
specialty steel manufacturing facilities in The United States filed this action
Western Pennsylvania: the Brackenridge against ALC on June 28, 1995. The
Facility (the Brackenridge and Natrona Complaint, as amended, alleged three types
plants); the West Leechburg Facility (the of violations: (1) discharges at each of
West Leechburg and Bagdad plants); and ALC’s five facilities containing discharges
t h e V a n d e r g r if t F a c il it y. T he in excess of ALC’s permits as shown by the
Brackenridge Facility conducts melting, Discharge Monitoring Reports (“DMRs”)
continuous casting, rolling, and finishing submitted to the EPA; (2) discharges from
operations. The West Leechburg and the Vandergrift facility that interfered with
Vandergrift Facilities are finishing the operations of the Kiski Valley WPCA;
operations. and (3) ALC’s failure to report violations as
required by its permits. The parties filed
The steelmaking process generates
4
cross motions for summary judgment. In that the defense had not been recognized in
response, the District Court ruled that ALC this Circuit, and that it would not adopt such
could not raise several defenses to the a new defense, “especially since the Act can
reported violations, includin g the be interpreted as creating an obligation to
“laboratory error” defense by which ALC insure that the self-monitoring of pollutants
contended that its reported violations is accurate, assigning the risk of inaccuracy
resulted from erroneous laboratory to the company.” The Court thus granted
analyses—later discovered to be caused by partial summary judgment to the United
a contaminated reagent— which overstated States on that issue. The Court denied the
zinc pollutant levels.1 The Court opined governm ent’s motion for summary
judgment on the reporting failure and
interference claims, finding that ALC had
1
ALC’s overreporting of zinc provided sufficient evidence to create triable
exceedences was based upon effluent issues of fact.
sample analyses performed by ALC’s The District Court held a jury trial on
Technical Laboratory which turned out to liability from January 5 to February 2, 2001.
be flawed. ALC allegedly tried to The jury found in favor of ALC on all of the
determine the cause of the zinc interference and reporting failure claims, but
exceedences, without success. In in favor of the government on half of the
February 1996, it started to examine its remaining reported violations claims. In
own laboratory’s performance. ALC total, the violations for which ALC
took samples of effluent and had part stipulated to liability, those for which the
analyzed at the ALC Laboratory and part court granted summary judgment, and those
analyzed by two outside laboratories, a for which the jury returned a verdict against
protocol known as “split sampling.” ALC added up to 1,122 days of violations
According to ALC, the zinc results
obtained by its laboratory were
significantly higher than those obtained and analyzed by the outside laboratories
at the outside laboratories, while the showed significantly lower zinc results
outside laboratories’ results were than the corresponding results from ALC’s
consistent with each other. In this split laboratory. However, the sample sets
sampling, each laboratory performed its analyzed by the outside laboratories after
own digestion of the samples. In March, the samples were predigested by ALC’s
1996, ALC again split samples with the laboratory were as high in zinc as the
two outside laboratories, but this time results from ALC’s laboratory, leading
provided each laboratory with two ALC to the conclusion that it was the
sample sets, one undigested and one digestion process in ALC’s laboratory that
predigested by ALC’s Laboratory. was causing zinc values to be overstated.
According to ALC, the values generated Once ALC switched to a different reagent,
by the samples that were both digested it no longer reported zinc exceedences.
5
from July 1990 through February 1997. II. The Laboratory Error Defense
From February 5 to 8, 2001, the A. Overview of the Clean Water Act
Court conducted a bench trial on the
The Clean Water Act (“CWA”) was
penalty amount. To save time, the Court
enacted by Congress in 1972 “to restore and
allowed the experts to give their direct
maintain the chemical, physical, and
testimony in the form of written proffers,
biological integrity of the Nation’s waters.”
and allowed live cross-examination.
33 U.S.C. § 1251(a). In order to achieve
Following the penalty trial, the parties
this goal, the CWA prohibits the discharge
submitted proposed (judicial) opinions,
of any pollutant into waters of the United
and on February 20, 2002, the Court filed
States except as expressly authorized under
an opinion and entered judgment against
the Act. See 33 U.S.C. § 1311(a). In order
ALC in the amount of $8,244,670. ALC
to discharge pollutants into navigable
filed a motion under Fed. R. Civ. P. 59(e)
waters, one must obtain a National Pollution
to alter or amend the judgment, which the
Discharge Elimination System (“NPDES”)
District Court denied. On November 26,
permit. 33 U.S.C. § 1342. Discharges that
2002, ALC filed a notice of appeal from
comply with the limits and conditions in an
the District Court’s summary judgment
NPDES permit are deemed to comply with
order of September 28, 2000, the
the Act. 33 U.S.C. § 1342(k). The CWA
reconsideration order of November 28,
requires NPDES permittees to test their
2000, the final judgment of February 20,
effluent and report the results to the EPA in
2002, and the Rule 59(e) order of October
Discharge Monitoring Reports (“DM Rs”).
8, 2002.
33 U.S.C. § 1318(a); 40 C.F.R. §§ 122.41(j),
The District Court had jurisdiction 122.48. Section 307 of the CWA authorizes
pursuant to 28 U.S.C. § 1331. ALC’s the EPA to promulgate regulations
appeal is timely under Fed. R. App. P. prohibiting the discharge of any pollutant
4(a)(1)(B), and we have appellate into a Publicly Owned Treatment Works
jurisdiction pursuant to 28 U.S.C. § 1291. (“POTW”) that “interferes with, passes
Our review of the grant of summary through, or otherwise is incompatible with”
judgment is plenary. See Shelton v. Univ. the POTW. 33 U.S.C. § 1371(b)(1). The
of Med. & Dentistry of N.J., 223 F.3d 220, Act prohibits discharges to POTWs that are
224 (3d Cir. 2000). We review the in excess of those pretreatment standards.
imposition of a penalty under Section 33 U.S.C. § 1317(d). The EPA has issued
1319(d) of the CWA for abuse of general pretreatment standards and national
discretion, see Tull v. United States, 481 categorical pretreatment standards for the
U.S. 412 (1987), but our review of the iron and steel manufacturing industry. See
legal construction of Section 1319(d) is 40 C.F.R. Pts. 403, 420.
plenary, see Public Interest Research
The Act authorizes the EPA to bring
Group, Inc. v. Powell Duffryn Terminals,
civil enforcement actions for injunctive
Inc., 913 F.2d 64, 80 (3d Cir. 1990).
6
relief and penalties, at times relevant, to up government then argues that, consistent with
to $25,000 per day for each violation. See the Act’s requirement for accurate self-
33 U.S.C. § 1319(d). A violation of the reporting, courts should treat DMRs, which
Act can be established by showing that the must be certified by the discharger, as
defendant is a person who discharged admissions that are sufficient to establish
pollutants from a point source into liability under the CWA.
navigable waters in violation of the terms
The government relies in this respect
of the applicable NPDES permit or into a
on Sierra Club v. Union Oil Co., 813 F.2d
POTW in violation of a pretreatment
1480, 1491-92 (9th Cir. 1987), vacated on
standard. See 33 U.S.C. §§ 1311, 1317(d).
other grounds, 485 U.S. 931 (1988), where
In assessing a civil penalty for a violation
the Court of Appeals held that a CWA
of § 1311 or § 1317, the court must
defendant could not escape liability based
consider: “the seriousness of the violation
on alleged sampling violations. The Court
or violations, the economic benefit (if any)
no ted that the “N PD ES p rogra m
resulting from the violation, any history of
fundamentally relies on self-monitoring”
such violations, any good-faith efforts to
and that Congress deemed accurate DMRs
comply with the applicable requirements,
“critical to effective operation of the Act.”
the economic impact of the penalty on the
Id. It opined that allowing CWA permittees
violator, and such other matters as justice
to impeach their own DMRs “would be
may require.” 33 U.S.C. § 1319(d).
sanctioning countless additional hours of
B. The Government’s Contentions NPDES litigation and creating new,
complicated factual questions for district
The government argues that the
courts to resolve.” Id. at 1492. The Court
CWA establishes a scheme of strict
further reasoned that if permittees could
liability aimed at facilitating enforcement.
impeach their own reported violations with
It first notes that Congress gave the EPA
claims of laboratory error, it would “create
the “authority to require information, data,
the perverse result of rewarding permittees
and reports, as well as establish monitoring
for sloppy laboratory practices” and
requirements,” recognizing that such an
“undermine the efficacy of the self-
authority is a “necessary adjunct to the
monitoring program.” Id.; accord Conn.
establishment of effective water pollution
Fund for the Env’t, Inc. v. Upjohn Co., 660
requirements and the enforcement of such
F. Supp. 1397 (D. Conn. 1987).
requirements.” Government Br. at 16
(citing S. Rep. 92-414, at 62 (1971)). Relying on this reasoning, the
Furthermore, it points out that Congress government submits that we should reject
intended “these new requirements” to ALC’s laboratory error defense. Because
“avoid the necessity of lengthy fact the regulations require dischargers to amend
finding, investigations, and negotiations at their sworn DMRs whenever they discover
the time of enforcement.” Id. (citing S. an error in their reporting, and because
Rep. 92-414, at 62 (1971)). The failure to do so constitutes a criminal
7
violation in and of itself, the government between the defendant’s results and those
contends that allowing dischargers to from outside laboratories, though no
contest their own DMRs conflicts with the consistent pattern could be detected in those
statute and the applicable regulations. See discrepancies (sometimes the defendant’s
40 C.F.R. §§ 122.41(k)(2), (1)(8). The results were higher, and sometimes they
government further argues that allowing a were lower than the outside laboratories’
laboratory error defense would frustrate results).
“congressional intent, would reward
The Court explained that “if a
companies for inaccurate monitoring
defendant wishes to contest the accuracy of
practices, and would give them an
its DMRs, it ‘has a heavy burden to
incentive to wait until they are sued to
establish faulty analysis.’” Id. at 1178
ensure the accuracy of their DMRs.”
(quoting Student Pub. Interest Research
C. The Authorities Relied upon by ALC Group, Inc. v. Georgia-Pacific Corp., 615
F. Supp. 1419, 1429 (D.N.J. 1985)). “The
ALC first cou nters th e
‘defendant must present direct evidence of
government’s arguments by citing a
reporting inaccuracies’ and ‘may not rely on
number of cases from district courts within
unsupported “speculation” of measurement
this Circuit that have recognized—either
error.’” Id. (quoting Georgia-Pacific Corp.,
explicitly or implicitly—the availability
of
615 F. Supp. at 1429). The fact that “no
the laboratory error defense. While no
court in this district ha[d] thus far found a
defendant in these cases has actually made
defendant to have met this heavy burden,”
it past the summary judgment stage based
id., however, did not preclude the possibility
on the laboratory error defense, that lack
of the defense as a matter of law.
of success has been due to district courts
finding that the defendants failed to raise a The Elf Atochem Court, in discussing
genuine issue of material fact as to the the reasoning in Upjohn, quotes Chesapeake
existence of a laboratory error, and not Bay Foundation v. Bethlehem Steel Corp.,
because the defendants were precluded 608 F. Supp. 440, 452 (D. Md. 1985), which
from raising the defense as a matter of stated that “‘[g]iven the heavy emphasis on
law. accuracy in the Act and the clear
Congressional policy that DMRs should be
In Public Interest Research Group,
used for enforcement purposes, the court
Inc. v. Elf Atochem North America, Inc.,
will not accept claims of inaccurate
817 F. Supp. 1164 (D.N.J. 1993), a similar
monitoring as a defense.’” Elf Atochem, 817
case of potential overreporting came
F. Supp. at 1179. The Elf Atochem Court
before the District Court. The defendant
agreed that “the Act places the burden of
claimed that errors in its laboratory testing
accurately monitoring the levels of
had resulted in the overreporting of toxic
pollutants in their effluent squarely on the
discharges. Split sampling over a six-
shoulders of permit holders, and that we
month period revealed large discrepancies
must hold them to that obligation,” but it
8
ultimately held that ultimately granted summary judgment
against the defendant— based on the fact
while we agree with the
that the cover letters the defendant
[Upjohn] court that it is
submitted to the Court were too speculative
incon sis t e n t with th e
in that they merely asserted that the
structure and purpose of the
defendant “felt” and “believed” that
Act to allow permit holders
laboratory errors had occurred—it clearly
to escape liability altogether
implied that had the factual situation been
on the basis of laboratory
different, Yates could have survived a
error, we find it more
summary judgment motion based on a
accurate, where laboratory
laboratory error defense. See id.
error has been shown, to
hold a defendant liable for a D. Discussion
monitoring violation rather
We find the reasoning of the Elf
than a discharge violation.
Atochem Court persuasive. The violations
Elf Atochem, 817 F. Supp. at 1179 at issue here alleged that ALC discharged
(emphasis added). pollutants in violation of the terms of its
permit. In order to prove these violations, it
Similarly, in Public Interest
was necessary for the government to
Research Group, Inc. v. Yates Industries,
establish that ALC did in fact violate the
Inc., 757 F. Supp 438, 447 (D.N.J. 1991),
permit terms. If a permittee reports that it
the Court expressly recognized the
has violated a permit limit, the report is
laboratory error defense, noting that
sufficient to discharge the government’s
“DMRs may be deemed admissions when
burden of production, but neither the CWA
establishing liability in summary judgment
itself nor any regulation of which we are
motions,” but are not conclusive proof of
aware makes such a report conclusive.2 The
liability. The Court held that under some
circumstances, a “defendant may avoid
liability at the summary judgment stage on 2
the basis of inaccurate data in DMRs.” Id. The question before us is whether a
While the Yates Court also recognized the permittee violates its permit if its
heavy burden on the defendant to prove discharges in fact comply with the terms
laboratory error, it stated that a showing of of the CWA but its reports erroneously
“‘errors in the actual tests performed indicate the permit was violated. This is a
which showed a permit violations [sic]’” pure question of law, and our review is
may defeat a summary judgment motion. plenary. In its brief, the government did
Id. (quoting Student Pub. Interest not argue that, in interpreting the relevant
Research Group, Inc. v. Tenneco provisions of the Act or any relevant
Polymers, Inc.,
602 F. Supp. 1394, 1400 regulations, we should give any degree of
(D.N.J. 1985)). Thus, while the Court deference to any formal or informal
administrative interpretations of the Act or
9
trier of fact must still be convinced that the liability means that the CWA is violated if a
permit was in fact violated. Evidence that permittee discharges pollutants in violation
the reports inaccurately overreported the of its permit, regardless of the permittee’s
level of discharge are certainly relevant to mens rea. Strict liability does not mean that
show that no violation occurred.3 a permittee may be held liable for violating
its permit even if it does not in fact do so.
The government stresses the fact
that the civil liability provisions of the While the government’s policy
CWA create a regime of strict liability, but arguments are certainly forceful in the case
this argument misses the mark. Strict of a permittee underreporting levels of toxic
liability relieves the government of the waste and then claiming a laboratory error
obligation to show mens rea, not the actus defense, we are unpersuaded that they prove
reus. See, e.g., W. Fuels-Utah, Inc. v. Fed. compelling in a case like this where the
Mine Safety & Health Review Comm’n, permittee alleges that the laboratory error
870 F.2d 711, 713-14 (D.C. Cir. 1989). In resulted in the overreporting of the levels of
the context of the present case, strict toxic waste.4 From a public policy
perspective, a polluter should not be given
the opportunity to underreport levels of
regulations. By failing to make any such toxic waste, thereby dumping in excess of
argument in its brief, the government its permit, and then, when caught, cry
waived any contention based on “laboratory error kept me from knowing that
deference. Moreover, when counsel for I was in violation!” But in the case at bar,
the government was questioned on this the opposite apparently occurred: ALC was
point at oral argument, she did not call to conducting its sampling but a contaminated
our attention any administrative reagent used in the ALC laboratory’s
interpretation to which she claimed that analysis was causing the laboratory
deference was owed. Nor has the systematically to overreport the amount of
government brought any such toxic zinc that was dumped into the water.
interpretation to our attention after the We fail to see what incentive ALC could
argument. have had to overreport how much zinc it
3
was dumping into the river when it knew
We use the term “laboratory error that such amounts would result in fines. We
defense” in this opinion because the term do not believe that a scheme assigning strict
has been used in prior cases and is used liability for discharge violations in the case
by the parties here, but it is important to
note that laboratory error is not an
4
affirmative defense to liability. Instead, In the underreporting situation, the
evidence of laboratory error is simply permittee would be attempting to use
evidence that is relevant to the question laboratory error to show that it lacked
whether a violation of a permit mens rea, which is irrelevant under the
requirement in fact occurred. civil liability provisions of the CWA.
10
of overreporting errors makes sense, nor regulations thereunder. Moreover the very
do we infer from the CWA that such was circumstances that would support a
Congress’s intent. laboratory error defense would also likely
support the finding of a monitoring
In citing United States v. Pozsgai,
violation. See 40 C.F.R. § 122.41(j). In
999 F.2d 719, 725 (3d Cir. 1993), the
light of these direct sanctions on inaccurate
government correctly asserts that a
DMRs, we find wanting the government’s
discharge that is not in compliance with a
argument that CWA provisions addressed to
permit “is the archetypal Clean Water Act
actual discharges ought to be made
violation, and subjects the discharger to
surrogate enforcers of the reporting
strict liability.” But in Pozsgai, strict
requirements. In sum, barring the assertion
liability was imposed based upon an
of a laboratory error defense seems unfair
unlawful discharge, not the mistaken
and at odds with the overall plan of the
report of a discharge. The government
CWA, especially in a case such as this
seems to be aware of this difference when
where the alleged laboratory error caused
it argues that strict liability should be
overreporting rather than underreporting.
imposed on reporting requirements, as it
writes about the conjunction of the We have considered the arguments of
“CWA’s reporting requirements and the government and the Union Oil Court
imposition of strict liability for permit that recognizing a laboratory error defense
violations.” (emphasis added). So, while would reward sloppy practices and
the CWA unambiguously imposes strict undermine the self-monitoring program by
liability for unlawful discharges, it is by giving companies an invitation to wait until
no means obvious that a similar strict they are sued. But these arguments do not
liability regime has been imposed on faulty apply to overreporting, which is almost
reporting. certainly involuntary. We also suspect that
overreporting is rare, for only the most
In fact, the existence of a
penny-wise and pound-foolish of permittees
mechanism to correct erroneous DMRs
would expose itself to the cost of a decade
suggests the opposite. See 40 C.F.R. §
of litigation (as here) if it had any chance of
122.41(l)(8) (requiring a permittee who
clearing the matter up with improved
becomes aware of any inaccuracy in a
laboratory testing and amended NPDES
DMR to promptly notify the EPA). That
reports. Conc omita ntly, we a re
regulation was promulgated pursuant to
underwhelmed by the government’s
the Administrator’s authority under 33
argument that permitting the defense will
U.S.C. § 1318(a) to impose reporting
add time to NPDES litigation. At bottom,
requirements. Since 33 U.S.C. § 1319
we do not believe that efficiency should
authorizes administrative, civil, and even
override fairness in administration. Thus,
criminal penalties for violations of § 1318,
while we do not gainsay the validity of the
the failure to correct an inaccurate DMR is
government’s argument that, consistent with
an independent violation of the CWA and
11
the Act’s requirement for accurate self- defense argument in the proper light, it, not
reporting, courts should treat DMRs, this Court, should consider the defense in
which must be certified by the discharger, the first instance. We will therefore vacate
as admissions that are sufficient to and remand so that the laboratory error
establish liability under the CWA, we hold defense can be considered and adjudicated
that the presence of certified DMRs does with respect to the claims that it affected.
not preclude the laboratory error defense in
III. The Penalty Calculation - Economic
cases of overreporting.
Benefit
The government has argued that
A. ALC’s Objections to the Penalty
even if the laboratory defense is
Assessment
recognized, there is insufficient evidence
in this record to support it. The District The assessment of civil penalties for
Court did appear to endorse this position in these violations as sought by the United
a post-trial opinion: “Nothing in ALC’s States is governed by 33 U.S.C. § 1319(d).
proffer or testimony on this issue Section 1319(d) provides that the violator of
persuades the court that these violations a permit issued pursuant to the Act shall be
arise solely from laboratory error.” But subject to a civil penalty not to exceed
that statement followed a trial at which the $25,000 per day for each violation. This
laboratory error defense had been penalty provision further states that in
excluded. More specifically, while the assessing the penalty, the court shall
District Court did have available some of consider the following factors:
ALC’s laboratory error evidence in the
the seriousness of the
penalty phase, having already determined
violation or violations, the
that ALC was liable for discharge claims,
economic benefit (if any)
this after-the-fact consideration of the
resulting from the violation,
evidence for penalty purposes does not
any history of such violations,
cure the error in precluding the laboratory
any good-faith efforts to
error defense in the liability jury trial.
comply with the applicable
Arguably the District Court’s evaluation of
requirements, the economic
ALC’s laboratory error evidence in the
impact of the penalty on the
penalty phase strengthens ALC’s argument
violator, and such other
that it was entitled to have the jury
matters as justice may require.
evaluate such evidence because, what the
District Court was doing was to assess the
credibility to that evidence (“[I]t is not
Id. The District Court considered each of
credible that laboratory error would persist
these factors in connection with the penalty
. . . .”, normally a jury function.
determination. The Court found ALC’s
Since the District Court did not violations of the CWA to be serious. It
consider the sufficiency of laboratory error questioned the level of ALC’s commitment
12
to the obligations imposed by the Act. It Finance 932 (6th ed. 2002). 5
found the economic benefit to ALC to be
ALC asserts that the District Court’s
considerable, primarily in terms of the
economic benefit calculation did not “level
avoided cost stemming from reduced
the playing field,” as required by law, but
(inadequate) staffing at its wastewater
rather imposed a severe penalty. ALC also
treatment plants, its delay in a plant
contends that the District Cou rt’s
upgrade at the Vandergrift facility, and a
calculations failed to apply other principles
number of other smaller projects. The
required by law, including that (1)
Court totaled the economic benefit at
expenditures made and included in the
$4,122,335, and ultimately doubled it to
economic benefit calculation must relate
$8,244,670 as the final penalty. See infra
directly to the violations; (2) the least costly
note 6.
method of compliance should be used in
The imposition of a penalty under § calculating economic benefit; and (3)
1319(d) is subject to the exercise of a economic benefit calculations must be based
district court’s discretion. See Tull v. only on periods of non-compliance. We
United States, 481 U.S. 412, 426-27 reject the argument that the District Court
(1987). In general, a district court abuses did not apply the proper legal precepts.
its discretion when it “bases its opinion on Rather the question is the manner of
a clearly erroneous finding of fact, an application, and whether the District Court
erroneous legal conclusion, or an improper made clearly erroneous fact findings which
application of law to fact.” LaSalle Nat’l skewed the calculations to ALC’s detriment.
Bank v. First Conn. Holding Group, L.L.C.
XXIII,
287 F.3d 279, 288 (3d Cir. 2002).
B. The Economic Benefit Principle
Many of the District Court’s
As noted above, § 1319(d) requires
findings are supported, and unchallenged
the District Court to consider “the economic
on appeal. The primary issue contested
benefit (if any) resulting from the violation”
here relates to economic benefit—i.e. the
when determining the amount of a civil
Court’s use of the government’s experts’
penalty under the CWA. ALC argues that
computation of ALC’s weighted average
the purpose of the economic benefit
cost of capital (“WACC”) as the interest
component of the penalty is to “level the
rate to use to bring the money forward to
the penalty judgment date. WACC is
defined as “the average cost of capital on 5
Of course, this general definition is
the firm’s existing projects and activities, only so useful; moving from the broad
. . . . calculated by weighting the cost of definition to the actual numbers (in
each source of funds by its proportion of particular establishing the “cost of ...
the total market value of the firm.” funds”) can be extremely complex and
Stephen A . Ross, Randolph W. subject to dispute as this case so aptly
Westerfield & Jeffrey Jaffe, Corporate demonstrates.
13
economic playing field.” We agree. See Putting aside the ultimate way in
United States v. Mun. Auth. of Union
Township, 150 F.3d 259, 263-64 (3d Cir.
1998) [hereinafter Dean Dairy]. In other employ the “bottom up” approach, in
words, the purpose is to prevent a party which economic benefit is established, and
violating the CWA from gaining an unfair the remaining five elements of § 1319(d)
advantage against its competitors, and to are used to adjust the figure upward or
prevent it from profiting from its downward. Dean
Dairy, 150 F.3d at 265.
wrongdoing. See Powell Duffryn In Dean Dairy, we held that the method
Terminals, 913 F.2d at 80. The used in assessing the civil penalty is best
government, on the other hand, submits left to the trial court’s discretion. See
id.
that CWA penalties are intended to In the case at bar, the District Court
“promote immediate compliance” and followed the “bottom up” approach.
“deter future violations” by the defendant Having arrived at a figure of economic
and other regulated entities. Friends of the benefit totaling $4,122,335, the District
Earth, Inc. v. Laidlaw Envtl. Servs., Inc., Court then conducted a detailed analysis
528 U.S. 167, 185 (2000). Therefore, of the remaining factors enumerated in §
while the government agrees that the 1319(d) and found that, while the
economic benefit analysis is designed to government advocated a trebling of the
calcu late how much money was economic benefit, a doubling would be
illegitimately gained by failing to spend more appropriate under the circumstances
the appropriate amounts on environmental of the case for a total penalty of
safeguards, it does not agree that the $8,244,670. In Dean Dairy, we approved
assessment of a penalty need stop at that the doubling of economic benefit as a
figure. In our view, the latter point possible method for assessing a penalty
addresses a different aspect of the Act, as stating that, even after the doubling of
explained in the margin.6 economic benefit, the “penalty was barely
9% of the maximum statutory penalty to
which Dean Dairy was subject.” Dean
6
The CWA does not prescribe a Dairy, 150 F.3d at 265. In the case at bar,
specific method for determining the statutory maximum penalty that could
appropriate civil penalties for violations. have been leveled against ALC was
In Dean Dairy, we noted that some $28.05 million, counting $25,000 for each
courts use the “top down” approach in of the 1,122 days of violations. While
which the maximum penalty is set $8,244,670 is approximately 29% of
($25,000 per day of violation at the times $28.05 million, a much larger proportion
relevant here), and reduced as than the 9% approved in Dean Dairy, we
appropriate considering the six are satisfied that the District Court was
enumerated elements of § 1319(d) as well within its discretion to assess such a
mitigating factors, while other courts penalty in this case.
14
which the result of the economic benefit The District Court derived this rate
calculation might be employed, such a from the proffer of government witnesses
calculation is intended, at its base, to Gary Amendola and Robert Harris who
identify the benefit realized by a violator explained the three steps they took to
from delayed expenditures to comply with calculate the WACC. First, they determined
the CWA. The economic benefit that ALC had a debt rating of “A,” as
calculation starts with the costs spent or assigned by Standard & Poor’s (“S&P”).
that should have been spent, to achieve Then, they researched what the typical
compliance. Once that figure is monthly interest rate was for A-rated bonds
established, an appropriate calculation of in each relevant year and computed yearly
economic benefit should also reflect the averages. This rate was adjusted to account
time value of money. In order to make for the advantageous tax treatment of
that calculation, a court must “apply an interest payments on corporate debt.
interest rate to determine the present value Second, they calculated the cost of equity as
of the avoided or delayed costs.” United follows: They started with a 30-year
States v. Smithfield Foods, Inc., 191 F.3d treasury bond as a baseline. They next
516, 530 (4th Cir. 1999). Herein lies the looked up the company’s “beta,” which is a
crux of the disagreement: ALC contends measure used to evaluate the relative risk of
that the District Court used an interest rate a particular stock for an equity investor.
so high that the effect was punitive rather Finally, they assumed a generic value for the
than “leveling,” whereas the government market-risk premium— the premium that a
contends that the interest rate used by the person would demand to invest in stock
District Court was entirely appropriate and rather than in a (risk free) treasury
yielded a result that was well within the instrument. At that point, they multiplied
Court’s discretion. the beta by the market-risk premium, and
added an “intermediate stock premium” for
C. The Interest Rate Adopted by the
the years before ALC merged with another
District Court
entity and became a bigger, “safer”
The District Court, in arriving at its company. They then added this to the 30-
penalty assessment, adopted the economic year treasury bond rate to arrive at an equity
analysis proffered by the government. In cost by year. Third, they combined these
that submission, the alleged economic cost of debt and cost of equity measures by
benefit stemming from each violation was taking a weighted average of them, based on
computed forward from the date of the relative proportions of debt and equity in
violation to February 28, 2001 (roughly the ALC’s capital structure for that year.7
date of the judgment) at a rate of 12.73%
annually, to arrive at a $4,122,335 total
economic benefit at the time of judgment. 7
In its brief, the government
mischaracterizes its own experts’
testimony and states that the WACC was
15
1. The Contentions of the Parties not achieved by ALC.
ALC characterizes the 12.73% rate ALC submits that, instead of the
as “a theoretical, risk-adjusted rate 12.73% rate, one of four alternative rates
(denominated by EPA as the weighted should have been used:
average cost of capital or ‘WACC’), based
(1) the statutory interest rate
on broad averages across the U.S. capital
(6%)
markets.” As the foregoing explanation
suggests, this characterization is generally (2) the risk-free rate
accurate. ALC contends that using such a represented by the short-term
hypothetical rate of interest was an error of U.S. treasury rates during
law because ALC had presented evidence
the relevant time period
of its actual rate of return on capital which,
at the time of the penalty trial, showed that (3) the actual average rate of
the average rate of return on capital for ALC’s return of capital from
ALC and its parent company between 1990-2000
1990-2000 was 5.7%. This fact was
(4) the actual average rate of
uncontested, and thus ALC submits that
ALC’s return of capital from
the 12.73% rate did not achieve the legal
1990-2001
purpose of “leveling the economic playing
field,” but rather was used to exact a Each of the rates suggested by ALC results
severe penalty “reflecting not the time in approximately the same interest rate,
value of money nor ALC’s benefits from hovering between 5.2% and 6%, which is
retaining funds, but rather theoretical less than half the rate that the District Court
investment averages that indisputably were actually used.8 ALC adds that the
“theoretical WACC has been rejected
consistently when applied to companies and
calculated by “first determining the rate industries that are not achieving such
at which ALC borrowed funds during the theoretical rates of return.” 9
relevant time period.” This
representation implies that the
government experts relied on figures that 8
Although the government maintains
were much more ALC specific than was that the only alternatives to the WACC
actually the case. As we have explained, preserved by ALC for appeal are the T-bill
the experts seem to have relied primarily rate and the Pennsylvania statute rate, we
on general market numbers for have examined the record and do not find
companies situated similarly to ALC that ALC waived any of the proposed
over a long period. We do not know the alternative rates.
reasons for the government’s
9
mischaracterization, but we do note our We think that ALC overstates the
disapproval. principle—if any—that may be drawn
16
The government responds with a
from the cases it cites. The two cases it number of arguments. First, the government
discusses are Chesapeake Bay correctly notes that the economic benefit
Foundation v. Gwaltney of Smithfield, calculation need not be precise. In Dean
Ltd., 611 F. Supp. 1542 (E.D. Va. 1985), Dairy, we recognized that economic benefit
aff’d,
791 F.2d 304 (4th Cir. 1986), “ m a y n o t b e c a p a b l e o f re a d y
vacated on other grounds,
484 U.S. 49 determination,” and the Court gave “the
(1987), and United States v. Sheyenne district court’s award of a penalty wide
Tooling & Mfg. Co.,
952 F. Supp. 1420 discretion, even though it represents an
(D.N.D. 1996).
approximation.” 150 F.3d at 264 (citing
In Gwaltney, 611 F. Supp. at Tull, 481 U.S. at 426-27). The government
1559, the Court held that “the actual couples this deference accorded to district
interest rate Gwaltney itself paid on court awards with the suggestion that, since
borrowed funds [] is a more accurate the statutory maximum penalty for ALC’s
basis for determining Gwaltney’s violations was $28.05 million, the District
economic benefit from delay” than “the Court gave ALC “a break.” The
ten-year rate of return on equity earned government advocated taking other statutory
by Smithfield Foods, Inc.—Gwaltney’s factors into account and trebling the
parent corporation.” While this case economic benefit to yield a penalty of
does not adopt WACC as a measure of approximately $12.3 million,
see supra note
economic benefit, it also does not 6, but the District Court only doubled the
affirmatively reject it. economic benefit and ordered ALC to pay
Likewise, in Sheyenne Tooling, $8,244,670. The government points to this
952 F. Supp. at 1426, the Court held that discrepancy between what it asked for and
the principle of requiring that what the Court actually did as proof that the
persons at fault must be held District Court really does have, and should
to a ‘level playing field’ means have, a great amount of discretion in
that the defendant must be held determining these types of penalties.
to the conditions of his field, not
that of larger or more wealthy The government also points to the
players. And the economic decisions of other courts that have approved
experts for the United States the use of WACC to discount economic
used averages and generalizations benefit when calculating CWA penalties,
which were not compatible with particularly Smithfield Foods where the
the playing field in which the District Court, crediting expert testimony,
defendant operated. used the WACC to discount the defendant’s
This is doubtless a sound principle, but
simply does not address what the
appropriate measure is for determining economic benefit.
17
economic benefit. See United States v. the District Court.10 In this case, however,
Smithfield Foods, Inc., 972 F. Supp. 338,
349 & n.17 (E.D. Va. 1997), cited with
approval in Dean
Dairy, 150 F.3d at 266. 10
We note a provision from the field of
trusts that enables the District Court to
2. The Appropriate Interest Rate exercise its discretion in choosing the
appropriate measure for assessing a
The methodology used by the trustee’s liability in the case of a breach of
District Court and those advanced by the trust. The choice to make here (i.e., both
parties do not exhaust the possible cost measures and actual returns are
interpretations of economic benefit under possible ways of valuing economic
§ 1319(d). It will be helpful to analyze the benefit, so which should be adopted?)
options. There are, as we see it, two resembles that choice. The Restatement
possible approaches. The first is the cost (Second) of Trusts § 205 provides (in the
of obtaining capital— i.e., the interest rate disjunctive):
necessary to acquire the capital with which If the trustee commits a
to make the improvements (which were breach of trust, he is
never made). The second is the use of the chargeable with:
corporate offender’s actual return on its (a) any loss or depreciation
capital, which, it is conclusively presumed, in value of the trust estate
was not used to make the improvements. resulting from the breach of
These are both highly variable factors, trust; or
turning on the cost of money to the (b) any profit made by him
company (which depends not only on the through the breach of trust;
general market forces but also on its or
financial strength and credit rating) or on (c) any profit which would
the profitability of the company at a given have accrued to the trust
time. estate if there had been no
In view of this variability, we think breach of trust.
that it would be inappropriate for us to As in Gwaltney, 611 F. Supp. at 1558-59
decree which methodology should be used & n.17, the choice is within the discretion
since in any given situation, “leveling the of the District Court, and we are confident
playing field” might be more readily that it will give due consideration to the
achieved with one or the other. Therefore, equities involved in selecting an
we think that the choice of methodology appropriate measure of economic benefit.
should be left to the sound discretion of Indeed, we do not even hold that economic
benefit is the sole permissible approach to
assessing a penalty; there may well be
other ways. Given this variability, we
disagree with the dissent’s contention that
18
it is not clear that the District Court was figures specific to ALC’s bonds. 11
aware of or considered the range of
The second problem is the
options available.
government’s application of the WACC.
a. Economic Benefit as Measured by the WACC averages are constructed on the
Cost of Capital basis of a company’s existing capital
structure (that is, the relative proportions of
As noted above, economic benefit
debt and equity). A WACC figure based on
can be measured by an entity’s cost of
a company’s existing capital structure at a
capital. In accepting the government’s
given time is not, without further support,
experts’ position, the District Court
necessarily the same as a company’s
adopted one such measure—WACC— but
marginal or current cost of capital at that
there are others. In commenting upon the
time (i.e., what it would cost to obtain
cost-of-capital measure adopted by the
additional capital) because new capital
District Court, we hope to provide some
might come in a different mix of debt and
guidance as to what constitutes an
equity. See Aswath Damodaran, Applied
appropriate cost-of-capital measure of
Corporate Finance 108 (1999) (“In
economic benefit.
estimating [the current cost of capital using
With respect to the cost-of-capital WACC], we have in a sense conceded the
measure used by the District Court, we status quo in terms of financing mix, since
conclude that both the calculation and we have estimated the cost of capital at the
application are, at the very least, existing mix. It is entirely possible that a
unsupported. The first problem is the firm, by changing its mix, could lower its
government’s calculation of the WACC. cost of capital.”). Unless WACC is shown
That calculation relied on values that were to be a good approximation for the marginal
not ALC-specific. Instead of using the or current cost of capital, it sheds little light
actual yield on bonds that ALC had issued, on how expensive it would have been for
the government experts computed the the company to go to the market for its
WACC by using the yield on Standard & capital, instead of diverting funds that
Poors A-rated bonds. While using the should have gone to improving pollution
S&P figure might well have been a
reasonable approximation of ALC’s 11
bonds’ yield, a more accurate calculation In contrast, as far as we can tell, the
could easily have been achieved by using cost of equity calculation was as ALC-
specific as could reasonably be achieved:
The value for beta seems to have been
ALC-specific, and the other figures that
entered into the computation (the market-
our holding saps too much discretion risk premium and the “intermediate stock
from district courts in cases under the premium”) are not by their nature
CWA. company specific.
19
controls. established by a cost-of-capital measure, the
measure to use is ALC’s marginal or current
As noted above, the government
cost of new capital in the years in question.12
and the District Court relied on Smithfield
Some courts appear to have endorsed this
Foods. But, upon closer analysis,
approach. See, e.g., Gwaltney of Smithfield,
Smithfield Foods does not help the
611 F. Supp. at 1559 (“[T]he actual rate
government. There are reasons to suspect
Gwaltney itself paid on borrowed funds . . .
that in the food processing industry (in
is a more accurate basis for determining
which Smithfield operated), the WACC
Gwaltney’s economic benefit from delay.”).
may have been an entirely appropriate
approximation of Smithfield’s economic It is of course possible that this
benefit, whereas conditions in the steel approach might make an offender worse off
industry (in which ALC operates) are than under the government’s WACC
radically different. More precisely, it may proposal. For example, a company in dire
have been that in Smithfield Foods that the financial straits may well have a marginal
WACC was a good approximation for the cost of capital (offered by lenders who see it
terms on which money could have as a high-risk investment) that exceeds its
currently been raised; the food processing WACC. This is no anomaly. For
industry is a stable industry where companies that are hard up for capital and
companies probably attract new capital on cannot afford to raise it in the market, it is
terms similar to their existing capital doubtless all too tempting to forego the
structure. The steel industry, in contrast, sometimes costly improvements and
has been highly volatile and rife with stiff pollution controls that are required by the
foreign competition, dislocations, and CWA and EPA regulations. But such
bankruptcies. Indeed, as the District Court companies must still be held to the law. To
noted, the industry is going through a do otherwise is, in essence, to allow capital-
“brutal restructuring,” and more than
twenty-five United States steelmakers have 12
sought bankruptcy protection since 1997. This could be established by looking
Thus, a company in ALC’s position may to, for example, the cost of any capital
not have, at the times in question, been actually raised by ALC at the relevant
able to raise capital on the same terms as times, or by the expert opinion of an
its existing capital structure. We need not investment banker regarding the terms on
(indeed, cannot) resolve this; but for our which ALC could have raised capital. Of
purposes, it is enough that there was course, if expert testimony can establish to
insufficient evidence for the District Court the District Court’s satisfaction that
to say that ALC’s existing capital structure WACC is—in this particular case—a good
was representative of the terms on which approximation for marginal cost of capital,
new capital would be raised. Thus, if the then WACC could be accepted as a
economic benefit to ALC is to be surrogate measure of the marginal cost of
capital.
20
strapped polluters to take out low-interest its retained funds or the risk-free return it
loans against the environment. might have enjoyed using those funds. We
think that the return on capital is a quite
We of course intimate no view on
viable means of leveling the playing field,
what a remand may develop respecting
along with the marginal or (then) current
ALC’s situation in the 1990s. The
cost of capital.
government’s experts’ proffer shows debt
costs for S&P A-rated bonds were in the 3. Other Observations About the District
6.68% - 10.06% range in the 1990s. That Court’s Analysis
is significantly lower than the 12.73%
There are other potential problems
WACC figure relied on by the District
with the District Court’s calculation, which
Court. Moreover, in recent years, which
relied on the methodology provided by the
would also figure in the calculations,
government’s experts. It appears that the
interest rates have been very low. The
government’s experts computed annual
record does not reflect ALC’s actual
estimates of WACC for each of the years
financial strength, and it may (or may not)
1990-1998, and came up with the 12.73%
also have (or have had) a good credit
figure by taking the arithmetic mean.13
rating throughout the relevant period.
Since the savings from different violations
b. Economic Benefit as Measured by accrued on different dates over a several
Actual Return year period, it is questionable whether an
average interest rate is appropriate, when
We have so far been talking about
year-to-year interest rate estimates are
measuring the economic benefit of
known and could be used with only minimal
additional capital by the cost to obtain that
additional effort by the experts.14 The
capital elsewhere. But the other option is
to use actual rates of return on capital to
com pute economic benefit. The
13
government’s experts cited the importance To be clear, by “mean” we are
of leveling the economic playing field “in referring not to WACC (which, as a
the same industry.” It is obvious, for “weighted average” is a mean of sorts) but
example, that ALC and the steel industry rather to the further step of taking the
were not, at times relevant, enjoying stellar mean of a whole series of WACC figures
returns. Indeed, as noted above, it was (one for each of the years in the relevant
uncontested at trial that ALC had a return period). We have no objection, as the
on capital that was less than half the dissent suggests, to the use of the WACC
12.73% rate used by the District Court. formula to assess economic benefit.
On this view, any advantage that ALC 14
enjoyed over its competitors by avoiding While any correction will be slight, in
the cost of CWA compliance is measured the interest of precision the District Court
by the return that ALC actually realized on might also consider whether, if an average
is to be used, the correct procedure would
21
potentially problematic practice of using a We are, of course, acutely aware that
mean interest rate over a large time span is we review the District Court’s interest rate
present in the government’s experts’ determination for abuse of discretion, and
report.15 As it happens, this wound up that its determination need not be exact. See
hurting ALC: The theoretical WACC Dean Dairy, 150 F.3d at 264-65. Our
figures from the early 1990s (15.85% in deferential scope of review does not mean,
1990 and 1991, and 13.95% in 1992) are however, that we cannot intervene when a
the highest of the group, but really have no District Court makes a finding that is
bearing on the economic benefit conferred methodologically flawed, even if, under
by post-1992 violations. Thus, the average such theory, the penalty figure it ultimately
WACC was biased toward the less- arrives at is plausible.
relevant higher WACC estimates from the
In the dissent’s view “given our
early 1990s.
highly deferential standard of review, the
Finally, we note that the District Court did not clearly err in crediting
government is unquestionably correct in its the government’s witness over ALC’s
assertion at oral argument that any witness and adopting the WACC to
computation must use the same discount calculate economic benefit.” Of course,
rate for both forward and backward when presented with two sound but
computations during the same period. For conflicting expert opinions, a district court
example, it would be clearly inappropriate has discretion to credit one over the other.
to discount all econo mic benefit But this discretion is not a license to adopt
backwards to a uniform date using one an opinion based on unsound methodology,
rate, and then use a different rate to carry whatever its source.
the value forward to the date of judgment.
Based upon our analysis of the
4. Conclusion government’s expert’s methodology, we are
unconvinced that the use of the 12.73%
interest rate achieves the stated purpose of
“leveling the economic playing field,” nor
be to use a geometric mean (computed as
are we sure that it bears much connection to
the nth root of the product of n items),
a meaningful measure of ALC’s cost of
since the percentages involved are
capital (much less its return on capital).
applied in consecutive multiplications.
We therefore must set aside the penalty
See Damodaran, Applied Corporate
calculation and remand for further
Finance at 69-70.
proceedings with respect to the interest rate,
15
Moreover, this practice is not fully open to the possibilities that the record
unique to the use of W ACC as a measure on remand will support a higher, lower, or
of economic benefit; it is an issue substantially similar penalty. We will not
regardless of the method used to derive choose among the alternatives we have
the interest rate. suggested (or those suggested by ALC ) in
22
the discussion above; rather we shall leave question does not appear to have been
it to the District Court, after receipt of addressed by any Court of Appeals. Those
further submissions by both parties, to District Courts that have addressed the issue
decide what alternative rate is best applied hold that the calculations should be based on
to the circumstances developed in the the least costly method of compliance. See,
record on remand.16 e.g., Gwaltney of Smithfield, 611 F. Supp. at
1563 n.25 (holding that economic benefit
D. The District Court’s Determination of
calculations could not be based on a more
Costs of Compliance
expensive, “permanent solution” when a
1. Introduction—The Least Costly less expensive “interim solution” had
Method of Compliance already achieved compliance); United States
v. WCI Steel, Inc., 72 F. Supp. 2d 810 (N.D.
The second basis on which ALC
Oh io 1999) (finding cre dib le the
asks us to overturn the District Court’s
defendant’s expert testimony regarding
calculation of economic benefit is its
poss ible com pliance measures and
contention that the District Court erred in
calculating economic benefit based on
calculating the amount of money it would
significantly less expensive method of
have cost ALC to institute the changes that
compliance than that proposed by the
would have led to compliance with the
government’s expert). We find these
requirements of its permits. In brief, ALC
decisions persuasive, and hold that
argues that the numbers the EPA came up
economic benefit analysis should be based
with (which were adopted by the Court)
on the least costly method of compliance.
and the kinds of solutions it proposed were
However, contra ALC’s contentions, it does
cons iderab ly overpriced, es pecia lly
not appear to us that the District Court took
considering that, according to ALC, it had
a different approach.
already fixed the problems for much less
money and could show that the solutions it 2. The Vandergrift Plant
had implemented already worked.
ALC cites to two main instances of
The threshold question is whether, alleged miscalculation of benefit. The first,
as a matter of law, the District Court must relating to the Vandergrift plant, stems from
calculate economic benefit using the least the District Court’s calculation which
costly method of compliance. This incorporated a $600,000 project that the
government’s expert posited would have
brought ALC into compliance with the
16
The District Judge who originally pretreatment permit issued for that site.
heard and decided this case has resigned ALC, however, claims that, in October of
from the bench. Accordingly, the parties 1993, shortly before the Vandergrift
will doubtless have to develop a record violations ceased, it installed and began to
for the edification of the newly assigned operate a diversion tank connected to the
judge. discharge piping leading to the Vandergrift
23
facility WWTP outfall. This diversion at a time without reporting any violations.
tank cost no more than $150,000 to buy The District Court chose to credit the
and install. According to ALC, the testimony of the government’s expert that
pretreatment violations stopped shortly the diversion tank “would not have been
after the installation of the diversion tank adequate to prevent all violations.” A
although there were two monthly average decision to credit the expert testimony of
and four daily maximum violations in one expert witness over another is entitled to
November and December 1993, which deference. See Gen. Elec. Co. v. Joiner, 522
ALC attributed to “start-up problems.” U.S. 136, 143 (1997) (holding that a District
ALC contends that starting December 15, Court’s assessment of expert testimony is to
1993, not a single violation occurred. be accorded “the deference that is the
ALC then argues that, in adopting the hallmark of abuse-of-discretion review”).
government’s proposed $600,000 project Under these circumstances the District
to solve the problem and bring ALC into Court’s findings of fact were not clearly
compliance, the District Court made erroneous, and they must therefore be left to
clearly erroneous findings of fact. stand.
There is, however, another side to 3. Outfall 107
the story. As noted above, there were
The next issue concerns a $476,090
several so-called “start-up violations” after
project that the government’s expert posited
the diversion tank was installed, and ALC
was necessary to bring ALC into
cannot claim a clean record until
compliance for non-contact cooling water
December 15, 1993. ALC claims that the
violations at Outfall 107. ALC contends
District Court should have used the
that the District Court’s economic benefit
December 15, 1993 date as the compliance
calculation which adopted that figure was
date because that is the last reported
premised on clearly erroneous findings of
pretreatment violation before the WWTP
fact which led to misapplication of the least
upgrade in August of 1994. However, the
costly method of compliance legal principle.
government’s expert, Gary Amendola,
ALC argues that violations at the outfall
explained that he chose to use August
were limited to June though October 1994
1994 as the compliance date (as did the
and that those violations were resolved
District Court) because the diversion tank
through various maintenance efforts,
installed in October 1993 was not
including repairing cracks in certain
sufficient to address the problem at
trenches and sumps. The government,
Vandergrift. Amendola explained that the
however, points out that ALC’s brief does
fact that ALC had reported no violations
not contain any record citation indicating
during the first half of 1994 did not
that it presented factual material to the
establish that the diversion tank was a
District Court at trial relating to its
sufficient compliance measure because the
maintenance efforts, and that to the extent
facility had previously operated for months
that there is such evidence in the record, the
24
evidence is limited to ALC’s own has a direct relationship to the calculation of
pleadings. Furthermore, the government economic benefit: The longer the period of
contends that ALC reported violations non-compliance, the greater the amount of
long after it alleges that it cured them in economic benefit, and the higher the
October 1994. penalty. ALC contends that the government
miscalculated the period of non-compliance
This difference of opinion as to
and that, in adopting the government’s
whether more violations occurred stems
calculations, the Court calculated ALC’s
from the fact that ALC identifies only one
purported economic benefit on lengths of
internal monitoring point, “Outfall 107,”
time that bore no semblance to reality.
associated with the $476,090 re-lining
project. The government expert, We do not find it necessary to engage
Amendola, however, opined that the re- in a lengthy analysis of the various
lining project was required to cure contentions regarding the periods of non-
violations associated with Number 90 compliance and will set forth some of the
Anneal and Pickle Line, which discharged factual disputes only in the margin.17
through Outfall 007. Outfalls 107 and 207
are internal monitoring points that 17
discharged through Outfall 007. Since ALC relies on a table it has created
ALC reported violations at Outfall 007 that purports to show the non-compliance
through December 1995, long after ALC periods designated by the government
alleges it cured those violations with were far greater than the actual non-
maintenance efforts in October 1994, the compliance periods that occurred. In the
government contends that the maintenance table, ALC challenges the non-compliance
efforts at Outfall 107 are not enough to dates for the $476,090 relining project
carry the day. discussed above. That project was
completed in 1996 and was necessary to
It is clear that the District Court cure violations at Outfall 007, at which
decided to adopt the government’s ALC reported violations through
framework regarding the monitoring and December 1995. However, government
links between these different outfalls. In expert Amendola extended the non-
view of the bona fide evidentiary dispute, compliance date back to the beginning of
its findings were not clearly erroneous and the limitations period for this case because
must be upheld. ALC reported violations associated with
E. Periods of Non-Compliance the Number 90 Anneal and Pickle Line
beginning at the time it came online in
ALC’s final complaint relating to 1988. See App. 583-88; see also App. 991-
the economic benefit analysis undertaken 92, 994-95 (ALC documents stating need
by the District Court is the identification of for treatment upgrade to attain
the period of non-compliance. Obviously, compliance).
the length of the period of non-compliance ALC also appears to be repeating
25
Having thoroughly reviewed the record, Court held:
we hold that the District Court’s findings
Plaintiff’s Motion in Limine
as to the periods of non-compliance are
on Cou n t i n g D a y s of
supported by the record, were not clearly
Violation, Doc. No. 242, is
erroneous, and must be left to stand.
GRANTED. All violations of
IV. Monthly Average Violations the monthly average
parameters of defendant’s
In a pretrial ruling the District
NPDES permits shall be
counted as violations equal in
number to all the days in the
its contention that the $150,000 diversion monitored month. See
tank it installed in October 1993 cured its Atlantic States Legal Found’n
pretreatment violations at Vandergrift, v. Tyson Foods, Inc., 897
but the District Court found that it was F.2d 1128, 1139 (11th Cir.
not until the WW TP upgrade in August 1990).
1994 that the pretreatment problem at
Vandergrift was solved, and we have ALC maintains that the District Court erred
declined to disturb that finding. in so ruling, and in particular by improperly
Additionally, ALC’s table excluding evidence that actual exceedences
challenges the non-compliance date of occurred on fewer days. ALC relies
December 1994 for the 24-hour staffing primarily on Texaco Refining & Marketing,
the District Court deemed necessary to 2 F.3d at 507. The relevant portion of the
alleviate pretreatment violations at holding of that case is that violations of the
Vandergrift. The Court found that ALC daily average limits result in penalties only
did not have 24-hour staffing in place for the number of days within the month that
until “late 1994” or 1995. ALC’s the facility operated. That decision does
contemporaneous internal documents not, however, resolve this case.
confirm that 24-hour staffing was The leading authority in this area is
necessary and was not in place before the Court of Appeals for the Fourth
December 1994. Thus, like the WWTP Circuit’s opinion in Gwaltney. Gwaltney
upgrade, the 24-hour staffing problem held that a violation of a monthly average
was not solved until December 1994. parameter constitutes a violation of each day
ALC’s table also challenges the non- of the month. The Court reasoned:
compliance dates for 24-hour staffing at
West Leechburg. The District Court While the statute does not
rejected this challenge, finding ALC’s address directly the matter of
analysis “misleading” because ALC monthly average limitations,
committed 599 violations between 1990 it does speak in terms of
and November 1993 that were the subject penalties per day of violation,
of consent agreements with the State. rather than penalties per
26
violation . This moderate, long-term discharges are
language strongly potentially harmful.” Id. at 315 n.17. The
suggests that where a Court also observed that the statute merely
violation is defined sets a maximum penalty; the District Court
in terms of a time retains the discretion to assess a smaller
period longer than a penalty where appropriate. Id. The Court
day, the maximum stressed that counting average monthly
penalty assessable violations as a violation of each day of the
for that violation month is essential to providing a framework
should be defined in that allows district courts “sufficient
terms of the number flexibility to assess penalties that suit the
of days in that time particular circumstances of each case.” Id.
period. at 314. We find the reasoning of Gwaltney
incomplete. A discharger who exceeds the
791 F.2d at 314 (footnote omitted). The
monthly average maximum by a great
Court of Appeals for the Eleventh Circuit
amount will probably also have committed
has followed Gwaltney. See Atl. States
a number of daily violations, and the
Legal Found., Inc. v. Tyson Foods, Inc.,
penalties for those violations will mete out
897 F.2d 1128, 1139-40 (11th Cir. 1990).
at least part of the total punishment that the
ALC contends that charging it with permittee’s conduct for the month merits.
a month’s worth of violations based on the The penalty for violating the average
excedence of a monthly average permit monthly maximum seems well suited to
limit yields illogical and unfair results. punish a pattern of discharges that, with a
For example, ALC claims that a single few exceptions, do not violate the daily
upset caused the average of the four maximums but are nevertheless, in the
samples for M ay and September 1991 to aggregate, excessive. However, we find
exceed the monthly average limit, while problematic the proposition that the
three of the months’ samples were within maximum penalty for such a course of
the effluent limits. ALC submits that the conduct should be thirty times the maximum
District Court’s ruling “automatically penalty for the worst daily violation
converted a single event into 31 violation imaginable.
days, despite evidence to the contrary.”
Under 33 U.S.C. § 1319(d) a violator
This was the justification rejected in is “subject to a civil penalty not to exceed
Gwaltney. In that case the defendant $25,000 per day for each violation,” which
presented the Court with hypotheticals means that a civil penalty of $25,000 may be
similar to ALC’s contentions. 791 F.2d at assessed for each day that a violation
314-15. The Court noted that the occurs. Under Gwaltney, a violation of the
defendant’s hypotheticals ignored the fact monthly average maximum occurs on every
that “both large, isolated discharges and day of the month, which could result in a
27
monthly penalty of roughly $750,000, but House and Senate Committees. But we
that does not seem to be the most literal must still decide this case. We are not
reading of the statutory language. That prepared to say that Gwaltney was simply
said, we are fairly confident that no one in wrongly decided. Instead—and the best we
Congress ever thought of the question that can do in view of the muddled state of
is now before us, and it does not appear affairs—is to follow Gwaltney on the
that there is any answer to be found in the question of the statutory maximum, and to
text of the CWA or its legislative history. use it as a framework, but to give guidance
Nor do we think that the structure or structuring the way in which a district court
purpose of the Act yields any clear answer. is to exercise its discretion in setting an
Certainly we can infer that Congress actual penalty. This is the course we follow.
wanted to set an upper limit on the civil
More particularly, in exercising its
penalty that a district court can award;
discretion, a district court should take into
Congress did not want to leave this
account the degree to which the polluter’s
entirely to the district court’s discretion.
conduct had already been punished by
But without knowing Congress’s views on
penalties for daily violations and to use the
the relative severity of a violation of a
maximum penalty for a daily violation as a
monthly as opposed to a daily limit, it is
basis for comparison. Thus a district court
difficult to tell what sort of upper limit
would not assess a daily penalty of more
Congress wanted to propose.
than $25,000 as a function of the monthly
Given the opaqueness of the statute average violation unless it could say that the
and the consequent muddle that we have permittee’s violation of the average monthly
described, we urge either that the Congress maximum was as blameworthy (taking into
amend the statute to clarify its intentions account the factors enumerated in 33 U.S.C.
or that the EPA consider the matter and, § 1319(d) including environmental harm) as
after notice and comment, promulgate a daily violation for which the $25,000
regulations that will give more guidance.18 maximum would be appropriate. This
To that end we will direct the Clerk of exercise will not always be simple as there
Court to send copies of this opinion, is a certain incommensurability between
directing attention to this section, to the short, intense and prolonged moderate
Administrator and General Counsel of the discharges, but we are confident that the
EPA and to the counsel for the relevant district courts, in the exercise of their
discretion, can do the job. Since the District
18
Court did not have the benefit of this
Indeed, in a sense it is the EPA’s standard, we must vacate and remand so that
regulations that have created the it may apply it to reconsider the penalty for
quandary, because they inject the concept monthly average violations.
of a monthly violation into a statute that
authorizes penalties denominated only in Our modified Gwaltney approach
days. must, however, be applied in accord with
28
Texaco. Under such a regime, there must United States v. Allegheny Ludlam,
be excluded from the calculation days on
No. 02-4346
which the facility in question did not
operate. If there was evidence in this
record that the plant did not operate on
FUENTES, Circuit Judge, dissenting.
certain days, this District Court would
have to consider that as well. As best we I concur and join in Part II, Parts IIID
can ascertain, however, there is no such and E, and Part IV of the majority’s well-
evidence in the record. The closest ALC crafted opinion. I disagree, however, with
comes is to represent that the Basic the majority’s conclusion that the District
Oxygen Furnaces were not operating Court abused its discretion when it credited
during the week of January 24, 1994, but the EPA’s expert economist and used that
ALC makes no claim that non-functioning expert’s interest rate to calculate ALC’s
furnaces establishes overall plant closure. economic benefit rather than the rate
In fact, one ALC witness testified “all of presented by ALC’s expert. The majority
our facilities typically operate 365 days a writes that the District Court committed
year, 24 hours a day” and that “Allegheny clear error because, in applying the EPA’s
Ludlum’s facilities generally operate 24 12.73% discount rate, the Court so vastly
hours a day, 365 days a year.” At all overstated the economic benefit to ALC of
events, no date other than January 24, its Clean Water Act (“CWA”) violations
1994, is identified as a date for (possible) that it failed to level the economic playing
plant shut down. Additionally, we note field. In my view, in selecting the 12.73%
that the argument maintained by ALC in rate, the District Court acted squarely within
its briefs is not that the Court’s order its discretionary authority.
deprived it of the opportunity of proving
that plants were not operating on given
days, but rather that it was not discharging I.
or was in compliance during parts of the
Before discussing the discount rate
month.
issue and the Court’s exercise of discretion,
V. Conclusion I think it worth commenting on the
proceeding conducted by the District Court.
For the foregoing reasons, we will
The $8,244,670 penalty imposed on ALC
affirm the judgment on liability, except as
came after a three-day penalty hearing
to those aspects of the government’s
during which the District Court heard
claims that are affected by the laboratory
testimony from 13 witnesses, 11 live and 2
error defense and the monthly average
through depositions. These witnesses
violations. We will vacate the assessment
included experts on economic benefit, cost
of penalty and remand for further
avoidance and aquatic toxicology, ALC’s
consideration in light of this opinion.
Director of Environmental Affairs, and
Parties to bear their own costs.
29
officials from the United States Coast that the District Court erred in using the
Guard, the Pennsylvania Fish and Boat 12.73% discount rate.
Commission and the Pennsylvania
Department of Environmental Protection.
Expert testimony was submitted by written
II.
proffer with live cross-examination. On
the subject of economic benefit, the EPA As I see it, the central issue here is
presented testimony from Robert Harris, whether the District Court abused its
an economist, who explained how he discretion in crediting one expert over
calculated the 12.73% WACC. ALC another when it determined the interest rate.
presented testimony from Dr. Howard We have noted many times that abuse of
Pifer, who proposed using the 30-day discretion is a highly deferential standard of
treasury bill rate to determine the value of review. And, we have stated, on numerous
the money going forward to the penalty occasions, that a decision to credit the
payment date. In a 30-page opinion issued testimony of one expert witness over
after the hearing, the District Court another is entitled to deference. See United
credited the EPA’s expert testimony, States v. Universal Rehabilitation Services
concluding that Dr. Pifer’s argument was (PA), Inc., 205 F.3d 657, 665 (3d Cir.
not supported by the facts and that the 2000), quoting General Elec. Co. v. Joiner,
WACC offered a reasonable approach
522 U.S. 136, 143 (1997), United States v.
because it represented an average of Mathis,
264 F.3d 321, 335 (3d Cir. 2001),
potential investments made by ALC during Laverdi v. Jenkins Township, 2002 WL
the time it had use of the funds that it did 31108910 at *364 (3d Cir. Sept. 19, 2002),
not spend on compliance. The District Matlin v. Langkow,
2003 WL 283164 at
Court also followed Dean Dairy’s *382 (3d Cir. Jan. 22, 2003). The Supreme
endorsement of the WACC, as used in Court has held that a district court’s
Smithfield Foods. evaluation of expert testimony is to be
accorded “the deference that is the hallmark
The majority finds fault with the
of abuse-of-discretion review.” General
District Court’s analysis, noting that the
Elec. Co. v. Joiner, 522 U.S. at 143. A
government’s calculation of the WACC
district court abuses its discretion when it
“relied on values that were not ALC-
“bases its opinion on a clearly erroneous
specific.” Maj. Op. at 19. The majority
finding of fact, an erroneous legal
also believes that, rather than using an
conclusion, or an improper application of
average such as the WACC, the
law to fact.” LaSalle Nat’l Bank v. First
government should have applied the actual
Conn. Holding Group, L.L.C. XXIII, 287
rate it would have cost ALC to raise
F.3d 279, 288 (3d Cir. 2002). Indeed, we
capital for the years when it was diverting
have said that “[i]n order to justify reversal,
funds that should have gone to pollution
a district court’s analysis and resulting
control. Therefore, the majority concludes
conclusion must be “arbitrary or irrational.”
30
United States v. Universal Rehabilitation (1993); see also Kumho Tire Co., Ltd. v.
Services (PA), Inc., 205 F.3d 657, 665 (3d Carmichael,
526 U.S. 137, 147 (1999)
Cir. 2000), quoting In re Paoli R.R. Yard (extending Daubert’s gatekeeping obligation
PCB Litig.,
113 F.3d 444, 453 (3d Cir. to all expert testimony).
1997) (internal quotations omitted).
Abuse of discretion requires a showing of
clear error, not inappropriateness. In my Still, the majority conducts a
view, given our highly deferential standard protracted survey of economic theories,
of review, the District Court did not clearly considers treatises not specifically presented
err in crediting the government’s witness by experts before the District Court, and
over ALC’s witness and adopting the decides that it disagrees with the District
WACC to calculate economic benefit. Court’s discretionary determination. Of
course, there will always be disagreement
among experts concerning scientific, or in
Here, after considering all of the
this case economic, theories. However, it is
testimony, the District Court credited the
for the District Court Judge, as fact finder,
testimony of the government’s economic
to resolve those disagreements by judging
expert concerning the WACC, stating that
the credibility of the expert witnesses,
it “represents the rate of return a company
resolving the conflicting evidence, and
must earn annually to continue to attract its
assessing the weight of the expert’s
current investors and maintain its current
testimony. There is nothing in the record
levels of operations. It is a rate which is
here to indicate that the government’s expert
commonly used by companies in making
did not use sound methodology and
capital budgeting decisions.” Dist. Ct. Op.
adequately support his opinion, and nothing
at 22, quoting Harris Proffer at 6 (internal
to show that the District Court was clearly
quotations omitted); App. I at 47. The
erroneous in crediting that opinion.
District Court also credited the testimony
of the government’s expert on avoided
costs, noting that he had 30 years of
The majority’s disagreement as to
experience in the environmental field,
which interest rate is more “appropriate” is
including working for and as a consultant
not enough to justify a remand.19 This is
to the EPA and several major steel
companies. Dist. Ct. Op. at 16-17; App. I
at 41-42. The District Court was not 19
required to explore every possibility. As The majority states, for example, that
the Supreme Court has stated, a district “[i]n commenting upon the cost-of-capital
court need not have conducted an measure adopted by the District Court
“exhaustive search” of all possible [i.e., the WACC], we hope to provide
alternatives. See, e.g., Daubert v. Merrell some guidance as to what constitutes an
Dow Pharms., Inc., 509 U.S. 579, 597 appropriate cost-of-capital measure of
economic benefit.” Maj. Op. at 19.
31
especially true in light of Dean Dairy, the District Court’s calculation was
where we stressed that economic benefit “reasonable,” we cannot find the Court to
“may not be capable of ready have abused its discretion. Relying on
determination,” and we accorded “the theoretical values rather than actual values
district court’s award of a penalty wide to calculate the WACC does not render the
discretion, even though it represents an District Court’s decision “unsupported,” as
approximation.” 150 F.3d at 264, citing the majority contends.
United States v. Tull,
481 U.S. 412, 426-
The record shows th at the
27 (1987). Surely the choice to credit the
government’s expert gave a satisfactory
government’s expert over ALC’s falls
explanation for his decision to use the
within this wide discretion. Indeed, the
WACC in this case instead of, for example,
Dean Dairy Court went on to say that the
the marginal or current cost of capital for
“[p]recise economic benefit to a polluter
the relevant years, as the majority suggests.
may be difficult to prove” and that
He stated:
“[r]easonable approximations of economic
benefit will suffice.” 150 F.3d at 264, [The WACC] is a rate that I consider proper
quoting Public Interest Research Group of and represents a rate that falls between the
N.J., Inc. v. Powell Duffryn Terminals, risk free rate and the equity rate. The reason
Inc.,
913 F.2d 64, 80 (3d Cir. 1990). As that I believe that the WACC rate is
here when the District Court credited one appropriate is because a company’s cash is
expert’s reasonable approximation of the fungible. That is, funds are not segregated
economic benefit over another’s, it acted and used for specific purposes. Funds are
well within its discretion. We ought not used in many different ways and the
substitute our own opinion for that of the company receives different returns for each
District Court’s. use. Some projects earn a high rate of
return. Others earn a low or no rate of
In its attempt to fault the District
return. It is impossible to say exactly how
Court’s calculation of the WACC for
the funds that should have been spent in this
“rely[ing] on values that were not ALC-
example were used. Therefore, I believe the
specific” [i.e., using theoretical yields on
most appropriate rate to use is the average
bonds issued rather than actual yields], the
return the company earns on all of its
majority, in fact, concedes that the District
projects. In essence, this is the average
Court’s analysis contained reasonable
return for the company.
approximations. Maj. Op. at 19. It states
that while the bond-yield “figure might
well have been a reasonable approximation
App. IV at 1009. The record evidence
of ALC’s bonds’ yields, a more accurate
clearly shows that the District Court’s
calculation could easily have been
decision to use the WACC was supported by
achieved by using figures specific to
various considerations, including, as
ALC’s bonds.” Id. However, as long as
testified by the government’s expert, the
32
fungibility of a company’s funds and the figure to use when calculating ALC’s
variable rates of return a company receives economic benefit during those years. I
depending on how it uses those funds. disagree with the majority’s contention that
“[t]he theoretical WACC figures from the
Further, the Court’s exercise of
early 1990s . . . really have no bearing on
discretion is supported by the case law.
the economic benefit conferred by post-
Dean Dairy cites the Smithfield Foods
1992 violations” simply because they are the
Court’s use of the WACC favorably,
highest figures of the group. Maj. Op. at 22.
indicating that the WACC is a perfectly
The figures from 1990 to 1992 are equally
acceptable interest rate for a district court
as relevant as those from 1993 to 1998, as
in this circuit to adopt when calculating
CWA violations occurred in each of the
economic benefit. 150 F.3d at 266, citing
years from 1990 to 1998. There is no record
United States v. Smithfield Foods, Inc.,
support for the majority’s assertion that the
972 F. Supp. 338, 349 (E.D.Va. 1997).
WACC figures from the early 1990s are
The majority’s failure to find clear “less-relevant” than those for later years. Id.
error after combing the record is evident in Therefore, the majority’s suggestion that the
several places. For example, the majority average WACC was unduly biased towards
criticizes the government’s expert’s use of high numbers is inaccurate.20 Further, the
the arithmetic mean (instead of the District Court pointed out that, in some
geometric mean) to compute an estimate of instances, it credited the government’s
the WACC for the years 1990-1998. expert in ways that wound up benefitting
Although the majority admits that “any ALC. For example, in calculating the
correction will be slight,” the WACC economic benefit that ALC enjoyed by
comes to 12.71%, as opposed to 12.73%, spending less money to staff its facilities,
when it is calculated using the geometric the District Court noted that the
mean. Maj. Op. at 21-22 n.14. Surely, a government’s expert
discretionary choice by a district judge that
made two assumptions that were favorable
results in an interest rate .02% higher than
to defendant. First, he included in ALC’s
an alternative cannot be viewed as clearly
actual staffing costs time billed by
erroneous.
maintenance workers who stopped by the
The majority also criticizes the
government’s use of a mean interest rate at 20
all, asserting that it “wound up hurting The majority also overstates the
ALC.” Maj. Op. at 22. I do not agree that degree to which the highest figures deviate
this calculation unduly punished ALC. from the rest of those in the calculation. A
Taking an average of the interest rates for figure of 15.85% would not be considered
all of the years in which ALC was non- a statistical outlier when computing an
compliant is a common and perfectly average, particularly when the same figure
acceptable method for arriving at a single appears twice and the rest of the figures
range from 10.53% to 13.95%.
33
facility, even though having a maintenance the WACC may not have been as
worker stop by is not the same as having appropriate an approximation of economic
full-time staffing. Second, [his] benefit for ALC as it was for the company
calculations do not include money saved in Smithfield Foods because of differences
by ALC at its West Leechburg and in the volatility of the industries in which
Brackenridge facilities prior to entry of the each company operated. Again, the
c onsent agreements w i th P aD E P standard of review is abuse of discretion,
[Pennsylvania Departm ent of and not whether another decision might
Environmental Protection]. have been more “appropriate.” Further, the
majority cites no authority for the
Dist. Ct. Op. at 16 n.7, citing Amendola
proposition that using a theoretical interest
Proffer at 17; App. I at 41. Also, in
rate as opposed to an actual one in a
calculating the least costly upgrade that
particular industry is clearly erroneous. The
would have brought ALC into compliance
majority quotes Chesapeake Bay Found.,
at its Vandergrift facility before 1994, the
Inc. v. Gwaltney of Smithfield, Ltd., 611 F.
District Court noted that
Supp. 1542, 1559 (E.D.Va. 1985), as stating
the United States might have pointed to a that “[t]he actual interest rate Gwaltney
$1.8 million upgrade considered by ALC itself paid on borrowed funds . . . is a more
in 1988 and 1989, or the entire cost of the accurate basis for determining Gwaltney’s
$5.7 million upgrade of the Vandergrift economic benefit from delay.” Maj. Op. at.
WWTP [Wastewater Treatment Plants], 20 (ellipsis in original). When put into
and argued that money should have been context, however, this case does not support
spent in 1990, rather than 1994. But in an the majority’s position. In Gwaltney, the
approach that is favorable to ALC, [the plaintiff’s calculation computed Gwaltney’s
government’s expert] calculated the least economic benefit from delay using “the ten-
costly upgrade in 1994 that would likely year rate of return on equity earned by
have eliminated the violations, and Smithfield Foods, Inc.--Gwaltney’s parent
provided a $600,000 alternative. corporation.” 611 F. Supp. at 1559. The
Court went on to hold that “[a]t least in
Dist. Ct. Op. at 19, citing Amendola
these circumstances, the Court believes that
Proffer at 12-13; App. I at 44. As with its
13%--the actual interest rate Gwaltney itself
WACC calculation, the District Court
paid on borrowed funds--is a more accurate
exercised its discretion here and supported
basis for determining Gwaltney's economic
its decision with acceptable explanations.
benefit from delay.” Id. The Gwaltney
Here, however, it arrived at a figure that
Court, therefore, held against the use of a
benefitted ALC. The majority fails to
parent corporation’s interest rate, but not the
explain how this decision falls within the
use of a theoretical interest rate per se. In
District Court’s discretion while its
addition, the record shows that the District
WACC calculation does not.
Court did consider the economic benefit
The majority also hypothesizes that calculation in an industry-specific context,
34
stating that “[f]ailures to comply with the figure. Despite the majority’s contention to
[CWA] can . . . result in indirect the contrary, the District Court demonstrated
competitive benefits when compared with a proper application of the law in assessing
companies in the same field that do the penalty and, therefore, did not abuse its
comply with the [CWA].” Dist. Ct. Op. at discretion.
15; App. I at 40.
In short, there is nothing in the record
Finally, the majority asserts that the to show that the District Court committed
District Court abused its discretion in clear error in its choice of the interest rate to
choosing the WACC instead of a lower calculate economic benefit. After carefully
alternative interest rate because using the weighing the evidence presented by experts
WACC evidenced an effort to punish and on both sides during a three-day penalty
deter when calculating the economic trial, the District Court exercised its
benefit. However, the District Court discretion as the trier of fact and credited the
clearly recognized that there are two steps testimony of one witness over another. The
to the “bottom up” approach to penalty decision is supported by the expert
assessment and it is the second step that is testimony as well as our case law. Because
geared toward punishing and deterring the I do not believe that the District Court’s
violator. The District Court stated: fact-finding was clearly erroneous, its
decision is entitled to deference under abuse
To achieve the goal of deterrence,
of discretion review.
an appropriate penalty must encompass
both the economic benefit that the
d e f e n d a n t o b t a in e d t h ro u g h i t s
I would, therefore, affirm the District
noncompliance, and an additional punitive
Court’s decision as to the interest rate used
component that takes into account the
to calculate economic benefit.
penalty factors listed in Section 1319(d).
Without the second component, those
regulated by the CWA would have nothing
to lose by violating it.
Dist. Ct. Op. at 29; App. I at 54.
The District Court was clearly mindful of
the two-step process to be used when
assessing penalty, first calculating the
economic benefit and then considering the
penalty factors to increase that figure. The
Court followed the correct analysis, only
taking punitive measures in the second
step when it doubled the economic benefit
35
