It is a truism that much regulatory enforcement activity takes place outside of formal proceedings. Regulated entities often settle enforcement disputes to avoid litigation costs, even when they have serious questions about the legality of the agency’s position. Strengthening the agency’s hand in those situations are statutes that authorize imposition of daily penalties for “continuing violations,” i.e., violations that have yet to be remedied. Parties that decline to settle early run the risk of rapidly escalating penalty maximums. To make matters worse, various legal doctrines, such as exhaustion of administrative remedies, bar lawsuits brought by regulated parties to challenge the agency’s legal position before enforcement proceedings run their course.
For regulated entities confronted with this predicament, a recent decision by the Pennsylvania Supreme Court offers a glimmer of hope. In EQT Production Co. v. Department of Environmental Protection, No. 15 MAP 2015 (Pa. S. Ct. December 29, 2015)(EQT), the Court ruled (with one judge dissenting) that an operator of natural gas wells threatened by the Department of Environmental Protection (DEP) with ongoing penalties for discharging pollutants could sue for a judicial declaration that the agency misconstrued its statutory penalty authority, without having to wait for the outcome of administrative enforcement proceedings. While the court purported to limit the scope of its holding, the dissent raises legitimate questions about whether the decision will invite more pre-enforcement lawsuits.
EQT took place against the backdrop of two statutes: (i) Pennsylvania’s Land Recycling and Environmental Remediation Act (known as “Act 2”), which created a scheme for setting cleanup standards applicable to voluntary efforts to remediate environmental contamination for which an entity may bear legal responsibility; and (ii) the Clean Streams Law, which prohibited “discharges” of pollutants into “waters of the Commonwealth,” and established penalties for violations.
In May 2012, EQT Production Company (EPC) notified the DEP that it had discovered leaks in an underground impoundment containing water that had been contaminated during hydraulic fracturing. EPC cleared the site of impaired water and sludge and began a voluntary cleanup process in accordance with Act 2. Two years later, the DEP tendered to EPC a consent agreement proposing to settle EPC’s penalty liability under the Clean Streams Law. The agreement would have required EPC to pay about $1.3 million in penalties, of which $900,000 represented liability for continuing violations for the period after the leaks occurred, when the contamination outside the impoundment remained. EPC disagreed with the DEP’s position, contending that penalties could only accrue while leaks from the impoundment were occurring, which ended in June 2012.
In September 2014, EPC sued the DEP in state court, seeking a declaratory judgment against DEP’s interpretation of its penalty authority. EPC asserted that it met the Pennsylvania requirements for a declaratory judgment since (i) the legal question it posed was adequately developed and ripe for judicial review, (ii) it would suffer immediate hardship if review was delayed, and (iii) the action would settle controversies otherwise likely to prompt immediate litigation.
A few weeks later, the DEP lodged a complaint with the Environmental Hearing Board (EHB) seeking more than $4.5 million in penalties from EPC, supplemented by continuing levies of up to $10,000 per day. DEP then took the position in the state court proceeding that the court lacked jurisdiction for several reasons, including that EPC had an adequate administrative remedy before the EHB; the penalty issues were within the exclusive jurisdiction of the administrative tribunal; the issue was not ripe in court; and the EHB proceedings had the potential to moot the controversy. The court agreed with the DEP, ruling that exclusive authority to determine the appropriate penalty lay with the EHB. In addition, the court concluded that EPC’s complaint did not meet the criteria for a declaratory judgment, because EPC faced no imminent threat of harm until the EHB acted on the DEP’s complaint. EPC’s appeal to the Pennsylvania Supreme Court followed.
In the Supreme Court, EPC challenged the lower court’s finding that it lacked direct, substantial and immediate consequences from the DEP’s complaint, asserting that the DEP’s continuing violation theory (1) imposed indefinite penalty liability for the mere presence of pollutants in “waters of the Commonwealth,” even if the source of pollution had ceased, and (ii) forced EPC to continue to spend money to clean up the site, well beyond what is legally required, or face massive civil penalties for an indefinite period so long as any detectable amount of pollution remained. It also alleged that its lawsuit raised the discrete legal issue of whether the mere presence of contaminants in the environment represents a prohibited “discharge” under the Clean Streams Law.
Together with the US Chamber of Commerce as Amicus Curiae, EPC invoked by analogy Sackett v. EPA, 132 S. Ct. 1367 (2012), in which the Supreme Court unanimously upheld the jurisdiction of federal courts under the Administrative Procedure Act to declare the rights of landowners after the Environmental Protection Agency (EPA) interpreted the Clean Water Act to prohibit filling their property with dirt and rock and to justify daily penalties pending abatement. EPC and the Chamber drew particular attention to the statement of Justice Alito in a concurring opinion that denying judicial review while potentially massive daily penalties accrued was “unthinkable.” Slip op. 7-8, citing 132 S. Ct. at 1375.
In response, the DEP continued to assert that the proceedings before the EHB served as the appropriate and exclusive vehicle to resolve challenges to its interpretation of the Clean Stream Act’s penalty provisions, and that any harm to EPC prior to EHB action was speculative, since the DEP lacked the authority to impose penalties unilaterally. Citing Pennsylvania precedent, the DEP argued that a liberal approach to allowing suits for declaratory judgments would “embroil[ courts] in poorly-developed, ill-considered, and largely academic debates examining other governmental entities’ legal judgments.” Slip op. 8-9, quoting from Commonwealth v. Donahue, 626 Pa. 437, 486, 98 A. 3rd 1223, 1252 (2014)(Todd, J., concurring).
Taking account of the purposes of declaratory judgments as well as the DEP’s opposing arguments, the Court sided with EPC, deeming the case to “present a sufficient, actual controversy and to fall within the class of disputes that are a proper subject of pre-enforcement judicial review.” Slip op. 9. Acknowledging that the doctrine allowing pre-enforcement lawsuits arose out of a challenge to published administrative regulations whereas the current controversy involved an agency’s less formal statutory interpretation, the court nonetheless concluded that the burdensome impact on those subject to the regulation, not the formality of agency action, was the decisive consideration. Ibid. The court noted that pre-enforcement legal challenges to agency requirements had been allowed in earlier Pennsylvania cases,[1] but acknowledged that there was no bright-line standard to determine whether a particular pre-enforcement dispute was justiciable. “…[T]he assessment of all of the relevant factors in determining justiciability (including immediacy and substantiality)—individually and collectively—entails discerning judgments,” the court stated.
The court cited two other factors that weighed in favor of allowing EPC’s declaratory judgment action to proceed. First was the fact that the DEP failed to make a convincing case that “there are material factual dynamics involved in evaluating the validity of its continuing-violation interpretation, or that the application of the specialized expertise of the Hearing Board is essential to a full and fair understanding of it.” Slip op. 11. Instead, the court observed that the DEP had “limited its argument …to regurgitation of the landscape of potentially relevant environmental statutes and a conclusory pronouncement of the need to develop a full factual record before the EHB.” Ibid.
The second factor was EPC’s “inability in its own right to implicate the sole avenue available for quasi-judicial review…” While the court acknowledged that this consideration “may be offset by the Department’s somewhat proximate, but subsequent, initiation of a proceeding before the EHB,” it concluded that that did not “sufficiently alleviate the hardships facing EPC so as to divest the [lower] court of jurisdiction that already was secure.” Slip op. 11. In an accompanying footnote, the court stated that a “different dynamic” might have come into play had the DEP begun the administrative proceedings before EPC initiated the declaratory judgment action. Slip op. 11-12 n. 8. While it declined to resolve whether it would have reached a different result under that scenario, it noted that it “would be hesitant to foster races to the respective judicial and quasi-judicial tribunals.” Ibid.
The dissenting opinion by Judge Baer contends that the majority “generally eroded the requirements for declaratory relief in a departure from established law” for three reasons. First, he claimed that EPC did not have an interest that was sufficiently substantial, direct or immediate to confer standing, since EPC would have the opportunity to challenge the DEP’s statutory interpretation in the EHB proceeding before any penalty could be assessed. In that regard, the court claimed that EPC’s predicament was no different than “the sort of choice industry participants routinely assess when confronted with allegations that they have violated the law: whether to settle with the agency to mitigate their losses, or to wait for DEP to file a complaint before the EHB and challenge DEP’s statutory interpretation before that tribunal.” Dissent, slip op. 2-3.
Second, Judge Baer contended that the EHB proceeding constituted an adequate administrative remedy which EPC should have been required to exhaust before securing judicial review. In that regard, Judge Baer asserted that in assigning weight to the fact that EPC brought its declaratory judgment action before the DEP filed its complaint with the EHB, the majority would indeed foster the races to judicial and quasi-judicial tribunals that the majority said it feared. While granting that the majority was right that that if DEP’s continuing violation theory is correct it could increase the fine by delaying administrative review, Judge Baer stated that “[t]here is no reason to believe… that EHB will not understand this and reject a nonmeritorious result if appropriate.” Dissent, slip op. 4.
Third, Judge Baer asserted that EPC’s complaint should have been dismissed because the matter was within the exclusive jurisdiction of the EHB as a matter of law.
Judge Baer concluded with a discussion of policy considerations that, in his view, should have caused the majority to uphold the lower court’s dismissal of the lawsuit. “Rather than representing an aberration,” he stated, “EPC’s disagreement with the agency tasked with ensuring its compliance with relevant statutory obligations is the type of dispute for which administrative review is well suited. ….By focusing on the mounting penalties for which EPC may or may not be responsible, I am concerned that the Majority has created an exception to the requirement of exhaustion of administrative remedies that will swallow the rule.” Dissent, slip op. 5-6. He went on to express his confidence in the competence and fairness of administrative agencies and to emphasize the hazards of “wading into matters that have not yet ripened into concrete disputes.” Id. at 6.
While Judge Baer does a good job of laying out the arguments against pre-enforcement judicial review of agency action, it is a safe bet that many regulated entities do not share his confidence that regulatory tribunals can be counted on to “reject a nonmeritorious result if appropriate.” The abundance of court decisions reversing agency decisions for misinterpreting statutes and regulations suggests otherwise.
The nub of the matter is that “continuing violations” statutes do give regulators tremendous leverage to pressure targets of enforcement to agree to pay penalties even when the regulators’ authority may be in doubt. The difference between the majority and dissenting opinions in EQT is that the majority recognized the inherent unfairness that can result when that leverage is exercised, whereas the dissent viewed the matter with almost academic detachment. Judge Baer’s concern that the majority “has created an exception to the requirement of exhaustion of administrative remedies that will swallow the rule” may be overstated, particularly in light of the facts of this case (e.g., the agency’s failure to show that resolution of the legal issue turned on disputed facts; the fact that EPC sued before the enforcement proceedings were initiated); but many in the regulated community will be pleased if that aspect of Judge Baer’s dissent proves to be correct.
[1] Arsenal Coal Co. v. Commonwealth, 505 Pa. 198, 477 A. 2d 1333 (1984)(allowing pre-enforcement challenge to requirements promulgated by Environmental Quality Board brought to “clarify the operators’ and producers’ obligations under the law and avoid unnecessarily protracted proceedings”); Bayada Nurses, Inc. v. DLI, 607 Pa. 527, 8 A. 3rd 866 (2010)(allowing pre-enforcement challenge by home health-care provider “since judicial review would eliminate the substantial expense and uncertainty in the day-to-day operations of such providers and alleviate costly and inefficient piecemeal enforcement measures”); Commonwealth v. Donahue, supra, 626 Pa. at 450, 98 A. 3rd at 1230-31 (allowing declaratory judgment action challenging Office of Open Records’ interpretation of statutes governing submission of record requests “in light of the adverse, direct, and immediate impact on Commonwealth agencies”).