United States v. Municipal Authority of Union Township

Opinions of the United
1998 Decisions States Court of Appeals
for the Third Circuit
7-20-1998
United States v. Union Township
Precedential or Non-Precedential:
Docket 97-7115
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Filed July 20, 1998
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 97-7115
UNITED STATES OF AMERICA
v.
THE MUNICIPAL AUTHORITY OF UNION TOWNSHIP;
DEAN DAIRY PRODUCTS COMPANY, INC,
d/b/a Fairmont Products, Inc.
Dean Dairy Products, Inc. d/b/a Fairmont Products,
Appellant
On Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. No. 94-cv-00621)
Argued March 19, 1998
Before: SLOVITER, RENDELL and HEANEY,*
Circuit Judges
(Filed July 20, 1998)
Gary A. Peters
Steven C. Kohl (Argued)
Howard & Howard
Bloomfield Hills, MI 48304
Attorneys for Appellant
_________________________________________________________________
* Hon. Gerald W. Heaney, Senior Circuit Judge for the Eighth Circuit
Court of Appeals, sitting by designation.
Lynn P. Dodge (Argued)
United States Department of Justice
Environmental Enforcement Section
Washington, DC 20044
Attorney for Appellee
John G. Roberts, Jr.
Hogan & Hartson
Washington, DC 20004
Attorney for Amicus-Appellant
American Frozen Food Institute
Paul G. Wallach
Hale & Dorr
Washington, DC 20004
Attorney for Amicus-Appellant
International Dairy Foods
Association, and
The Grocery Manufacturers of
America
Kathy D. Bailey
Chadbourne & Parke
Washington, DC 20036
Attorney for Amicus-Appellant
Chemical Manufacturer
Association, and
American Automobile
Manufacturers Association
OPINION OF THE COURT
SLOVITER, Circuit Judge.
Appellant Dean Dairy Products, Inc., d/b/a Fairmont
Products, Inc., appeals the district court's imposition of a
$4,031,000 civil penalty against it for Clean Water Act
violations. Dean Dairy contends that the district court erred
when it assessed the economic benefit Dean Dairy gained
during the period of the Clean Water Act violations on the
basis of Dean Dairy's "wrongful profits." Dean Dairy also
2
contends that the district court improperly looked to the
financial condition of Dean Dairy's parent company in
evaluating whether it could afford the substantial penalty
imposed. The American Frozen Food Institute, the Chemical
Manufacturers Association, the American Automobile
Manufacturers Association, the International Dairy Foods
Association, and the Grocery Manufacturers of America
support Dean Dairy's appeal as amicus curiae. We have
jurisdiction under 28 U.S.C. S 1291.
I.
The underlying facts of this case are undisputed and are
comprehensively set forth in the district court's published
opinion, United States v. Municipal Auth. of Union
Township, 929 F. Supp. 800 (M.D. Pa. 1996). Briefly stated,
Dean Dairy, operating in Union Township, Belleville,
Pennsylvania, is a wholly-owned subsidiary of Dean Foods,
Inc., the country's largest milk processor. Since 1974 Dean
Dairy's wastewater, a result of the production of sour
cream, cottage cheese, yogurt and ice cream, has been
discharged and treated by Union Township's Publicly
Owned Treatment Works (POTW). Union Township collected
a user fee based upon the volume of wastewater and the
amount of conventional non-toxic pollutants treated at the
plant, including Total Suspended Solids (or TSS) and
Biological Oxygen Demand (or BOD). In June 1989,
pursuant to requirements of the United States
Environmental Protection Agency, Union Township issued
to Dean Dairy an Industrial User Wastewater Discharge
Permit ("the IU permit") which established monthly average
limits and daily maximum limits for TSS and BOD and for
flow volume.
Beginning in July 1989, Dean Dairy exceeded the limits
set forth in its IU permit. Its wastewater, containing the
impermissibly high levels of BOD and TSS, flowed from
Union Township's POTW into the nearby Kishacoquillas
Creek, which was damaged as a result. There is no dispute
that because Dean Dairy issued monitoring reports to
Union Township on a monthly basis, it had been aware of
its violations since July 1989.
3
In 1994, the United States filed a civil enforcement action
against Dean Dairy under the Clean Water Act, 33 U.S.C.
S 1251 et seq., for close to 1800 violations of the IU permit
and for numerous interferences with the POTW. Following
discovery, the United States moved for and was granted
summary judgment on the issue of Dean Dairy's liability for
the CWA violations. The action against the Municipal
Authority of Union Township was settled and therefore the
Authority is not a party to this appeal. Dean Dairy does not
contest its liability for the violations. Its appeal is limited to
the amount of the civil penalty imposed.
The district court held a three-day bench trial to
determine the appropriate penalty under the Clean Water
Act. Under 33 U.S.C. S 1319(d), a violator of a permit issued
pursuant to the Act shall be subject to a civil penalty not
to exceed $25,000 per day for each violation. This section
further provides that in establishing the penalty the court
shall consider the following six factors: "[T]he seriousness of
the violation or violations, the economic benefit (if any)
resulting from the violation, any history of such violations,
any good-faith efforts to comply with the applicable
requirements, the economic impact of the penalty on the
violator, and such other matters as justice may require." Id.
The district court found Dean Dairy liable for 1,754
violations of its IU permit and 79 instances of interference
with Union Township's POTW between July 1989 and April
1994. It also found that Dean Dairy continued to violate its
IU permit even after the United States filed suit. Although
Dean Dairy took certain steps to address the violations of
its permit between 1991 and 1994, the district court found
these efforts were belated and ineffective. It was only the
construction of a $865,000 pretreatment system, which
became operational in April 1995, that succeeded in
reducing Dean Dairy's pollutants to permissible levels.
Important to the issue before us is that Dean Dairy
considered various options to meet its permit obligations
but, as the district court found, "it continued to produce at
a volume which it recognized was very likely to generate
levels of BOD and TSS beyond that allowed by its IU
permit. [Dean Dairy] chose not to reduce production volume
because it viewed the concomitant reduction in earnings as
4
too high a price to pay for compliance with the Clean Water
Act." 929 F. Supp. at 805.
Although the district court applied the six statutory
factors a court must consider in assessing the appropriate
penalty for a CWA violation, the appellant presents the case
as if the court concentrated almost exclusively on the
"economic benefit" factor. In fact, the district court made
extensive findings of fact and issued conclusions of law on
each of the six factors. See id. at 802-09. The court noted
that the history of Dean Diary's violations dated back to
1989, that the excessive discharges required the
Pennsylvania Fish and Boat Commission to cease stocking
fish in areas of the Kishacoquillas Creek, and that its two-
year delay to take meaningful action to remedy the
violations did "not speak highly of its good faith in this
matter." Id. at 803-08.
In connection with its evaluation of the economic benefit
factor, which is the primary basis of the appeal, the district
court acknowledged that the parties had previously
stipulated that Dean Dairy did not realize any economic
benefit from delaying the capital investments necessary to
achieve compliance with its IU permit. This was due to the
unusual fact that, by delaying the construction of the
pretreatment plant, Dean Dairy was actually losing money
because it was paying higher usage fees to the POTW for its
increased volume. Thus, Dean Dairy did not reap an
economic benefit by delaying the construction of the
pretreatment plant. The court nevertheless found that Dean
Dairy did realize an economic benefit during the period of
the violations because it produced "at a volume above that
which would have allowed it to operate within its IU
permit." Id. at 805.
In making the finding of economic benefit, the district
court relied upon a document produced by Dean Dairy
during discovery and introduced at trial as Joint Exhibit 18
that outlined various options by which Dean Dairy could
comply with its permit. The district court noted that Option
#4 of that document indicated that Dean Dairy could drop
PennMaid as a customer and thereby reduce the amount of
wastewater generated. Dean Dairy recognized, however, in
Exhibit 18 that losing the revenues from PennMaid would
5
result in a loss of earnings in the amount of $417,000 in
fiscal year 1994.*
During the damages trial, the government questioned
Fairmont plant manager Dean Koontz about that document
in the following exchange:
Counsel for the United States: Let me turn your
attention to Joint Exhibit 18, please. It is entitled
Recap of Wastewater Treatment Options . . . .
***
Mr. Koontz: Okay. Yes. This is the information that I
fed to Ron Crock based on the costs that Union
Township gave us. And he ran some type of analysis
with it.
Q: Ron Crock is the comptroller for Dean Dairy
Products, is that correct?
A: Yes, he is.
***
Q: And Mr. Crock ran numbers using four options, is
that right?
A: Yes it is.
Q: And one of those options includes Fairmont not
building a treatment plant and discharging to the
Authority but cutting back on plant volume to reduce
_________________________________________________________________
* The other three options for wastewater treatment as set forth in Exhibit
18, were, in brief summary:
Option #1: Fairmont builds pretreatment plant at cost of $700,000
(with obligation to municipal authorities for belt press, filter
press
and/or reed bed filter press);
Option #2: Fairmont builds pretreatment plant at cost of $1 million
dollars with no obligation to municipal authorities;
Option #3: Fairmont does not build a pretreatment plant leading to
substantial (in excess of $100,000 a year) obligation to municipal
authorities for belt press, filter press and reed bed filter press.
App. at 15-17.
6
flow rate which does not allow for growth -- future
growth of the plant. Do you see that?
A: Yes, option four.
Q: Option number four. . . . [I]t has an estimate of the
impact on earnings that this option would involve. Is
that correct?
A: That is the way I read it, yes.
Q: These are numbers that Mr. Crock arrived at. Is
that correct, sir?
A: Yes.
Q: Isn't it true that if you reduce volume, you would
lose an account by the name of PennMaid according to
the scenario?
A: Yes. This was when we did look at possibilities of
reducing volume. The only customer that we could
come up with that would have an impact would have
been PennMaid because we make only one product for
them, cottage cheese. And we could eliminate them as
a possible customer, which would have made all of us
very happy.
Q: It would have made you all happy, and it would also
have set you back $417,000 for fiscal year '94. Is that
correct?
A: Yes. There would have been a considerable amount
of overhead absorption loss by losing that.
App. at 275-77.
In its opinion, the district court commented on Exhibit
18 as follows: "Production volume at Fairmont was higher
in each year from 1989 to 1993 than it was in 1994, and,
therefore, it is reasonable to believe that Fairmont gained at
least $417,000 in earnings annually during the period of its
violations. On this basis, the court concludes that between
July 1989 and April 1994, Fairmont gained approximately
$2,015,500 by violating its IU permit." 929 F. Supp. at 805.
The district court also determined that the figure should be
doubled in order to provide a proper deterrent and
7
punishment, and accordingly imposed a total penalty of
$4,031,000.
II.
Dean Dairy challenges the district court's analysis of two
of the six factors to be considered in imposing a CWA civil
penalty - the economic benefit to the violator and the
economic impact of a penalty. We consider first its
contention that the district erred as a matter of law in
using a "wrongful profits" approach to ascertain whether
Dean Dairy received any "economic benefit" from its Clean
Water Act violations.
A.
The Use of "Wrongful Profits" to
Measure Economic Benefit
Section 1319(d) of the Clean Water Act provides in
pertinent part:
Any person who violates . . . this title, or any permit
condition or limitation . . . shall be subject to a civil
penalty not to exceed $25,000 per day for each
violation. In determining the amount of a civil penalty
the court shall consider the seriousness of the violation
or violations, the economic benefit (if any) resulting
from the violation, any history of such violations, any
good-faith efforts to comply with the applicable
requirements, the economic impact of the penalty on
the violator, and such other matters as justice may
require.
33 U.S.C. S 1319(d).
The statute does not define the term "economic benefit"
used in this section. It is apparent, however, that the goal
of the economic benefit analysis is to prevent a violator
from profiting from its wrongdoing. In United States v.
Smithfield Foods, Inc., 972 F. Supp. 338, 348 (E.D. Va.
1997), the district court explained that "[c]ourts use
economic benefit analysis to level the economic playing field
8
and prevent violators from gaining an unfair competitive
advantage."
A similar rationale was also given by the Environmental
Protection Agency, which emphasized that the reason for
considering economic benefit to a violator in assessing a
CWA penalty is to remove or neutralize the economic
incentive to violate environmental regulations. In a 1990
Manual to its BEN computer program, established to assist
in the calculation of civil CWA penalties, the EPA explained:
An organization's decision to comply with
environmental regulations usually implies a
commitment of financial resources; both initially, in the
form of a capital investment or one-time expenditure,
and over time, in the form of annual, continuing
expenses. These expenditures might result in better
protection of public health or environmental quality;
however, they are unlikely to yield any direct economic
benefit (i.e., net gain) to the organization. If these
financial resources were not used for compliance, they
presumably would be invested in projects with an
expected direct economic benefit to the organization.
This concept of alternative investment; that is, the
amount the violator would normally expect to make by
not investing in pollution control, is the basis for
calculating the economic benefit of noncompliance. As
part of the Civil Penalty Policy, EPA uses the Agency's
penalty authority to remove or neutralize the economic
incentive to violate environmental regulations. In the
absence of enforcement and appropriate penalties, it is
usually in the organization's best economic interest to
delay the commitment of funds for compliance with
environmental regulations and to avoid certain other
associated costs, such as operating and maintenance
expenses.
EPA BEN User's Manual I-6 (July 1990), quoted in Friends
of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 890 F.
Supp. 470 (D.S.C. 1995) ("Laidlaw I").
Few published cases discuss the "economic benefit"
factor of the Clean Water Act in any detail, and those that
do are, in large part, district court opinions. In Laidlaw, the
9
court described economic benefit as: "the after-tax present
value of avoided or delayed expenditures on necessary
pollution control measures." 890 F. Supp. at 481. The
theory is that economic benefit "represents the opportunity
a polluter had to earn a return on funds that should have
been spent to purchase, operate, and maintain appropriate
pollution control devices." Id.
This court has previously recognized that a violator's
economic benefit under the Clean Water Act may not be
capable of ready determination. In Public Interest Research
Group of New Jersey, Inc. v. Powell Duffryn Terminals, Inc.,
913 F.2d 64 (3d Cir. 1990), we stated:
Precise economic benefit to a polluter may be difficult
to prove. The Senate Report accompanying the 1987
amendment that added the economic benefit factor to
section 309(d) recognized that a reasonable
approximation of economic benefit is sufficient to meet
plaintiff 's burden for this factor. . . . The determination
of economic benefit or other factors will not require an
elaborate or burdensome evidentiary showing.
Reasonable approximations of economic benefit will
suffice.
Id. at 80 (citation omitted).
Because of the difficulty of determining the appropriate
penalty under the Clean Water Act, the court will accord
the district court's award of a penalty wide discretion, even
though it represents an approximation. This was
emphasized by the Supreme Court when it said, more than
a decade ago, "Congress [made the] assignment of the
determination of the amount of civil penalties to trial judges
. . . . Since Congress itself may fix the civil penalties, it may
delegate that determination to trial judges. In this case,
highly discretionary calculations that take into account
multiple factors are necessary in order to set civil penalties
under the Clean Water Act." Tull v. United States, 481 U.S.
412, 426-27 (1987).
This has been the approach generally followed by the
courts. In Smithfield Foods, the court recognized that it is
difficult to prove the precise economic benefit to a polluter,
but stated that the economic benefit analysis provides an
10
approximation of "the amount of money a company has
gained over its competitors by failing to comply with the
law." 972 F. Supp. at 348. See Sierra Club v. Cedar Point
Oil Co., 73 F.3d 546, 576 (5th Cir. 1996) ("a court need only
make a ``reasonable approximation' of economic benefit
when calculating a penalty under the CWA") (citation
omitted); Public Interest Research Group of New Jersey, Inc.
v. Hercules, Inc., 970 F. Supp. 363, 364 (D.N.J. 1997) ("In
assessing a penalty under the Clean Water Act, a district
court has a great amount of discretion."); United States v.
Sheyenne Tooling & Mfg. Co., 952 F. Supp. 1420, 1422-23
(D.N.D. 1996) ("It must be understood, however, that
despite the directional aid and guidance that the six
enumerated factors in S 1319(d) provide, the calculation of
a final penalty may often be imprecise and approximate at
best. Indeed, the accuracy of the final calculations, and the
figure of penalty that they produce, is as dependant, or
even more so, upon the provision of complete and accurate
evidence, as introduced, developed, and explained at trial,
as it is upon a good evaluation of this information by the
court.").
Courts have applied different methods in determining the
appropriate penalty for a Clean Water Act violation. Some
courts have employed a "top down" approach in which the
maximum possible penalty is first established, then
reduced following an examination of the six "mitigating"
factors. See, e.g., Sierra Club, 73 F.3d at 574-76; Powell
Duffryn, 913 F.2d at 79; Atlantic States Legal Found., Inc.
v. Tyson Foods, Inc., 897 F.2d 1128, 1142 (11th Cir. 1990);
Hawaii's Thousand Friends v. City and County of Honolulu,
821 F. Supp. 1368, 1395 (D. Haw. 1993); Atlantic States
Legal Found., Inc. v. Universal Tool & Stamping Co., 786 F.
Supp. 743, 746-47 (N.D. Ind. 1992).
Other courts have used a "bottom up" approach whereby
the economic benefit a violator gained by noncompliance is
established and adjusted upward or downward using the
remaining five factors in S 1319(d). See , e.g., Smithfield
Foods, 972 F. Supp. at 354; Friends of the Earth, Inc. v.
Laidlaw Envtl. Servs. (TOC), Inc., 956 F. Supp. 588, 603
(D.S.C. 1997) ("Laidlaw II"). Because the statute does not
prescribe either method, it appears that a court is free to
11
use its discretion in choosing the appropriate method. See
Smithfield Foods, 972 F. Supp. at 354.
Had the district court in this case taken a "top-down"
approach, it would have begun at the maximum penalty,
which was approximately $45,825,000, based on the
statutory penalty of $25,000 a day. Instead, the court
applied the "bottom up" approach, 929 F. Supp. at 806, by
determining Dean Dairy's economic benefit acquired
through the Fairmont plant's production at a volume that
resulted in more wastewater than permissible under its
permit. These were knowing violations, as its own
document demonstrated it was aware that if it had reduced
its wastewater volume by reducing its production, it would
have been in compliance with its IU permit. As Koontz
specifically testified, if Dean Dairy had reduced volume, it
believed it would have lost PennMaid as a customer. Dean
Dairy's own document prepared by Ron Crock, its
controller, demonstrated that this loss of PennMaid would
have had a negative impact of $417,000 per year.** This
was the basis on which the district court calculated Dean
Dairy's economic benefit as $2,015,500, which when
doubled, resulted in the penalty of $4,031,000. That
penalty was barely 9% of the maximum statutory penalty to
which Dean Dairy was subject.
It is not surprising that no published case has used this
method of ascertaining a violator's economic benefit
because it is the rare violator who actually loses money by
delaying compliance with the law. Typically, a violator
benefits economically by avoiding or delaying the
construction of antipollution equipment that would have
_________________________________________________________________
** While the exhibit referred to, and relied upon by the district court
(and
specifically the "impact on earnings" portion, see app. at 18) is
susceptible to different interpretations, including an interpretation that
earnings could have been affected anywhere from $407,748 to $443,000,
it was not error, and specifically not clearly erroneous, for the district
court to have made a factual finding based upon the documentary
evidence, coupled with the testimony of Koontz, that the continued sale
to PennMaid had a positive impact of $417,000. Further, it was not error
to conclude as a matter of law that this impact, which by the company's
own statements resulted from noncompliant production, could be
deemed wrongful profits and therefore economic benefit to Dean Dairy.
12
placed it in compliance with its permit. See, e.g., Sierra
Club, 73 F.3d at 574; Hawaii's Thousand Friends, 821 F.
Supp. at 1396. In Smithfield Foods, the court explained
that, "[w]hen a company delays or avoids certain costs of
capital and operations and maintenance necessary for
compliance, the company is able to use those funds for
other income-producing activities, such as investing that
money in their own company." Id. at 349. Therefore, it
concluded that in that case, "the avoided and/or delayed
cost of compliance, and the weighted average cost of capital
(WACC) as a discount/interest rate in the economic benefit
calculation, to be both the best and the appropriate method
to determine how much money defendants made on the
funds they did not spend for compliance." Id. at 349
(footnote omitted).
This case is unusual because Dean Dairy's delay in
constructing a pretreatment plant was not beneficial to its
"bottom line"; in effect, Dean Dairy was actually penalizing
itself in failing to promptly build the pretreatment plant.
Our general assumption of the reasonable capitalist went
awry with this company.
There are methods other than the delayed or avoided
capital expenditure for ascertaining economic benefit, a fact
the appellant and the amici decline to acknowledge. It is
significant that neither the statute nor the case law
supports the contention that the cost-avoidance method is
the only permissible method of determining the amount a
polluter has gained from violating the law. In Smithfield
Foods, though the court applied the delayed or avoided
costs method, it "acknowledge[d] there are various methods
for calculating defendants' economic benefit gained from
noncompliance." 972 F. Supp. at 349.
In contrast to the situation in Smithfield Foods, the "cost-
avoided" method of determining economic benefit is not a
method that fits the facts that were presented to the district
court because Dean Dairy did not profit by delaying its
construction of the pretreatment plant. But it clearly gained
other economic benefits by failing to adopt the method that
was readily available. The wastewater from the Fairmont
plant is created by the required daily cleaning of its vats
and other processing equipment. A reduction of production
13
would reduce the wastewater. Thus, if Dean Dairy wanted
to avoid the cost entailed by the purchase of new
equipment, it had the option of reducing volume.
The approach adopted by the district court is not in
conflict with the CWA or basic economic principles. A
violator who chooses to continue to violate its permit while
experimenting with less costly remedies necessarily
subjects itself to the surrender via penalty of any economic
benefit it acquired. The fact that the violator has also
penalized itself by failing to implement cost-effective
methods that would have put it into compliance with its
permit and thereby save it money is certainly no basis to
mitigate its penalty.
Requiring a company to reduce the amount of pollution
it creates to comply with its permit is not unreasonable. As
the court in Tyson Foods stated: "There was one simple and
straightforward way for Tyson to avoid paying civil penalties
for violations of the Clean Water Act: After purchasing the
plant, Tyson could have ceased operations until it was able
to discharge pollutants without violating the requirements
of its . . . permit. Tyson chose not to do this and it must
now bear the consequences of that decision." 897 F.2d at
1141-42. Similarly, Dean Dairy chose neither what proved
to be the economically sensible option (building the
pretreatment facility) nor the alternative option of reducing
the amount of wastewater produced. Accordingly, it must
bear the consequences.
Appellant and the amici argue that the use of the
"wrongful profits" method to calculate economic benefit
contravenes EPA policy. They base this argument on the
EPA's interim Clean Water Act Settlement Penalty Policy
Guide published in 1995, which states that the "objective of
the economic benefit calculation is to place violators in the
same financial position as they would have if they complied
on time." App. at 244. The appellant focuses on language in
the Guide that explains that "[p]ersons that violate the
Clean Water Act are likely to have obtained an economic
benefit as a result of delayed or completely avoided
pollution control expenditures during the period of
noncompliance." Id. Thus, this reference to delay and
avoidance and the EPA's creation of computer software
14
("the BEN model") to calculate a violator's economic benefit
from delaying or avoiding compliance has led appellant to
conclude that this is the only approach to determining
economic benefit.
However, the EPA guideline itself notes that this
approach may not always be applicable. The policy states:
[I]f the violator is a privately-owned regulated utility,
the standard BEN model may not be appropriate. In
this situation, the Agency should consider a wrongful
profits analysis and seek to recover the profits and
other competitive market benefits the violator obtained
as a result of operating during the period of
operation. . . . In a few unusual cases, economic benefit
may be negative: this means, e.g., operating the old
efficient system was more expensive than purchasing
and operating a new, more efficient treatment system.
When economic benefit is negative, the settlement
calculation enters zero as the economic benefit.
App. at 245-46 (emphasis added).
Even the EPA guideline, on which Dean Dairy relies, is
receptive to a wrongful profits analysis where appropriate.
But the EPA policy is not applicable here because, by its
own express terms, it is not "intended for use by EPA,
violators, courts or administrative judges in determining
penalties at a hearing or trial." App. at 243. See also
Laidlaw I, 956 F. Supp. at 601 ("the policy expressly states
that it is not to be used by a court in determining a penalty
at a trial . . . . [therefore] it will not be considered in
arriving at an appropriate penalty amount"). Finally, the
conclusive evidence that the "wrongful profits" approach to
economic benefit does not conflict with EPA's policy is the
fact that its representative is on the brief for the
government arguing in support of that approach here.
We conclude that the district court's method of
calculation of the penalty was within its discretion. We do
not suggest that we have any dissatisfaction with the cost-
avoided method of determining a violator's economic benefit
in the usual case. However, under these unusual
circumstances, we see no legally significant difference in
measuring the economic benefit achieved by avoiding the
15
costs of antipollution equipment, and the economic benefits
achieved by failing to reduce the volume of pollution
created. Both methods aim to recoup any benefits a violator
gained by breaking the law and which gave the violator an
advantage vis-a-vis its competitors. The penalty thus
achieves the leveling of the playing field intended by
Congress.
Finally, we reject Dean Dairy's claim that it was
"ambushed" and unfairly surprised by the government's
reliance on the "wrongful profits" theory of economic
benefit. Although the government first identified Joint
Exhibit 18 as the document on which it based the
$417,000 figure in its penalty calculation in its closing
argument, the document had already been admitted into
evidence and was the subject of the government's trial
examination of Koontz, Dean Dairy's plant manager, quoted
earlier in this opinion. Dean Dairy did not question Koontz
on this document nor did it call Ron Crock, its own
controller, who prepared the figures in the document, for
an explanation. If Dean Dairy was content to allow those
figures to go to the factfinder without cross-examining
Koontz and examining Crock, then it cannot reasonably
argue only after the district court's opinion, forthcoming six
months later, that the figures don't mean what they say.
Dean Dairy vehemently contends that it was given
inadequate notice of the government's theory. Our
examination of the record establishes that the government
gave Dean Dairy ample notice that it was pursuing this
theory of economic benefit. The government's pretrial
memorandum states that "Dean Dairy was operating its
Fairmont plant at a percentage over capacity, thus
increasing its profits at the expense of violating" the CWA,
and that this "economic benefit, separate from capital
costs, was substantial for each year of production." Supp.
App. at 748. The government's trial brief also emphasized
that Dean Dairy "enjoyed financial benefits during the
period of noncompliance" because its "production
operations were neither halted nor adversely impacted by
its noncompliance." App. at 768. The government's opening
statement promised to "present evidence showing what
Dean itself estimated as the amount of revenue it would
16
lose if it decreased production to levels that would comply
with its permit." Supp. App. at 734. Dean Dairy never
requested a continuance of the bench trial to answer those
contentions.
Moreover, although Dean Dairy repeatedly refers to the
government's stipulation that Dean Dairy did not realize
any economic benefit from delaying the capital expenditures
needed to achieve compliance with the IU permit, the
government carefully reserved the argument that Dean
Dairy could have received economic benefit from other
actions. Indeed, at trial government counsel specifically
stated:
[T]he United States is preserving the argument with
respect to economic benefit to other actions that the
dairy could have taken. In other words, we are talking
about production or other matters aside from the
capital expenditures, as well as the maintenance costs
associated with the actual hardware that was brought
on-line at the dairy facility.
App. at 288.
Finally, although six months elapsed after the close of
the trial during which the parties prepared and submitted
post trial briefs, which we have examined, Dean Dairy
never argued that it had been unprepared by the
government's theory or method of proof. Only after the
district court's opinion fixing the penalty did it raise these
claims. By then, it was too late. Under these circumstances,
we cannot accept Dean Dairy's claim that it was unfairly
surprised by either its use of the "wrongful profits"
approach of economic benefit or the basis of the calculation
of the penalty.
B.
Consideration of the Finances of
Dean Dairy's Parent Company
In analyzing the "economic impact on the violator," one of
the six factors the statute lists as relevant to the CWA
penalty, the district court stated it would look to the
17
finances of Dean Dairy's parent, Dean Foods. Among the
reasons it gave were that "Dean Foods was closely involved
with Fairmont [Dean Dairy's plant] in evaluating the
options for resolving Fairmont's wastewater problems, and
it had complete control over whether and when Fairmont
would achieve compliance with its IU permit." 929 F. Supp.
at 808. The district court also stated that "[a]t the same
time, Dean Foods was siphoning off profits from Fairmont."
Id.
Dean Dairy contends that it was legal error for the
district court to consider the financial condition of Dean
Foods because the parent corporation was not a party to
the action, it did not violate the Clean Water Act, and there
was insufficient evidence to pierce the corporate veil. We
reject its contention. Notwithstanding the arguments made
in the brief and before us orally, it is important to
remember that it was not Dean Foods, but only Dean Dairy,
the violator, who was penalized. The reference to Dean
Foods' financial statement merely assured that the penalty
would not be set at a level above Dean Dairy's ability to
pay. If the subsidiary does not retain its revenues, as the
evidence showed in this case, then its parent'sfinancial
resources are highly relevant. Other courts in CWA cases
have looked to the assets and finances of the violator's
parent in evaluating the economic impact of the penalty on
a violator, see Universal Tool, 786 F. Supp. at 753; PIRG v.
Powell Duffryn, 720 F. Supp. 1158, 1166 (D.N.J. 1989),
reversed in part on other grounds, 913 F.2d 64 (3d Cir.
1990), and we see nothing improper in the same action
here.
The consideration of a parent's financial condition in
assessing a penalty on a subsidiary is a far cry from
piercing the corporate veil and holding the parent liable for
the actions of its subsidiary; here the penalty was assessed
against the subsidiary alone. Furthermore, the district
court only considered Dean Foods' assets as one factor
among others; they were not dispositive. The court simply
undertook a fact-specific assessment that examined the role
of the parent in the operations of the subsidiary,
particularly with regard to the issue of pollution of the
nearby waters and actions that could have resolved it.
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Although Dean Dairy contends that any evaluation of its
financial condition would show that it lost over one million
dollars between 1992 and 1995, there was also evidence
that it had over twenty million dollars in assets infiscal
year 1995. App. at 586-88. In light of the discretion
afforded a district court in determining a penalty, we
conclude that the court's examination of the parent's
assets, the basis for which it was done, and the manner in
which the information was used was neither clear error nor
an abuse of discretion.
III.
For the foregoing reasons, the order of the district court
will be affirmed.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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