United States v. Smithfield Foods, Inc.

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
SMITHFIELD FOODS, INCORPORATED;
SMITHFIELD PACKING COMPANY,
INCORPORATED; GWALTNEY OF
SMITHFIELD, LTD.,
Defendants-Appellants.
MICHIGAN CHAMBER OF COMMERCE;
PENNSYLVANIA CHAMBER OF
No. 97-2709
BUSINESS AND INDUSTRY; COLORADO
ASSOCIATION OF COMMERCE AND
INDUSTRY; AMERICAN AUTOMOBILE
MANUFACTURERS ASSOCIATION;
AMERICAN MEAT INSTITUTE;
AMERICAN PETROLEUM INSTITUTE;
INDEPENDENT PETROLEUM ASSOCIATION
OF AMERICA; INTEGRATED WASTE
SERVICES ASSOCIATION; NATIONAL
ASSOCIATION OF MANUFACTURERS,
Amici Curiae.
Appeal from the United States District Court
for the Eastern District of Virginia, at Norfolk.
Rebecca B. Smith, District Judge.
(CA-96-1204-2)
Argued: October 26, 1998
Decided: September 14, 1999
Before ERVIN and HAMILTON, Circuit Judges,
and G. Ross ANDERSON, Jr., United States District Judge
for the District of South Carolina, sitting by designation.
_________________________________________________________________
Affirmed in part, reversed in part, and remanded with instructions by
published opinion. Judge Ervin wrote the opinion, in which Judge
Hamilton and Judge Anderson joined.
_________________________________________________________________
COUNSEL
ARGUED: John G. Roberts, Jr., HOGAN & HARTSON, L.L.P.,
Washington, D.C., for Appellants. Joan M. Pepin, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. ON
BRIEF: Patrick M. Raher, James T. Banks, Audrey J. Anderson, Pat-
rick D. Traylor, HOGAN & HARTSON, Washington, D.C.; Anthony
F. Troy, James E. Ryan, Jr., James S. Crockett, Jr., MAYS & VAL-
ENTINE, L.L.P., Richmond, Virginia, for Appellants. Lois J. Schif-
fer, Assistant Attorney General, John T. Stahr, Sarah D. Himmelhoch,
UNITED STATES DEPARTMENT OF JUSTICE, Washington,
D.C.; Nadine Steinberg, UNITED STATES ENVIRONMENTAL
PROTECTION AGENCY, Washington, D.C.; Yvette Roundtree,
Office of Regional Counsel, Region III, UNITED STATES ENVI-
RONMENTAL PROTECTION AGENCY, Philadelphia, Pennsylva-
nia, for Appellee. Charles E. Barbieri, Lisa J. Gold, FOSTER,
SWIFT, COLLINS & SMITH, P.C., Lansing, Michigan; LeRoy S.
Zimmerman, Mark D. Bradshaw, ECKERT, SEAMANS, CHERIN &
MELLOTT, L.L.C., Harrisburg, Pennsylvania; L. Duane Woodard,
BRENMAN, BROMBERG & TENENBAUM, P.C., Denver, Colo-
rado, for Amici Curiae Michigan Chamber of Commerce, et al. Scott
M. Duboff, WRIGHT & TALISMAN, P.C., Washington, D.C., for
Amici Curiae Automobile Manufacturers, et al.
_________________________________________________________________
2
OPINION
ERVIN, Circuit Judge:
Smithfield Foods, Inc. ("Smithfield") appeals a grant of summary
judgment in favor of the United States finding Smithfield liable for
multiple Clean Water Act violations. Smithfield also challenges the
court's imposition of a corresponding $12.6 million civil penalty.
Smithfield alleges that the court committed two errors with respect
to liability. First, Smithfield claims that the district court erred when
it found that Orders issued by the Virginia State Water Control Board
did not condition, revise, or supercede Smithfield's obligations under
its 1992 water discharge permit. Second, Smithfield asserts that the
district court erred in its finding that this suit was not (1) precluded
by the Supreme Court's holding in Gwaltney of Smithfield, Ltd. v.
Chesapeake Bay Foundation, Inc., 484 U.S. 49 (1987), or § 510 of the
Clean Water Act ("CWA"), 33 U.S.C.A. § 1370 (West 1986); or (2)
barred by § 309 (g)(6)(A)(ii) of the CWA, 33 U.S.C.A.
§ 1319(g)(6)(A)(ii) (West 1986 & Supp. 1999). On the penalty issue,
Smithfield contends that the district court erred in calculating the pen-
alty, especially with respect to its determination of economic benefit
and the denial of "good-faith" credit to Smithfield for its compliance
efforts.
For the reasons that follow, we affirm the district court's grant of
summary judgment on liability. We remand the penalty determination
to the district court with instructions to recalculate the civil penalty
as directed by this opinion.
I.
The facts of this case are undisputed and are comprehensively set
out in the district court's published opinion, United States v. Smith-
field Foods, Inc., 965 F. Supp. 769, 772-81 (E.D. Va. 1997). To prop-
erly analyze this case, however, the major events bear repeating.
Smithfield owns and operates two swine slaughtering and processing
plants, Smithfield Packing Co. and Gwaltney of Smithfield, Ltd. Both
plants are located on the Pagan River, a tributary of the James River,
3
in Isle of Wight County, Virginia. The wastewater discharged from
these plants is treated in two of Smithfield's facilities, Outfall 001 and
Outfall 002. From at least August 1991 to August 1997, treated
wastewater was discharged from Outfall 001 into the Pagan River.
From at least August 1991 until June 1996, treated wastewater was
discharged from Outfall 002 into the Pagan River. Smithfield stopped
discharging wastewater into the Pagan River when it successfully
connected its plants to the Hampton Roads Sanitation District
("HRSD") system.
A.
Smithfield's wastewater discharges contained numerous pollutants
that were regulated under the CWA and thus, could not be discharged
into the waters of the United States unless specifically authorized by
permit. Permits are governed by the National Pollutant Discharge
Elimination System ("NPDES"), under which polluters obtain an
NPDES permit to discharge lawfully certain pollutants in specific
amounts. See 33 U.S.C.A. § 1342 (West 1986 & Supp. 1999). Regula-
tion of NPDES permits is overseen by the Environmental Protection
Agency ("EPA"), see 33 U.S.C.A. § 1342(a), but locally administered
by the Commonwealth of Virginia through its agent, the Virginia
State Water Control Board ("the Board"). See 33 U.S.C.A.
§§ 1251(b), 1342(b) (West 1986 & Supp. 1999). The Board is autho-
rized to enforce the CWA subject to the guidance and approval of the
EPA. See 33 U.S.C.A. § 1319.
Smithfield's discharges were authorized by an NPDES permit ("the
Permit") issued in 1986, modified in 1990, and reissued in 1992. The
Permit placed restrictions on the amount and concentration of certain
pollutants allowed in wastewater released to the Pagan River and
required Smithfield to monitor, sample, analyze, and issue reports
concerning its discharges. The results of Smithfield's wastewater
sampling program were periodically compiled into Discharge Moni-
toring Reports ("DMRs") and submitted to the Board.
In response to elevated levels of nitrogen and phosphorus in the
Chesapeake, the Commonwealth of Virginia promulgated regulations
requiring, among other things, that NPDES permits for facilities dis-
charging into nutrient-rich waters like the Pagan River be modified to
4
allow a monthly average phosphorus effluent limitation of 2.0 mg/l.
The new regulations represented a considerable reduction in the
amount of phosphorus permittees like Smithfield could discharge. To
comply, Smithfield would have had to upgrade significantly its waste-
water treatment facilities, which the company contended was an
insurmountable obstacle under the required deadline. As a result, on
June 3, 1988, Smithfield filed suit challenging Virginia's new phos-
phorus limitation as technologically infeasible.
Notwithstanding the pending legal challenge, the Board reopened
Smithfield's Permit on January 4, 1990 and modified it to apply the
new, more restrictive phosphorus limitation. The modified Permit
("1990 Permit") also contained a compliance schedule requiring
Smithfield to take steps to comply with the new phosphorus limitation
within three years of the Permit modification. Smithfield contested
this action by appealing the modification. Because these new phos-
phorus limitations were not required in other states, Smithfield also
began to talk publicly about moving its operations out of Virginia
rather than complying.
Negotiations between Smithfield and Virginia ensued and to settle
the dispute, each of the parties agreed to various accommodations.
The agreement was documented in an Order issued by the Board on
March 21, 1990 ("the 1990 Order"), in which Smithfield agreed to
study the costs and feasibility of solving its wastewater treatment
problem by connecting its present wastewater treatment system to the
HRSD. In addition, Smithfield pledged to report the results of these
studies to the Board by November 13, 1990, by which time Smithfield
would decide whether it intended to connect to HRSD or to upgrade
its own facilities to comply with the new phosphorus limitations. In
return, the Board resolved to defer the commencement of the 1990
Permit compliance schedule until December 1, 1990.
On November 6, 1990, the Board amended the 1990 Order by
extending by three months the date by which Smithfield was to report
its decision whether to connect to HRSD. The Board also agreed to
further defer commencement of the compliance schedule for the new
phosphorus limitations.
5
On May 9, 1991, the Board amended the 1990 Order a second time
("May 1991 Order") granting Smithfield another extension. The May
1991 Order included the following amendments:
(1) Smithfield now had until June 15, 1991 to notify the
Board of its commitment to connect to HRSD or upgrade its
own facilities to comply with the new phosphorus discharge
standard. If Smithfield decided to connect to HRSD, it was
required to do so within three months of notification by
HRSD that the necessary sewer line was completed and
operational. If Smithfield decided not to connect to HRSD,
it was required to upgrade its own treatment facilities to
comply with all discharge limitations according to the
scheduled deadline.
(2) Smithfield had to comply with the interim effluent limi-
tations listed in Appendix A of the May 1991 Order until it
connected to HRSD or completed the necessary upgrades to
its facilities. Appendix A set out new discharge limitations
and monitoring requirements for a pollutant other than phos-
phorus, but reiterated that required effluent limitations for
all other substances remained as listed in the 1990 Permit.
(3) Smithfield was required to dismiss its legal challenge to
the phosphorus standard pending in Virginia state court.
At the end of the May 1991 Order, the Board stated that "[n]othing
herein shall be construed as altering, modifying, or amending any
term or condition contained in the [1990] Permit." Within a month of
receiving the May 1991 Order, Smithfield determined that connecting
to HRSD would be the best long-term solution and notified the Board
of its decision on June 7, 1991.
In the meantime, in May 1991, Smithfield's original Permit, issued
in 1986 and modified in 1990, expired. The Board submitted a draft
permit ("Draft Permit") for Smithfield's facilities to the EPA for
review and public comment. Part I.B. of the Draft Permit contained
the same compliance schedule as in the modified 1990 Permit, giving
Smithfield until January 4, 1993 to comply with the phosphorus dis-
charge limitations. Part I.C. of the Draft Permit listed the effluent lim-
6
itations that would be in effect after the completion of the compliance
schedule in Part I.B. The EPA approved the Draft Permit.
Smithfield submitted comments on the Draft Permit to the Board.
In its comments, Smithfield expressed concern that the Draft Permit
contained the same effluent requirements as in the 1990 Permit,
which it believed were inconsistent with the terms of the May 1991
Order. Smithfield asked the Board for clarification of this alleged dis-
crepancy, suggesting that the Board agree that "alternate compliance
will be maintained with Smithfield's agreement to connect to HRSD
as soon as it becomes available regardless of the time frame in which
this occurs." Debra Thompson, an environmental engineer with the
Board, responded to Smithfield's concerns in an October 10, 1991 let-
ter stating that "[a]ny special order agreements relative to compliance
with water quality standards, the Permit regulation and associated
studies that have been approved by the Board take precedence over
the . . . Permit." The EPA received a copy of this letter.
Despite Smithfield's comments and concerns, on January 3, 1992,
the Board finalized and issued Smithfield's new permit ("1992 Per-
mit"). Part I.C. of the 1992 Permit retained the phosphorus discharge
limitations listed in the 1990 Permit, and Part I.B. contained the same
deadline for achieving phosphorus compliance, January 4, 1993.
Smithfield never challenged the 1992 Permit conditions nor sought a
modification.
In response to a February 1992 letter from Smithfield to the Board
indicating that Smithfield intended to comply with effluent limitations
for substances other than phosphorus as listed in the 1992 Permit by
connecting to the HRSD system, the Board responded as follows:
These "plans" are acceptable as submitted. The remainder of
the schedule requires submittal of quarterly progress reports.
These reports should indicate construction progress and
other issues which may effect completion of the project.
Also note that the deadline for achieving final effluent limi-
tations [for substances other than phosphorus] is May 13,
1994. Should construction be delayed such that this deadline
may be missed, a modification to the existing Consent Order
should be requested.
7
Smithfield met neither the January 4, 1993 compliance deadline for
phosphorus discharges, nor the May 13, 1994 compliance deadline for
the other regulated substances. There is no evidence that Smithfield
sought or received a permit modification challenging these deadlines
before failing to adhere to required compliance schedules.
In November 1994 the Board amended the May 1991 Order, stat-
ing that Smithfield could achieve compliance with the final effluent
limitations for the substances other than phosphorus by connecting to
HRSD and agreed to hold the compliance deadline scheduled for May
13, 1994 in abeyance. In addition, however, the Board and Smithfield
agreed that the amendment did not alter, modify, or amend any other
term or condition of the May 1991 Order or of the 1992 Permit.
Before Smithfield could connect to HRSD, three things needed to
occur: (1) Smithfield needed to upgrade its own wastewater treatment
system to pre-treat its waste before discharging it to HRSD, (2) a new
pipeline had to be built to connect Smithfield with HRSD, and (3)
HRSD needed to upgrade its facilities to treat Smithfield's waste-
water. HRSD's original completion schedule was February 1995 for
the pipeline, and December 1996 for the facility upgrade. The pipe-
line was not completed until March 1996 and Smithfield's Outfall 002
was connected to HRSD in June 1996. Outfall 001 could not be con-
nected until HRSD completed its facility upgrades. The facility
upgrades were not completed until June 1997 and Outfall 001 was
connected to HRSD in August 1997.
Under the NPDES program as administered by EPA, permit hold-
ers who are not in compliance with the terms of their permits are
listed in the EPA's Quarterly Noncompliance Report ("QNCR").
Although it had been out of compliance for months, Smithfield's Per-
mit violations did not appear in the QNCRs until the third quarter of
1994. The EPA cited Smithfield's false and inaccurate reporting and
the Board's willingness to permit Smithfield to continue to exceed its
1992 Permit limits as the reason why Smithfield's violations did not
appear in the QNCRs. If a state does not achieve compliance, the
CWA authorizes the EPA to step in and initiate its own enforcement
action. Once Smithfield appeared in the QNCR, EPA began to closely
track Virginia's efforts to bring Smithfield into compliance.
8
In 1995 state and federal agencies began a criminal investigation
into the illegal activities of Terry Rettig ("Rettig"), chief operator of
Smithfield's wastewater treatment plant. Rettig was charged with fal-
sifying records and DMRs submitted to both state and federal regula-
tory agencies. When Rettig's actions came under suspicion, he
destroyed presumably incriminating records from Smithfield's waste-
water treatment operations. At the beginning of the criminal investi-
gation, federal investigators asked Virginia authorities to refrain from
pursuing an enforcement action against Smithfield for its Permit vio-
lations until after the criminal investigation into Rettig's conduct was
underway. In February 1996, the United States notified Virginia that
there was no longer any need to delay pursuing an enforcement action
against Smithfield, but the Commonwealth took no action.
In April 1996, the Virginia Department of Environmental Quality
informed the Board that it had evidence of Smithfield's numerous
CWA violations and recommended that legal action be initiated. At
their meeting in May 1996, the Board decided to do nothing until it
was sure Smithfield was aware of the violations.
When it became apparent to the EPA that Virginia did not intend
to initiate legal action against Smithfield for its CWA violations, the
EPA filed its own action. The EPA invited Virginia to join the suit,
but the Commonwealth declined, electing instead to file its own
enforcement action in the Circuit Court of the County of Isle of
Wight. Virginia's enforcement action alleged that Smithfield violated
its 1992 Permit discharge limits on other substances, but did not
include claims for violations of the phosphorus limitations, false
reporting, or late reporting.
B.
The government filed suit in the United States District Court for
the Eastern District of Virginia on December 16, 1996, seeking
injunctive relief and penalties for a range of effluent limit violations,
submission of false DMRs, submission of late reports, and destruction
of records. On March 10, 1997, the United States moved for summary
judgment on liability arguing that there were no disputes of material
fact and the evidence proved that Smithfield had (1) violated the
CWA by discharging pollutants into the Pagan River at levels above
9
the allowable limits of its 1992 Permit, and (2) submitted false DMRs
late on numerous occasions.
Smithfield countered that it did not violate the phosphorus limita-
tions in the 1992 Permit because the Board's Orders superseded and
revised the 1992 Permit limitations. In the alternative, even if it vio-
lated the terms of its 1992 Permit, Smithfield argued that the EPA's
claim was barred by § 309(g)(6)(A) of the CWA and the doctrines of
estoppel and waiver. The district court granted summary judgment for
the United States on liability and claims of false reporting and docu-
ment destruction, but decided to calculate the exact number of viola-
tions and the penalty amount at trial.
The district court held a bench trial on the remaining issues in July
1997. The court reviewed evidence and heard from both sides'
experts who opined on the proper calculations for each of the factors
to be considered under the CWA's penalty statute. In the end, the dis-
trict court found Smithfield liable for 6,982 days of violations and,
after weighing the mitigating and aggravating circumstances, assessed
a penalty of $12.6 million.
Meanwhile, the Commonwealth's enforcement action against
Smithfield continued to proceed in state court. On July 9, 1997, the
state court declared that Smithfield's obligations under the 1992 Per-
mit were circumscribed by the May 1991 Order, and therefore Smith-
field was required to comply with the phosphorus limits only by
connecting to HRSD within three months of availability.
Based on this decree, Smithfield filed a motion to dismiss or for
summary judgment in this federal action. Arguing that the imposition
of the phosphorus limitation was imposed solely as a matter of state
law, Smithfield contended that the federal court must give substantial
weight to the Virginia court ruling in a state enforcement action. On
that basis, Smithfield asked the district court to reverse its liability
finding. The district court declined to do so.1 Smithfield now appeals
the district court's ruling.
_________________________________________________________________
1 The Commonwealth appealed the Circuit Court's decision to the
Supreme Court of Virginia. The action was pending when the parties
10
II.
Smithfield's initial challenge is to the district court's grant of sum-
mary judgment in favor of the United States on the issue of liability.
We review the grant of summary judgment de novo , viewing all evi-
dence in the light most favorable to the non-movant. See Sempione v.
Provident Bank of Maryland, 75 F.3d 951, 954 (4th Cir. 1996). The
district court allegedly made three distinct errors.
First, Smithfield contends that the district court erred in finding
that the May 1991 Order did not take precedence over or alter the
terms of the 1992 Permit. Smithfield admits that the May 1991 Order
explicitly states that "[n]othing herein shall be construed as altering,
modifying, or amending any term or condition contained in [the] Per-
mit," but argues that the May 1991 Order was incorporated into, and
therefore took precedence over, the 1992 Permit. In the alternative,
Smithfield insists that the EPA was bound by the terms of the May
1991 Order when it failed to object to it during the permitting process.
The district court rejected these arguments, holding that the 1992
Permit could not have incorporated any of the Board's Orders. See
Smithfield, 965 F. Supp. at 790. After an extensive analysis of the
Board's post-1992 Permit correspondence, the court reasoned that
"because [Smithfield] did not follow the procedures required for the
modification of a permit, and none of the Board's Special Orders and
letters were issued in accordance with the permit modification proce-
dures, [Smithfield] cannot support [its] argument that the Special
Orders or letters issued by the Board after the 1992 Permit modify the
terms of the Permit . . . ." Id. at 787-88.
_________________________________________________________________
filed their briefs to this Court. On June 5, 1998, the Supreme Court of
Virginia reversed and vacated the judgment below. Based on the Com-
monwealth's continued agreement with Smithfield that the May 1991
Orders modified the phosphorous limitations set out in the 1992 Permit,
the Virginia Supreme Court found that Smithfield was not entitled to a
declaratory judgment because it failed to demonstrate a justiciable con-
troversy between the parties. See Treacy v. Smithfield Foods, Inc., 500
S.E.2d 503, 507 (Va. 1998).
11
With respect to the Board's Orders pre-dating the 1992 Permit, the
court found it illogical that correspondence written before the 1992
Permit was finalized could change the terms of a subsequently-issued
document. See id. at 788. Finally, regarding Smithfield's assertion
that the EPA was bound to abide by the Board's Orders because the
agency failed to object contemporaneously, the court found that the
agency's "silence with regard to the agreement between Smithfield
and the Board does not indicate its approval, especially when the EPA
was not asked to review and approve of Smithfield's agreement with
the Board." Id.
Second, Smithfield argues that the district court erred when it
found that the EPA's suit was not barred by CWA§ 309(g)(6)(A)(ii).
See 33 U.S.C.A. § 1319(g)(6)(A)(ii). Section 309(g)(6) of the CWA
provides in part that any violation of the CWA "which a State has
commenced and is diligently prosecuting an action under a State law
comparable to this subsection" shall not be the subject of a federal
civil enforcement action. See id. Because Smithfield believes that
since 1990 Virginia has been diligently prosecuting Smithfield
through the issuance of Orders and enforcing a state statutory scheme
that is sufficiently comparable to the CWA, Smithfield asserts that the
EPA's enforcement action should have been barred.
Examining this argument, the district court found that Virginia's
enforcement scheme was not sufficiently comparable to § 309(g) to
bar the EPA's suit. Because Virginia's enforcement scheme did not
give the Commonwealth authority to assess administrative penalties
without the violator's consent,2 and did not provide adequate proce-
_________________________________________________________________
2 In 1996, Virginia amended its enforcement scheme to allow the Com-
monwealth to impose administrative penalties without the permission of
the violator. See Va. Code Ann. § 62.1-44.32 (Michie 1998). Smithfield
argues that, because the law was amended before the filing of this suit,
comparability should be judged based on the amended version of the
statute. The basis of Smithfield's argument, however, is that Virginia had
been "diligently prosecuting" the case by issuing Orders since 1990. The
only Orders relevant to this case were issued in 1990, 1991, and 1994
and during that time, the Commonwealth could have imposed penalties
only with Smithfield's consent. We decline to accept Smithfield's argu-
ment here. Because the amendment was not in effect when the relevant
Orders were issued, it is not applicable to our inquiry of whether Virgin-
ia's law was comparable to § 309(g) at the time of the Commonwealth's
enforcement action.
12
dures for notice and public participation,3 the district court found that
the Commonwealth's statutory structure was not sufficiently compa-
rable to CWA § 309(g). See Smithfield, 965 F. Supp. at 795.4
Third, Smithfield challenges the district court's finding that this
suit was not precluded by the Supreme Court's holding in Gwaltney,
484 U.S. at 60-61. In Gwaltney, the Court recognized that there would
be cases under the CWA in which it would be counter-productive to
assess penalties against violators who had agreed to take corrective
actions not otherwise required. See id. Smithfield asserts that is
exactly what happened here. The Board and Smithfield reached a
compromise in which Smithfield agreed to take non-mandatory cor-
rective actions, and the company argues that for the district court to
allow the EPA to assess administrative penalties after the fact violates
Gwaltney.
For the same reasons, Smithfield contends, the EPA's enforcement
action violates CWA § 510, which allows states to adopt more strin-
gent effluent limits than those required under the CWA. See 33
U.S.C.A. § 1370. Smithfield argues that the Commonwealth's ability
to adopt more stringent standards as provided by§ 510 is rendered
useless if it cannot implement those effluent limits in the manner it
finds most directly serves the public interest. On these two grounds,
Smithfield asserts that the district court erred in failing to hold that
the EPA's enforcement action was precluded.
_________________________________________________________________
3 As noted by the district court, the Commonwealth amended its public
participation statutes in 1996 to allow citizens to obtain judicial review
of an Order of the Board. See Smithfield, 965 F. Supp. at 795 n.37. For
the same reasons given above, see supra note 2, we agree with the dis-
trict court that the timing of this amendment renders it irrelevant to this
inquiry.
4 Because the district court held that Virginia's enforcement scheme
was not sufficiently comparable to § 309(g), the court found it unnecces-
sary to address the issue of whether the Commonwealth was diligently
prosecuting an administrative action against Smithfield. See Smithfield,
965 F. Supp. at 795. Smithfield did not challenge this ruling on appeal
and, because we agree with the district court's ruling that the Common-
wealth's scheme is not comparable to § 309(g), we similarly decline to
address this issue.
13
Acknowledging the Supreme Court's holding in Gwaltney, the dis-
trict court found that Smithfield's alleged corrective actions did not
preclude the EPA's enforcement action here because the chosen
enforcement methods were not achieving compliance. See Smithfield,
965 F. Supp. at 790 n.29 (citing Gwaltney, 484 U.S. at 61). Further,
the court found that the text of CWA § 510 did not support Smith-
field's argument. Besides allowing states to enforce more stringent
standards, the CWA act also provides that the EPA has the authority
to enforce these more stringent state effluent standards once they are
incorporated into a polluter's permit. See CWA §§ 309(a)(1), (3), 33
U.S.C.A. §§ 1319(a)(1), (3). The district court agreed that Virginia
adopted more stringent phosphorus standards than under the CWA
and that these elevated standards were included in Smithfield's 1992
Permit. Once incorporated into the Permit, however, the district court
found that the CWA requires the EPA to enforce a state's more strin-
gent effluent standards. On that basis, the court ruled that § 510 did
not preclude the EPA's enforcement action.
Having had the benefit of oral argument and the parties' briefs, and
after careful consideration of the record and the applicable law, we
conclude that the district court correctly decided the issue of liability.
We concur with the district court that (1) the Board's Orders were not
incorporated into nor changed the terms of the 1992 Permit;5 (2) Vir-
ginia's enforcement scheme is not sufficiently comparable to § 309(g)
to bar the EPA from bringing its own independent penalty action; and
(3) neither the Supreme Court's ruling in Gwaltney, nor § 510 of the
CWA preclude the EPA from bringing this enforcement action.
Rejecting Smithfield's claims of error, we affirm the district court's
reasoning and ruling on liability. See Smithfield, 965 F. Supp. at 784-
96.
III.
Smithfield's second major challenge is to the district court's
assessment of a $12.6 million penalty. We review the factual findings
that formed the basis of the district court's penalty calculation for
_________________________________________________________________
5 Because we agree with the district court's ruling that the May 1991
Order did not change the terms of the Permit, we find it unnecessary to
consider whether the EPA was bound by the terms of that Order.
14
clear error, see Sierra Club, Lone Star Chapter v. Cedar Point Oil
Co., Inc., 73 F.3d 546, 573 (5th Cir. 1996), but the highly discretion-
ary calculations necessary to award civil penalties are reviewed for
abuse of discretion. See id. See also Chesapeake Bay Found., Inc. v.
Gwaltney of Smithfield, Ltd., 791 F.2d 304, 316-17 (4th Cir. 1986),
rev'd on other grounds, 484 U.S. 49 (1987).
The CWA sets out six factors intended to assist courts in determin-
ing the appropriate civil penalty. See CWA§ 309(d), 33 U.S.C.A.
§ 1319(d) (Supp. 1999). Section 309(d) provides that "the court shall
consider the seriousness of the violation or violations, the economic
benefit (if any) resulting from the violation, any history of such viola-
tions, any good-faith efforts to comply with the applicable require-
ments, the economic impact of the penalty on the violator, and such
other matters as justice may require." Id.
These factors are designed to give district courts direction in fash-
ioning penalties for CWA violations, but once applied in a specific
case, we have given and will continue to give the district court's final
penalty calculation wide discretion. See Stoddard v. Western Carolina
Reg'l Sewer Auth., 784 F.2d 1200, 1208 (4th Cir. 1986) ("The amount
of the penalty to be levied is, of course, discretionary with the
court."); Atlantic States Legal Found., Inc. v. Tyson Foods, Inc., 897
F.2d 1128, 1142 (11th Cir. 1990) (same). Because of the difficulty of
determining an appropriate penalty in a complex case such as this
one, we give deference to the "highly discretionary calculations that
take into account multiple factors [that] are necessary in order to set
civil penalties under the Clean Water Act." Tull v. United States, 481
U.S. 412, 427 (1987).
Although Smithfield contests several of the district court's discre-
tionary decisions, such as the method used to count each violation and
the alleged trebling of the penalty, Smithfield's major allegations of
error relate to the court's economic benefit calculation and its refusal
to grant Smithfield good-faith credit for its compliance efforts. We
consider each of these arguments in turn.
A.
Smithfield argues that the district court "double counted" its viola-
tions by counting separately its exceedances of daily maximum limits
15
when it had already imposed thirty days of violations for exceedances
of the monthly average limit for the same substance. In the opinion
below, the district court reaffirmed our holding in Chesapeake Bay
Found., 791 F.2d at 313-15, that each violation of a monthly average
limit shall be treated as a violation for every day in the month in
which the violation occurred, rather than as a single violation for that
month. See United States v. Smithfield Foods, Inc., 972 F. Supp. 338,
340 (E.D. Va. 1997). The court went on to hold, however, that "if
multiple violations of the Permit occur on the same day, defendants
are liable for a separate day for each violation of the Permit, including
the daily maximum, monthly average concentration, and monthly
average loading limits for each pollutant." Id. at 340.
In coming to this conclusion, the district court reasoned that the
two limits are included in the Permit for different reasons and serve
distinct purposes: daily maximum effluent limits protect the environ-
ment from the acute effects of large, single releases, and monthly
averages protect against chronic effects occurring at lower levels. See
id. at 340-42. Acknowledging that there was no Fourth Circuit prece-
dent for this counting method, the district court found that the differ-
ent pollutants and their daily maximum and monthly average loading
limits are separate requirements listed in the Permit and therefore rep-
resent distinct violations. See id. at 341.
We find the district court's opinion persuasive here. It is clear from
the language of § 309(d) of the CWA that such a penalty structure
was anticipated. See 33 U.S.C.A. § 1319(d) (providing for a "civil
penalty not to exceed $25,000 per day for each violation" rather than
a statutory maximum of $25,000 per day) (emphasis added). The spe-
cific limitations of Smithfield's 1992 Permit support this conclusion
as well. The daily maximum limits in the 1992 Permit were set at
double its monthly average limits. As a result, a violation of one did
not automatically result in the violation of the other, further support-
ing the notion that the different limits were included in the Permit to
protect against distinct environmental effects. See Smithfield, 972 F.
Supp. at 340-41.
Far from double counting, the district court's decision to treat each
violation of the 1992 Permit as a separate infraction for purposes of
penalty calculation makes sense. This structure gives courts consider-
16
able flexibility to tailor penalties to the unique facts of each case. As
noted by the district court, a permittee who violates a single effluent
limit one time is less culpable than one who violates the limits of sev-
eral different pollutants in one day. See id. Such a structure is reason-
able considering the first violator causes less overall harm to the
environment. In the same vein, a permittee who violates a monthly
average limit is less culpable and causes less harm than a permittee
who violates daily maximum and monthly average limits in the same
month. See id.
Furthermore, this method of counting violations creates the proper
incentives for polluters to comply. For example, if the maximum pen-
alty that could be levied against a violator on a single day was
$25,000, no matter how many different Permit effluent limitations
were violated, the permittee would have a strong disincentive to com-
ply with the other permit limitations. Once one effluent limit was vio-
lated, there would be no reason for the permittee to heed the rest of
the permit limits for that day.
We agree with the district court's decision to treat each of Smith-
field's permit violations as a separate and distinct infraction for pur-
poses of penalty calculation. We feel this approach is consistent with
the language of § 309(d) of the CWA and Smithfield's 1992 Permit
and join the other courts which have interpreted the CWA in the same
manner.6
_________________________________________________________________
6 See Public Interest Research Group of New Jersey, Inc. v. Powell
Duffryn Terminals, Inc., 913 F.2d 64, 78 & n.28 (3d Cir. 1990) (holding
that violation calculations should be analyzed "on a parameter by param-
eter basis" and that each type of effluent limit is "clearly separate" and
there is "no reason why [a defendant] should not be penalized separately
for violating each limitation"); Natural Resources Defense Council, Inc.
v. Texaco Ref. & Mktg., Inc., 800 F. Supp. 1, 21 (D. Del. 1992) (finding
that "separate exceedances of weight and concentration limits can consti-
tute separate violations"); Student Pub. Interest Research Group of New
Jersey, Inc. v. Monsanto Co., No. CIV.A.83-2040, 1988 WL 156691, at
*11 (D.N.J. Mar. 24, 1988) (concluding that "[e]ach violation of any
express limitation in the permit may, of course, be treated as a separate
violation for the purposes of assessing a penalty"); United States v.
Amoco Oil Co., 580 F. Supp. 1042, 1046 n.1 (W.D. Mo. 1984) (suggest-
ing that the CWA allows for separate penalties for violations of the daily
limit of different pollutants). But see Tyson Foods, 897 F.2d at 1140
(declining to interpret § 309(d) as allowing single discharges that violate
both daily and monthly limits to constitute distinct violations).
17
B.
Smithfield next argues that the district court erred as a matter of
law by allegedly calculating the penalty by trebling the amount of
economic benefit calculated. Pointing to the text of the Act, Smith-
field contends that, unlike other federal statutes, the CWA does not
provide for trebling and therefore the court committed reversible error
by assessing a penalty equal to exactly three times the amount of eco-
nomic benefit calculated. We see no indication that the district court
"simply trebled the amount of economic benefit." Appellant's Br. at
42. On the contrary, we find that the district court correctly applied
the CWA in assessing Smithfield's penalty.
In calculating the penalty, the district court properly began by
determining that the statutory maximum based on Smithfield's viola-
tions was $174.55 million. See Smithfield, 972 F. Supp. at 353. There-
after, the court evaluated two different methods used to assess
penalties -- the top-down method and the bottom-up method -- and
to Smithfield's advantage, chose the bottom-up method.7 Under the
bottom-up method, the court begins with the violator's estimated eco-
nomic benefit from non-compliance, which here was $4.2 million,
and then adjusts up or down based on the court's evaluation of the six
factors set out in § 309(d). See id. at 353-54. After evaluating and dis-
cussing the effect of each of the factors, the court found a $12.6 mil-
lion penalty appropriate. See id. at 354.
When calculating Smithfield's penalty, the district court took into
account all six of the statutorily mandated factors and sufficiently
detailed its findings as to whether the evidence in each area had a mit-
igating or aggravating impact on the total penalty. See id. at 354. The
_________________________________________________________________
7 As noted by the district court, the CWA does not require the use of
either method, however, courts have applied both. See, e.g., Tyson
Foods, 897 F.2d at 1142 (using top-down method in which a court begins
with the statutory maximum and adjusts downward based on its evalua-
tion of § 309(d) factors); Hawaii's Thousand Friends v. City & County
of Honolulu, 821 F. Supp. 1368, 1395 (D. Haw. 1993) (same). But see
United States v. Municipal Auth. of Union Township , 150 F.3d 259, 265
(3d Cir. 1998) (applying the bottom-up method) (known as "Dean
Dairy"); Monsanto, 1988 WL 156691, at *16 (same).
18
court properly exercised its discretion in weighing the evidence and
determining the credibility of key witnesses and, in doing so, made
several decisions that were highly favorable to Smithfield. In the end,
however, the court found that Smithfield's thousands of CWA viola-
tions warranted a penalty far in excess of the economic benefit calcu-
lation.
We find that the court's analysis was complete and in line with
what is required under the statute. It is clear from its opinion that the
court's exhaustive examination of the facts formed the basis of its
final penalty calculation, rather than simply multiplying the economic
benefit by three as Smithfield contends.
But even if the court had simply trebled the economic benefit to
determine the appropriate penalty, that was within its discretion, as
long as it was below the statutory maximum of $174.55 million. As
mentioned, the Supreme Court has emphasized that under the CWA,
the highly discretionary calculations necessary to assess civil penal-
ties are particularly within the purview of trial judges, see Tull, 481
U.S. at 426-27, and we have continually given these determinations
wide deference, reviewing them only for abuse of discretion. See
Sierra Club v. Simkins Indus., Inc., 847 F.2d 1109, 1116 (4th Cir.
1988). The government asked for a $20 million penalty, but based on
its analysis of the relevant factors, the district court determined that
$12.6 million was more appropriate, which is approximately 7.2% of
the maximum penalty that could have been assessed. Finding that the
court did not abuse its discretion in calculating the penalty, we reject
Smithfield's contention that the district court erred as a matter of law
in determining the penalty. Accord Dean Dairy , 150 F.3d at 265
(affirming a penalty that was calculated by doubling the economic
benefit amount and intended to serve the goal of punishment and
deterrence).
C.
Smithfield also argues that the district court erred as a matter of
law by failing to give Smithfield credit for certain capital costs
incurred and user fees paid when calculating economic benefit.
19
As one of the six factors the court must use to calculate CWA pen-
alties, economic benefit is assessed to keep violators from gaining an
unfair competitive advantage by violating the law. This is accom-
plished by including as part of the penalty an approximation of the
amount of money the violator has saved by failing to comply with its
permit. See Powell Duffryn, 913 F.2d at 80. The rationale for includ-
ing this measure as part of the violators' fine is"to remove or neutral-
ize the economic incentive to violate environmental regulations."
Dean Dairy, 150 F.2d at 264.8 As noted in the Senate Report accom-
panying the 1987 amendment adding the economic benefit factor to
§ 309(d), and as recognized by courts, the precise economic benefit
a polluter has gained by violating its effluent limits may be difficult
to prove, so "[r]easonable approximations of economic benefit will
suffice." Id. (referring to S. Rep. No. 50, 99th Cong., 1st Sess. 25
(1985)).9
The statute does not define economic benefit and courts have
applied different methods to determine the appropriate amount.10 The
district court used the common "cost-avoided" method here whereby
economic benefit is measured by determining "the avoided and/or
delayed cost of compliance, . . . [using] the weighted average cost of
capital (WACC) as a discount/interest rate."11 Smithfield, 972 F. Supp.
at 349 (footnote omitted). The rationale behind this method is that
_________________________________________________________________
8 See also Powell Duffryn, 913 F.2d at 80 ("Violators should not be
able to obtain an economic benefit vis-a-vis their competitors due to their
noncompliance with environmental laws.") (citation omitted).
9 See also Cedar Point Oil, 73 F.3d at 576 ("[A] court need only make
a ``reasonable approximation' of economic benefit when calculating a
penalty under the CWA.").
10 In Dean Dairy, the Third Circuit calculated a violator's economic
benefit by determining that the company would have lost $417,000 per
year in revenues from a customer it would have had to drop in order to
reduce production enough to comply with its permit. 150 F.3d at 262-67.
In most cases, however, the court applies the cost-avoided method
applied by the district court in the instant case. See Friends of the Earth,
Inc. v. Laidlaw Envtl. Servs., Inc., 890 F. Supp. 470, 481 (D.S.C. 1995).
11 The weighted average cost of capital method was chosen by the dis-
trict court as a means by which to calculate the present value of the costs
avoided.
20
"[w]hen a company delays or avoids certain costs of capital and oper-
ations 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.
The cost-avoided method has been utilized elsewhere, see, e.g.,
Laidlaw, 890 F. Supp. at 481, and was chosen by the district court in
its discretion in part based on the court's evaluation of the credibility
of the government's expert witness. The cost-avoided method is not
in conflict with the CWA or basic economic principles. On the con-
trary, it represents a logical method by which a violator in Smith-
field's position can be disgorged of any profits it attained through its
non-compliance. Finding no fault with the district court's choice to
apply the cost-avoided method in this case, we reject Smithfield's
claim that its application was in error.
Smithfield further alleges that even under the cost-avoided method,
the district court should have given Smithfield credit for (1) capital
expenses incurred to build a pretreatment facility and to modify a
sludge lagoon in preparation for connecting to HRSD, and (2) future
user fees paid that Smithfield claims allowed HRSD to construct the
necessary facilities for Smithfield's connection. In support of this
argument, Smithfield repeatedly asserts that these are expenses it
would have gotten credit for had it built its own direct-discharge treat-
ment system.
Smithfield decided to connect to HRSD in 1991 and, from that time
until HRSD became available in 1996 and 1997, Smithfield was
responsible for complying with its 1992 Permit requirements. Its deci-
sion to ignore these requirements in the interim certainly benefitted
Smithfield financially because, by failing to comply with the 1992
Permit limits, Smithfield avoided the costs of pollution control its
competitors were simultaneously incurring by complying with the
law. It is these costs that constitute Smithfield's economic benefit.
These capital expenses and user fees can reduce the economic ben-
efit that Smithfield experienced from 1991 to 1996 or 1997 only in
so far as they are duplicative of costs Smithfield should have incurred
for interim compliance. The building of its pretreatment facility and
the paying of user fees for future HRSD use were not costs Smithfield
21
incurred to aid in compliance from 1991 to 1996 or 1997 and, there-
fore, should not have been credited to Smithfield during the district
court's economic benefit calculation.
The final allegation of error with respect to economic benefit is
Smithfield's contention that the district court erred in using the
WACC to calculate the present value interest rate. In a footnote,
Smithfield apparently thinks that the court's error was in accepting
the testimony of the government's expert witness, Robert Harris
("Harris") -- who persuaded the court to apply the WACC rate --
rather than accrediting its own expert who advocated application of
a "risk-free" rate.
As part of calculating economic benefit, the court must apply an
interest rate to determine the present value of the avoided or delayed
costs. Harris advocated the use of the WACC rate which represents
"the average rate of return a company expects to make for its inves-
tors, in order to maintain its current level of investors and its current
level of business operations." Smithfield, 972 F. Supp. at 349 n.18.
Smithfield's expert used the "risk-free" rate, or the rate on short-term
U.S. Treasury bills. The district court found Harris' approach to be
the most appropriate and his testimony the most credible and, on that
basis, decided to apply the WACC rate to determine the present value
of Smithfield's economic benefit. See id. at 349 & n.17. Smithfield
argues that the district court chose to rely on Harris' testimony solely
on the basis of credibility and failed to examine the differences in the
suggested procedures.
We find this argument meritless. The district court is licensed to
determine the credibility of expert witnesses and its assessments on
such questions are entitled to deference by this Court. See League of
United Latin American Citizens, #4552, v. Roscoe Indep. School
Dist., 123 F.3d 843, 846 (5th Cir. 1997). There is no indication from
the evidence that the district court committed clear error in choosing
to accredit Harris' testimony, nor that it accepted the WACC rate
without examining the differences between the two methods. Given
that Smithfield's argument is essentially that the district court accred-
ited the wrong expert, we reject this assertion and affirm the district
court's application of the WACC rate to determine the present value
of Smithfield's avoided costs.
22
We do find troubling, however, the district court's summary find-
ing that Harris' admitted WACC calculation error of approximately
4% was insignificant. See Smithfield, 972 F. Supp. at 349 n.19. While
it is true that, compared to $12.6 million dollars, a miscalculation of
between $100,000-$200,000 seems immaterial, we see no reason that
an admitted error should stand uncorrected in a judicial opinion. On
this basis, we remand the penalty to the district court with instructions
to recalculate the penalty solely to correct Harris' approximately 4%
error.
D.
Finally, Smithfield alleges that the district court erred when it
failed to give Smithfield credit for its good-faith efforts to comply by
connecting to HRSD. Specifically, Smithfield argues that it should
have received credit for its efforts to connect to HRSD because, even
if it was mistaken, Smithfield believed that connecting to HRSD was
the only applicable requirement in the interim.
Section 309(d) of the CWA requires a district court to consider
"any good-faith efforts to comply with the applicable requirements"
as a mitigating factor in the penalty calculation. 33 U.S.C.A.
§ 1319(d). In practice, a court evaluates the evidence to determine
whether the permittee took any actions to reduce the number of viola-
tions or attempted to lessen the impact of their discharges on the envi-
ronment. See Atlantic States Legal Found., Inc. v. Universal Tool &
Stamping Co., Inc., 786 F. Supp. 743, 751 (N.D. Ind. 1992).
In its opinion, the district court began by acknowledging that
Smithfield should receive credit for its decision to connect to HRSD
when available, a decision that would eventually reduce its discharges
to zero. The court went on, however, to focus its inquiry on whether
there were any good-faith efforts to comply with the requirements set
out in Smithfield's Permits during the relevant period -- from 1991
until 1996 or 1997 when Smithfield connected to HRSD. In evaluat-
ing the facts presented at trial, the court found little evidence that the
defendants made any good-faith efforts to comply because Smithfield
did not facilitate its connection to HRSD or mitigate its discharges by
treating its wastewater or decreasing its releases of pollutants in the
interim. See Smithfield, 972 F. Supp. at 350.
23
The court looked beyond these obvious facts, however, for other
signs that Smithfield might have tried to mitigate its violations by
evaluating Smithfield's other business practices. In doing so, the court
found that during the relevant period Smithfield cut back on the num-
ber of times it curtailed production to achieve compliance, ignored the
advice of its own consultants who pointed out serious deficiencies in
the operation and maintenance of Smithfield's existing wastewater
treatment plant, and dismissed evidence that its treatment plant
employees were inadequately trained. Other than agreeing to connect
to HRSD, the court found that Smithfield "apparently believed they
could discharge as much and as frequently as they wanted into the
Pagan River . . . ." See id. at 351.
The district court's finding of liability, with which we agree, was
based on the notion that Smithfield impermissibly ignored its explicit
obligations under its 1992 Permit by failing to comply with effluent
limitations for the entire period between its decision to connect to
HRSD and the time the connection was made. It is only reasonable,
therefore, that Smithfield's efforts towards connecting to HRSD
would not suffice as good-faith efforts to comply with its applicable
permit requirements since, during this entire interim period, Smith-
field made no effort to heed the specific limits established by its 1992
Permit.
Furthermore, the evidence supports the district court's ruling. The
testimony presented at trial and the documentary evidence on which
the court relied in making these factual findings illustrate that Smith-
field did not make efforts to decrease its violations and, instead, relied
on the unreasonable notion that as long as it connected to HRSD
within three months of availability, it was unnecessary to comply with
the specific effluent limitations listed in its 1992 Permit during the
five year interim. Finding that the district court's factual determina-
tions regarding Smithfield's lack of good-faith efforts to comply with
applicable requirements were not clearly erroneous, we affirm its
findings on this issue.
IV.
For the foregoing reasons, we affirm the district court's grant of
summary judgment on liability. We reverse and remand the penalty
24
determination to the district court with instructions to recalculate the
civil penalty to the extent required by this opinion.
AFFIRMED IN PART, REVERSED IN PART,
AND REMANDED WITH INSTRUCTIONS
25