Deepwater Horizon Litigation: Where Things Stand and What is Next
On Wednesday, January 14, we hosted a webinar on the litigation summarized below. The webinar featured a panel of experts to discuss the status of the litigation and what is next. You can read more about the webinar and view a recording when it is posted here.
The Disaster and the Trial
On April 20, 2010, an explosion rocked the Deepwater Horizon mobile offshore drilling unit. Eleven crewmen lost their lives in the blast, and the rig burned for the next thirty-six hours. Over the next three months, oil gushed from the wellhead into the Gulf of Mexico, impacting more than 1,000 miles of coast.
The Deepwater Horizon disaster spurred numerous lawsuits. The trial that is the subject of this blog is largely focused on Clean Water Act (CWA) civil penalties related to the oil spill. Two phases of the trial have already been completed, with the next phase set to begin on January 20. The third phase will focus on eight factors set out in the CWA, which must be taken into account in determining civil penalties. This has important implications for the 80% of CWA penalties that will be channeled through the RESTORE Act for economic and ecological recovery activities in the Gulf.
But before we talk about Phase III, it’s important to know where things stand leading up to January 20.
Where Things Stand
One of the main issues being tried by the court is the determination of civil penalties under Section 311(b) of the Clean Water Act. CWA Section 311 provides several factors for determining civil penalties for any “owner, operator, or person in charge of any vessel, onshore facility, or offshore facility” from which oil is discharged. Among the factors considered are the violator’s conduct (the subject of Phase I of the trial) and the number of barrels of oil discharged (one of the subjects of Phase II of the trial). In addition, the court must take into account eight factors enumerated under the CWA, described below (the subject of Phase III of the trial).
Phase I: The Incident Phase
Phase I of the trial (the “Incident” phase) began on February 25, 2013. It addressed fault relating to “the loss of well control, the ensuing explosion and fire, the sinking of the Deepwater Horizon, and the initiation of the release of oil from the well.” In this Phase, one of the main issues was whether BP (and other parties responsible for the spill) acted with gross negligence. This is an important factor in determining civil penalties since:
The court issued its “Findings of Fact and Conclusions of Law” for the Phase I Trial on September 4, 2014. Among other things, it considered the unique risks of deep-water drilling and acts/omissions by the parties. In its ruling, the court held that the oil spill “was the result of [BP’s] gross negligence or willful misconduct.”
In addition to its ruling on gross negligence, the court also made rulings under maritime law. This included a ruling on comparative fault: BP was assigned 67% liability for the disaster, Transocean 30%, and Halliburton 3%. Also under maritime law, the court held that, although BP’s conduct would generally make it liable for punitive damages, they did not apply here. The court based this decision on Fifth Circuit precedent, which the court interpreted as requiring conduct that emanated from corporate policy or a corporate official with policy-making authority (here, the judge held that the conduct at issue was by employees without such authority).
In sum, the gross negligence ruling means that BP is subject to enhanced penalties. BP has appealed the ruling.
Phase II: Source Control and Quantification Phase
Phase II of the trial (the “Source Control” and “Quantification” phase) began on September 30, 2013. It addressed conduct to stop the spill (“Source Control”) and the amount of oil actually discharged into the Gulf of Mexico (“Quantification”).
Source Control: BP argued that its actions to halt the ongoing spill should reduce its civil penalties and contended that it acted “as quickly and safely as practical” to stop the spill, spending $1.6 billion in the process.
Quantification: BP argued that 2.45 million barrels of oil were discharged into the Gulf of Mexico; the U.S. argued that 4.2 million barrels were discharged into the Gulf (both parties agreed that 810,000 barrels were captured before being discharged into the Gulf of Mexico). Much of the Phase II trial centered on methodology and assumptions used to estimate oil flow rate during the 87 days of the spill.
The court issued its “Findings of Fact and Conclusions of Law” for the Phase I Trial on January 15, 2015. In the ruling, the court held that “BP was not grossly negligent, reckless, willful, or wanton in its source control planning and preparation” and that “nothing from the Source Control segment alters” Phase I findings. For the purposes of calculating maximum civil penalties, the court found that “3.19 million barrels of oil discharged into the Gulf of Mexico.”
What is Next
Phase III: The Penalty Phase
Phase III (the “Penalty” phase) will determine the amount of civil penalties under the CWA. The Phase I “gross negligence” ruling means that BP is subject to enhanced penalties. Phase II found that 3.19 million barrels of oil were discharged into the Gulf of Mexico. Therefore, if the maximum penalty is applied, total civil penalties would be $13.7 billion.
*As noted above, the court has yet to determine the amount of the maximum enhanced per-barrel penalty. Here we use $4300 per barrel, the amount in an EPA regulation (though the amount is in dispute).
The court must, however, take into account eight other factors under the CWA when determining civil penalties. These factors will be the subject of the Phase III trial.
CWA Civil Penalty Factors
1. The “seriousness of the violation or violations”
In its pre-trial statement for Phase III, the US urged the court to take a top-down approach, and to levy the maximum civil penalty (now $13.7 billion) unless mitigating circumstances exist. The primary contention of the US is that BP’s “willful misconduct, the enormity of [the] spill and its impacts, and the comparatively miniscule economic benefit” should result in the maximum penalty. BP, meanwhile, contends that CWA civil penalties are designed to deter behavior that might lead to environmental harm and to incentivize effective response actions, and it argues that both purposes are furthered by penalties at the lower end of the statutory range.
Based on pre-trial statements of the parties, some issues that the parties may focus on in the Phase III trial include:
Whether and how much BP should be credited for response expenses and CWA criminal penalties that have already been levied against the company
Whether BP’s history of prior violations demonstrate an increased need for deterrence through fines closer to the statutory maximum
Whether BP’s response to the spill demonstrates minimization or mitigation efforts that should decrease its civil penalties
Whether the penalty will have a severe economic impact on BP. An important issue included in this determination is whether the analysis focuses on BP as a whole or just its subsidiary, BP Exploration & Production.
Whether BP’s efforts in the Gulf (particularly its economic efforts) qualify as “other matters as justice may require”
Whether the CWA factors do or do not justify penalizing Anadarko
Nearly 5 years have passed since the start of the Deepwater Horizon disaster. Moving into Phase III of the trial, the possible outcomes have narrowed due to findings and arguments made in Phases I and II. However, until the final ruling is issued or a settlement is reached, any predictions would be speculation. It is also likely that the parties will appeal any decisions that are adverse to their positions.
As the start of Phase III approaches, one thing is certain: we’ve come a long way in the process of determining CWA civil penalties, and (absent a settlement) there could be a long way to go.
-ELI’s Gulf Team, January 14, 2014 (updated Jan. 15)