Looking for Liability in BP’s Gulf Oil Spill

LEGAL
Looking for Liability in BP’s Gulf Oil Spill
June 7, 2010, 9:30 AM

Peter J. Henning follows issues involving securities law and white-collar crime for DealBook’s White Collar Watch.

Attorney General Eric H. Holder Jr. made a commitment during a visit to the Gulf Coast last week that the Justice Department would be looking at both civil and criminal charges to ensure accountability for anyone responsible for the oil spill at BP’s oil rig. In his statement, the attorney general said that “if we find evidence of illegal behavior, we will be forceful in our response.”

The likelihood of civil enforcement proceedings for violations of various environmental laws is almost guaranteed for BP and Transocean, the operator and owner, respectively, of the Deepwater Horizon rig that exploded back in April. Halliburton was working as a contractor for Transocean in cementing the well, so it also may be named.

Mr. Holder’s emphasis on using criminal provisions makes it clear that the companies, and perhaps even some individuals at them, will be the targets for prosecution. Here is a preliminary assessment of the various types of litigation the environmental disaster is likely to spawn.

Criminal Prosecution

Criminal charges are probable under the environmental laws that govern discharging pollutants in navigable waterways and that cause harm to migratory birds. My colleague, Prof. Noah Hall, an expert in environmental law, summarized on the Great Lakes Law blog some potential criminal environmental charges and penalties that may result:

Government attorneys have many laws to use in this case, and would likely pursue violations for discharge of pollution under the Clean Water Act. Criminal charges could be brought under the Refuse Act and the Migratory Bird Treaty Act, both of which use strict liability, so the government would not need to show that BP intended to violate the law or was even negligent in its operation and response. Fines are the most likely outcome — Exxon was nailed for $150 million after the 1989 Valdez spill in Alaska, although the court forgave $125 million of the fine in recognition of Exxon’s cooperation in cleaning up the spill and paying certain private claims. The money would likely go to some combination of special funds, the federal government, and state governments.

Strict liability provisions like those included in the Refuse Act and Migratory Bird Treaty Act mean that BP and Transocean would be liable for any violation, regardless of whether it occurred accidentally or as a result of intentional misconduct. For a Clean Water Act violation, 33 U.S.C. § 1319(c)(1), the government would only have to show negligence, which is a fairly low threshold for criminal liability.

Whether prosecutors pursue a case against a company in this situation would usually depend on how cooperative it was in clean-up efforts and complying with requests for information because there are no real defenses to charges under these provisions. Given the pressure on the Obama administration over its response to the oil spill, however, criminal charges are much more likely than in other cases.

Criminal penalties for environmental violations are not as severe as for other white-collar crimes. For a Clean Water Act violation, the maximum fine is $25,000 a day and up to one year in prison for a conviction based on negligence, and $50,000 a day and up to three years in prison for a conviction based on conduct shown to be done “knowingly.”

A greater danger for both the companies and any individual employees would be if false statements were made to the government in obtaining any permits or approvals for operating the rig or in compliance reports about applicable environmental and safety regulations. The broad federal false statement statute, 18 U.S.C. § 1001, makes it a crime to make any “materially false, fictitious, or fraudulent statement or representation” in connection with “any matter within the jurisdiction of the” federal government.

Unlike the environmental statutes, a violation of this provision is subject to a five-year prison term for each violation. More important, under the federal sentencing guidelines, the recommended sentence can be based on the amount of the loss caused to victims of the crime, and this could include the environmental damage caused by the oil spilling up on the beaches of the Gulf Coast. That loss calculation could lead to a lengthy prison term if an individual were found to have made multiple false statements, while the potential fine for a company could be multiplied significantly.

No individuals have been identified as targets of the criminal investigation, which is still in its earliest stages, and it remains to be seen whether anyone will be accused of wrongdoing. At this point, it does not appear any senior executives at BP, Transocean, or Halliburton would be the focus of a criminal case. Although the oil spill is a significant event, the Deepwater Horizon rig was only a small part of their global operations, so it is unlikely senior executives had much if any awareness of its operations before the disaster.

Civil Liability

The direct costs to BP from the oil spill have escalated significantly since April. In its earlier disclosures to shareholders right after the rig accident, the company estimated that the costs would be approximately $6 million a day. BP stated Friday that it had spent more than $1 billion in response and clean-up costs, and that those are only increasing as the oil slick reaches further along the Gulf Coast.

BP and Transocean will be liable for all the environmental clean-up costs, under both the Clean Water Act and the Comprehensive Environmental Response Compensation and Liability Act. Halliburton’s work as a contractor on the well may also make it liable for the costs.

How much each company ultimately has to pay remains to be seen. Transocean disclosed that it has an agreement under which BP would “assume full responsibility for and defend, release and indemnify us from any loss, expense, claim, fine, penalty or liability for pollution or contamination, including control and removal thereof, arising out of or connected with operations under the contract.” This provision will doubtless be the subject of litigation once the government figures out what is owed for the oil spill.

Thousands of lawsuits have already been filed against the companies by those harmed by the oil spill, but there is an interesting limit on the amount of economic damages they may be liable to pay. Under the Oil Pollution Act of 1990, passed in the wake of the Exxon Valdez oil spill, an “offshore facility” is liable for “the total of all removal costs plus $75,000,000.”

There is a bill in Congress called the Big Oil Bailout Prevention Liability Act of 2010, introduced in early May, to raise the cap on economic damages to $10 billion. But as Professor Hall points out, “the $75 million cap does not apply to claims in state court or under maritime law, and as we saw from the Exxon case, that’s where most victims and potential plaintiffs will turn to pursue large claims against BP and other parties.” In addition, the cap is not available if there was a violation of federal safety regulations at the facility, a real possibility given what happened on the Deepwater Horizon.

One area in which the Exxon Valdez spill may actually help BP and Transocean is the limit the Supreme Court imposed on punitive damages in its 2008 decision in Exxon Shipping Co. v. Baker, which only allows such damages up to the amount of compensatory damages awarded. Juries in the Gulf Coast region will remember this spill long after its effects are mitigated, but the limit on punitive damages may keep down the costs of the disaster somewhat.

Finally, and perhaps inevitably, a securities class action complaint was filed against BP on May 21 alleging that the company misled investors about the risks from deep water drilling. We are unlikely to see claims against the directors of the companies for breach of a fiduciary duty because BP is a British corporation and Transocean is a Swiss company, and neither country’s laws are as accommodating of shareholder suits as the law in the United States. So at least that’s one less case their lawyers will have to deal with.

– Peter J. Henning