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Pennsylvania Supreme Court Decides EQT Case, Holding Daily Penalties Do Not Accrue for Continuing Presence of Pollutants In Waters of the Commonwealth

Last week, the Pennsylvania Supreme Court issued its highly anticipated opinion in EQT Prod. Co. v. Dep’t of Envtl. Prot., No. 6 MAP 2017, 2018 WL 1516385, (Pa. Mar. 28, 2018), holding that the Clean Streams Law (“CSL”) does not authorize the Department of Environmental Protection (“DEP”) to impose daily penalties for the ongoing, continuing presence of pollutants in waters of the Commonwealth. In the 5-to-2 decision, which affirmed in part the Commonwealth Court’s preceding opinion, the Court ruled that to construe the language of the CSL as allowing penalties for the movement of pollutants from one water body to another (DEP’s “water-to-water” theory) was not only unsupported by the statutory language, but would also expose the regulated community to potentially massive civil penalties, and as such, DEP’s penalty calculations including penalties for the days the pollutants remained in the affected groundwater after the initial discharge were excessive.

As background on the issues addressed in the Supreme Court’s landmark opinion, EQT is involved in the hydraulic fracturing business as an owner and operator of natural gas wells and well pads. In 2012, an impoundment holding water impacted by the fracturing operations became compromised and leaked into the soil beneath it, and although EQT took steps to address the contamination upon discovering the leak, the impaired water remained in the subsoil and eventually impacted nearby groundwater. In 2014, seeking a remedy, DEP sought to enter into a consent decree with EQT for over $1,000,000, which the agency calculated based on the continuing impacts to the groundwater for a total of 878 days. DEP also sought to include the caveat in the proposed consent order that the penalties would continue to accrue because the pollution continued to impact the nearby groundwater. After failing to agree to the terms of the proposed consent order, and anticipating DEP’s action for civil penalties in the Environmental Hearing Board (“EHB”), EQT initiated a declaratory judgment action in the Commonwealth Court to resolve the statutory interpretation issue of whether a violation of the CSL occurs only on a day in which a person initially allows an unauthorized industrial discharge into the waters of the Commonwealth, and whether the mere presence of an industrial waste in the waters of the Commonwealth, in and of itself, constitutes a violation.

Initially when EQT filed its declaratory judgment action, the Commonwealth Court dismissed it on the basis that the dispute was speculative. EQT appealed, and the Supreme Court then reversed and remanded back to the Commonwealth Court, as we reported, holding that EQT could indeed challenge DEP’s “continuing violation” interpretation before the pending EHB action for penalty determination was resolved given the threat of a substantial penalty determination. EQT Prod. Co. v. Dep’t of Envtl. Prot., 114 A.3d 438 (Pa. Commw. Ct.), rev’d sub nom. EQT Prod. Co. v. Dep’t of Envtl. Prot., 634 Pa. 611, 130 A.3d 752 (2015).

Shortly after EQT had filed its declaratory judgment action, DEP filed a complaint for the assessment of civil penalties before the EHB, seeking at least over $4,000,000, claiming that penalties continued to accrue for each day contaminants deriving from the faulty impoundment continued to be present in the waters of the Commonwealth. Eventually, in May of 2017, the EHB reduced the penalty to a $1.1 million fine, finding that EQT’s post-release behavior evinced a conscious disregard of the fact that its conduct could result in a violation of the CSL and significant harm to the waters of the Commonwealth. DEP v. EQT Prod. Co., No. 2014-140-CP-L, 2017 WL 2399756 (EHB May 26, 2017)

Back in the Commonwealth Court, EQT succeeded on summary relief, and we also reported on that opinion. EQT Production Co. v. Dept. of Envt’l Prot., 153 A.3d 424 (Pa. Commw. Ct. 2017). Curiously, although EQT never sought to limit the scope of the Commonwealth Court’s review to only Section 301 of the CSL, the Commonwealth Court decided that the “waste” involved in the pollution was “industrial waste,” so it was solely regulated under Article III of the CSL and not Article IV (relating to other forms of pollutants), thus eliminating the claims under Section 401. The Commonwealth Court also, sua sponte, eliminated the claim under Section 307 which the court, by looking at the definition of “discharge” under the NPDES rules, found only applied to surface water discharges, and EQT’s leak only infiltrated groundwater.

After limiting its scope of review to only claims under Section 301, in granting summary relief, the Commonwealth Court held that to interpret Section 301 of the CSL as providing that a violation occurs when the pollution travels from one water of the Commonwealth into another (again, DEP’s “water-to-water” theory), and continues to occur until the remediation is complete, was not supported by the Section’s plain language. In making its decision, the Court considered the practical impact of the Department’s proffered interpretation in that it could result in limitless penalties, as long as the impacts remained in the water. Furthermore, the Court found that a party must engage in a culpable action or inaction in order to violate the CSL, so passive movement of waste could not be said to establish an infraction. Ultimately, the Court sided with EQT in finding that a violation occurs only when the industrial waste is first released to a water of the Commonwealth.

The Department appealed and the Supreme Court, in its opinion issued last week, affirmed the Commonwealth Court’s holding on the “water-to-water” theory and vacated the decision in all other respects. DEP argued that the language of the governing statutes contemplate movement not just into waters, but into any waters of the Commonwealth, and used the broad “waters of the Commonwealth” definition as support for its contention that any passage of contamination into any water of the Commonwealth constituted a violation. As such, there would be no distinction between the release from the impoundment and the subsequent migration of contaminants into the surrounding water, which DEP argued, constituted grounds for daily penalties. Meanwhile, EQT reiterated that a violation occurs only when a contaminant moves from outside the waters of the Commonwealth into them, as the word “into” refers to something moving from outside to the inside of an object. Seemingly most persuasive for the Supreme Court, EQT also argued that the limitless and potentially excessive penalty exposure as set forth by the Department would chill business activities and voluntary efforts to remediate contamination.

The Supreme Court looked at these arguments to finally decide that the CSL is ambiguous in terms of the whether the ongoing migration of already released contaminants among all the waters of the Commonwealth fashions a violation. The Court recognized that of the competing constructions, the most reasonable was that the Legislature sought to protect the waters of the Commonwealth from just the places of initial entry of pollutants. In so concluding, the Supreme Court once again reiterated that express terms would be necessary to justify the scale of the penalty exposure created through DEP’s interpretation of the statute, and that although the Court appreciated “the critical need for protection to vindicate the constitutional entitlement of the citizenry to a clean environment and recognize[d] that the Clean Streams Law is designed as a mechanism to advance this salutary objective,” citing Pa. Const. Article I, Section 27, “if the General Assembly wished to create the sort of massive civil penalty exposure administered by the Department,” it would have said so expressly.

As to the Commonwealth Court’s remaining holdings, including DEP’s “soil-to-water” theory and the decision to narrow the scope of the review to only under Section 301, the Supreme Court found that they were improperly analyzed and would be better addressed on a more complete record. The Supreme Court declined to address the “soil-to-water” theory, where DEP proposed that violations occur every day pollution seeps from contaminated soil into water, because that issue was not squarely in focus before the Court, and suggested EQT should take it up in its pending challenge to the EHB’s assessed penalty currently before the Commonwealth Court. The Supreme Court also vacated the Commonwealth Court’s sua sponte decision to only address the claims under Section 301, finding that the analysis was not only incorrect, but also improperly before the Court as EQT never raised the issue in the first place. Thus, also to be determined by the pending Commonwealth Court appeal is whether Sections 401 and 307 apply to these polluting discharges, an issue on which the Supreme Court added that “if and when those matters are revisited, the colorable positions expressed by the Board and the Department should be considered.” The Concurring and Dissenting Opinion concurred with these two portions of the Supreme Court’s holding, however it dissented from the main holding, finding that the plain language of the CSL would permit DEP’s “water-to-water” theory.

Members of the regulated community will no doubt appreciate this opinion for providing some clarity and limiting their exposure to civil penalties under the CSL.  But there are certainly more shoes to drop in this case as EQT's appeal of the assessed penalties continues to percolate through the court.