Liability for Invalid State Agency Permit Decisions: Is the Regulated Party Left Holding the Bag?

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Regulated parties who comply with their permit sometimes get an unwelcome surprise. They meet with their state agency, make full disclosure about their discharges or emissions, and then the state agency makes decisions about how to regulate the discharges or emissions, including what type of permit to issue. Sometimes the state agency gets it wrong, and then citizen groups sue. In that instance, one in which the regulated party relied on the state agency and did what it was told to do, does the regulated party win or lose? That depends on the facts, but there are at least two cases, including one just decided by the Fourth Circuit, that give hope to regulated parties that find themselves in this position. These cases were decided under the Clean Water Act (“CWA”), but the principles and rationale apply equally to enforcement cases under other environmental laws.

In Southern Appalachian Mountain Stewards v. Red River Coal Co., the issue was whether underdrains at the defendant’s facility were point sources that required a NPDES permit. The facts showed EPA had delegated authority to issue NPDES permits to Virginia’s Department of Mines, Minerals and Energy’s Division of Mined Land Reclamation (“DMLR”), and that DMLR also had the ability to issue permits under the Surface Mining Control and Reclamation Act (“SMCRA”). When DMLR renewed the facility’s combined NPDES/SMCRA permit, it determined that the underdrains did not need to be regulated as point sources under the NPDES permit. Citizens groups sued and argued the defendant was violating the CWA by discharging pollutants without a NPDES permit.

The district court noted this was not a case where the regulatory authority knew nothing about the underdrains. The court recited evidence showing that DMLR made a conscious decision not to regulate the underdrains under the NPDES portion of the permit because DMLR believed that monitoring the underdrain effluent under the SMCRA portion of the permit was sufficient. The court found this decision was legally incorrect and held the underdrains were point sources. The issue then before the court was whether the CWA permit shield applied. Under the CWA, a discharger is shielded from liability if it complies with its NPDES permit, but its discharge nevertheless fails to meet water-quality standards. There is no permit shield under the Surface Mining Act. That meant the court had to consider whether a discharger who is shielded from liability under the CWA can still be held liable under equivalent Surface Mining Act standards.

In its analysis, the district court noted that EPA had objected to the draft permit and instructed DMLR that these ongoing discharges must be subject to the NPDES permit. The court also noted that EPA had written to the defendant and put it on notice that the agency considered it to be in violation of the CWA. Under those facts one would expect the court to determine the defendant violated the CWA, at least under EPA’s view of how the permit shield was to be applied. But that’s not what the Court ruled. In upholding the permit shield, the court said:

The undisputed evidence demonstrates that Red River has done what DMLR has told it to do. Red River should be able to rely upon the clear directives of its regulators without being subjected to liability. The EPA disagrees with what DMLR has required, but it would be unfair to place Red River in the middle of a battle between federal and state regulators. The EPA and SAMS are free to take legal action against DMLR, but DMLR is not a party to this litigation. By being completely forthcoming with DMLR and complying with the express terms of this Permit, Red River has met its obligations under the CWA and is entitled to rely on the permit shield. I will therefore grant Red River’s Motion for Summary Judgment as to the CWA claim.

The court then went on to hold that the Surface Mining Act’s savings clause, which bars construing the Act in any way that would supersede, amend, modify or repeal the CWA, meant that no liability can be imposed under the Surface Mining Act for conduct that is otherwise shielded from liability under the CWA. The Fourth Circuit affirmed the district court’s decision on appeal.  

The second case is Wisconsin Resources Protection Council v. Flambeau Mining Co., 727 F.3d 700 (7th Cir. 2013). The issue there was whether the defendant’s discharges violated the CWA. The facility at issue discharged stormwater, and the Wisconsin Department of Natural Resources (“WDNR”) determined it could do so under a mining permit approved as part of the state’s delegated NPDES program. The facts showed that WDNR was authorized by EPA to administer the federal program and issue all NPDES permits within the state. Citizens groups sued, contending the state had erroneously determined that discharges under the mining permit were authorized by the CWA and that the defendant should have known it. The defendant alleged the permit shield applied, but the district court did not agree.

The Seventh Circuit reversed. It made short work of the argument that the defendant “should have known” it was not entitled to rely on what the state had said. It held:

[W]e need not decide whether the EPA approved this specific provision of Wisconsin’s WPDES scheme because, even if Flambeau’s permit were legally invalid, we cannot, consistent with the requirements of due process, impose a penalty on Flambeau for complying with what Wisconsin deemed a valid WPDES permit.

Id. at 707. The court rejected the argument that the defendant “should have known” the state did not have authority to do what it did because, according to the plaintiff, applicable regulations made that clear. The court said:

…[F]orcing a permit holder to establish that the undisputed permitting entity had actual authority to issue the permit, despite a facially valid law authorizing the entity to issue the permit, would vitiate the permit shield. Permit holders would be brought into court to establish not only the validity of their permits, but also the validity of the issuing      authority to issue such a permit, requiring permit holders to prove the validity of legislative and regulatory transactions to which they were not parties. This undermines the purpose of the shield provision, which the Supreme Court has stated is to “giv[e] permits finality,” E.I. du Pont de Nemours, 430 U.S. at 138 n.28.

The court held that the permit shield applied because “[t]o hold otherwise would be inconsistent with the requirements of due process.”

These cases give regulated parties hope that, when they rely on their state agencies to make correct decisions, they won’t be penalized if the state agency gets it wrong. Any given case, though, is fact-specific, so the holdings in these cases may not have apply in other contexts. The best outcome is for the regulated party, working with the state, to avoid these situations altogether by making sure any permitting decisions made are legally sound before the permit is issued.

Southern Appalachian Mountain Stewards v. Red River Coal Co., 420 F.Supp.3d 481 (W.D. Va. 2019), aff’d 992 F.3d 306 (4th Cir. 2021)

Wisconsin Resources Protection Council v. Flambeau Mining Co., 727 F.3d 700 (7th Cir. 2013).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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