CH-44-45 Accountants Legal Liability – Smith and Robersons Business Law : Chapter Notes

This Document Contains Chapters 44 to 45 Chapter 44 ACCOUNTANT’S LEGAL LIABILITY Common Law [44-1] Contract Liability [44-1a] Tort Liability [44-1b] Negligence Fraud Criminal Liability [44-1c] Client Information [44-1d] Working Papers Accountant-Client Privilege Federal Securities Law [44-2] Securities Act of 1933 [44-2a] Securities Exchange Act of 1934 [44-2b] Civil Liability Criminal Liability Audit Requirements Sarbanes-Oxley Act Cases in This Chapter Murphy v. BDO Seidman, LLP Ernst & Ernst v. Hochfelder Chapter Outcomes After reading and studying this chapter, the student should be able to: • Describe the contract liability of an accountant to her client. • Describe for what and to whom an accountant has tort liability. • Describe who owns the working papers an accountant generates and whether client information is privileged. • Discuss the potential civil and criminal liability of an accountant under the 1933 Securities Act. • Discuss the potential civil and criminal liability of an accountant under the 1934 Securities Act. TEACHING NOTES 44-1 COMMON LAW *** Chapter Outcome*** Explain the contract liability of an accountant to her client. 44-1a Contract Liability Common law contract elements must be satisfied. The accountant agrees to perform all duties stated in the contract and impliedly agrees to perform in a professional manner. A breach of contract will make the accountant liable to the client and to any third party beneficiaries who were intended to primarily benefit from the work product. Under general contract law, accountants are not entitled to compensation following a material breach, although, if the accountant substantially performs, compensation minus losses suffered by the client are recoverable. *** Chapter Outcome*** Describe for what and to whom an accountant has tort liability 44-1b Tort Liability Negligence — Accountants incur negligence liability if they do not exercise the degree of care a reasonably prudent accountant would have exercised under similar circumstances. Most courts do not permit an accountant to raise the defense of the plaintiff's contributory (or comparative) negligence. An accountant's negligence liability has traditionally been restricted to clients and intended third party beneficiaries under the privity of contract doctrine (Ultramares v. Touche). Recently, most courts have extended the Ultramares approach to include foreseen users or foreseen classes of users. This approach, which also has been adopted by the Second Restatement of Torts and the Restatement Third, Torts: Liability for Economic Harm, expands the class of protected individuals to include those whom the accountant knew would use the work product or those who use the accountant’s work for a purpose for which the accountant knew the work would be used. A few courts have extended liability to an even broader group: reasonably forseeable plaintiffs. NOTE: See Figure 44-1: Accountants' Liability to Third Parties for Negligent Misrepresentation. CASE 44-1 MURPHY v. BDO SEIDMAN, LLP Court of Appeal, Second District, 2003 113 Cal.App.4th 687, 6 Cal.Rptr.3d 770 http://scholar.google.com/scholar_case?case=6493495192376414472&hl=en&as_sdt=2&as_vis=1 Rubin, J. In November 1995, respondent accounting firm Logan, Throop & Company (Logan) prepared a financial statement for World Interactive Networks, Inc. (WIN), a non-publicly-traded corporation, for the period ending in August 1995. The statement misrepresented the value of various WIN assets, claiming they were worth $145 million when in fact they amounted to only $30 million. Logan also claimed the financial statement complied with generally accepted accounting principles (GAAP) when it did not. In February 1996, Logan repeated essentially the same misrepresentations in its auditors’ report of WIN’s 1995 balance sheet. The same month that Logan released its auditors’ report, respondent accounting firm BDO Seidman, LLP (Seidman), issued WIN’s audited financial statement for 1995. In the statement, Seidman misrepresented the value of WIN’s assets, claiming they were worth slightly more than $121 million, when they were truly worth only $6.9 million. In addition, Seidman misrepresented WIN’s shareholder equity as $88 million, when the company was worthless. Several months later, Seidman repeated essentially the same misrepresentations when it released its review of WIN’s quarterly balance sheet for the period ending March 1996. Struthers Industries, Inc. (Struthers), was a publicly traded corporation. In 1995, WIN and Struthers agreed to a reverse merger, subject to shareholder approval, in which WIN would sell its assets to Struthers in return for Struthers stock, following which Struthers would become WIN’s subsidiary. While the proposed merger was pending, Seidman prepared a pro forma financial statement of Struthers and WIN as a combined entity, which substantially repeated, from Seidman’s earlier audit of WIN, the same false asset values and misrepresentations about complying with GAAP. In January 1997, Seidman sent the pro forma statement to the Securities and Exchange Commission. The SEC told Struthers the pro forma statement did not comply with GAAP because it did not properly account for the inherent uncertainty of the proposed merger. Seidman did not tell appellants, all of whom either owned or later bought WIN or Struthers stock, about the SEC’s rejection of Seidman’s accounting for the proposed merger. In March 1998, WIN and Struthers filed for bankruptcy, and appellants, who allege they relied on Seidman’s and Logan’s financial statements to buy stock in the companies, lost their investments. Consequently, appellants sued both accounting firms, alleging causes of action for negligent and intentional misrepresentation. * * * Respondents demurred to the complaint * * * arguing it failed for a number of reasons to state a cause of action and pleaded fraud with insufficient detail. The court adopted respondents’ arguments and sustained [the] demurrers without leave to amend. * * * The court entered judgment for respondents. This appeal followed. * * * Respondents’ Duty to Appellants * * * In Bily v. Arthur Young & Co. [citation], our Supreme Court formulated a hierarchy of duty for accountants who prepare inaccurate financial statements. Casting an ever-widening circle of obligation, Bily established that the more egregious the misstatement, the broader the duty: • For ordinary negligence, an auditor owes a duty only to its client. As Bily explained, “[A]n auditor’s liability for general negligence in the conduct of an audit of its client financial statements is confined to the client, i.e., the person who contracts for or engages the audit services. Other persons may not recover on a pure negligence theory.” [Citation.] • For negligent misrepresentation, the duty expands to specifically intended beneficiaries of the report who are substantially likely to receive the misinformation. Bily defined such beneficiaries as “persons who, although not clients, may reasonably come to receive and rely on an audit report and whose existence constitutes a risk of audit reporting that may fairly be imposed on the auditor. Such persons are specifically intended beneficiaries of the audit report who are known to the auditor and for whose benefit it renders the audit report.” [Citation.] Liability arises toward such plaintiffs when the representation was made “with the intent to induce plaintiff, or a particular class of persons to which plaintiff belongs, to act in reliance upon the representation in a specific transaction, or a specific type of transaction, that defendant intended to influence. Defendant is deemed to have intended to influence [its client’s] transaction with plaintiff whenever defendant knows with substantial certainty that plaintiff, or the particular class of persons to which plaintiff belongs, will rely on the representation in the course of the transaction.” [Citations.] • For intentional misrepresentation, the duty expands yet further to include anyone whom the auditor should have reasonably foreseen would rely on the misrepresentations. Bily explained, “The representation must have been made with the intent to defraud plaintiff, or a particular class of persons to which plaintiff belongs, whom defendant intended or reasonably should have foreseen would rely upon the representation. One who makes a representation with intent to defraud the public or a particular class of persons is deemed to have intended to defraud every individual in that category who is actually misled thereby.” [Citation.] Bily can thus be briefly summarized as follows: (1) ordinary negligence—no duty to third parties; (2) negligent misrepresentation—duty to third parties who would be known with substantial certainty to rely on the misrepresentation; and (3) intentional misrepresentation—duty to third parties who could be reasonably foreseen to rely on the misrepresentation. * * * 1. Appellants Allege the Duty for Negligent Misrepresentation. The complaint alleges WIN and Struthers hired respondents to prepare various financial statements that appellants relied upon in buying WIN or Struthers stock and in approving their merger. The complaint also alleges respondents knew WIN or Struthers would distribute the statements to existing and potential shareholders for such purposes. * * * Such an allegation, and similar allegations targeted at Logan, satisfy Bily‘s criteria for negligent misrepresentation: respondents knew with substantial certainty that potential investors such as appellants would rely on the misstatements. [Citation.] The complaint therefore states a cause of action for negligent misrepresentation. 2. Appellants Allege the Duty for Intentional Misrepresentation. The complaint alleges respondents either intentionally or recklessly misstated the value of WIN’s assets and shareholder equity. It further alleges respondents should have foreseen that current and future investors in WIN and Struthers would rely on the misstated values in deciding whether to invest in those companies and to approve their merger. * * * The complaint therefore states a cause of action for intentional misrepresentation. 3. Appellants Who Bought Struthers Stock Allege Causes of Action. Some appellants bought only Struthers stock. Respondents note that Struthers hired Seidman, but not Logan, to prepare its financial statements. According to respondents, Struthers appellants therefore cannot state a cause of action against Logan because Struthers was not Logan’s client and thus owed no duty to Struthers’ shareholders for any misstatements. Bily imposes on respondents a duty to more than just their clients. Respondents owed a duty to anyone whom they (1) should have reasonably foreseen would rely on their intentional misrepresentations, or (2) knew with substantial certainty would rely on their negligent misrepresentations. [Citation.] The complaint alleges respondents knew the proposed merger of WIN and Struthers would induce investors in Struthers to rely on financial statements about WIN in anticipation of the two companies becoming one. In addition, the complaint alleges respondents knew Struthers investors would rely on WIN’s financial statements in deciding whether to approve the merger itself. The complaint therefore alleges a duty from respondents to Struthers’ shareholders, making respondents liable to those shareholders for their misrepresentations. Reliance 1. Sufficient Detail. Logan contends the complaint does not describe appellants’ reliance on Logan’s alleged misrepresentations with enough detail. According to Logan, appellants must identify the “when, where, and how” of their reliance. Our review finds most appellants describe their reliance on WIN’s inflated assets with enough specificity, often including the precise date they bought stock in the company and the amount paid, to permit respondents to prepare a defense. * * * 2. Forbearance Is Reliance. A number of appellants, whom we identify in Appendix 2, bought WIN or Struthers stock before Logan and Seidman issued their first reports, and thereafter relied on respondents’ rosy misstatements in deciding not to sell their stock. * * * After briefing ended in this appeal, our Supreme Court held in [citation] that holding stock can be actionable reliance. * * * 3. ‘Grapevine”Plaintiffs. Some appellants did not read or otherwise directly rely on the Logan or Seidman financial statements. Instead, they relied on what others told them the statements said. Respondents argue such indirect reliance by those appellants, whom they call “grapevine plaintiffs,” does not constitute legal reliance and is thus not actionable. The law is otherwise. Indirect reliance is actionable if Logan or Seidman had reason to know others would convey their misrepresentations to appellants. Under Bily, respondents are liable for (1) negligent misrepresentation if they knew it was substantially certain that appellants would receive the misstatements and (2) intentional misrepresentation if it was reasonably foreseeable appellants would receive the statements. Thus, nothing in Bily’s formulation of negligent or intentional misrepresentation precludes indirect reliance. * * * Respondents’ contention is well-taken, however, as to certain appellants who do not expressly allege relying on any Logan or Seidman misstatement, whether directly or indirectly. Because they do not allege reliance, the trial court properly dismissed them for failing to state a claim for negligent or intentional misrepresentation. * * * * * * The trial court’s judgment is reversed in part and affirmed in part. * * * Fraud — Accountants may be liable for intentionally tortious conduct constituting fraudulent misrepresentation. In recent years, accountants also have been subject to a number of civil lawsuits based on the Racketeer Influenced and Corrupt Organizations Act (RICO). 44-1c Criminal Liability An accountant's potential criminal liability is primarily based on federal securities and federal tax law. Additionally, fraudulently certifying financial statements constitutes a crime in most states. *** Chapter Outcome *** Describe who owns the working papers an accountant generates and whether client information is privileged. 44-1d Client Information Working Papers — An accountant is considered the owner of his working papers but may not disclose their contents unless the client agrees or a court orders the disclosure. Accountant-Client Privilege — Not recognized by the common law or federal law, although some states have adopted statutes granting some form of privilege. *** Chapter Outcome*** Discuss the potential civil and criminal liability of an accountant under the 1933 Securities Act. 44-2 FEDERAL SECURITIES LAWS 44-2a Securities Act of 1933 Subject to civil liability under Section 11 for preparing or certifying for inclusion in a securities offering a false or omitted material statement. Due diligence is a defense to negligence claims made under Section 11. Criminal penalties may be imposed for willful violations. In addition, an accountant is not liable for any or the entire amount otherwise recoverable under Section 11 that the defendant proves was caused by something other than the defective disclosure. *** Chapter Outcome*** Discuss the potential civil and criminal liability of an accountant under the 1934 Securities Act. 44-2b Securities Exchange Act of 1934 Section 18 imposes civil liability on an accountant for any false or misleading information filed with the SEC. A showing of good faith and lack of actual knowledge of falsity will serve as a defense. Civil liability — may also be imposed pursuant to Rule 10b-5 if there is scienter, and this may be demonstrated by a reckless disregard of the truth. Mere negligence would not be sufficient to establish scienter. NOTE: See Figure 44-2: Accountants' Liability under Federal Securities Law CASE 44-2 ERNST & ERNST v. HOCHFELDER Supreme Court of the United States, 1976 425 U.S. 185, 96 S.Ct. 1375,47 L.Ed.2d 668 http://scholar.google.com/scholar_case?case=4219834259989886465&hl=en&as_sdt=2&as_vis=1&oi=scholarr Powell, J. The issue in this case is whether an action for civil damages may lie under §10(b) of the Securities Exchange Act of 1934 (1934 Act), * * *, and Securities and Exchange Commission Rule 10b-5, * * * in the absence of an allegation of intent to deceive, manipulate, or defraud on the part of the defendant. Petitioner, Ernst & Ernst, is an accounting firm. From 1946 through 1967 it was retained by First Securities Company of Chicago (First Securities), a small brokerage firm and member of the Midwest Stock Exchange and of the National Association of Securities Dealers, to perform periodic audits of the firm’s books and records. In connection with these audits Ernst & Ernst prepared for filing with the Securities and Exchange Commission (Commission) the annual reports required of First Securities under §17(a) of the 1934 Act. It also prepared for First Securities responses to the financial questionnaires of the Midwest Stock Exchange (Exchange). Respondents were customers of First Securities who invested in a fraudulent securities scheme perpetrated by Leston B. Nay, president of the firm and owner of 92% of its stock. * * * This fraud came to light in 1968 when Nay committed suicide, leaving a note that described First Securities as bankrupt and the escrow accounts as “spurious.” Respondents subsequently filed this action for damages against Ernst & Ernst in the United States District Court for the Northern District of Illinois under §10(b) of the 1934 Act. The complaint charged that Nay’s escrow scheme violated §10(b) and Commission Rule 10b-5, and that Ernst & Ernst had “aided and abetted” Nay’s violations by its “failure” to conduct proper audits of First Securities. As revealed through discovery, respondents’ cause of action rested on a theory of negligent nonfeasance. The premise was that Ernst & Ernst had failed to utilize “appropriate auditing procedures” in its audits of First Securities, thereby failing to discover internal practices of the firm said to prevent an effective audit. * * * Federal regulation of transactions in securities emerged as part of the aftermath of the market crash in 1929. The Securities Act of 1933 (1933 Act), [citation] was designed to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing. [Citation.] The 1934 Act was intended principally to protect investors against manipulation of stock prices through regulation of transactions upon securities exchanges and in over-the-counter markets, and to impose regular reporting requirements on companies whose stock is listed on national securities exchanges. [Citation.] Although the Acts contain numerous carefully drawn express civil remedies and criminal penalties, Congress recognized that efficient regulation of securities trading could not be accomplished under a rigid statutory program. As part of the 1934 Act Congress created the Commission, which is provided with an arsenal of flexible enforcement powers. [Citations.] Section 10 of the 1934 Act makes it “unlawful for any person * * * (b) [t]o use or employ, in connection with the purchase or sale of any security * * * any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” [Citation.] In 1942, acting pursuant to the power conferred by §10(b), the Commission promulgated Rule 10b-5. * * * Although §10(b) does not by its terms create an express civil remedy for its violation, and there is no indication that Congress, or the Commission when adopting Rule 10b-5, contemplated such a remedy, the existence of a private cause of action for violations of the statute and the Rule is now well established. [Citation.] During the 30-year period since a private cause of action was first implied under §10(b) and Rule 10b-5, a substantial body of case law and commentary has developed as to its elements. Courts and commentators long have differed with regard to whether scienter is a necessary element of such a cause of action, or whether negligent conduct alone is sufficient. * * * Although the extensive legislative history of the 1934 Act is bereft of any explicit explanation of Congress’ intent, we think the relevant portions of that history support our conclusion that §10(b) was addressed to practices that involve some element of scienter and cannot be read to impose liability for negligent conduct alone. * * * The Commission argues that Congress has been explicit in requiring willful conduct when that was the standard of fault intended. * * * * * * The structure of the Acts does not support the Commission’s argument. In each instance that Congress created express civil liability in favor of purchasers or sellers of securities it clearly specified whether recovery was to be premised on knowing or intentional conduct, negligence, or entirely innocent mistake. [Citations.] For example, §11 of the 1933 Act unambiguously creates a private action for damages when a registration statement includes untrue statements of material facts or fails to state material facts necessary to make the statements therein not misleading. Within the limits specified by §11(e), the issuer of the securities is held absolutely liable for any damages resulting from such misstatement or omission. But experts such as accountants who have prepared portions of the registration statement are accorded a “due diligence” defense. In effect, this is a negligence standard. An expert may avoid civil liability with respect to the portions of the registration statement for which he was responsible by showing that “after reasonable investigation” he had “reasonable ground[s] to believe” that the statements for which he was responsible were true and there was no omission of a material fact. §11(b)(3)(B)(i). See, e.g., Escott v. BarChris Const. Corp. [citation, see Case 43-2]. The express recognition of a cause of action premised on negligent behavior in §11 stands in sharp contrast to the language of §10(b), and significantly undercuts the Commission’s argument. We also consider it significant that each of the express civil remedies in the 1933 Act allowing recovery for negligent conduct, see §§11, 12(2), 15, [citations] is subject to significant procedural restrictions not applicable under §10(b). * * * * * * We have addressed, to this point, primarily the language and history of §10(b). The Commission contends, however, that subsections (b) and (c) of Rule 10b-5 are cast in language which—if standing alone—could encompass both intentional and negligent behavior. These subsections respectively provide that it is unlawful “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading * * *” and “[t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person * * *.” Viewed in isolation the language of subsection (b), and arguably that of subsection (c), could be read as proscribing, respectively, any type of material misstatement or omission, and any course of conduct, that has the effect of defrauding investors, whether the wrongdoing was intentional or not. We note first that such a reading cannot be harmonized with the administrative history of the Rule, a history making clear that when the Commission adopted the Rule it was intended to apply only to activities that involved scienter. More importantly, Rule 10b-5 was adopted pursuant to authority granted the Commission under §10(b). The rulemaking power granted to an administrative agency charged with the administration of a federal statute is not the power to make law. Rather, it is “‘the power to adopt regulations to carry into effect the will of Congress as expressed by the statute.”’ [Citations.] * * * When a statute speaks so specifically in terms of manipulation and deception, and of implementing devices and contrivances—the commonly understood terminology of intentional wrongdoing—and when its history reflects no more expansive intent, we are quite unwilling to extend the scope of the statute to negligent conduct. * * * The judgment of the Court of Appeals is reversed. Criminal liability — imposed for willful violation of ß 18 or Rule 10b-5. As amended by the Sarbanes-Oxley Act (SOX), conviction may carry a fine of not more than $5 million or imprisonment for not more than twenty years, or both. An accounting firm may be fined up to $25 million. Moreover, under the Federal Alternative Fines Act, if any person derives pecuniary gain from the offense, or if the offense results in pecuniary loss to a person other than the defendant, the defendant may be fined not more than the greater of twice the gross gain or twice the gross loss. Audit requirements — The Private Securities Litigation Reform Act of 1995 imposes obligations upon public accountants who audit financial statements required by the Act of 1934. These requirements include the establishment of procedures capable of detecting material illegal acts, identifying material related party transactions, and evaluating whether there is a substantial doubt about the issuer’s ability to continue as a going concern during the next fiscal year. Sarbanes-Oxley Act — Passed by Congress in 2002 in response to the business scandals involving companies such as Enron, WorldCom, Global Crossing, and the accounting firm of Arthur Andersen. This Act provides for the establishment of the five-member Public Company Accounting Oversight Board. The SEC has oversight and enforcement authority over the Board. The Board enforces SOX Act, the Federal securities laws, the SEC’s rules, the Board’s rules, and professional accounting standards. The duties of the Board include (1) registering public accounting firms that prepare audit reports for issuers; (2) overseeing the audit of public companies; (3) establishing audit report standards and rules; and (4) inspecting, investigating, and enforcing compliance on the part of registered public accounting firms and their associated persons. The Act directs the Board to establish or modify the auditing and related attestation standards, quality control standards, and ethics standards used by registered public accounting firms to prepare and issue audit reports. The willful violation of any Board rule is treated as a willful violation of the 1934 Act. Moreover, the Board can impose sanctions in its disciplinary proceedings, including the permanent revocation of an accounting firm’s registration, a permanent ban on a person’s associating with any registered firm, and monetary penalties of $15,825,000 for an accounting firm and $800,000 for a natural person, as adjusted for inflation in 2013. The Act also prohibits accounting firms from performing eight specified non-audit services for audit clients, including bookkeeping or other services related to the accounting records or financial statements; financial information systems design and implementation, appraisal or valuation services; fairness opinions; management functions or human resources; and actuarial services. Accounting firms may perform other non-audit services not expressly forbidden by the Act if the company’s audit committee grants prior approval and the approval by the audit committee is disclosed to investors in periodic reports. The lead audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit must rotate at least every five years. Auditors must report directly to the company’s audit committee and make timely disclosure of accounting issues concerning (1) critical accounting policies and practices used in the audit; (2) alternative treatments and their ramifications within generally accepted accounting principles that have been discussed with management officials and the treatment preferred by the auditor; and (3) other material written communications between the auditor and management. Chapter 45 ENVIRONMENTAL LAW Common Law Actions for Environmental Damage Nuisance [45-1] Private Nuisance [45-1a] Public Nuisance [45-1b] Trespass to Land [45-2] Strict Liability for Abnormally Dangerous Activities [45-3] Problems Common to Private Causes of Action [45-4] Federal Regulation of the Environment The National Environmental Policy Act [45-5] The Council on Environmental Quality [45-5a] Environmental Impact Statements [45-5b] Procedure for Preparing an EIS Scope of EIS Requirements Content of an EIS Nature of EIS Requirement The Clean Air Act [45-6] Existing Stationary Sources and Motor Vehicles Then in Use [45-6a] National Ambient Air Quality Standards State Implementation Plans Prevention of Significant Deterioration Areas Nonattainment Areas New Source Standards [45-6b] New Stationary Sources New Vehicles Hazardous Air Pollutants Acid Rain Greenhouse Gases The Clean Water Act [45-7] Point Sources [45-7a] Effluent Limitations National Pollutant Discharge Elimination System (NPDES) The 1977 Amendments Nonpoint Source Pollution [45-7b] New Source Performance Standards [45-7c] Hazardous Substances [45-8] The Federal Insecticide, Fungicide and Rodenticide Act [45-8a] The Toxic Substances Control Act [45-8b] The Resource Conservation and Recovery Act [45-8c] The Superfund [45-8d] International Protection of the Ozone Layer [45-9] Cases in This Chapter Environmental Protection Agency v. EME Homer City Generation, L. P. South Florida Water Management District v. Miccosukee Tribe of Indians Chapter Outcomes After reading and studying this chapter, the student should be able to: • Outline and explain the common law actions for environmental damage and the difficulties in prevailing in such actions. • Explain the major substantive provisions of the National Environmental Policy Act. • Explain the regulatory scheme of the Clean Air Act. • Explain the regulation of both point and nonpoint sources of pollution by the Clean Water Act. • Explain (1) the Federal Insecticide, Fungicide and Rodenticide Act, (2) the Toxic Substances Control Act, (3) the Resource Conservation and Recovery Act, (4) the Superfund, and (5) the various United Nations Conventions on Climate Change. TEACHING NOTES As populations have grown, people have crowded into towns and cities, and air and water have grown much dirtier. Technology, which has helped people live longer, travel faster, and communicate almost instantaneously, has also led to environmental disasters such as the massive radiation release at Chernobyl and oil spills from Alaska to Siberia. In the United States, the common law has been largely unable to control environmental damage. Moreover, even as we have enjoyed some success in controlling some pollutants, a new generation of environmental problems has arisen. One of the more recent environmental issues is the regulation of high-volume horizontal hydraulic fracturing (fracking) for oil and gas. In this chapter, we will discuss both common law causes of action for environmental damage and Federal regulation of the environment. COMMON LAW ACTIONS FOR ENVIRONMENTAL DAMAGE People may bring private tort actions to recover damages for harm to the environment. For example, if Alice’s land is polluted by the mill next door, Alice may sue the mill in tort for the damage to her land. Plaintiffs have generally relied on the theories of nuisance, trespass, and strict liability. *** Chapter Outcome*** Outline and explain the common law actions for environmental damage and the difficulties in prevailing in such actions. 45-1 NUISANCE 45-1a Private Nuisance Private nuisance involves an interference with a person’s use and enjoyment of his or her land. The plaintiff, when suing, must show that the defendant has substantially and unreasonably interfered with the use and enjoyment of the plaintiff’s land — not that the defendant’s conduct was unreasonable but that the interference was. On the other hand, reasonableness of the defendant’s conduct is an issue when the plaintiff sues for an injunction. In determining whether an injunction against a nuisance is appropriate, a court will “balance the equities” by considering such factors as the gravity of the harm to the plaintiff, the social value of the defendant’s activity that is causing the harm, the feasibility and costs of avoiding the harm, and the public interest, if any. As a result of balancing the equities, the courts often deny injunctions when the defendant is engaged in a socially useful activity. Thus, private nuisance actions have been of limited value in controlling environmental damage. 45-1b Public Nuisance A public nuisance is an activity that interferes with the health, safety, or comfort of the public. Generally, only a public representative, such as the attorney general, may sue to stop a public nuisance. Public representatives frequently are unwilling to sue to abate a public nuisance out of concern about the economic impact of closing an industrial operation. Consequently, relatively few public nuisance actions have been brought against polluters. 45-2 TRESPASS TO LAND To establish trespass to land, a plaintiff must show an invasion which interferes with the plaintiff’s right of exclusive possession of the property and which is the direct result of an action by the defendant. Trespass differs from private nuisance in that trespass requires an interference with the plaintiff’s possession of the land. Thus, sending smoke or gas onto another’s property may constitute a private nuisance but does not constitute a trespass. Trespass is difficult to establish in actions for environmental damage, and trespass actions have been of limited use in halting environmental harm. 45-3 STRICT LIABILITY FOR ABNORMALLY DANGEROUS ACTIVITIES Strict liability is liability without fault if a person engages in an abnormally dangerous activity. To establish strict liability, the plaintiff must show that the defendant is carrying on an unduly dangerous activity in an inappropriate location and that the plaintiff has suffered damage because of this activity. Only a limited number of strict liability actions have been brought against polluters. 45-4 PROBLEMS COMMON TO PRIVATE CAUSES OF ACTION • The costs of private litigation are high. And while the environmental damage may be considerable overall, the extent of any particular injury may not warrant a person pursuing a private lawsuit. • Tort actions generally do not provide relief for aesthetic, as opposed to physical, injury. • In many tort actions, causation is a significant issue — as when a landowner lives near several polluting plants, none of which alone causes the amount of damage the landowner’s property has suffered. In this case, the landowner may have difficulty recovering from any of the plant owners. • Finally, even if a plaintiff recovers monetary damages, the defendant may continue polluting. FEDERAL REGULATION OF THE ENVIRONMENT Because private causes of action have proved inadequate to recompense and prevent environmental damage, the federal, state, and local governments have enacted statutes to protect the environment. *** Chapter Outcome *** Explain the major substantive provisions of the National Environmental Policy Act. 45-5 THE NATIONAL ENVIRONMENTAL POLICY ACT In 1969, Congress enacted the National Environmental Policy Act (NEPA) to establish environmental protection as a goal of federal policy. The NEPA has two major substantive sections: • one creating the Council on Environmental Quality (CEQ) • one requiring federal agencies to prepare an environmental impact statement (EIS) if a piece of proposed legislation or proposed federal action will have a significant environmental impact. Thus, NEPA imposes the responsibility for maintaining the environment on all Federal agencies. It is the responsibility of the Federal government to consider the environmental consequences of all of its actions and to administer all of its programs in an environmentally sound manner. 45-5a The Council on Environmental Quality The Council on Environmental Quality is a three-member advisory group and is part of the Executive Office of the President. The CEQ makes recommendations to the president on environmental matters and prepares annual reports on the condition of the environment. Though not expressly authorized to do so by statute, the CEQ, acting under a series of executive orders, has issued regulations regarding the content and preparation of environmental impact statements. Generally, the federal courts have deferred to these regulations. 45-5b Environmental Impact Statements (EIS) The NEPA does not focus on a particular type of environmental damage. Rather, it expresses the federal government’s concern with protecting the environment by mandating the EIS requirement. An environmental impact statement (EIS) is required if the proposed action (1) is Federal, (2) is considered “major”, and (3) has a significant environmental impact. Procedure for Preparing an EIS — • When a federal agency proposes legislation or considers taking a major federal action, the CEQ regulations require the agency initially to make an “environmental assessment,” which is a short analysis of the need for an EIS. • The agency may decide that no EIS is required; if so, it must make this decision available to the public. • If the agency concludes that an EIS is required, the agency must engage in “scoping,” which consists of consulting other relevant federal agencies and the public to determine the significant issues the EIS will address and the appropriate scope of the statement. • After scoping, the agency prepares a draft EIS, for which there is a comment period. • After the comment period ends and revisions, if necessary, are made, a final EIS is published. Scope of EIS Requirement — The EIS requirement applies to a broad range of projects — not only those a federal agency undertakes itself but also those by other parties, as a result of some federal decision, when such projects will affect environmental quality. The NEPA’s EIS requirement is also construed to apply to the urban environment, not just to the natural environment. Health effects, including psychological health, are considered environmental effects under the NEPA. However, the Supreme Court has held that an effect is environmental only if it has a reasonably close causal relation to an impact on the physical environment. Thus, the Nuclear Regulatory Commission was not required to prepare an EIS before permitting one of the Three Mile Island reactors to resume operation, even though such resumption would cause residents of nearby areas to suffer psychological stress. Content of an EIS — The EIS must describe in detail: • the environmental impact of a proposed action, • any adverse environmental effects that could not be avoided if the proposal were implemented, • alternatives to the proposed action, (including doing nothing) • the relationship between local short-term uses of the environment and the maintenance and enhancement of long-term productivity, • and any irreversible and irretrievable commitments of resources the proposed action would involve if it were implemented. Impact statements provide a basis for evaluating the benefits of a proposed project in light of its environmental risks; they also compare the environmental risks of the proposed project with those of the alternatives. The Supreme Court has held that a federal agency is required to consider all reasonable alternatives in its EIS. Furthermore, when analyzing alternatives, a federal agency is required to consider only the reasonable impacts of those alternatives. Nature of EIS Requirement — After the NEPA was enacted, it was unclear whether the act was solely procedural or whether it had a substantive component. The Supreme Court resolved the issue by holding that the NEPA’s requirements are primarily procedural and that the NEPA does not require that the relevant Federal agency attempt to mitigate the adverse effects of a proposed Federal action. Rather, NEPA attempts to prohibit uninformed decisions, not unwise agency actions. 45-6 THE CLEAN AIR ACT Initially, the states had primary responsibility for controlling air pollution, and the federal government merely supervised the states’ efforts and offered technical and financial assistance. But state efforts proved inadequate, and Congress enacted the Clean Air Act Amendments of 1970, greatly expanding the federal role. Major revisions to the Clean Air Act were enacted in 1977 and 1990. In March 2011, EPA issued the Second Prospective Report that looked at the results of the Clean Air Act from 1990 to 2020. According to this study, the direct benefits from the 1990 Clean Air Act Amendments are estimated to reach almost $2 trillion for the year 2020 and to prevent 230,000 early deaths. Direct costs of implementation are estimated at $65 billion. Under the Act, the Environmental Protection Agency (EPA) may impose civil penalties, as adjusted for inflation in December, 2013, of up to $37,500 per day of violation. Criminal penalties, which depend on the type of violation, vary greatly, providing for a maximum fine of $1 million per violation and/or fifteen years’ imprisonment for a knowing violation that endangers a person. For repeat convictions, the Act doubles the maximum punishments. Moreover, under the Federal Alternative Fines Act, if any person derives pecuniary gain from the offense, or if the offense results in pecuniary loss to a person other than the defendant, the defendant may be fined up to the greater of twice the gross gain or twice the gross loss. *** Chapter Outcome*** Explain the regulatory scheme of the Clean Air Act. The Act establishes two regulatory schemes: • one for existing sources and • one for new stationary sources. The states retain primary responsibility for regulating existing stationary sources and motor vehicles then in use (i.e., in use when the Act or its subsequent amendments took effect). The federal government regulates new sources, new vehicles, and hazardous air pollutants. CASE 45-1 MASSACHUSETTS v. ENVIRONMENTAL PROTECTION AGENCY The United States Supreme Court, 2007 549 U.S. 497, 127 S.Ct. 1438, 167 L.Ed.2d 248 http://scholar.google.com/scholar_case?case=16923241216495494762&q=549+U.S.+497&hl=en&as_sdt=2,10 Stevens, J. ENVIRONMENTAL PROTECTION AGENCY v. EME HOMER CITY GENERATION, L. P. Supreme Court of the United States, 2014 574 U.S. ___, 134 S.Ct. 1584, 188 L.Ed.2d 775 Ginsburg, J. These cases concern the efforts of Congress and the Environmental Protection Agency (EPA or Agency) to cope with a complex problem: air pollution emitted in one State, but causing harm in other States. Left unregulated, the emitting or upwind State reaps the benefits of the economic activity causing the pollution without bearing all the costs. [Citation.] Conversely, downwind States to which the pollution travels are unable to achieve clean air because of the influx of out-of-state pollution they lack authority to control the problem. [Citation.] Congress included a Good Neighbor Provision in the Clean Air Act (Act or CAA). That provision, in its current phrasing, instructs States to prohibit in-states sources “from emitting any air pollutant in amounts which will . . . contribute significantly” to downwind States’ “nonattainment . . . , or interfere with maintenance,” of any EPA-promulgated national air quality standard. [Citation.] Interpreting the Good Neighbor Provision, EPA adopted the Cross-State Air Pollution Rule (commonly and hereinafter called the Transport Rule). The rule calls for consideration of costs, among other factors, when determining the emission reductions an upwind State must make to improve air quality in polluted downwind areas. The Court of Appeals for the D. C. Circuit vacated the rule in its entirety. ***. [The U.S. Supreme Court granted certiorari.] *** Air pollution is transient, heedless of state boundaries. Pollutants generated by upwind sources are often transported by air currents, sometimes over hundreds of miles, upwind States are relieved of the associated costs. Those costs are borne instead by the downwind States, whose ability to achieve and maintain satisfactory air quality is hampered by the steady stream of infiltrating pollution. For several reasons, curtailing interstate air pollution poses a complex challenge for environmental regulators. First, identifying the upwind origin of downwind air pollution is no easy endeavor. Most upwind States propel pollutants to more than one downwind State, many downwind States receive pollution from multiple upwind States, and some States qualify as both upwind and downwind. [Citation.] The overlapping and interwoven linkages between upwind and downwind States with which EPA had to contend number in the thousands.1 Further complicating the problem, pollutants do not emerge from the smokestacks of an upwind State and uniformly migrate downwind. Some pollutants stay within upwind States’ borders, the wind carries others to downwind States, and some subset of that group drifts to States without air quality problems. *** In crafting a solution to the problem of interstate air pollution, regulators must account for the vagaries of the wind. Finally, upwind pollutants that find their way downwind are not left unaltered by the journey. Rather, as the gases emitted by upwind polluters are carried downwind, they are transformed, through various chemical processes, into altogether different pollutants. The offending gases at issue in these cases—nitrogen oxide (NOX) and sulfur dioxide (SO2)—often develop into ozone and fine particulate matter (PM2.5) by the time they reach the atmospheres of downwind [citation] that must be reduced to enable downwind States to keep their levels of ozone and PM2.5 in check. *** Under the Transport Rule, EPA employed a “two-step approach” to determine when upwind States “contribute[d]significantly to nonattainment,” [citation], and therefore in “amounts” that had to be eliminated. At step one, called the “screening” analysis, the Agency excluded as de minimis any upwind State that contributed less than one percent of the three NAAQS to any downwind State “receptor,” a location at which EPA measures air quality. *** The remaining States were subjected to a second inquiry, which EPA called the “control” analysis. At this stage, the Agency sought to generate a cost-effective allocation of emission reductions among those upwind States “screened in” at step one. The control analysis proceeded this way. EPA first calculated, for each upwind State, the quantity of emissions the State could eliminate at each of several cost thresholds. [Citation.] Cost for these purposes is measured as cost per ton of emissions prevented, for instance, by installing scrubbers on power plant smokestacks. EPA estimated, for example, the amount each upwind State’s NOX emissions would fall if all pollution sources within each State employed every control measure available at a cost of $500 per ton or less. [Citation.] The Agency then repeated that analysis at ascending cost thresholds. [Citation.] Armed with this information, EPA conducted complex modeling to establish the combined effect the upwind reductions projected at each cost threshold would have on air quality in downwind States. [Citation.] The Agency then identified “significant cost threshold[s],” points in its model where a “noticeable change occurred in downwind air quality, such as . . . where large upwind emission reductions become available because a certain type of emissions control strategy becomes cost-effective.” [Citation.] For example, reductions of NOX sufficient to resolve or significantly curb downwind *** Finally, EPA translated the cost thresholds it had selected (RUN IN) into amounts of emissions upwind States would be required to eliminate. For each regulated upwind State, EPA created an annual emissions “budget.” These budgets represented the quantity of pollution an upwind State would produce in a given year if its in-state sources implemented all pollution controls available at the chosen cost thresholds. [Citation.] If EPA’s projected improvements to downwind air quality were to be realized, an upwind State’s emissions could not exceed the level this budget allocated to it, subject to certain adjustments not relevant here. Taken together, the screening and control inquiries defined EPA’s understanding of which upwind emissions were within the Good Neighbor Provision’s ambit. In short, under the Transport Rule, an upwind State “contribute[d] significantly” to downwind nonattainment to the extent its exported pollution both (1) produced one percent or more of a NAAQS in at least one downwind State (step one) and (2) could be eliminated cost-effectively, as determined by EPA (step two). [Citation.] *** [The Act supports the EPA's position. Once the EPA has found a SIP inadequate, the EPA has a statutory duty to correct the deficiency. The Good Neighbor Provision delegates authority to the EPA to reduce upwind pollution, but only in “amounts” that push a downwind state's pollution concentrations above the relevant NAAQS. However, the nonattainment of downwind states results from the collective and interwoven contributions of multiple upwind states. Using costs in the Transport Rule calculus makes good sense. Eliminating those amounts that can cost-effectively be reduced is an efficient and equitable solution to the allocation problem the Good Neighbor Provision requires the EPA to address.] For the reasons stated, the judgment of the United States Court of Appeals for the D. C. Circuit is reversed, and the cases are remanded for further proceedings consistent with this opinion. 45-6a Existing Stationary Sources and Motor Vehicles Then in Use Because the states had not managed to control air pollution, the 1970 amendments provided that the federal government would set national air quality standards for stationary sources and motor vehicles then in use, and the states would be responsible for achieving them. National Ambient Air Quality Standards — The EPA administrator is required to establish national ambient air quality standards, known as NAAQS, for air pollutants that endanger the public health and welfare. “Primary” standards protect the public health, and “secondary” standards protect elements relating to the public welfare, such as animals, crops and structures. The NAAQS for a particular pollutant specifies the concentration of that pollutant that is allowable in outside air over designated periods of time. The EPA administrator established quality standards for seven major classes of pollutant: carbon monoxide, particulates, sulfur dioxide, nitrogen dioxide, hydrocarbons, ozone, and lead. (The hydrocarbon NAAQS was later withdrawn as no longer necessary.) The 1977 NAAQS deadline was extended by Congress to 1988, but the deadline expired and was not extended. The EPA has not vigorously enforced it. Congress, in its 1990 amendments, sought to hasten attainment of the standards and provided that the EPA must establish new standards for major pollutants every five years. The amendments also imposed tighter standards with regard to ozone pollution. State Implementation Plans — When the EPA promulgates a new NAAQS, each state must submit to the agency a state implementation plan (SIP) detailing how the state will meet the standard. Under the SIP, the state is required to attain primary standards as soon as doing so is practicable or within three years after the EPA approves the SIP. Once the EPA approves an SIP, the plan is regarded as both state and federal law, enforceable by either the state or federal government. Prevention of Significant Deterioration Areas — Can air that is cleaner than required by an applicable NAAQS be allowed to deteriorate to the NAAQS level? This issue arose because much of the United States, particularly the Southwestern states, had air whose quality exceeded the standards. Congress, in the 1977 amendments, sought to prevent the quality of clean air from deteriorating. Congress established rules for Prevention of Significant Deterioration (PSD) Areas, classified on a pollutant-by-pollutant basis. Thus, an area may be a PSD area for one pollutant but not another. In PSD areas, only limited increases in air pollution are allowed, and the owner or operator of a major new stationary source in a PSD area must receive a permit from the applicable state regulator. To get a permit, the owner or operator must show that the source will not increase pollution beyond permitted levels and must show that the source will use the best control technology available. These rules were modified in January 2011 to cover additional construction projects. Nonattainment Areas — Nonattainment areas are areas that did not meet applicable NAAQ standards, and the 1977 and 1990 amendments established special rules for them. To get a permit from the state, the owner or operator of a major new stationary source must in some way reduce total emissions from all sources (existing and new/modified). One way is to pay the owner/operator of another source to reduce its emissions. Or, an owner/operator may reduce its own total emissions by altering the mix of emission controls at its plant. Under the EPA’s “bubble concept,” an entire plant is viewed as one source; consequently, the permit process applies only if total emissions from the plant increase. Thus, the owner/operator need not obtain a permit whenever it changes one unit of a plant. Environmental groups challenged the bubble concept, but the Supreme Court upheld it in 1984. 45-6b New Source Standards The scheme of federal NAAQ standards and state SIPs applies to existing stationary sources and to motor vehicles then in use. In contrast, the Clean Air Act authorizes the federal government to establish national emission standards for new stationary sources, hazardous air pollutants and new vehicles. New Stationary Sources — The act requires the EPA administrator to establish performance standards for stationary sources that are constructed or modified after the publication of applicable regulations. Since the standard for new sources is more stringent than the standard for existing sources, from industry’s perspective it is better to be considered an existing source than a new or modified one. New Vehicles — The Clean Air Act requires the EPA administrator to establish emission standards for new motor vehicles and new motor vehicle engines. The 1990 amendments also require the use of reformulated automotive fuels to reduce ozone and carbon monoxide pollution. Hazardous Air Pollutants — The EPA administrator also establishes national emission standards for hazardous or toxic air pollutants. Acid Rain — Acid rain is precipitation that contains high levels of sulfuric or nitric acid. The 1990 amendments to the Clean Air Act regulate electric utilities, which are primarily responsible for releasing sulfuric dioxide into the atmosphere. (Sulfuric dioxide forms sulfuric acid in the atmosphere.) Utilities are allotted emission allowances and may either bank or sell their unused emission allowances. Greenhouse Gases — In 2007, the U.S. Supreme Court held that the Clean Air Act's sweeping definition of “air pollutant” includes greenhouse gases and, therefore, the EPA has statutory authority to regulate such gases from new motor vehicles. Effective on January 2, 2011, the EPA promulgated greenhouse gas emission standards for new passenger cars, light-duty trucks, and medium-duty passenger vehicles. In addition, the EPA issued regulations subjecting stationary sources to PSD permitting based on their potential to emit greenhouse gases. This regulation was challenged, and the U.S. Supreme Court largely upheld the EPA's authority to regulate greenhouse gas emissions from stationary sources. The Supreme Court held that the EPA may continue to treat greenhouse gases as a pollutant subject to regulation for purposes of requiring permits for power plants and other large stationary pollution sources that would need permits based on their emission of conventional pollutants. 45-7 THE CLEAN WATER ACT Initially the states were responsible for controlling water pollution. Their efforts were inadequate, and Congress overhauled the nation’s water pollution laws in the 1972 amendments to the Federal Water Pollution Control Act (subsequently renamed the Clean Water Act). The act, amended in 1977, 1981, and 1987, attempts to restore and maintain the chemical, physical, and biological integrity of the nation’s waters. The EPA may impose civil penalties, as adjusted for inflation in December 2013, of up to $37,500 per day for each violation. Criminal penalties for knowing violations are not less than $5,000 nor more than $50,000 per day of violation and/or three years’ imprisonment. For repeat convictions, the maxi¬mum punishments are doubled. Moreover, under the Federal Alternative Fines Act, if any person derives pecuniary gain from the offense, or if the offense results in pecuniary loss to a person other than the defendant, the defendant may be fined up to the greater of twice the gross gain or twice the gross loss. Like the Clean Air Act, the Clean Water Act establishes different schemes for existing sources and new sources, and also for point sources and nonpoint sources of pollution. Scope of the act: all navigable waters of the United States; also tributaries of navigable waters; interstate waters and their tributaries; the use of nonnavigable intrastate waters, if their misuse could affect interstate commerce; and freshwater wetlands. *** Chapter Outcome*** Explain the regulation of both point and nonpoint sources of pollution by the Clean Water Act. 45-7a Point Sources The EPA administrator establishes effluent limitations for categories of existing point sources. An effluent limitation is a technology-based standard that limits the amount of a pollutant that a point source may discharge into a body of water. Effluent Limitations — Under the 1972 amendments, effluent limitations for existing point sources other than publicly owned treatment works required application of the best practicable control technology currently available (BPT) by 1977 and application of the best available technology economically achievable (BAT) by 1983. National Pollutant Discharge Elimination System (NPDES) — requires that any person responsible for the discharge of a pollutant from a point source into U.S. waters obtain a discharge permit from the EPA, Army Corps of Engineers, or the relevant state. The NPDES permit states the applicable effluent limitations and establishes a schedule for compliance. A discharge not in compliance with a permit is unlawful. Generally, new permits for existing facilities cannot be less stringent than current permits. CASE 45-2 SOUTH FLORIDA WATER MANAGEMENT DISTRICT v. MICCOSUKEE TRIBE OF INDIANS Supreme Court of the United States, 2004 541 U.S. 95, 124 S.Ct. 1537, 158 L.Ed.2d 264 http://scholar.google.com/scholar_case?q=124+S.Ct.+1537&hl=en&as_sdt=2,34&case=2885126139617306748&scilh=0 O’Connor, J. Petitioner South Florida Water Management District operates a pumping facility that transfers water from a canal into a reservoir a short distance away. Respondents Miccosukee Tribe of Indians and the Friends of the Everglades brought a citizen suit under the Clean Water Act contending that the pumping facility is required to obtain a discharge permit under the National Pollutant Discharge Elimination System. The District Court agreed and granted summary judgment to respondents. A panel of the United States Court of Appeals for the Eleventh Circuit affirmed. Both the District Court and the Eleventh Circuit rested their holdings on the predicate determination that the canal and reservoir are two distinct water bodies. For the reasons explained below, we vacate and remand for further development of the factual record as to the accuracy of that determination. The Central and South Florida Flood Control Project (Project) consists of a vast array of levees, canals, pumps, and water impoundment areas in the land between south Florida’s coastal hills and the Everglades. Historically, that land was itself part of the Everglades, and its surface and groundwater flowed south in a uniform and unchanneled sheet. Starting in the early 1900’s, however, the State began to build canals to drain the wetlands and make them suitable for cultivation. These canals proved to be a source of trouble; they lowered the water table, allowing salt water to intrude upon coastal wells, and they proved incapable of controlling flooding. Congress established the Project in 1948 to address these problems. It gave the United States Army Corps of Engineers the task of constructing a comprehensive network of levees, water storage areas, pumps, and canal improvements that would serve several simultaneous purposes, including flood protection, water conservation, and drainage. These improvements fundamentally altered the hydrology of the Everglades, changing the natural sheet flow of ground and surface water. The local sponsor and day-to-day operator of the Project is the South Florida Water Management District (District). Five discrete elements of the Project are at issue in this case. One is a canal called “C—11.” C—11 collects groundwater and rainwater from a 104 square-mile area in south central Broward County. The area drained by C—11 * * * is home to 136,000 people. At the western terminus of C—11 is the second Project element at issue here: a large pump station known as “S—9.” When the water level in C—11 rises above a set level, S—9 begins operating and pumps water out of the canal. The water does not travel far. Sixty feet away, the pump station empties the water into a large undeveloped wetland area called “WCA— 3,” the third element of the Project we consider here. WCA—3 is the largest of several “water conservation areas” that are remnants of the original South Florida Everglades. The District impounds water in these areas to conserve fresh water that might otherwise flow directly to the ocean, and to preserve wetlands habitat. [Citation.] Using pump stations like S—9, the District maintains the water table in WCA—3 at a level significantly higher than that in the developed lands drained by the C—11 canal to the east. Absent human intervention, that water would simply flow back east, where it would rejoin the waters of the canal and flood the populated areas of the C—11 basin. That return flow is prevented, or, more accurately, slowed, by levees that hold back the surface waters of WCA—3. Two of those levees, L—33 and L— 37, are the final two elements of the Project at issue here. The combined effect of L—33 and L—37, C—11, and S—9 is artificially to separate the C—11 basin from WCA—3; left to nature, the two areas would be a single wetland covered in an undifferentiated body of surface and ground water flowing slowly southward. As the above description illustrates, the Project has wrought large-scale hydrologic and environmental change in South Florida, some deliberate and some accidental. Its most obvious environmental impact has been the conversion of what were once wetlands into areas suitable for human use. But the Project also has affected those areas that remain wetland ecosystems. Rain on the western side of the L—33 and L—37 levees falls into the wetland ecosystem of WCA—3. Rain on the eastern side of the levees, on the other hand, falls on agricultural, urban, and residential land. Before it enters the C—11 canal, whether directly as surface runoff or indirectly as groundwater, that rainwater absorbs contaminants produced by human activities. The water in C—11 therefore differs chemically from that in WCA—3. Of particular interest here, C—11 water contains elevated levels of phosphorous, which is found in fertilizers used by farmers in the C—11 basin. When water from C—11 is pumped across the levees, the phosphorous it contains alters the balance of WCA—3’s ecosystem (which is naturally low in phosphorous) and stimulates the growth of algae and plants foreign to the Everglades ecosystem. [Plaintiffs Miccosukee Tribe of Indians and the Friends of the Everglades brought a citizen suit under the Clean Water Act contending that the pumping facility is required to obtain a discharge permit under the National Pollutant Discharge Elimination System (NPDES). The district court agreed and granted summary judgment to the plaintiffs. The U.S. Court of Appeals for the Eleventh Circuit affirmed. Both the district court and the Eleventh Circuit rested their holdings on the predicate determination that the canal and reservoir are two distinct water bodies.] * * * Congress enacted the Clean Water Act (Act) in 1972. Its stated objective was “to restore and maintain the chemical, physical, and biological integrity of the Nation’s waters.” [Citation.] To serve those ends, the Act prohibits “the discharge of any pollutant by any person” unless done in compliance with some provision of the Act. [Citation.] The provision relevant to this case, [citation], establishes the National Pollutant Discharge Elimination System, or “NPDES.” Generally speaking, the NPDES requires dischargers to obtain permits that place limits on the type and quantity of pollutants that can be released into the Nation’s waters. The Act defines the phrase “‘discharge of a pollutant”’ to mean “any addition of any pollutant to navigable waters from any point source.” [Citation.] A “‘point source,”’ in turn, is defined as “any discernible, confined and discrete conveyance,” such as a pipe, ditch, channel, or tunnel, “from which pollutants are or may be discharged.” [Citation.] According to the Tribe, the District cannot operate S—9 without an NPDES permit because the pump station moves phosphorous-laden water from C—11 into WCA—3. The District does not dispute that phosphorous is a pollutant, or that C—11 and WCA—3 are “navigable waters” within the meaning of the Act. The question, it contends, is whether the operation of the S—9 pump constitutes the “discharge of [a] pollutant” within the meaning of the Act. * * * The District and the Federal Government * * * advance three separate arguments, any of which would, if accepted, lead to the conclusion that the S—9 pump station does not require a point source discharge permit under the NPDES program. Two of these arguments involve the application of disputed contentions of law to agreed-upon facts, while the third involves the application of agreed-upon law to disputed facts. For reasons explained below, we decline at this time to resolve all of the parties’ legal disagreements, and instead remand for further proceedings regarding their factual dispute. * * * * * * For purposes of determining whether there has been “any addition of any pollutant to navigable waters from any point source,” * * *, the Government contends that all the water bodies that fall within the Act’s definition of “‘navigable waters’” (that is, all “the waters of the United States, including the territorial seas”) should be viewed unitarily for purposes of NPDES permitting requirements. Because the Act requires NPDES permits only when there is an addition of a pollutant “to navigable waters,” the Government’s approach would lead to the conclusion that such permits are not required when water from one navigable water body is discharged, unaltered, into another navigable water body. That would be true even if one water body were polluted and the other pristine, and the two would not otherwise mix. [Citation.] Under this “unitary waters” approach, the S—9 pump station would not need an NPDES permit. * * * In the courts below, as here, the District contended that the C—11 canal and WCA—3 impoundment area are not distinct water bodies at all, but instead are two hydrologically indistinguishable parts of a single water body. The Government agrees with the District on this point, claiming that because the C—11 canal and WCA—3 “share a unique, intimately related, hydrological association,” they “can appropriately be viewed, for purposes of Section 402 of the Clean Water Act, as parts of a single body of water.” [Citation.] The Tribe does not dispute that if C—11 and WCA—3 are simply two parts of the same water body, pumping water from one into the other cannot constitute an “addition” of pollutants. * * * The record does contain information supporting the District’s view of the facts. Although C—11 and WCA—3 are divided from one another by the L—33 and L—37 levees, that line appears to be an uncertain one. Because Everglades soil is extremely porous, water flows easily between ground and surface waters, so much so that “[g]round and surface waters are essentially the same thing.” C—11 and WCA—3, of course, share a common underlying aquifer. Moreover, the L—33 and L—37 levees continually leak, allowing water to escape from WCA—3. This means not only that any boundary between C—11 and WCA—3 is indistinct, but also that there is some significant mingling of the two waters; the record reveals that even without use of the S—9 pump station, water travels as both seepage and groundwater flow between the water conservation area and the C—11 basin. * * * We do not decide here whether the District Court’s test is adequate for determining whether C—11 and WCA—3 are distinct. Instead, we hold only that the District Court applied its test prematurely. * * * The record before us leads us to believe that some factual issues remain unresolved. The District Court certainly was correct to characterize the flow through the S—9 pump station as a non-natural one, propelled as it is by diesel-fired motors against the pull of gravity. And it also appears true that if S—9 were shut down, the water in the C—11 canal might for a brief time flow east, rather than west, as it now does. But the effects of shutting down the pump might extend beyond that. The limited record before us suggests that if S—9 were shut down, the area drained by C—11 would flood quite quickly. [Citation.] That flooding might mean that C—11 would no longer be a “distinct body of navigable water,” [citation] but part of a larger water body extending over WCA—3 and the C—11 basin. It also might call into question the Eleventh Circuit’s conclusion that S—9 is the cause in fact of phosphorous addition to WCA—3. Nothing in the record suggests that the District Court considered these issues when it granted summary judgment. * * * We find that further development of the record is necessary to resolve the dispute over the validity of the distinction between C—11 and WCA—3. * * * Accordingly, the judgment of the United States Court of Appeals for the Eleventh Circuit is vacated, and the case is remanded for further proceedings consistent with this opinion. The 1977 Amendments — divided pollutants into three categories — toxic, conventional, and nonconventional — and established deadlines (later extended) and standards for each category. 45-7b Nonpoint Source Pollution Controlling nonpoint source pollution, such as agricultural and urban runoff, is more difficult than controlling point source pollution. In the 1987 amendments, Congress required states to identify state waters that will not meet the act’s requirements without the management of nonpoint sources of pollution and to institute “best management practices” to control such sources. The EPA must approve each state’s management plan. 45-7c New Source Performance Standards The act requires the EPA administrator to establish federal performance standards for new sources. A standard should reflect the greatest effluent reduction than can be achieved by “the best available demonstrated control technology.” The preferred standard for new sources is one “permitting no discharge of pollutants.” 45-8 HAZARDOUS SUBSTANCES *** Chapter Outcome*** (Question 5, part 1) Explain the Federal Insecticide, Fungicide and Rodenticide Act. 45-8a The Federal Insecticide, Fungicide and Rodenticide Act FIFRA requires that a pesticide be registered with the EPA before any person in any state may distribute it. To be registered, a pesticide must perform its intended function without “unreasonable adverse effects on the environment,” which FIFRA defines as any unreasonable risk to humans or the environment, taking into account the economic, social, and environmental costs and benefits of a pesticide’s use. Thus, FIFRA expressly requires the EPA to consider the costs of the action it takes under the statute. EPA may cancel a pesticide’s registration if subsequent data reveal more hazards. Cancellation takes years, owing to the administrative process and scientific review. Until recently, the FIFRA did not address the problem of old pesticides registered under earlier, less strict standards. In 1988, Congress amended FIFRA to require the re-registration of pesticides registered before 1984. U.S. exports are not subject to most of the act’s requirements, though an exported pesticide not registered under the FIFRA must bear a label stating “Not Registered for Use in the United States of America.” To establish a more consistent, protective regulatory scheme, in 1996 Congress enacted the Food Quality Protection Act (FQPA), which amended FIFRA and the Federal Food Drug, and Cosmetic Act. The FQPA imposed stricter safety standards, especially for infants and children, and a complete reassessment of all existing pesticide tolerances. The EPA may impose civil penalties, as adjusted for inflation in December 2013, of up to $7,500 for each offense. Maximum criminal penalties for knowing violations are a $50,000 fine and/or one year imprisonment. Moreover, under the Federal Alternative Fines Act, if any person derives pecuniary gain from the offense, or if the offense results in pecuniary loss to a person other than the defendant, the defendant may be fined up to the greater of twice the gross gain or twice the gross loss. *** Chapter Outcome*** (Question 5, part 2) Explain the Toxic Substances Control Act. 45-8b The Toxic Substances Control Act Congress passed the Toxic Substances Control Act (TSCA) in 1976 to regulate the manufacture of new chemicals, the testing of suspect chemicals, and the regulation of chemicals that present an unreasonable risk of injury to health and the environment, and the inventorying of all chemicals. Specifically, a manufacturer must notify the EPA before it manufactures a new chemical or makes a significant new use of an existing chemical. The EPA may require the testing of any substance, existing or new, if the manufacture or distribution of the substance may present an unreasonable risk of injury to health or the environment. Because so many substances might have to be tested under the statute, the EPA is required to establish a priority list for testing that contains no more than 50 substances at any time. Once the EPA determines that a substance “presents or will present an unreasonable risk of injury to health or the environment,” the agency may restrict or prohibit use of the substance. The EPA is required to keep a current inventory of all chemicals manufactured in the United States. The first such inventory was completed in 1980 and contained 55,000 substances. A chemical not in the inventory is subject to premanufacture review. Though not required to do so by the act, the EPA reviews chemicals already on the inventory to determine their safety. The EPA may impose civil penalties, as adjusted for inflation in December 2013, of up to $37,500 per day for a violation of the TSCA. Maximum criminal penalties for knowing violations are $25,000 fines for each day of violation and/or one year’s imprisonment. Moreover, under the Federal Alternative Fines Act, if any person derives pecuniary gain from the offense, or if the offense results in pecuniary loss to a person other than the defendant, the defendant may be fined up to the greater of twice the gross gain or twice the gross loss. The European Union enacted a new law effective on June 1, 2007—Registration, Evaluation and Authorization of Chemicals (REACH), which requires companies producing more than specified quantities of chemicals to investigate the potential hazards to human health and the environment. *** Chapter Outcome*** (Question 5, part 3) Explain the Resource Conservation and Recovery Act. 45-8c The Resource Conservation and Recovery Act Also known as the RCRA and passed in 1976, this act is meant to regulate treatment of solid waste, particularly hazardous waste. Under this statute, the states are primarily responsible for nonhazardous waste, while the EPA regulates all phases of hazardous waste — generation, transportation and disposal. The federal government establishes criteria for identifying hazardous waste. Factors include toxicity, persistence, degradability, flammability, and corrosiveness. Generators (producers) of hazardous waste must follow standards for record keeping, labeling, use of appropriate containers, and reporting. Generators must also certify that the volume and toxicity of the waste have been reduced to the greatest degree economically practicable and that the method of treatment, storage, and disposal minimizes the threat to health and the environment. Transporters must keep records and properly label the waste they transport. They can transport hazardous waste only to facilities that have an RCRA hazardous waste facility permit. Owners/operators of hazardous waste treatment, storage, and disposal sites must have an RCRA permit and keep records. The EPA may impose civil penalties penalties, as adjusted for inflation in December 2013, of up to $37,500 per day of violation. Maximum criminal penalties for knowing violations are $50,000 for each day of violation and/or five years’ imprisonment. Where a knowing violation endangers a person, the maximum criminal penalty is a $1 million fine and/or fifteen years’ imprisonment. Moreover, under the Federal Alternative Fines Act, if any person derives pecuniary gain from the offense, or if the offense results in pecuniary loss to a person other than the defendant, the defendant may be fined up to the greater of twice the gross gain or twice the gross loss. *** Chapter Outcome*** (Question 5, part 4) Explain the Superfund. 45-8d The Superfund While the RCRA regulates current and future generation, transportation, and disposal of hazardous waste, it provides only limited authority for cleanup of abandoned or inactive hazardous waste sites. To fill this gap, and to respond to the serious environmental and health risks posed by industrial pollution, Congress in 1980 enacted the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), better known as the Superfund. By 1986, the EPA had begun the cleanup of only 8 sites and had spent $1.6 billion in doing so. This performance and other problems led Congress to amend CERCLA by enacting the Superfund Amendments and Reauthorization Act of 1986 (SARA). The EPA has cleaned up more than a thousand National Priorities List sites, but funds in the Superfund are nearly exhausted. Under CERCLA, when the EPA determines that an environmental cleanup is necessary at a contaminated site, the agency has four options: (1) enter into a settlement with potentially responsible parties (PRPs); (2) conduct the cleanup with Superfund money and then file suit to obtain reimbursement from the PRPs ; (3) file an abatement action in a Federal district court to compel the PRPs to conduct the cleanup; or (4) issue a unilateral administrative order instructing the PRPs to clean the site. CERCLA requires the federal government to establish a National Contingency Plan (NCP) prescribing procedures and standards for responding to hazardous substance releases. The NCP also sets criteria for prioritizing sites to be cleaned up and identifies, at least annually, the sites with highest priority for immediate cleanup. The EPA may impose a civil penalty, as adjusted for inflation in December 2013, of up to $37,500 per day of violation; for repeat violations, the penalty may reach up to $117,500 per day of violation. The CERCLA trust fund, which pays for hazardous waste removal and other remedial actions, is financed in part by a surtax on businesses with annual incomes of over $2 million, a tax on petroleum, a tax on chemical feedstocks, and money recovered from persons responsible for releases of hazardous substances. A problem with CERCLA was that it imposed liability on all owners of contaminated property, even if they had acquired contaminated land either involuntarily or without knowledge of the hazardous wastes there. To remedy such inequities, Congress in the SARA established a new defense to CERCLA liability for “innocent landowners.” To qualify, one must have undertaken, at the time of acquisition, an appropriate inquiry into the previous ownership and uses of the property. In addition, under the Superfund Recycling Act of 1999, recyclers are exempt from liability to third parties, although they remain liable in suits brought by the federal or state governments. In 2002, President Bush signed into law the Small Business Liability Relief and Brownfields Revitalization Act. The purpose of the Act is to promote the purchase, development and use of brownfields (industrially polluted property which are not sufficiently contaminated as to be classified as a priority by either the EPA or state environmental agencies). The Act attempts to accomplish this purpose by providing protection from liability under CERCLA to any purchaser of contaminated property, to owners and developers who clean up property under state voluntary cleanup programs, and to owners of property that have become contaminated by migrating pollutants. NOTE: See Figure 45-1: Major Environmental Statutes. *** Chapter Outcome*** (Question 5, part 5) Explain the various United Nations Framework Conventions on Climate Change. 45-9 INTERNATIONAL PROTECTION OF THE OZONE LAYER In 1987, the United States and 23 other countries entered into the Montreal Protocol on Substances that Deplete the Ozone Layer, a treaty designed to prevent pollution that harms the ozone layer. The treaty requires all signatories to reduce their production and consumption of all chemicals, in particular chlorofluorocarbons (CFCs) that deplete the ozone layer. (Ozone in the stratosphere helps protect the earth from harmful ultraviolet radiation.) In1992, 165 nations negotiated an international treaty on global warming at the United Nations Framework Convention on Climate Change (UNFCCC) in Rio de Janeiro. The Convention sets an overall framework for intergovernmental efforts to address the challenge posed by climate change. The treaty’s ultimate objective is to stabilize the “greenhouse gas concentration in the atmosphere at a level that would prevent dangerous anthropogenic [human-induced] interference with the climate system.” Nearly 200 countries eventually ratified the treaty, which went into effect on March 21, 1994. The UNFCCC calls for all signa¬tory countries to develop and update national inventories of all greenhouse gases not otherwise covered by the Montreal Protocol. At a subsequent UNFCCC conference of parties, held in Kyoto, Japan, in December 1997, the participating nations adopted the Kyoto Protocol, which is an international agreement linked to UNFCCC establishing a set of binding greenhouse gas emission targets for industrial nations. The Kyoto Protocol entered into force in February 2005. The Protocol’s first commitment period started in 2008 and ended in 2012. On December 8, 2012, the Doha Amendment to the Kyoto Protocol was adopted. The Amendment includes a second commitment period from 2013 through 2020 and a revised list of greenhouse gases to be reported on by the parties in the second commitment period. The amendment, however, has not yet been accepted by the requisite number of nations to enter into force. At least 192 countries have ratified the Kyoto Protocol. The United States is the only signatory to the Kyoto Protocol not to ratify the protocol. However, on July 27, 2005, the United States and five Asia-Pacific nations (Australia, India, China, South Korea, and Japan) announced a pact, the Asia-Pacific Partnership on Clean Development, which is designed to reduce global warming. As of April 5, 2011, the Partnership formally concluded, although a number of individual projects continue. At the Paris Climate Conference, officially known as the 21st Conference of the Parties (COP 21 or CMP 11) to the United Nations Framework Convention on Climate Change (UNFCCC), in December 2015, 196 countries adopted the first-ever universal, legally binding global climate agreement. The agreement will become binding if joined by at least 55 countries which together represent at least 55 percent of global greenhouse emissions. The agreement sets out a global action plan limit global warming to below 2°C compared to previous industrial levels and calls for zero net anthropogenic greenhouse gas emissions to be reached during the second half of the 21st century. The agreement is due to enter into force in 2020. Instructor Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637