                                                                                                                           Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-28-2004

USA v. Allegheny Ludlum
Precedential or Non-Precedential: Precedential

Docket No. 02-4346




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"USA v. Allegheny Ludlum" (2004). 2004 Decisions. Paper 735.
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                                           ROBERT H. MILLER
                    PRECEDENTIAL           JOHN SITHER
                                           KATHRYN E. KOVACS (Argued)
IN THE UNITED STATES COURT OF              U.S. Department of Justice
            APPEALS                        Environment & Natural Resources
     FOR THE THIRD CIRCUIT                 Division, Appellate Section
    _________________________              P.O. Box 23795 L’Enfant Plaza Station
                                           Washington, DC 20026
           NO. 02-4346
    _________________________              KERRY NELSON
                                           LORI G. KIER
  UNITED STATES OF AMERICA                 U.S. Environmental Protection Agency
                                           Office of Regional Counsel
                     v.                    1650 Arch Street
                                           Philadelphia, Pennsylvania 19103
       ALLEGHENY LUDLUM
         CORPORATION,                             Counsel for Appellee

                    Appellant              H. WOODRUFF TURNER (Argued)
    __________________________             JOHN E. BEARD, III
                                           THOMAS J. SMITH
   On Appeal from the United States        TODD R. BROWN
             District Court                Kirkpatrick & Lockhart, LLP
For the Western District of Pennsylvania   Henry W. Oliver Building
        (D.C. No. 95-cv-00990)             535 Smithfield Street
  District Judge: Honorable Robert J.      Pittsburgh, Pennsylvania 15222
               Cindrich
    __________________________                    Counsel for Appellant

      Argued December 16, 2003                 ____________________________

    Before: ALITO, FUENTES and                   OPINION OF THE COURT
      BECKER, Circuit Judges                   ____________________________

         (Filed April 28, 2004)
                                           BECKER, Circuit Judge.
                                                   This is an appeal from an order of the
THOMAS L. SANSONETTI
                                           District Court granting judgment for the
Assistant Attorney General
                                           plaintiff United States and against defendant
JOHN T. STAHR
                                           Allegheny Ludlum Corporation (“ALC”) in
NANCY FLICKINGER
                                           an action brought for violations of the Clean
Water Act (“CWA” or the “Act”) at five of           ensure that polluters will take responsibility
AL C’s We ste r n P e n n sy lv a n ia              for ensuring the correct and precise
manufacturing facilities. The judgment is           measurements of their waste (which they are
multifaceted, flowing from: (1) pretrial            obliged to certify), we do not believe that a
legal determinations by the Court; (2) a            laboratory error defense—where the error
jury verdict on a number of liability issues;       resulted in overreporting—is inconsistent
and (3) determinations by the Court                 with this regime. Rather, inasmuch as the
following a penalty hearing. The jury               penalty imposed is for an unlawful
verdict was mixed; each side prevailed on           discharge and not for faulty reporting, we
a number of issues, and ALC’s appeal                think that deprivation of the defense would
leaves unchallenged significant portions of         not advance the purpose of the CWA and
the judgment against it. However, the               that it would be grossly unfair, especially in
appeal does challenge major aspects of the          view of the presence of companion
judgment and also of the civil penalty              provisions of the CWA imposing liability
assessment leveled against ALC for the              for monitoring and reporting violations. We
alleged violations in the sum of                    will therefore vacate the judgment in part
$8,244,670.                                         and remand so that the laboratory error
                                                    defense can be considered and adjudicated
        The first important question
                                                    with respect to the affected claims.
presented by the appeal concerns the
viability of the so-called “laboratory error               The appeal also requires us to
defense.” The CWA operates under a self-            determine whether the District Court made
monitoring and reporting system whereby             either a mistake of law or abused its
the discharger of toxic waste measures and          discretion in calculating the economic
reports to the Environmental Protection             benefit that ALC obtained from those
Agency (“EPA”) the volume of its                    violations that are unchallenged on appeal.
discharge. ALC maintains that the EPA               Section 1319(d) of the CWA requires that
predicated certain aspects of the violation         the District Court, when determining the
upon reports submitted by ALC that were             amount of a civil penalty under the CWA,
tainted by laboratory error caused by a             consider “the economic benefit (if any)
contaminated reagent resulting in                   resulting from the violation,” so as to “level
overreporting of the amount of the toxic            the playing field.” The District Court’s
zinc discharge.       The District Court            calculation here was an agglomeration,
declined to allow the laboratory error              based on a number of factors. The largest
defense on the grounds that it had not been         single factor was the 12.73% interest rate
recognized in the Third Circuit, and that to        used by the government and the District
allow such a “new defense” would                    Court to compute interest from the date of
contravene the CWA.                                 violation to the date of the judgment so as to
                                                    calculate the total economic benefit to ALC.
      Although the CWA operates under
                                                    This rate was predicated largely on a
a regime of strict liability, designed to

                                                2
calculation of ALC’s weighted average                 District Court’s application of the other
cost of capital (“WACC”). Noting that it              legally required factors to calculate ALC’s
was uncontested at trial that ALC had an              economic benefit—the least costly method
actual rate of return on capital that was             of compliance and the periods of non-
less than half the 12.73% rate used by the            compliance—were supported by the record.
District Court, ALC contends that the                 In the course of this determination, we
12.73% rate is excessive.                             clarify that the proper method for
                                                      determining economic benefit is to base the
       We conclude that the application of
                                                      calculation on the least costly method of
the 12.73% rate may so vastly overstate
                                                      compliance. On the issue of economic
the economic benefit to ALC of its
                                                      benefit, we therefore vacate and remand
improper discharges, that it does not “level
                                                      with respect to the interest rate issue.
the playing field,” and that it constitutes an
abuse of discretion. As a prelude to                           Finally we must decide whether, in
making this determination we explore the              compiling the number of violations for the
potential ramifications of the notion of              purpose of assessing a penalty, the District
economic benefit under § 1319(d). We                  Court erred by counting violations of
conclude that there are two possible                  monthly averages as violations for each day
approaches to calculation of economic                 of the month. We, of course, follow our
benefit: (1) the cost of capital, i.e., what it       precedent in Natural Resources Defense
would cost the polluter to obtain the funds           Council, Inc. v. Texaco Refining &
necessary to install the equipment                    Marketing Inc., 2 F.3d 493 (3d Cir. 1993),
necessary to correct the violation; and (2)           that the daily average limit is computed by
the actual return on capital, i.e., what the          averaging effluent levels only for days on
polluter earned on the capital that it                which the facility operated. Although some
declined to divert for installation of the            Courts—most notably the Fourth Circuit in
equipment. Because these factors are so               Chesapeake Bay Foundation, Inc. v.
varia ble, depending upon market                      Gwaltney of Smithfield, Ltd., 791 F.2d 304
conditions and the financial soundness of             (4th Cir. 1986), vacated on other grounds,
the polluter, we leave it to the District             484 U.S. 49 (1987)—have held that a
Court, in the sound exercise of its                   violation of a monthly average parameter
discretion, to decide which approach to               constitutes a violation for each day of the
apply and how to apply it (there are a                month, we find this approach incomplete.
variety of models). However, we explain               We adopt Gwaltney insofar as it establishes
why the District Court’s application of the           an absolute upper bound on the penalty that
WACC in this case was, at a minimum,                  can be assessed for a monthly average
unsupported by the evidence, and needs to             violation. However, permit limits can be
be recalculated should the District Court             exceeded in many different ways, both by
on remand elect to pursue that approach.              very large, isolated discharges and by
                                                      m o d e r a t e c o n t i n uo u s d i s c h ar g e s .
       In contrast, we conclude that the

                                                  3
Furthermore, daily and monthly average               a considerable amount of pollution. ALC’s
limits are designed to avoid distinct                steel-making process uses water from
environmental harms. As a result, in some            adjacent rivers. The water is used as
cases a violator’s wrongful conduct will             process water and as non-contact cooling
merit punishment for both daily and                  water. Process water is used directly in the
monthly violations, while in others, the             process of making steel, and makes contact
conduct will have been sufficiently                  with steel or steel-making equipment. Non-
punished by penalties for daily violations           contact cooling water cools the steel-making
alone. We hold that district courts have             equipment without actually touching the
discretion to determine, on the facts of             steel. ALC operates six on-site wastewater
each case, how many violation days should            treatment plants (“WWTPs”) at these
be assessed for penalty purposes for the             facilities.    The three WWTPs at the
violation of a monthly average limit, based          Brackenridge facility discharge to the
on whether violations are already                    Allegheny River, pursuant to a National
sufficiently sanctioned as violations of a           Pollution Discharge Elimination System
daily maximum limit. In this case, the               ( “N PDES”) perm it issued by the
District Court did not have the benefit of           Pennsylvania Department of Environmental
this standard, so we will vacate its penalty         Protection (“PADEP”). The two WWTPs at
assessment and remand for further                    the West Leechburg facility discharge to the
proceedings.                                         Kiskiminetas River pursuant to another
                                                     NPDES permit. The Vandergrift WWTP
      We will therefore affirm in part,
                                                     discharges treated process waters to the
vacate in part, and remand for further
                                                     Kiski Valley Water Pollution Control
proceedings consistent with this opinion.
                                                     Authority (“KVW PCA”) pursuant to
     I. Facts and Procedural History                 permits with it. After applying further
                                                     treatment, KVWPCA discharges to the
        ALC manufactures steel and owns
                                                     Kiskiminetas River.
and operates five plants comprising three
specialty steel manufacturing facilities in                 The United States filed this action
Western Pennsylvania: the Brackenridge               against ALC on June 28, 1995. The
Facility (the Brackenridge and Natrona               Complaint, as amended, alleged three types
plants); the West Leechburg Facility (the            of violations: (1) discharges at each of
West Leechburg and Bagdad plants); and               ALC’s five facilities containing discharges
t h e V a n d e r g r if t F a c il it y. T he       in excess of ALC’s permits as shown by the
Brackenridge Facility conducts melting,              Discharge Monitoring Reports (“DMRs”)
continuous casting, rolling, and finishing           submitted to the EPA; (2) discharges from
operations. The West Leechburg and                   the Vandergrift facility that interfered with
Vandergrift Facilities are finishing                 the operations of the Kiski Valley WPCA;
operations.                                          and (3) ALC’s failure to report violations as
                                                     required by its permits. The parties filed
       The steelmaking process generates

                                                 4
cross motions for summary judgment. In            that the defense had not been recognized in
response, the District Court ruled that ALC       this Circuit, and that it would not adopt such
could not raise several defenses to the           a new defense, “especially since the Act can
reported violations, includin g the               be interpreted as creating an obligation to
“laboratory error” defense by which ALC           insure that the self-monitoring of pollutants
contended that its reported violations            is accurate, assigning the risk of inaccuracy
resulted from erroneous laboratory                to the company.” The Court thus granted
analyses—later discovered to be caused by         partial summary judgment to the United
a contaminated reagent— which overstated          States on that issue. The Court denied the
zinc pollutant levels.1 The Court opined          governm ent’s motion for summary
                                                  judgment on the reporting failure and
                                                  interference claims, finding that ALC had
   1
     ALC’s overreporting of zinc                  provided sufficient evidence to create triable
exceedences was based upon effluent               issues of fact.
sample analyses performed by ALC’s                        The District Court held a jury trial on
Technical Laboratory which turned out to          liability from January 5 to February 2, 2001.
be flawed. ALC allegedly tried to                 The jury found in favor of ALC on all of the
determine the cause of the zinc                   interference and reporting failure claims, but
exceedences, without success. In                  in favor of the government on half of the
February 1996, it started to examine its          remaining reported violations claims. In
own laboratory’s performance. ALC                 total, the violations for which ALC
took samples of effluent and had part             stipulated to liability, those for which the
analyzed at the ALC Laboratory and part           court granted summary judgment, and those
analyzed by two outside laboratories, a           for which the jury returned a verdict against
protocol known as “split sampling.”               ALC added up to 1,122 days of violations
According to ALC, the zinc results
obtained by its laboratory were
significantly higher than those obtained          and analyzed by the outside laboratories
at the outside laboratories, while the            showed significantly lower zinc results
outside laboratories’ results were                than the corresponding results from ALC’s
consistent with each other. In this split         laboratory. However, the sample sets
sampling, each laboratory performed its           analyzed by the outside laboratories after
own digestion of the samples. In March,           the samples were predigested by ALC’s
1996, ALC again split samples with the            laboratory were as high in zinc as the
two outside laboratories, but this time           results from ALC’s laboratory, leading
provided each laboratory with two                 ALC to the conclusion that it was the
sample sets, one undigested and one               digestion process in ALC’s laboratory that
predigested by ALC’s Laboratory.                  was causing zinc values to be overstated.
According to ALC, the values generated            Once ALC switched to a different reagent,
by the samples that were both digested            it no longer reported zinc exceedences.

                                              5
from July 1990 through February 1997.                 II. The Laboratory Error Defense
        From February 5 to 8, 2001, the             A. Overview of the Clean Water Act
Court conducted a bench trial on the
                                                         The Clean Water Act (“CWA”) was
penalty amount. To save time, the Court
                                                  enacted by Congress in 1972 “to restore and
allowed the experts to give their direct
                                                  maintain the chemical, physical, and
testimony in the form of written proffers,
                                                  biological integrity of the Nation’s waters.”
and allowed live cross-examination.
                                                  33 U.S.C. § 1251(a). In order to achieve
Following the penalty trial, the parties
                                                  this goal, the CWA prohibits the discharge
submitted proposed (judicial) opinions,
                                                  of any pollutant into waters of the United
and on February 20, 2002, the Court filed
                                                  States except as expressly authorized under
an opinion and entered judgment against
                                                  the Act. See 33 U.S.C. § 1311(a). In order
ALC in the amount of $8,244,670. ALC
                                                  to discharge pollutants into navigable
filed a motion under Fed. R. Civ. P. 59(e)
                                                  waters, one must obtain a National Pollution
to alter or amend the judgment, which the
                                                  Discharge Elimination System (“NPDES”)
District Court denied. On November 26,
                                                  permit. 33 U.S.C. § 1342. Discharges that
2002, ALC filed a notice of appeal from
                                                  comply with the limits and conditions in an
the District Court’s summary judgment
                                                  NPDES permit are deemed to comply with
order of September 28, 2000, the
                                                  the Act. 33 U.S.C. § 1342(k). The CWA
reconsideration order of November 28,
                                                  requires NPDES permittees to test their
2000, the final judgment of February 20,
                                                  effluent and report the results to the EPA in
2002, and the Rule 59(e) order of October
                                                  Discharge Monitoring Reports (“DM Rs”).
8, 2002.
                                                  33 U.S.C. § 1318(a); 40 C.F.R. §§ 122.41(j),
        The District Court had jurisdiction       122.48. Section 307 of the CWA authorizes
pursuant to 28 U.S.C. § 1331. ALC’s               the EPA to promulgate regulations
appeal is timely under Fed. R. App. P.            prohibiting the discharge of any pollutant
4(a)(1)(B), and we have appellate                 into a Publicly Owned Treatment Works
jurisdiction pursuant to 28 U.S.C. § 1291.        (“POTW”) that “interferes with, passes
Our review of the grant of summary                through, or otherwise is incompatible with”
judgment is plenary. See Shelton v. Univ.         the POTW. 33 U.S.C. § 1371(b)(1). The
of Med. & Dentistry of N.J., 223 F.3d 220,        Act prohibits discharges to POTWs that are
224 (3d Cir. 2000). We review the                 in excess of those pretreatment standards.
imposition of a penalty under Section             33 U.S.C. § 1317(d). The EPA has issued
1319(d) of the CWA for abuse of                   general pretreatment standards and national
discretion, see Tull v. United States, 481        categorical pretreatment standards for the
U.S. 412 (1987), but our review of the            iron and steel manufacturing industry. See
legal construction of Section 1319(d) is          40 C.F.R. Pts. 403, 420.
plenary, see Public Interest Research
                                                         The Act authorizes the EPA to bring
Group, Inc. v. Powell Duffryn Terminals,
                                                  civil enforcement actions for injunctive
Inc., 913 F.2d 64, 80 (3d Cir. 1990).

                                              6
relief and penalties, at times relevant, to up       government then argues that, consistent with
to $25,000 per day for each violation. See           the Act’s requirement for accurate self-
33 U.S.C. § 1319(d). A violation of the              reporting, courts should treat DMRs, which
Act can be established by showing that the           must be certified by the discharger, as
defendant is a person who discharged                 admissions that are sufficient to establish
pollutants from a point source into                  liability under the CWA.
navigable waters in violation of the terms
                                                             The government relies in this respect
of the applicable NPDES permit or into a
                                                     on Sierra Club v. Union Oil Co., 813 F.2d
POTW in violation of a pretreatment
                                                     1480, 1491-92 (9th Cir. 1987), vacated on
standard. See 33 U.S.C. §§ 1311, 1317(d).
                                                     other grounds, 485 U.S. 931 (1988), where
In assessing a civil penalty for a violation
                                                     the Court of Appeals held that a CWA
of § 1311 or § 1317, the court must
                                                     defendant could not escape liability based
consider: “the seriousness of the violation
                                                     on alleged sampling violations. The Court
or violations, the economic benefit (if any)
                                                     no ted that the “N PD ES p rogra m
resulting from the violation, any history of
                                                     fundamentally relies on self-monitoring”
such violations, any good-faith efforts to
                                                     and that Congress deemed accurate DMRs
comply with the applicable requirements,
                                                     “critical to effective operation of the Act.”
the economic impact of the penalty on the
                                                     Id. It opined that allowing CWA permittees
violator, and such other matters as justice
                                                     to impeach their own DMRs “would be
may require.” 33 U.S.C. § 1319(d).
                                                     sanctioning countless additional hours of
   B. The Government’s Contentions                   NPDES litigation and creating new,
                                                     complicated factual questions for district
         The government argues that the
                                                     courts to resolve.” Id. at 1492. The Court
CWA establishes a scheme of strict
                                                     further reasoned that if permittees could
liability aimed at facilitating enforcement.
                                                     impeach their own reported violations with
It first notes that Congress gave the EPA
                                                     claims of laboratory error, it would “create
the “authority to require information, data,
                                                     the perverse result of rewarding permittees
and reports, as well as establish monitoring
                                                     for sloppy laboratory practices” and
requirements,” recognizing that such an
                                                     “undermine the efficacy of the self-
authority is a “necessary adjunct to the
                                                     monitoring program.” Id.; accord Conn.
establishment of effective water pollution
                                                     Fund for the Env’t, Inc. v. Upjohn Co., 660
requirements and the enforcement of such
                                                     F. Supp. 1397 (D. Conn. 1987).
requirements.” Government Br. at 16
(citing S. Rep. 92-414, at 62 (1971)).                      Relying on this reasoning, the
Furthermore, it points out that Congress             government submits that we should reject
intended “these new requirements” to                 ALC’s laboratory error defense. Because
“avoid the necessity of lengthy fact                 the regulations require dischargers to amend
finding, investigations, and negotiations at         their sworn DMRs whenever they discover
the time of enforcement.” Id. (citing S.             an error in their reporting, and because
Rep. 92-414, at 62 (1971)).             The          failure to do so constitutes a criminal

                                                 7
violation in and of itself, the government          between the defendant’s results and those
contends that allowing dischargers to               from outside laboratories, though no
contest their own DMRs conflicts with the           consistent pattern could be detected in those
statute and the applicable regulations. See         discrepancies (sometimes the defendant’s
40 C.F.R. §§ 122.41(k)(2), (1)(8). The              results were higher, and sometimes they
government further argues that allowing a           were lower than the outside laboratories’
laboratory error defense would frustrate            results).
“congressional intent, would reward
                                                            The Court explained that “if a
companies for inaccurate monitoring
                                                    defendant wishes to contest the accuracy of
practices, and would give them an
                                                    its DMRs, it ‘has a heavy burden to
incentive to wait until they are sued to
                                                    establish faulty analysis.’” Id. at 1178
ensure the accuracy of their DMRs.”
                                                    (quoting Student Pub. Interest Research
C. The Authorities Relied upon by ALC               Group, Inc. v. Georgia-Pacific Corp., 615
                                                    F. Supp. 1419, 1429 (D.N.J. 1985)). “The
        ALC      first   cou nters       th e
                                                    ‘defendant must present direct evidence of
government’s arguments by citing a
                                                    reporting inaccuracies’ and ‘may not rely on
number of cases from district courts within
                                                    unsupported “speculation” of measurement
this Circuit that have recognized—either
                                                    error.’” Id. (quoting Georgia-Pacific Corp.,
explicitly or implicitly—the availability of
                                                    615 F. Supp. at 1429). The fact that “no
the laboratory error defense. While no
                                                    court in this district ha[d] thus far found a
defendant in these cases has actually made
                                                    defendant to have met this heavy burden,”
it past the summary judgment stage based
                                                    id., however, did not preclude the possibility
on the laboratory error defense, that lack
                                                    of the defense as a matter of law.
of success has been due to district courts
finding that the defendants failed to raise a               The Elf Atochem Court, in discussing
genuine issue of material fact as to the            the reasoning in Upjohn, quotes Chesapeake
existence of a laboratory error, and not            Bay Foundation v. Bethlehem Steel Corp.,
because the defendants were precluded               608 F. Supp. 440, 452 (D. Md. 1985), which
from raising the defense as a matter of             stated that “‘[g]iven the heavy emphasis on
law.                                                accuracy in the Act and the clear
                                                    Congressional policy that DMRs should be
        In Public Interest Research Group,
                                                    used for enforcement purposes, the court
Inc. v. Elf Atochem North America, Inc.,
                                                    will not accept claims of inaccurate
817 F. Supp. 1164 (D.N.J. 1993), a similar
                                                    monitoring as a defense.’” Elf Atochem, 817
case of potential overreporting came
                                                    F. Supp. at 1179. The Elf Atochem Court
before the District Court. The defendant
                                                    agreed that “the Act places the burden of
claimed that errors in its laboratory testing
                                                    accurately monitoring the levels of
had resulted in the overreporting of toxic
                                                    pollutants in their effluent squarely on the
discharges. Split sampling over a six-
                                                    shoulders of permit holders, and that we
month period revealed large discrepancies
                                                    must hold them to that obligation,” but it

                                                8
ultimately held that                                ultimately granted summary judgment
                                                    against the defendant— based on the fact
       while we agree with the
                                                    that the cover letters the defendant
       [Upjohn] court that it is
                                                    submitted to the Court were too speculative
       incon sis t e n t with th e
                                                    in that they merely asserted that the
       structure and purpose of the
                                                    defendant “felt” and “believed” that
       Act to allow permit holders
                                                    laboratory errors had occurred—it clearly
       to escape liability altogether
                                                    implied that had the factual situation been
       on the basis of laboratory
                                                    different, Yates could have survived a
       error, we find it more
                                                    summary judgment motion based on a
       accurate, where laboratory
                                                    laboratory error defense. See id.
       error has been shown, to
       hold a defendant liable for a                               D. Discussion
       monitoring violation rather
                                                            We find the reasoning of the Elf
       than a discharge violation.
                                                    Atochem Court persuasive. The violations
Elf Atochem, 817 F. Supp. at 1179                   at issue here alleged that ALC discharged
(emphasis added).                                   pollutants in violation of the terms of its
                                                    permit. In order to prove these violations, it
        Similarly, in Public Interest
                                                    was necessary for the government to
Research Group, Inc. v. Yates Industries,
                                                    establish that ALC did in fact violate the
Inc., 757 F. Supp 438, 447 (D.N.J. 1991),
                                                    permit terms. If a permittee reports that it
the Court expressly recognized the
                                                    has violated a permit limit, the report is
laboratory error defense, noting that
                                                    sufficient to discharge the government’s
“DMRs may be deemed admissions when
                                                    burden of production, but neither the CWA
establishing liability in summary judgment
                                                    itself nor any regulation of which we are
motions,” but are not conclusive proof of
                                                    aware makes such a report conclusive.2 The
liability. The Court held that under some
circumstances, a “defendant may avoid
liability at the summary judgment stage on             2
the basis of inaccurate data in DMRs.” Id.              The question before us is whether a
While the Yates Court also recognized the           permittee violates its permit if its
heavy burden on the defendant to prove              discharges in fact comply with the terms
laboratory error, it stated that a showing of       of the CWA but its reports erroneously
“‘errors in the actual tests performed              indicate the permit was violated. This is a
which showed a permit violations [sic]’”            pure question of law, and our review is
may defeat a summary judgment motion.               plenary. In its brief, the government did
Id. (quoting Student Pub. Interest                  not argue that, in interpreting the relevant
Research Group, Inc. v. Tenneco                     provisions of the Act or any relevant
Polymers, Inc., 602 F. Supp. 1394, 1400             regulations, we should give any degree of
(D.N.J. 1985)). Thus, while the Court               deference to any formal or informal
                                                    administrative interpretations of the Act or

                                                9
trier of fact must still be convinced that the        liability means that the CWA is violated if a
permit was in fact violated. Evidence that            permittee discharges pollutants in violation
the reports inaccurately overreported the             of its permit, regardless of the permittee’s
level of discharge are certainly relevant to          mens rea. Strict liability does not mean that
show that no violation occurred.3                     a permittee may be held liable for violating
                                                      its permit even if it does not in fact do so.
        The government stresses the fact
that the civil liability provisions of the                    While the government’s policy
CWA create a regime of strict liability, but          arguments are certainly forceful in the case
this argument misses the mark. Strict                 of a permittee underreporting levels of toxic
liability relieves the government of the              waste and then claiming a laboratory error
obligation to show mens rea, not the actus            defense, we are unpersuaded that they prove
reus. See, e.g., W. Fuels-Utah, Inc. v. Fed.          compelling in a case like this where the
Mine Safety & Health Review Comm’n,                   permittee alleges that the laboratory error
870 F.2d 711, 713-14 (D.C. Cir. 1989). In             resulted in the overreporting of the levels of
the context of the present case, strict               toxic waste.4       From a public policy
                                                      perspective, a polluter should not be given
                                                      the opportunity to underreport levels of
regulations. By failing to make any such              toxic waste, thereby dumping in excess of
argument in its brief, the government                 its permit, and then, when caught, cry
waived any contention based on                        “laboratory error kept me from knowing that
deference. Moreover, when counsel for                 I was in violation!” But in the case at bar,
the government was questioned on this                 the opposite apparently occurred: ALC was
point at oral argument, she did not call to           conducting its sampling but a contaminated
our attention any administrative                      reagent used in the ALC laboratory’s
interpretation to which she claimed that              analysis was causing the laboratory
deference was owed. Nor has the                       systematically to overreport the amount of
government brought any such                           toxic zinc that was dumped into the water.
interpretation to our attention after the             We fail to see what incentive ALC could
argument.                                             have had to overreport how much zinc it
   3
                                                      was dumping into the river when it knew
    We use the term “laboratory error                 that such amounts would result in fines. We
defense” in this opinion because the term             do not believe that a scheme assigning strict
has been used in prior cases and is used              liability for discharge violations in the case
by the parties here, but it is important to
note that laboratory error is not an
                                                         4
affirmative defense to liability. Instead,                In the underreporting situation, the
evidence of laboratory error is simply                permittee would be attempting to use
evidence that is relevant to the question             laboratory error to show that it lacked
whether a violation of a permit                       mens rea, which is irrelevant under the
requirement in fact occurred.                         civil liability provisions of the CWA.

                                                 10
of overreporting errors makes sense, nor            regulations thereunder. Moreover the very
do we infer from the CWA that such was              circumstances that would support a
Congress’s intent.                                  laboratory error defense would also likely
                                                    support the finding of a monitoring
        In citing United States v. Pozsgai,
                                                    violation. See 40 C.F.R. § 122.41(j). In
999 F.2d 719, 725 (3d Cir. 1993), the
                                                    light of these direct sanctions on inaccurate
government correctly asserts that a
                                                    DMRs, we find wanting the government’s
discharge that is not in compliance with a
                                                    argument that CWA provisions addressed to
permit “is the archetypal Clean Water Act
                                                    actual discharges ought to be made
violation, and subjects the discharger to
                                                    surrogate enforcers of the reporting
strict liability.” But in Pozsgai, strict
                                                    requirements. In sum, barring the assertion
liability was imposed based upon an
                                                    of a laboratory error defense seems unfair
unlawful discharge, not the mistaken
                                                    and at odds with the overall plan of the
report of a discharge. The government
                                                    CWA, especially in a case such as this
seems to be aware of this difference when
                                                    where the alleged laboratory error caused
it argues that strict liability should be
                                                    overreporting rather than underreporting.
imposed on reporting requirements, as it
writes about the conjunction of the                         We have considered the arguments of
“CWA’s reporting requirements and                   the government and the Union Oil Court
imposition of strict liability for permit           that recognizing a laboratory error defense
violations.” (emphasis added). So, while            would reward sloppy practices and
the CWA unambiguously imposes strict                undermine the self-monitoring program by
liability for unlawful discharges, it is by         giving companies an invitation to wait until
no means obvious that a similar strict              they are sued. But these arguments do not
liability regime has been imposed on faulty         apply to overreporting, which is almost
reporting.                                          certainly involuntary. We also suspect that
                                                    overreporting is rare, for only the most
        In fact, the existence of a
                                                    penny-wise and pound-foolish of permittees
mechanism to correct erroneous DMRs
                                                    would expose itself to the cost of a decade
suggests the opposite. See 40 C.F.R. §
                                                    of litigation (as here) if it had any chance of
122.41(l)(8) (requiring a permittee who
                                                    clearing the matter up with improved
becomes aware of any inaccuracy in a
                                                    laboratory testing and amended NPDES
DMR to promptly notify the EPA). That
                                                    reports.        Conc omita ntly, we a re
regulation was promulgated pursuant to
                                                    underwhelmed by the government’s
the Administrator’s authority under 33
                                                    argument that permitting the defense will
U.S.C. § 1318(a) to impose reporting
                                                    add time to NPDES litigation. At bottom,
requirements. Since 33 U.S.C. § 1319
                                                    we do not believe that efficiency should
authorizes administrative, civil, and even
                                                    override fairness in administration. Thus,
criminal penalties for violations of § 1318,
                                                    while we do not gainsay the validity of the
the failure to correct an inaccurate DMR is
                                                    government’s argument that, consistent with
an independent violation of the CWA and

                                               11
the Act’s requirement for accurate self-            defense argument in the proper light, it, not
reporting, courts should treat DMRs,                this Court, should consider the defense in
which must be certified by the discharger,          the first instance. We will therefore vacate
as admissions that are sufficient to                and remand so that the laboratory error
establish liability under the CWA, we hold          defense can be considered and adjudicated
that the presence of certified DMRs does            with respect to the claims that it affected.
not preclude the laboratory error defense in
                                                    III. The Penalty Calculation - Economic
cases of overreporting.
                                                                    Benefit
          The government has argued that
                                                       A. ALC’s Objections to the Penalty
even if the laboratory defense is
                                                                 Assessment
recognized, there is insufficient evidence
in this record to support it. The District                 The assessment of civil penalties for
Court did appear to endorse this position in        these violations as sought by the United
a post-trial opinion: “Nothing in ALC’s             States is governed by 33 U.S.C. § 1319(d).
proffer or testimony on this issue                  Section 1319(d) provides that the violator of
persuades the court that these violations           a permit issued pursuant to the Act shall be
arise solely from laboratory error.” But            subject to a civil penalty not to exceed
that statement followed a trial at which the        $25,000 per day for each violation. This
laboratory error defense had been                   penalty provision further states that in
excluded. More specifically, while the              assessing the penalty, the court shall
District Court did have available some of           consider the following factors:
ALC’s laboratory error evidence in the
                                                           the seriousness of the
penalty phase, having already determined
                                                           violation or violations, the
that ALC was liable for discharge claims,
                                                           economic benefit (if any)
this after-the-fact consideration of the
                                                           resulting from the violation,
evidence for penalty purposes does not
                                                           any history of such violations,
cure the error in precluding the laboratory
                                                           any good-faith efforts to
error defense in the liability jury trial.
                                                           comply with the applicable
Arguably the District Court’s evaluation of
                                                           requirements, the economic
ALC’s laboratory error evidence in the
                                                           impact of the penalty on the
penalty phase strengthens ALC’s argument
                                                           violator, and such other
that it was entitled to have the jury
                                                           matters as justice may require.
evaluate such evidence because, what the
District Court was doing was to assess the
credibility to that evidence (“[I]t is not
                                                    Id. The District Court considered each of
credible that laboratory error would persist
                                                    these factors in connection with the penalty
. . . .”, normally a jury function.
                                                    determination. The Court found ALC’s
      Since the District Court did not              violations of the CWA to be serious. It
consider the sufficiency of laboratory error        questioned the level of ALC’s commitment

                                               12
to the obligations imposed by the Act. It           Finance 932 (6th ed. 2002). 5
found the economic benefit to ALC to be
                                                            ALC asserts that the District Court’s
considerable, primarily in terms of the
                                                    economic benefit calculation did not “level
avoided cost stemming from reduced
                                                    the playing field,” as required by law, but
(inadequate) staffing at its wastewater
                                                    rather imposed a severe penalty. ALC also
treatment plants, its delay in a plant
                                                    contends that the District Cou rt’s
upgrade at the Vandergrift facility, and a
                                                    calculations failed to apply other principles
number of other smaller projects. The
                                                    required by law, including that (1)
Court totaled the economic benefit at
                                                    expenditures made and included in the
$4,122,335, and ultimately doubled it to
                                                    economic benefit calculation must relate
$8,244,670 as the final penalty. See infra
                                                    directly to the violations; (2) the least costly
note 6.
                                                    method of compliance should be used in
        The imposition of a penalty under §         calculating economic benefit; and (3)
1319(d) is subject to the exercise of a             economic benefit calculations must be based
district court’s discretion. See Tull v.            only on periods of non-compliance. We
United States, 481 U.S. 412, 426-27                 reject the argument that the District Court
(1987). In general, a district court abuses         did not apply the proper legal precepts.
its discretion when it “bases its opinion on        Rather the question is the manner of
a clearly erroneous finding of fact, an             application, and whether the District Court
erroneous legal conclusion, or an improper          made clearly erroneous fact findings which
application of law to fact.” LaSalle Nat’l          skewed the calculations to ALC’s detriment.
Bank v. First Conn. Holding Group, L.L.C.
XXIII, 287 F.3d 279, 288 (3d Cir. 2002).
                                                        B. The Economic Benefit Principle
         Many of the District Court’s
                                                           As noted above, § 1319(d) requires
findings are supported, and unchallenged
                                                    the District Court to consider “the economic
on appeal. The primary issue contested
                                                    benefit (if any) resulting from the violation”
here relates to economic benefit—i.e. the
                                                    when determining the amount of a civil
Court’s use of the government’s experts’
                                                    penalty under the CWA. ALC argues that
computation of ALC’s weighted average
                                                    the purpose of the economic benefit
cost of capital (“WACC”) as the interest
                                                    component of the penalty is to “level the
rate to use to bring the money forward to
the penalty judgment date. WACC is
defined as “the average cost of capital on             5
                                                         Of course, this general definition is
the firm’s existing projects and activities,        only so useful; moving from the broad
. . . . calculated by weighting the cost of         definition to the actual numbers (in
each source of funds by its proportion of           particular establishing the “cost of ...
the total market value of the firm.”                funds”) can be extremely complex and
Stephen A . Ross, Randolph W.                       subject to dispute as this case so aptly
Westerfield & Jeffrey Jaffe, Corporate              demonstrates.

                                               13
economic playing field.” We agree. See                     Putting aside the ultimate way in
United States v. Mun. Auth. of Union
Township, 150 F.3d 259, 263-64 (3d Cir.
1998) [hereinafter Dean Dairy]. In other            employ the “bottom up” approach, in
words, the purpose is to prevent a party            which economic benefit is established, and
violating the CWA from gaining an unfair            the remaining five elements of § 1319(d)
advantage against its competitors, and to           are used to adjust the figure upward or
prevent it from profiting from its                  downward. Dean Dairy, 150 F.3d at 265.
wrongdoing.       See Powell Duffryn                In Dean Dairy, we held that the method
Terminals, 913 F.2d at 80. The                      used in assessing the civil penalty is best
government, on the other hand, submits              left to the trial court’s discretion. See id.
that CWA penalties are intended to                  In the case at bar, the District Court
“promote immediate compliance” and                  followed the “bottom up” approach.
“deter future violations” by the defendant          Having arrived at a figure of economic
and other regulated entities. Friends of the        benefit totaling $4,122,335, the District
Earth, Inc. v. Laidlaw Envtl. Servs., Inc.,         Court then conducted a detailed analysis
528 U.S. 167, 185 (2000). Therefore,                of the remaining factors enumerated in §
while the government agrees that the                1319(d) and found that, while the
economic benefit analysis is designed to            government advocated a trebling of the
calcu late how much money was                       economic benefit, a doubling would be
illegitimately gained by failing to spend           more appropriate under the circumstances
the appropriate amounts on environmental            of the case for a total penalty of
safeguards, it does not agree that the              $8,244,670. In Dean Dairy, we approved
assessment of a penalty need stop at that           the doubling of economic benefit as a
figure. In our view, the latter point               possible method for assessing a penalty
addresses a different aspect of the Act, as         stating that, even after the doubling of
explained in the margin.6                           economic benefit, the “penalty was barely
                                                    9% of the maximum statutory penalty to
                                                    which Dean Dairy was subject.” Dean
   6
     The CWA does not prescribe a                   Dairy, 150 F.3d at 265. In the case at bar,
specific method for determining                     the statutory maximum penalty that could
appropriate civil penalties for violations.         have been leveled against ALC was
In Dean Dairy, we noted that some                   $28.05 million, counting $25,000 for each
courts use the “top down” approach in               of the 1,122 days of violations. While
which the maximum penalty is set                    $8,244,670 is approximately 29% of
($25,000 per day of violation at the times          $28.05 million, a much larger proportion
relevant here), and reduced as                      than the 9% approved in Dean Dairy, we
appropriate considering the six                     are satisfied that the District Court was
enumerated elements of § 1319(d) as                 well within its discretion to assess such a
mitigating factors, while other courts              penalty in this case.

                                               14
which the result of the economic benefit                     The District Court derived this rate
calculation might be employed, such a                from the proffer of government witnesses
calculation is intended, at its base, to             Gary Amendola and Robert Harris who
identify the benefit realized by a violator          explained the three steps they took to
from delayed expenditures to comply with             calculate the WACC. First, they determined
the CWA.           The economic benefit              that ALC had a debt rating of “A,” as
calculation starts with the costs spent or           assigned by Standard & Poor’s (“S&P”).
that should have been spent, to achieve              Then, they researched what the typical
compliance.         Once that figure is              monthly interest rate was for A-rated bonds
established, an appropriate calculation of           in each relevant year and computed yearly
economic benefit should also reflect the             averages. This rate was adjusted to account
time value of money. In order to make                for the advantageous tax treatment of
that calculation, a court must “apply an             interest payments on corporate debt.
interest rate to determine the present value         Second, they calculated the cost of equity as
of the avoided or delayed costs.” United             follows: They started with a 30-year
States v. Smithfield Foods, Inc., 191 F.3d           treasury bond as a baseline. They next
516, 530 (4th Cir. 1999). Herein lies the            looked up the company’s “beta,” which is a
crux of the disagreement: ALC contends               measure used to evaluate the relative risk of
that the District Court used an interest rate        a particular stock for an equity investor.
so high that the effect was punitive rather          Finally, they assumed a generic value for the
than “leveling,” whereas the government              market-risk premium— the premium that a
contends that the interest rate used by the          person would demand to invest in stock
District Court was entirely appropriate and          rather than in a (risk free) treasury
yielded a result that was well within the            instrument. At that point, they multiplied
Court’s discretion.                                  the beta by the market-risk premium, and
                                                     added an “intermediate stock premium” for
  C. The Interest Rate Adopted by the
                                                     the years before ALC merged with another
             District Court
                                                     entity and became a bigger, “safer”
       The District Court, in arriving at its        company. They then added this to the 30-
penalty assessment, adopted the economic             year treasury bond rate to arrive at an equity
analysis proffered by the government. In             cost by year. Third, they combined these
that submission, the alleged economic                cost of debt and cost of equity measures by
benefit stemming from each violation was             taking a weighted average of them, based on
computed forward from the date of                    the relative proportions of debt and equity in
violation to February 28, 2001 (roughly the          ALC’s capital structure for that year.7
date of the judgment) at a rate of 12.73%
annually, to arrive at a $4,122,335 total
economic benefit at the time of judgment.               7
                                                          In its brief, the government
                                                     mischaracterizes its own experts’
                                                     testimony and states that the WACC was

                                                15
    1. The Contentions of the Parties                 not achieved by ALC.
         ALC characterizes the 12.73% rate                  ALC submits that, instead of the
as “a theoretical, risk-adjusted rate                 12.73% rate, one of four alternative rates
(denominated by EPA as the weighted                   should have been used:
average cost of capital or ‘WACC’), based
                                                             (1) the statutory interest rate
on broad averages across the U.S. capital
                                                             (6%)
markets.” As the foregoing explanation
suggests, this characterization is generally                 (2) the risk-free rate
accurate. ALC contends that using such a                     represented by the short-term
hypothetical rate of interest was an error of                U.S. treasury rates during
law because ALC had presented evidence
                                                             the relevant time period
of its actual rate of return on capital which,
at the time of the penalty trial, showed that                (3) the actual average rate of
the average rate of return on capital for                    ALC’s return of capital from
ALC and its parent company between                           1990-2000
1990-2000 was 5.7%. This fact was
                                                             (4) the actual average rate of
uncontested, and thus ALC submits that
                                                             ALC’s return of capital from
the 12.73% rate did not achieve the legal
                                                             1990-2001
purpose of “leveling the economic playing
field,” but rather was used to exact a                Each of the rates suggested by ALC results
severe penalty “reflecting not the time               in approximately the same interest rate,
value of money nor ALC’s benefits from                hovering between 5.2% and 6%, which is
retaining funds, but rather theoretical               less than half the rate that the District Court
investment averages that indisputably were            actually used.8       ALC adds that the
                                                      “theoretical WACC has been rejected
                                                      consistently when applied to companies and
calculated by “first determining the rate             industries that are not achieving such
at which ALC borrowed funds during the                theoretical rates of return.” 9
relevant time period.” This
representation implies that the
government experts relied on figures that                8
                                                          Although the government maintains
were much more ALC specific than was                  that the only alternatives to the WACC
actually the case. As we have explained,              preserved by ALC for appeal are the T-bill
the experts seem to have relied primarily             rate and the Pennsylvania statute rate, we
on general market numbers for                         have examined the record and do not find
companies situated similarly to ALC                   that ALC waived any of the proposed
over a long period. We do not know the                alternative rates.
reasons for the government’s
                                                         9
mischaracterization, but we do note our                   We think that ALC overstates the
disapproval.                                          principle—if any—that may be drawn

                                                 16
                                                           The government responds with a
from the cases it cites. The two cases it          number of arguments. First, the government
discusses are Chesapeake Bay                       correctly notes that the economic benefit
Foundation v. Gwaltney of Smithfield,              calculation need not be precise. In Dean
Ltd., 611 F. Supp. 1542 (E.D. Va. 1985),           Dairy, we recognized that economic benefit
aff’d, 791 F.2d 304 (4th Cir. 1986),               “ m a y n o t b e c a p a b l e o f re a d y
vacated on other grounds, 484 U.S. 49              determination,” and the Court gave “the
(1987), and United States v. Sheyenne              district court’s award of a penalty wide
Tooling & Mfg. Co., 952 F. Supp. 1420              discretion, even though it represents an
(D.N.D. 1996).                                     approximation.” 150 F.3d at 264 (citing
        In Gwaltney, 611 F. Supp. at               Tull, 481 U.S. at 426-27). The government
1559, the Court held that “the actual              couples this deference accorded to district
interest rate Gwaltney itself paid on              court awards with the suggestion that, since
borrowed funds [] is a more accurate               the statutory maximum penalty for ALC’s
basis for determining Gwaltney’s                   violations was $28.05 million, the District
economic benefit from delay” than “the             Court gave ALC “a break.”                The
ten-year rate of return on equity earned           government advocated taking other statutory
by Smithfield Foods, Inc.—Gwaltney’s               factors into account and trebling the
parent corporation.” While this case               economic benefit to yield a penalty of
does not adopt WACC as a measure of                approximately $12.3 million, see supra note
economic benefit, it also does not                 6, but the District Court only doubled the
affirmatively reject it.                           economic benefit and ordered ALC to pay
        Likewise, in Sheyenne Tooling,             $8,244,670. The government points to this
952 F. Supp. at 1426, the Court held that          discrepancy between what it asked for and
        the principle of requiring that            what the Court actually did as proof that the
        persons at fault must be held              District Court really does have, and should
         to a ‘level playing field’ means          have, a great amount of discretion in
        that the defendant must be held            determining these types of penalties.
        to the conditions of his field, not
        that of larger or more wealthy                    The government also points to the
        players. And the economic                  decisions of other courts that have approved
        experts for the United States              the use of WACC to discount economic
        used averages and generalizations          benefit when calculating CWA penalties,
        which were not compatible with             particularly Smithfield Foods where the
        the playing field in which the             District Court, crediting expert testimony,
        defendant operated.                        used the WACC to discount the defendant’s
This is doubtless a sound principle, but
simply does not address what the
appropriate measure is for determining             economic benefit.

                                              17
economic benefit. See United States v.               the District Court.10 In this case, however,
Smithfield Foods, Inc., 972 F. Supp. 338,
349 & n.17 (E.D. Va. 1997), cited with
approval in Dean Dairy, 150 F.3d at 266.                10
                                                          We note a provision from the field of
                                                     trusts that enables the District Court to
    2. The Appropriate Interest Rate                 exercise its discretion in choosing the
                                                     appropriate measure for assessing a
       The methodology used by the                   trustee’s liability in the case of a breach of
District Court and those advanced by the             trust. The choice to make here (i.e., both
parties do not exhaust the possible                  cost measures and actual returns are
interpretations of economic benefit under            possible ways of valuing economic
§ 1319(d). It will be helpful to analyze the         benefit, so which should be adopted?)
options. There are, as we see it, two                resembles that choice. The Restatement
possible approaches. The first is the cost           (Second) of Trusts § 205 provides (in the
of obtaining capital— i.e., the interest rate        disjunctive):
necessary to acquire the capital with which                  If the trustee commits a
to make the improvements (which were                         breach of trust, he is
never made). The second is the use of the                    chargeable with:
corporate offender’s actual return on its                      (a) any loss or depreciation
capital, which, it is conclusively presumed,                 in value of the trust estate
was not used to make the improvements.                       resulting from the breach of
These are both highly variable factors,                      trust; or
turning on the cost of money to the                            (b) any profit made by him
company (which depends not only on the                       through the breach of trust;
general market forces but also on its                        or
financial strength and credit rating) or on                    (c) any profit which would
the profitability of the company at a given                  have accrued to the trust
time.                                                        estate if there had been no
        In view of this variability, we think                breach of trust.
that it would be inappropriate for us to             As in Gwaltney, 611 F. Supp. at 1558-59
decree which methodology should be used              & n.17, the choice is within the discretion
since in any given situation, “leveling the          of the District Court, and we are confident
playing field” might be more readily                 that it will give due consideration to the
achieved with one or the other. Therefore,           equities involved in selecting an
we think that the choice of methodology              appropriate measure of economic benefit.
should be left to the sound discretion of            Indeed, we do not even hold that economic
                                                     benefit is the sole permissible approach to
                                                     assessing a penalty; there may well be
                                                     other ways. Given this variability, we
                                                     disagree with the dissent’s contention that

                                                18
it is not clear that the District Court was        figures specific to ALC’s bonds. 11
aware of or considered the range of
                                                           The second problem is the
options available.
                                                   government’s application of the WACC.
a. Economic Benefit as Measured by the             WACC averages are constructed on the
           Cost of Capital                         basis of a company’s existing capital
                                                   structure (that is, the relative proportions of
       As noted above, economic benefit
                                                   debt and equity). A WACC figure based on
can be measured by an entity’s cost of
                                                   a company’s existing capital structure at a
capital. In accepting the government’s
                                                   given time is not, without further support,
experts’ position, the District Court
                                                   necessarily the same as a company’s
adopted one such measure—WACC— but
                                                   marginal or current cost of capital at that
there are others. In commenting upon the
                                                   time (i.e., what it would cost to obtain
cost-of-capital measure adopted by the
                                                   additional capital) because new capital
District Court, we hope to provide some
                                                   might come in a different mix of debt and
guidance as to what constitutes an
                                                   equity. See Aswath Damodaran, Applied
appropriate cost-of-capital measure of
                                                   Corporate Finance 108 (1999) (“In
economic benefit.
                                                   estimating [the current cost of capital using
       With respect to the cost-of-capital         WACC], we have in a sense conceded the
measure used by the District Court, we             status quo in terms of financing mix, since
conclude that both the calculation and             we have estimated the cost of capital at the
application are, at the very least,                existing mix. It is entirely possible that a
unsupported. The first problem is the              firm, by changing its mix, could lower its
government’s calculation of the WACC.              cost of capital.”). Unless WACC is shown
That calculation relied on values that were        to be a good approximation for the marginal
not ALC-specific. Instead of using the             or current cost of capital, it sheds little light
actual yield on bonds that ALC had issued,         on how expensive it would have been for
the government experts computed the                the company to go to the market for its
WACC by using the yield on Standard &              capital, instead of diverting funds that
Poors A-rated bonds. While using the               should have gone to improving pollution
S&P figure might well have been a
reasonable approximation of ALC’s                     11
bonds’ yield, a more accurate calculation                In contrast, as far as we can tell, the
could easily have been achieved by using           cost of equity calculation was as ALC-
                                                   specific as could reasonably be achieved:
                                                   The value for beta seems to have been
                                                   ALC-specific, and the other figures that
                                                   entered into the computation (the market-
our holding saps too much discretion               risk premium and the “intermediate stock
from district courts in cases under the            premium”) are not by their nature
CWA.                                               company specific.

                                              19
controls.                                           established by a cost-of-capital measure, the
                                                    measure to use is ALC’s marginal or current
         As noted above, the government
                                                    cost of new capital in the years in question.12
and the District Court relied on Smithfield
                                                    Some courts appear to have endorsed this
Foods.       But, upon closer analysis,
                                                    approach. See, e.g., Gwaltney of Smithfield,
Smithfield Foods does not help the
                                                    611 F. Supp. at 1559 (“[T]he actual rate
government. There are reasons to suspect
                                                    Gwaltney itself paid on borrowed funds . . .
that in the food processing industry (in
                                                    is a more accurate basis for determining
which Smithfield operated), the WACC
                                                    Gwaltney’s economic benefit from delay.”).
may have been an entirely appropriate
approximation of Smithfield’s economic                      It is of course possible that this
benefit, whereas conditions in the steel            approach might make an offender worse off
industry (in which ALC operates) are                than under the government’s WACC
radically different. More precisely, it may         proposal. For example, a company in dire
have been that in Smithfield Foods that the         financial straits may well have a marginal
WACC was a good approximation for the               cost of capital (offered by lenders who see it
terms on which money could have                     as a high-risk investment) that exceeds its
currently been raised; the food processing          WACC.        This is no anomaly.          For
industry is a stable industry where                 companies that are hard up for capital and
companies probably attract new capital on           cannot afford to raise it in the market, it is
terms similar to their existing capital             doubtless all too tempting to forego the
structure. The steel industry, in contrast,         sometimes costly improvements and
has been highly volatile and rife with stiff        pollution controls that are required by the
foreign competition, dislocations, and              CWA and EPA regulations. But such
bankruptcies. Indeed, as the District Court         companies must still be held to the law. To
noted, the industry is going through a              do otherwise is, in essence, to allow capital-
“brutal restructuring,” and more than
twenty-five United States steelmakers have             12
sought bankruptcy protection since 1997.                 This could be established by looking
Thus, a company in ALC’s position may               to, for example, the cost of any capital
not have, at the times in question, been            actually raised by ALC at the relevant
able to raise capital on the same terms as          times, or by the expert opinion of an
its existing capital structure. We need not         investment banker regarding the terms on
(indeed, cannot) resolve this; but for our          which ALC could have raised capital. Of
purposes, it is enough that there was               course, if expert testimony can establish to
insufficient evidence for the District Court        the District Court’s satisfaction that
to say that ALC’s existing capital structure        WACC is—in this particular case—a good
was representative of the terms on which            approximation for marginal cost of capital,
new capital would be raised. Thus, if the           then WACC could be accepted as a
economic benefit to ALC is to be                    surrogate measure of the marginal cost of
                                                    capital.

                                               20
strapped polluters to take out low-interest          its retained funds or the risk-free return it
loans against the environment.                       might have enjoyed using those funds. We
                                                     think that the return on capital is a quite
        We of course intimate no view on
                                                     viable means of leveling the playing field,
what a remand may develop respecting
                                                     along with the marginal or (then) current
ALC’s situation in the 1990s.          The
                                                     cost of capital.
government’s experts’ proffer shows debt
costs for S&P A-rated bonds were in the              3. Other Observations About the District
6.68% - 10.06% range in the 1990s. That                         Court’s Analysis
is significantly lower than the 12.73%
                                                            There are other potential problems
WACC figure relied on by the District
                                                     with the District Court’s calculation, which
Court. Moreover, in recent years, which
                                                     relied on the methodology provided by the
would also figure in the calculations,
                                                     government’s experts. It appears that the
interest rates have been very low. The
                                                     government’s experts computed annual
record does not reflect ALC’s actual
                                                     estimates of WACC for each of the years
financial strength, and it may (or may not)
                                                     1990-1998, and came up with the 12.73%
also have (or have had) a good credit
                                                     figure by taking the arithmetic mean.13
rating throughout the relevant period.
                                                     Since the savings from different violations
  b. Economic Benefit as Measured by                 accrued on different dates over a several
           Actual Return                             year period, it is questionable whether an
                                                     average interest rate is appropriate, when
        We have so far been talking about
                                                     year-to-year interest rate estimates are
measuring the economic benefit of
                                                     known and could be used with only minimal
additional capital by the cost to obtain that
                                                     additional effort by the experts.14 The
capital elsewhere. But the other option is
to use actual rates of return on capital to
com pute economic benefit.               The
                                                        13
government’s experts cited the importance                 To be clear, by “mean” we are
of leveling the economic playing field “in           referring not to WACC (which, as a
the same industry.” It is obvious, for               “weighted average” is a mean of sorts) but
example, that ALC and the steel industry             rather to the further step of taking the
were not, at times relevant, enjoying stellar        mean of a whole series of WACC figures
returns. Indeed, as noted above, it was              (one for each of the years in the relevant
uncontested at trial that ALC had a return           period). We have no objection, as the
on capital that was less than half the               dissent suggests, to the use of the WACC
12.73% rate used by the District Court.              formula to assess economic benefit.
On this view, any advantage that ALC                    14
enjoyed over its competitors by avoiding                   While any correction will be slight, in
the cost of CWA compliance is measured               the interest of precision the District Court
by the return that ALC actually realized on          might also consider whether, if an average
                                                     is to be used, the correct procedure would

                                                21
potentially problematic practice of using a                  We are, of course, acutely aware that
mean interest rate over a large time span is        we review the District Court’s interest rate
present in the government’s experts’                determination for abuse of discretion, and
report.15 As it happens, this wound up              that its determination need not be exact. See
hurting ALC: The theoretical WACC                   Dean Dairy, 150 F.3d at 264-65. Our
figures from the early 1990s (15.85% in             deferential scope of review does not mean,
1990 and 1991, and 13.95% in 1992) are              however, that we cannot intervene when a
the highest of the group, but really have no        District Court makes a finding that is
bearing on the economic benefit conferred           methodologically flawed, even if, under
by post-1992 violations. Thus, the average          such theory, the penalty figure it ultimately
WACC was biased toward the less-                    arrives at is plausible.
relevant higher WACC estimates from the
                                                           In the dissent’s view “given our
early 1990s.
                                                    highly deferential standard of review, the
        Finally, we note that the                   District Court did not clearly err in crediting
government is unquestionably correct in its         the government’s witness over ALC’s
assertion at oral argument that any                 witness and adopting the WACC to
computation must use the same discount              calculate economic benefit.” Of course,
rate for both forward and backward                  when presented with two sound but
computations during the same period. For            conflicting expert opinions, a district court
example, it would be clearly inappropriate          has discretion to credit one over the other.
to discount all econo mic benefit                   But this discretion is not a license to adopt
backwards to a uniform date using one               an opinion based on unsound methodology,
rate, and then use a different rate to carry        whatever its source.
the value forward to the date of judgment.
                                                           Based upon our analysis of the
              4. Conclusion                         government’s expert’s methodology, we are
                                                    unconvinced that the use of the 12.73%
                                                    interest rate achieves the stated purpose of
                                                    “leveling the economic playing field,” nor
be to use a geometric mean (computed as
                                                    are we sure that it bears much connection to
the nth root of the product of n items),
                                                    a meaningful measure of ALC’s cost of
since the percentages involved are
                                                    capital (much less its return on capital).
applied in consecutive multiplications.
                                                    We therefore must set aside the penalty
See Damodaran, Applied Corporate
                                                    calculation and remand for further
Finance at 69-70.
                                                    proceedings with respect to the interest rate,
   15
      Moreover, this practice is not                fully open to the possibilities that the record
unique to the use of W ACC as a measure             on remand will support a higher, lower, or
of economic benefit; it is an issue                 substantially similar penalty. We will not
regardless of the method used to derive             choose among the alternatives we have
the interest rate.                                  suggested (or those suggested by ALC ) in

                                               22
the discussion above; rather we shall leave         question does not appear to have been
it to the District Court, after receipt of          addressed by any Court of Appeals. Those
further submissions by both parties, to             District Courts that have addressed the issue
decide what alternative rate is best applied        hold that the calculations should be based on
to the circumstances developed in the               the least costly method of compliance. See,
record on remand.16                                 e.g., Gwaltney of Smithfield, 611 F. Supp. at
                                                    1563 n.25 (holding that economic benefit
D. The District Court’s Determination of
                                                    calculations could not be based on a more
        Costs of Compliance
                                                    expensive, “permanent solution” when a
   1. Introduction—The Least Costly                 less expensive “interim solution” had
         Method of Compliance                       already achieved compliance); United States
                                                    v. WCI Steel, Inc., 72 F. Supp. 2d 810 (N.D.
       The second basis on which ALC
                                                    Oh io 1999) (finding cre dib le the
asks us to overturn the District Court’s
                                                    defendant’s expert testimony regarding
calculation of economic benefit is its
                                                    poss ible com pliance measures and
contention that the District Court erred in
                                                    calculating economic benefit based on
calculating the amount of money it would
                                                    significantly less expensive method of
have cost ALC to institute the changes that
                                                    compliance than that proposed by the
would have led to compliance with the
                                                    government’s expert).        We find these
requirements of its permits. In brief, ALC
                                                    decisions persuasive, and hold that
argues that the numbers the EPA came up
                                                    economic benefit analysis should be based
with (which were adopted by the Court)
                                                    on the least costly method of compliance.
and the kinds of solutions it proposed were
                                                    However, contra ALC’s contentions, it does
cons iderab ly overpriced, es pecia lly
                                                    not appear to us that the District Court took
considering that, according to ALC, it had
                                                    a different approach.
already fixed the problems for much less
money and could show that the solutions it                   2. The Vandergrift Plant
had implemented already worked.
                                                           ALC cites to two main instances of
       The threshold question is whether,           alleged miscalculation of benefit. The first,
as a matter of law, the District Court must         relating to the Vandergrift plant, stems from
calculate economic benefit using the least          the District Court’s calculation which
costly method of compliance.           This         incorporated a $600,000 project that the
                                                    government’s expert posited would have
                                                    brought ALC into compliance with the
   16
     The District Judge who originally              pretreatment permit issued for that site.
heard and decided this case has resigned            ALC, however, claims that, in October of
from the bench. Accordingly, the parties            1993, shortly before the Vandergrift
will doubtless have to develop a record             violations ceased, it installed and began to
for the edification of the newly assigned           operate a diversion tank connected to the
judge.                                              discharge piping leading to the Vandergrift

                                               23
facility WWTP outfall. This diversion                at a time without reporting any violations.
tank cost no more than $150,000 to buy               The District Court chose to credit the
and install. According to ALC, the                   testimony of the government’s expert that
pretreatment violations stopped shortly              the diversion tank “would not have been
after the installation of the diversion tank         adequate to prevent all violations.” A
although there were two monthly average              decision to credit the expert testimony of
and four daily maximum violations in                 one expert witness over another is entitled to
November and December 1993, which                    deference. See Gen. Elec. Co. v. Joiner, 522
ALC attributed to “start-up problems.”               U.S. 136, 143 (1997) (holding that a District
ALC contends that starting December 15,              Court’s assessment of expert testimony is to
1993, not a single violation occurred.               be accorded “the deference that is the
ALC then argues that, in adopting the                hallmark of abuse-of-discretion review”).
government’s proposed $600,000 project               Under these circumstances the District
to solve the problem and bring ALC into              Court’s findings of fact were not clearly
compliance, the District Court made                  erroneous, and they must therefore be left to
clearly erroneous findings of fact.                  stand.
        There is, however, another side to                          3. Outfall 107
the story. As noted above, there were
                                                             The next issue concerns a $476,090
several so-called “start-up violations” after
                                                     project that the government’s expert posited
the diversion tank was installed, and ALC
                                                     was necessary to bring ALC into
cannot claim a clean record until
                                                     compliance for non-contact cooling water
December 15, 1993. ALC claims that the
                                                     violations at Outfall 107. ALC contends
District Court should have used the
                                                     that the District Court’s economic benefit
December 15, 1993 date as the compliance
                                                     calculation which adopted that figure was
date because that is the last reported
                                                     premised on clearly erroneous findings of
pretreatment violation before the WWTP
                                                     fact which led to misapplication of the least
upgrade in August of 1994. However, the
                                                     costly method of compliance legal principle.
government’s expert, Gary Amendola,
                                                     ALC argues that violations at the outfall
explained that he chose to use August
                                                     were limited to June though October 1994
1994 as the compliance date (as did the
                                                     and that those violations were resolved
District Court) because the diversion tank
                                                     through various maintenance efforts,
installed in October 1993 was not
                                                     including repairing cracks in certain
sufficient to address the problem at
                                                     trenches and sumps. The government,
Vandergrift. Amendola explained that the
                                                     however, points out that ALC’s brief does
fact that ALC had reported no violations
                                                     not contain any record citation indicating
during the first half of 1994 did not
                                                     that it presented factual material to the
establish that the diversion tank was a
                                                     District Court at trial relating to its
sufficient compliance measure because the
                                                     maintenance efforts, and that to the extent
facility had previously operated for months
                                                     that there is such evidence in the record, the

                                                24
evidence is limited to ALC’s own                      has a direct relationship to the calculation of
pleadings. Furthermore, the government                economic benefit: The longer the period of
contends that ALC reported violations                 non-compliance, the greater the amount of
long after it alleges that it cured them in           economic benefit, and the higher the
October 1994.                                         penalty. ALC contends that the government
                                                      miscalculated the period of non-compliance
       This difference of opinion as to
                                                      and that, in adopting the government’s
whether more violations occurred stems
                                                      calculations, the Court calculated ALC’s
from the fact that ALC identifies only one
                                                      purported economic benefit on lengths of
internal monitoring point, “Outfall 107,”
                                                      time that bore no semblance to reality.
associated with the $476,090 re-lining
project.     The government expert,                          We do not find it necessary to engage
Amendola, however, opined that the re-                in a lengthy analysis of the various
lining project was required to cure                   contentions regarding the periods of non-
violations associated with Number 90                  compliance and will set forth some of the
Anneal and Pickle Line, which discharged              factual disputes only in the margin.17
through Outfall 007. Outfalls 107 and 207
are internal monitoring points that                      17
discharged through Outfall 007. Since                       ALC relies on a table it has created
ALC reported violations at Outfall 007                that purports to show the non-compliance
through December 1995, long after ALC                 periods designated by the government
alleges it cured those violations with                were far greater than the actual non-
maintenance efforts in October 1994, the              compliance periods that occurred. In the
government contends that the maintenance              table, ALC challenges the non-compliance
efforts at Outfall 107 are not enough to              dates for the $476,090 relining project
carry the day.                                        discussed above. That project was
                                                      completed in 1996 and was necessary to
        It is clear that the District Court           cure violations at Outfall 007, at which
decided to adopt the government’s                     ALC reported violations through
framework regarding the monitoring and                December 1995. However, government
links between these different outfalls. In            expert Amendola extended the non-
view of the bona fide evidentiary dispute,            compliance date back to the beginning of
its findings were not clearly erroneous and           the limitations period for this case because
must be upheld.                                       ALC reported violations associated with
     E. Periods of Non-Compliance                     the Number 90 Anneal and Pickle Line
                                                      beginning at the time it came online in
       ALC’s final complaint relating to              1988. See App. 583-88; see also App. 991-
the economic benefit analysis undertaken              92, 994-95 (ALC documents stating need
by the District Court is the identification of        for treatment upgrade to attain
the period of non-compliance. Obviously,              compliance).
the length of the period of non-compliance                    ALC also appears to be repeating

                                                 25
Having thoroughly reviewed the record,             Court held:
we hold that the District Court’s findings
                                                          Plaintiff’s Motion in Limine
as to the periods of non-compliance are
                                                          on Cou n t i n g D a y s of
supported by the record, were not clearly
                                                          Violation, Doc. No. 242, is
erroneous, and must be left to stand.
                                                          GRANTED. All violations of
    IV. Monthly Average Violations                        the monthly average
                                                          parameters of defendant’s
       In a pretrial ruling the District
                                                          NPDES permits shall be
                                                          counted as violations equal in
                                                          number to all the days in the
its contention that the $150,000 diversion                monitored month.          See
tank it installed in October 1993 cured its               Atlantic States Legal Found’n
pretreatment violations at Vandergrift,                   v. Tyson Foods, Inc., 897
but the District Court found that it was                  F.2d 1128, 1139 (11th Cir.
not until the WW TP upgrade in August                     1990).
1994 that the pretreatment problem at
Vandergrift was solved, and we have                ALC maintains that the District Court erred
declined to disturb that finding.                  in so ruling, and in particular by improperly
        Additionally, ALC’s table                  excluding evidence that actual exceedences
challenges the non-compliance date of              occurred on fewer days.          ALC relies
December 1994 for the 24-hour staffing             primarily on Texaco Refining & Marketing,
the District Court deemed necessary to             2 F.3d at 507. The relevant portion of the
alleviate pretreatment violations at               holding of that case is that violations of the
Vandergrift. The Court found that ALC              daily average limits result in penalties only
did not have 24-hour staffing in place             for the number of days within the month that
until “late 1994” or 1995. ALC’s                   the facility operated. That decision does
contemporaneous internal documents                 not, however, resolve this case.
confirm that 24-hour staffing was                         The leading authority in this area is
necessary and was not in place before              the Court of Appeals for the Fourth
December 1994. Thus, like the WWTP                 Circuit’s opinion in Gwaltney. Gwaltney
upgrade, the 24-hour staffing problem              held that a violation of a monthly average
was not solved until December 1994.                parameter constitutes a violation of each day
ALC’s table also challenges the non-               of the month. The Court reasoned:
compliance dates for 24-hour staffing at
West Leechburg. The District Court                        While the statute does not
rejected this challenge, finding ALC’s                    address directly the matter of
analysis “misleading” because ALC                         monthly average limitations,
committed 599 violations between 1990                     it does speak in terms of
and November 1993 that were the subject                   penalties per day of violation,
of consent agreements with the State.                     rather than penalties per

                                              26
              violation .     This                   moderate, long-term discharges are
              language strongly                      potentially harmful.” Id. at 315 n.17. The
              suggests that where a                  Court also observed that the statute merely
              violation is defined                   sets a maximum penalty; the District Court
              in terms of a time                     retains the discretion to assess a smaller
              period longer than a                   penalty where appropriate. Id. The Court
              day, the maximum                       stressed that counting average monthly
              penalty assessable                     violations as a violation of each day of the
              for that violation                     month is essential to providing a framework
              should be defined in                   that allows district courts “sufficient
              terms of the number                    flexibility to assess penalties that suit the
              of days in that time                   particular circumstances of each case.” Id.
              period.                                at 314. We find the reasoning of Gwaltney
                                                     incomplete. A discharger who exceeds the
791 F.2d at 314 (footnote omitted). The
                                                     monthly average maximum by a great
Court of Appeals for the Eleventh Circuit
                                                     amount will probably also have committed
has followed Gwaltney. See Atl. States
                                                     a number of daily violations, and the
Legal Found., Inc. v. Tyson Foods, Inc.,
                                                     penalties for those violations will mete out
897 F.2d 1128, 1139-40 (11th Cir. 1990).
                                                     at least part of the total punishment that the
        ALC contends that charging it with           permittee’s conduct for the month merits.
a month’s worth of violations based on the           The penalty for violating the average
excedence of a monthly average permit                monthly maximum seems well suited to
limit yields illogical and unfair results.           punish a pattern of discharges that, with a
For example, ALC claims that a single                few exceptions, do not violate the daily
upset caused the average of the four                 maximums but are nevertheless, in the
samples for M ay and September 1991 to               aggregate, excessive. However, we find
exceed the monthly average limit, while              problematic the proposition that the
three of the months’ samples were within             maximum penalty for such a course of
the effluent limits. ALC submits that the            conduct should be thirty times the maximum
District Court’s ruling “automatically               penalty for the worst daily violation
converted a single event into 31 violation           imaginable.
days, despite evidence to the contrary.”
                                                            Under 33 U.S.C. § 1319(d) a violator
       This was the justification rejected in        is “subject to a civil penalty not to exceed
Gwaltney. In that case the defendant                 $25,000 per day for each violation,” which
presented the Court with hypotheticals               means that a civil penalty of $25,000 may be
similar to ALC’s contentions. 791 F.2d at            assessed for each day that a violation
314-15.     The Court noted that the                 occurs. Under Gwaltney, a violation of the
defendant’s hypotheticals ignored the fact           monthly average maximum occurs on every
that “both large, isolated discharges and            day of the month, which could result in a


                                                27
monthly penalty of roughly $750,000, but            House and Senate Committees. But we
that does not seem to be the most literal           must still decide this case. We are not
reading of the statutory language. That             prepared to say that Gwaltney was simply
said, we are fairly confident that no one in        wrongly decided. Instead—and the best we
Congress ever thought of the question that          can do in view of the muddled state of
is now before us, and it does not appear            affairs—is to follow Gwaltney on the
that there is any answer to be found in the         question of the statutory maximum, and to
text of the CWA or its legislative history.         use it as a framework, but to give guidance
Nor do we think that the structure or               structuring the way in which a district court
purpose of the Act yields any clear answer.         is to exercise its discretion in setting an
Certainly we can infer that Congress                actual penalty. This is the course we follow.
wanted to set an upper limit on the civil
                                                            More particularly, in exercising its
penalty that a district court can award;
                                                    discretion, a district court should take into
Congress did not want to leave this
                                                    account the degree to which the polluter’s
entirely to the district court’s discretion.
                                                    conduct had already been punished by
But without knowing Congress’s views on
                                                    penalties for daily violations and to use the
the relative severity of a violation of a
                                                    maximum penalty for a daily violation as a
monthly as opposed to a daily limit, it is
                                                    basis for comparison. Thus a district court
difficult to tell what sort of upper limit
                                                    would not assess a daily penalty of more
Congress wanted to propose.
                                                    than $25,000 as a function of the monthly
       Given the opaqueness of the statute          average violation unless it could say that the
and the consequent muddle that we have              permittee’s violation of the average monthly
described, we urge either that the Congress         maximum was as blameworthy (taking into
amend the statute to clarify its intentions         account the factors enumerated in 33 U.S.C.
or that the EPA consider the matter and,            § 1319(d) including environmental harm) as
after notice and comment, promulgate                a daily violation for which the $25,000
regulations that will give more guidance.18         maximum would be appropriate. This
To that end we will direct the Clerk of             exercise will not always be simple as there
Court to send copies of this opinion,               is a certain incommensurability between
directing attention to this section, to the         short, intense and prolonged moderate
Administrator and General Counsel of the            discharges, but we are confident that the
EPA and to the counsel for the relevant             district courts, in the exercise of their
                                                    discretion, can do the job. Since the District
   18
                                                    Court did not have the benefit of this
     Indeed, in a sense it is the EPA’s             standard, we must vacate and remand so that
regulations that have created the                   it may apply it to reconsider the penalty for
quandary, because they inject the concept           monthly average violations.
of a monthly violation into a statute that
authorizes penalties denominated only in                  Our modified Gwaltney approach
days.                                               must, however, be applied in accord with

                                               28
Texaco. Under such a regime, there must             United States v. Allegheny Ludlam,
be excluded from the calculation days on
                                                    No. 02-4346
which the facility in question did not
operate. If there was evidence in this
record that the plant did not operate on
                                                    FUENTES, Circuit Judge, dissenting.
certain days, this District Court would
have to consider that as well. As best we                   I concur and join in Part II, Parts IIID
can ascertain, however, there is no such            and E, and Part IV of the majority’s well-
evidence in the record. The closest ALC             crafted opinion. I disagree, however, with
comes is to represent that the Basic                the majority’s conclusion that the District
Oxygen Furnaces were not operating                  Court abused its discretion when it credited
during the week of January 24, 1994, but            the EPA’s expert economist and used that
ALC makes no claim that non-functioning             expert’s interest rate to calculate ALC’s
furnaces establishes overall plant closure.         economic benefit rather than the rate
In fact, one ALC witness testified “all of          presented by ALC’s expert. The majority
our facilities typically operate 365 days a         writes that the District Court committed
year, 24 hours a day” and that “Allegheny           clear error because, in applying the EPA’s
Ludlum’s facilities generally operate 24            12.73% discount rate, the Court so vastly
hours a day, 365 days a year.” At all               overstated the economic benefit to ALC of
events, no date other than January 24,              its Clean Water Act (“CWA”) violations
1994, is identified as a date for (possible)        that it failed to level the economic playing
plant shut down. Additionally, we note              field. In my view, in selecting the 12.73%
that the argument maintained by ALC in              rate, the District Court acted squarely within
its briefs is not that the Court’s order            its discretionary authority.
deprived it of the opportunity of proving
that plants were not operating on given
days, but rather that it was not discharging                               I.
or was in compliance during parts of the
                                                           Before discussing the discount rate
month.
                                                    issue and the Court’s exercise of discretion,
              V. Conclusion                         I think it worth commenting on the
                                                    proceeding conducted by the District Court.
       For the foregoing reasons, we will
                                                    The $8,244,670 penalty imposed on ALC
affirm the judgment on liability, except as
                                                    came after a three-day penalty hearing
to those aspects of the government’s
                                                    during which the District Court heard
claims that are affected by the laboratory
                                                    testimony from 13 witnesses, 11 live and 2
error defense and the monthly average
                                                    through depositions.      These witnesses
violations. We will vacate the assessment
                                                    included experts on economic benefit, cost
of penalty and remand for further
                                                    avoidance and aquatic toxicology, ALC’s
consideration in light of this opinion.
                                                    Director of Environmental Affairs, and
Parties to bear their own costs.

                                               29
officials from the United States Coast              that the District Court erred in using the
Guard, the Pennsylvania Fish and Boat               12.73% discount rate.
Commission and the Pennsylvania
Department of Environmental Protection.
Expert testimony was submitted by written
                                                                   II.
proffer with live cross-examination. On
the subject of economic benefit, the EPA                    As I see it, the central issue here is
presented testimony from Robert Harris,             whether the District Court abused its
an economist, who explained how he                  discretion in crediting one expert over
calculated the 12.73% WACC. ALC                     another when it determined the interest rate.
presented testimony from Dr. Howard                 We have noted many times that abuse of
Pifer, who proposed using the 30-day                discretion is a highly deferential standard of
treasury bill rate to determine the value of        review. And, we have stated, on numerous
the money going forward to the penalty              occasions, that a decision to credit the
payment date. In a 30-page opinion issued           testimony of one expert witness over
after the hearing, the District Court               another is entitled to deference. See United
credited the EPA’s expert testimony,                States v. Universal Rehabilitation Services
concluding that Dr. Pifer’s argument was            (PA), Inc., 205 F.3d 657, 665 (3d Cir.
not supported by the facts and that the             2000), quoting General Elec. Co. v. Joiner,
WACC offered a reasonable approach                  522 U.S. 136, 143 (1997), United States v.
because it represented an average of                Mathis, 264 F.3d 321, 335 (3d Cir. 2001),
potential investments made by ALC during            Laverdi v. Jenkins Township, 2002 WL
the time it had use of the funds that it did        31108910 at *364 (3d Cir. Sept. 19, 2002),
not spend on compliance. The District               Matlin v. Langkow, 2003 WL 283164 at
Court also followed Dean Dairy’s                    *382 (3d Cir. Jan. 22, 2003). The Supreme
endorsement of the WACC, as used in                 Court has held that a district court’s
Smithfield Foods.                                   evaluation of expert testimony is to be
                                                    accorded “the deference that is the hallmark
        The majority finds fault with the
                                                    of abuse-of-discretion review.” General
District Court’s analysis, noting that the
                                                    Elec. Co. v. Joiner, 522 U.S. at 143. A
government’s calculation of the WACC
                                                    district court abuses its discretion when it
“relied on values that were not ALC-
                                                    “bases its opinion on a clearly erroneous
specific.” Maj. Op. at 19. The majority
                                                    finding of fact, an erroneous legal
also believes that, rather than using an
                                                    conclusion, or an improper application of
average such as the WACC, the
                                                    law to fact.” LaSalle Nat’l Bank v. First
government should have applied the actual
                                                    Conn. Holding Group, L.L.C. XXIII, 287
rate it would have cost ALC to raise
                                                    F.3d 279, 288 (3d Cir. 2002). Indeed, we
capital for the years when it was diverting
                                                    have said that “[i]n order to justify reversal,
funds that should have gone to pollution
                                                    a district court’s analysis and resulting
control. Therefore, the majority concludes
                                                    conclusion must be “arbitrary or irrational.”

                                               30
United States v. Universal Rehabilitation            (1993); see also Kumho Tire Co., Ltd. v.
Services (PA), Inc., 205 F.3d 657, 665 (3d           Carmichael, 526 U.S. 137, 147 (1999)
Cir. 2000), quoting In re Paoli R.R. Yard            (extending Daubert’s gatekeeping obligation
PCB Litig., 113 F.3d 444, 453 (3d Cir.               to all expert testimony).
1997) (internal quotations omitted).
Abuse of discretion requires a showing of
clear error, not inappropriateness. In my                    Still, the majority conducts a
view, given our highly deferential standard          protracted survey of economic theories,
of review, the District Court did not clearly        considers treatises not specifically presented
err in crediting the government’s witness            by experts before the District Court, and
over ALC’s witness and adopting the                  decides that it disagrees with the District
WACC to calculate economic benefit.                  Court’s discretionary determination. Of
                                                     course, there will always be disagreement
                                                     among experts concerning scientific, or in
        Here, after considering all of the
                                                     this case economic, theories. However, it is
testimony, the District Court credited the
                                                     for the District Court Judge, as fact finder,
testimony of the government’s economic
                                                     to resolve those disagreements by judging
expert concerning the WACC, stating that
                                                     the credibility of the expert witnesses,
it “represents the rate of return a company
                                                     resolving the conflicting evidence, and
must earn annually to continue to attract its
                                                     assessing the weight of the expert’s
current investors and maintain its current
                                                     testimony. There is nothing in the record
levels of operations. It is a rate which is
                                                     here to indicate that the government’s expert
commonly used by companies in making
                                                     did not use sound methodology and
capital budgeting decisions.” Dist. Ct. Op.
                                                     adequately support his opinion, and nothing
at 22, quoting Harris Proffer at 6 (internal
                                                     to show that the District Court was clearly
quotations omitted); App. I at 47. The
                                                     erroneous in crediting that opinion.
District Court also credited the testimony
of the government’s expert on avoided
costs, noting that he had 30 years of
                                                           The majority’s disagreement as to
experience in the environmental field,
                                                     which interest rate is more “appropriate” is
including working for and as a consultant
                                                     not enough to justify a remand.19 This is
to the EPA and several major steel
companies. Dist. Ct. Op. at 16-17; App. I
at 41-42. The District Court was not                    19
required to explore every possibility. As                   The majority states, for example, that
the Supreme Court has stated, a district             “[i]n commenting upon the cost-of-capital
court need not have conducted an                     measure adopted by the District Court
“exhaustive search” of all possible                  [i.e., the WACC], we hope to provide
alternatives. See, e.g., Daubert v. Merrell          some guidance as to what constitutes an
Dow Pharms., Inc., 509 U.S. 579, 597                 appropriate cost-of-capital measure of
                                                     economic benefit.” Maj. Op. at 19.

                                                31
especially true in light of Dean Dairy,              the District Court’s calculation was
where we stressed that economic benefit              “reasonable,” we cannot find the Court to
“may not be capable of ready                         have abused its discretion. Relying on
determination,” and we accorded “the                 theoretical values rather than actual values
district court’s award of a penalty wide             to calculate the WACC does not render the
discretion, even though it represents an             District Court’s decision “unsupported,” as
approximation.” 150 F.3d at 264, citing              the majority contends.
United States v. Tull, 481 U.S. 412, 426-
                                                             The record shows th at the
27 (1987). Surely the choice to credit the
                                                     government’s expert gave a satisfactory
government’s expert over ALC’s falls
                                                     explanation for his decision to use the
within this wide discretion. Indeed, the
                                                     WACC in this case instead of, for example,
Dean Dairy Court went on to say that the
                                                     the marginal or current cost of capital for
“[p]recise economic benefit to a polluter
                                                     the relevant years, as the majority suggests.
may be difficult to prove” and that
                                                     He stated:
“[r]easonable approximations of economic
benefit will suffice.” 150 F.3d at 264,              [The WACC] is a rate that I consider proper
quoting Public Interest Research Group of            and represents a rate that falls between the
N.J., Inc. v. Powell Duffryn Terminals,              risk free rate and the equity rate. The reason
Inc., 913 F.2d 64, 80 (3d Cir. 1990). As             that I believe that the WACC rate is
here when the District Court credited one            appropriate is because a company’s cash is
expert’s reasonable approximation of the             fungible. That is, funds are not segregated
economic benefit over another’s, it acted            and used for specific purposes. Funds are
well within its discretion. We ought not             used in many different ways and the
substitute our own opinion for that of the           company receives different returns for each
District Court’s.                                    use. Some projects earn a high rate of
                                                     return. Others earn a low or no rate of
       In its attempt to fault the District
                                                     return. It is impossible to say exactly how
Court’s calculation of the WACC for
                                                     the funds that should have been spent in this
“rely[ing] on values that were not ALC-
                                                     example were used. Therefore, I believe the
specific” [i.e., using theoretical yields on
                                                     most appropriate rate to use is the average
bonds issued rather than actual yields], the
                                                     return the company earns on all of its
majority, in fact, concedes that the District
                                                     projects. In essence, this is the average
Court’s analysis contained reasonable
                                                     return for the company.
approximations. Maj. Op. at 19. It states
that while the bond-yield “figure might
well have been a reasonable approximation
                                                     App. IV at 1009. The record evidence
of ALC’s bonds’ yields, a more accurate
                                                     clearly shows that the District Court’s
calculation could easily have been
                                                     decision to use the WACC was supported by
achieved by using figures specific to
                                                     various considerations, including, as
ALC’s bonds.” Id. However, as long as
                                                     testified by the government’s expert, the

                                                32
fungibility of a company’s funds and the             figure to use when calculating ALC’s
variable rates of return a company receives          economic benefit during those years. I
depending on how it uses those funds.                disagree with the majority’s contention that
                                                     “[t]he theoretical WACC figures from the
       Further, the Court’s exercise of
                                                     early 1990s . . . really have no bearing on
discretion is supported by the case law.
                                                     the economic benefit conferred by post-
Dean Dairy cites the Smithfield Foods
                                                     1992 violations” simply because they are the
Court’s use of the WACC favorably,
                                                     highest figures of the group. Maj. Op. at 22.
indicating that the WACC is a perfectly
                                                     The figures from 1990 to 1992 are equally
acceptable interest rate for a district court
                                                     as relevant as those from 1993 to 1998, as
in this circuit to adopt when calculating
                                                     CWA violations occurred in each of the
economic benefit. 150 F.3d at 266, citing
                                                     years from 1990 to 1998. There is no record
United States v. Smithfield Foods, Inc.,
                                                     support for the majority’s assertion that the
972 F.Supp. 338, 349 (E.D.Va. 1997).
                                                     WACC figures from the early 1990s are
        The majority’s failure to find clear         “less-relevant” than those for later years. Id.
error after combing the record is evident in         Therefore, the majority’s suggestion that the
several places. For example, the majority            average WACC was unduly biased towards
criticizes the government’s expert’s use of          high numbers is inaccurate.20 Further, the
the arithmetic mean (instead of the                  District Court pointed out that, in some
geometric mean) to compute an estimate of            instances, it credited the government’s
the WACC for the years 1990-1998.                    expert in ways that wound up benefitting
Although the majority admits that “any               ALC. For example, in calculating the
correction will be slight,” the WACC                 economic benefit that ALC enjoyed by
comes to 12.71%, as opposed to 12.73%,               spending less money to staff its facilities,
when it is calculated using the geometric            the District Court noted that the
mean. Maj. Op. at 21-22 n.14. Surely, a              government’s expert
discretionary choice by a district judge that
                                                     made two assumptions that were favorable
results in an interest rate .02% higher than
                                                     to defendant. First, he included in ALC’s
an alternative cannot be viewed as clearly
                                                     actual staffing costs time billed by
erroneous.
                                                     maintenance workers who stopped by the
        The majority also criticizes the
government’s use of a mean interest rate at             20
all, asserting that it “wound up hurting                   The majority also overstates the
ALC.” Maj. Op. at 22. I do not agree that            degree to which the highest figures deviate
this calculation unduly punished ALC.                from the rest of those in the calculation. A
Taking an average of the interest rates for          figure of 15.85% would not be considered
all of the years in which ALC was non-               a statistical outlier when computing an
compliant is a common and perfectly                  average, particularly when the same figure
acceptable method for arriving at a single           appears twice and the rest of the figures
                                                     range from 10.53% to 13.95%.

                                                33
facility, even though having a maintenance           the WACC may not have been as
worker stop by is not the same as having             appropriate an approximation of economic
full-time staffing.        Second, [his]             benefit for ALC as it was for the company
calculations do not include money saved              in Smithfield Foods because of differences
by ALC at its West Leechburg and                     in the volatility of the industries in which
Brackenridge facilities prior to entry of the        each company operated.            Again, the
c onsent agreements w i th P aD E P                  standard of review is abuse of discretion,
[Pennsylvania Departm ent of                         and not whether another decision might
Environmental Protection].                           have been more “appropriate.” Further, the
                                                     majority cites no authority for the
Dist. Ct. Op. at 16 n.7, citing Amendola
                                                     proposition that using a theoretical interest
Proffer at 17; App. I at 41. Also, in
                                                     rate as opposed to an actual one in a
calculating the least costly upgrade that
                                                     particular industry is clearly erroneous. The
would have brought ALC into compliance
                                                     majority quotes Chesapeake Bay Found.,
at its Vandergrift facility before 1994, the
                                                     Inc. v. Gwaltney of Smithfield, Ltd., 611 F.
District Court noted that
                                                     Supp. 1542, 1559 (E.D.Va. 1985), as stating
the United States might have pointed to a            that “[t]he actual interest rate Gwaltney
$1.8 million upgrade considered by ALC               itself paid on borrowed funds . . . is a more
in 1988 and 1989, or the entire cost of the          accurate basis for determining Gwaltney’s
$5.7 million upgrade of the Vandergrift              economic benefit from delay.” Maj. Op. at.
WWTP [Wastewater Treatment Plants],                  20 (ellipsis in original). When put into
and argued that money should have been               context, however, this case does not support
spent in 1990, rather than 1994. But in an           the majority’s position. In Gwaltney, the
approach that is favorable to ALC, [the              plaintiff’s calculation computed Gwaltney’s
government’s expert] calculated the least            economic benefit from delay using “the ten-
costly upgrade in 1994 that would likely             year rate of return on equity earned by
have eliminated the violations, and                  Smithfield Foods, Inc.--Gwaltney’s parent
provided a $600,000 alternative.                     corporation.” 611 F. Supp. at 1559. The
                                                     Court went on to hold that “[a]t least in
Dist. Ct. Op. at 19, citing Amendola
                                                     these circumstances, the Court believes that
Proffer at 12-13; App. I at 44. As with its
                                                     13%--the actual interest rate Gwaltney itself
WACC calculation, the District Court
                                                     paid on borrowed funds--is a more accurate
exercised its discretion here and supported
                                                     basis for determining Gwaltney's economic
its decision with acceptable explanations.
                                                     benefit from delay.” Id. The Gwaltney
Here, however, it arrived at a figure that
                                                     Court, therefore, held against the use of a
benefitted ALC. The majority fails to
                                                     parent corporation’s interest rate, but not the
explain how this decision falls within the
                                                     use of a theoretical interest rate per se. In
District Court’s discretion while its
                                                     addition, the record shows that the District
WACC calculation does not.
                                                     Court did consider the economic benefit
       The majority also hypothesizes that           calculation in an industry-specific context,

                                                34
stating that “[f]ailures to comply with the                figure. Despite the majority’s contention to
[CWA] can . . . result in indirect                         the contrary, the District Court demonstrated
competitive benefits when compared with                    a proper application of the law in assessing
companies in the same field that do                        the penalty and, therefore, did not abuse its
comply with the [CWA].” Dist. Ct. Op. at                   discretion.
15; App. I at 40.
                                                                   In short, there is nothing in the record
       Finally, the majority asserts that the              to show that the District Court committed
District Court abused its discretion in                    clear error in its choice of the interest rate to
choosing the WACC instead of a lower                       calculate economic benefit. After carefully
alternative interest rate because using the                weighing the evidence presented by experts
WACC evidenced an effort to punish and                     on both sides during a three-day penalty
deter when calculating the economic                        trial, the District Court exercised its
benefit. However, the District Court                       discretion as the trier of fact and credited the
clearly recognized that there are two steps                testimony of one witness over another. The
to the “bottom up” approach to penalty                     decision is supported by the expert
assessment and it is the second step that is               testimony as well as our case law. Because
geared toward punishing and deterring the                  I do not believe that the District Court’s
violator. The District Court stated:                       fact-finding was clearly erroneous, its
                                                           decision is entitled to deference under abuse
          To achieve the goal of deterrence,
                                                           of discretion review.
an appropriate penalty must encompass
both the economic benefit that the
d e f e n d a n t o b t a in e d t h ro u g h i t s
                                                                  I would, therefore, affirm the District
noncompliance, and an additional punitive
                                                           Court’s decision as to the interest rate used
component that takes into account the
                                                           to calculate economic benefit.
penalty factors listed in Section 1319(d).
Without the second component, those
regulated by the CWA would have nothing
to lose by violating it.


       Dist. Ct. Op. at 29; App. I at 54.
The District Court was clearly mindful of
the two-step process to be used when
assessing penalty, first calculating the
economic benefit and then considering the
penalty factors to increase that figure. The
Court followed the correct analysis, only
taking punitive measures in the second
step when it doubled the economic benefit

                                                      35
