Marcellus, Utica Shale Plays Account for 41 Percent of U.S. Natural Gas Output
The 2018 Babst Calland Report – Appalachian Basin Oil & Gas Industry: Forging Ahead Despite Obstacles; Legal and Regulatory Perspective for Producers and Midstream Operators, the firm’s annual review of shale gas development activity in the Appalachian Basin, acknowledges an ongoing rebound despite obstacles presented by regulatory agencies, the courts, activists, and the market. To request a copy of the Report, contact info@babstcalland.com.
In this Report, Babst Calland attorneys provide perspective on issues, challenges, opportunities and recent developments in the Appalachian Basin and beyond relevant to producers and operators.
According to the U.S. Energy Information Administration’s May 2018 report, the Appalachian Marcellus and Utica shale plays account for more than 40 percent of U.S. natural gas output, compared to only three percent a decade ago. Since then, the Appalachian Basin has become recognized in the U.S. and around the world as a major source of natural gas and natural gas liquids.
The industry has been forging ahead amidst relatively low natural gas prices, infrastructure building, acreage rationalization and drilling plans that align with business expectations. The policy landscape continues to evolve with ever-changing federal and state environmental and safety regulations and tax structures along with a patchwork of local government requirements across the multi-state region.
Joseph K. Reinhart, shareholder and co-chair of Babst Calland’s Energy and Natural Resources Group, said, “This Report provides perspective on the challenges and opportunities of a shale gas industry in the Appalachian Basin that continues to enjoy a modest rebound. While more business-friendly policies and procedures are emanating from Washington, D.C., threats of trade wars are raising concerns about the U.S. energy industry’s ability to fully capitalize on planned exports to foreign markets.”
He added, “In a sustaining low price natural gas environment, operators in the Appalachian Basin continue to reduce operating costs and maximize capital and operating budgets by increasing efficiencies, employing new technologies and consolidating operations. As a result, drilling activity and production continue to be strong compared to a year or two ago. All indicators suggest continued growth prospects for Appalachian Basin shale despite the lingering obstacles facing the industry.”
The 84-page Report contains five sections, highlighted below, each addressing key challenges for oil and gas producers and midstream operators.
Business Outlook: Growth Prospects Continue
The U.S. Energy Information Administration predicts that U.S. energy consumption and production is most likely set for modest growth over the next 30 years. Henry Hub spot prices for natural gas rebounded modestly in 2017 and have tracked reasonably close in the first half of 2018. Given relatively-flat price projections, Appalachian operators’ ability to keep costs down, improve efficiency, and pursue attractive transactions remains critical. The energy industry turnaround is evidenced by the significant slowing of bankruptcy filings, from 70 in 2016 to just 24 in 2017.
Oil and Gas Regulations Continue to Evolve, Reform and Persist
Federal and state courts, legislatures and regulatory agencies are addressing various oil and gas issues and reforms. Pennsylvania’s Environmental Rights Amendment (ERA) poses a new and significant legal and novel constitutional issue for operators in the Commonwealth. Recent court challenges include a sharp rise in the total dollar amount of assessed penalties based on how PADEP calculates fines and civil penalties. West Virginia’s Governor Jim Justice issued a series of executive orders that seek broad regulatory reform.
Pipeline Outlook Positive, But More Public Pressure
The pipeline industry is continuing to experience increased scrutiny from regulators at all levels of government. Much of this scrutiny is being driven by public interest groups and environmental advocacy organizations becoming more active in the pipeline permitting process and resorting with greater frequency to litigation as a means of advancing policy initiatives that are not favorable to the energy industry. The Pipeline and Hazardous Materials Safety Administration (PHMSA) continued to make progress in finalizing the Gas Transmission and Gathering Final Rule with the intention to divide the content of the proposed rule into three separate final rules with the hope of issuing the rules by the end of 2019.
Local Government Regulation Continues to Spawn Debate and Legal Challenges
In Robinson Township, the Pennsylvania Supreme Court invalidated two sections of Pennsylvania’s updated Oil and Gas Act (Act 13) that limited the authority of local governments to regulate oil and gas operations. This was based on a reinvigorated interpretation and application of the Article I, Section 27 of the Pennsylvania Constitution, commonly known as the Environmental Rights Amendment (ERA). On June 1, 2018, the PA Supreme Court published its long-awaited Gorsline opinion. In a 4-3 decision, the majority reversed the Commonwealth Court’s decision affirming the granting of a conditional use approval for an unconventional natural gas well pad. West Virginia’s Lincoln and Fayette counties have enacted forms of “nuisance ordinances” that could potentially be used to target oil and gas related operations. As Ohio Courts heard and decided several cases regarding the extent of local authority to regulate oil and gas development, anti-fracking groups pursued an alternative route to regulation through local ballot initiatives.
Litigation Trends
West Virginia continues to see private nuisance suits filed against both upstream and midstream companies. In the last few years, civil suit filings alleging property contamination and nuisance claims from unconventional natural gas development have diminished significantly in Pennsylvania. Articles related to claims of alleged health effects from unconventional natural gas development continue to be published in scientific journals and in the media in even greater numbers, resulting in increasing controversy and polarization.
Many of the current opportunities and challenges facing the industry are described in the pages of this Report. Babst Calland’s multidisciplinary team of energy attorneys have chronicled the legal and regulatory landscape to help inform the energy industry operating in the Appalachian Basin.
Environmental Alert
(by Michael H. Winek, Meredith Odato Graham and Gary E. Steinbauer)
On June 7, 2018, Pennsylvania Governor Tom Wolf and Department of Environmental Protection (DEP) Secretary Patrick McDonnell announced the final issuance of air permitting documents affecting oil and gas operations in the Commonwealth. DEP shortly thereafter released a suite of new materials to mark the latest step forward in implementing Governor Wolf’s Methane Reduction Strategy. The new permitting documents are controversial in so far as they represent a significant departure from the status quo, requiring operators to take a fresh look at when and where an air permit may be needed.
The suite of materials recently finalized by DEP includes three key permitting documents: (1) a revised Air Quality Permit Exemption List (with substantial changes to the longstanding “Exemption 38” for well sites); (2) a revision of the existing general permit for natural gas compression and processing facilities, known as “GP-5”; and (3) a new general permit known as “GP-5A” to authorize the construction and operation of unconventional natural gas well site operations and remote pigging stations. DEP accepted stakeholder feedback on multiple drafts before issuing the final documents, which are all effective August 8, 2018. The agency also released various ancillary documents, including a Technical Support Document and new permit application forms.
Operators now face the challenging task of adjusting to the new permitting regime. Although the changes to the program are generally forward-looking—affecting new or modified sources—all operators should become familiar with the applicability triggers associated with Exemption 38, GP-5, and GP-5A. What may seem like a routine activity at a facility could have unexpected consequences for permitting purposes. Operators will also want to become familiar with DEP’s new e-Permitting platform for GP-5 and GP-5A, as DEP believes that use of the e-Permitting system will expedite review of applications.
In conjunction with finalizing the permitting documents, DEP rescinded a technical guidance document entitled, “Guidance for Performing Single Stationary Source Determinations for Oil and Gas Industries,” that was issued in 2012. The agency previously relied on this guidance when evaluating whether to aggregate two or more sources as a single source for air permitting purposes. This topic has been the subject of considerable debate and litigation in recent years. DEP rescinded the document in response to a 2016 U.S. Environmental Protection Agency rulemaking regarding source determinations.
Air program requirements for the oil and gas industry will likely continue to evolve. For example, now that Exemption 38, GP-5 and GP-5A have been finalized, DEP is expected to turn its attention to developing a regulation that would impose emission control requirements for existing sources.
If you have questions regarding these air program changes and how they could impact your business, please contact Michael H. Winek at (412) 394-6538 or mwinek@babstcalland.com, Meredith Odato Graham at (412) 773-8712 or mgraham@babstcalland.com, or Gary E. Steinbauer at (412) 394-6590 or gsteinbauer@babstcalland.com.
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Babst Calland announced the addition of William L. Godfrey as Director, Mobility, Automation and Safety.
The Firm is expanding its capabilities to support the developing needs of companies with emerging technologies. It provides strategic leadership with business and legal advice for manufacturers, suppliers, start-ups, technology companies and government entities in the full-spectrum of transportation regulatory, safety, product quality, and automation matters, including those related to automated/autonomous driving systems.
“Will Godfrey’s expertise and creativity deepens our unique vision to deliver full-stack solutions to clients’ problems that integrate technical and engineering know-how with legal insight to expand business opportunities,” said Tim Goodman, Chair of Babst Calland’s Mobility, Transport and Safety Group, and former National Highway Traffic Safety Administration Assistant Chief Counsel for Enforcement and Federal Senior Executive.
A former General Motors vehicle engineer, production manager and senior U.S. federal regulatory chief at the National Highway Traffic Safety Administration (NHTSA)/U.S. Department of Transportation (DOT), Will Godfrey will assist clients in achieving their business goals and navigating obstacles by applying a current and detailed understanding of the federal government’s approach to transportation safety regulation (particularly motor vehicles), including its programs, processes, and personnel.
Godfrey spent nearly a decade at NHTSA/DOT, where he served in various leadership capacities. Among other things, as NHTSA’s Trends and Analysis Division Chief, he led the oversight, analysis, and investigation of more than 1,100 vehicle, equipment, tire, motorcycle, and child car seat manufacturers globally, including TREAD Act/Early Warning Reporting Program and the integration of new, data-driven techniques. As a senior policy advisor to the NHTSA Administrator, he led the agency’s comprehensive reorganization of the NHTSA Office of Defects Investigation (ODI).
“Will Godfrey is well-regarded and uniquely qualified to serve clients with emerging technologies as a senior technical and strategic advisor, integrated with our best in class legal and technical team,” said Donald C. Bluedorn II, Managing Shareholder of Babst Calland. “We’re thrilled to have him join us.”
Prior to his federal service, Godfrey worked at General Motors as a vehicle engineer and production manager for various vehicle and equipment platforms. Among other things, he led programs in quality control, research and development, production, distribution, licensing, sales and service.
Godfrey received his Bachelor of Science in Automotive Engineering and Technology from Southern Illinois University. He earned a certificate from the Graduate School USA, Washington D.C. in the Federal Senior Executive Leadership Development Program in Management.
Corporate and Commercial Alert
(by Johanna H. Jochum and Kevin T. Wills)
On May 25, 2018, the European Union General Data Protection Regulation No. 2016/679 (GDPR), which limits personal data processing, became effective and enforceable. Unlike most EU regulations, portions of the GDPR are applicable to companies in third party countries—including companies in the United States.
The extraterritorial ramifications of the GDPR are already apparent. Many U.S.-based companies that generate revenue from processing large amounts of personal data have recently revised their privacy policies to comply with the GDPR requirements. However, for companies with business models that do not center on personal data processing, the extent of the GDPR’s reach and application is less clear.
1. What is the GDPR?
In the age of the internet, nearly everyone routinely shares personal data in everyday tasks. The purpose of the GDPR is to protect the “fundamental rights and freedoms” of people who share that personal data by limiting the extent a third party can process that personal data.
The GDPR’s definitions of “personal data” and “processing” are broad enough that most online activities are captured. For example, “personal data” can be “any information” relating to an identifiable person, including a person who can be identified by a username or location ID.[1] Further, “processing” is defined to include activities such as collection, storage or dissemination of personal data.[2]
Generally speaking, no company may process personal data that is distributed during these everyday tasks at all unless the data falls into one of six broad exemption categories: (1) consent; (2) contractual obligations; (3) legal obligations; (4) protection of “vital interests”; (5) public interest; or (6) legitimate interests.[3] The person or legal entity that directs the data processing, the “controller,” and in some situations, the person or legal entity that processes data on behalf of the controller, the “processor,” are liable for violations.[4]
Although the GDPR has recently become a subject of media interest, its principles have largely been part of EU Member State law since the European Commission Data Protection Directive (DPD) first became effective in 1998.[5] While the GDPR requirements are more stringent than the DPD (such as stronger data privacy and data erasure requirements), the GDPR is newsworthy because it is extraterritorial. In other words, the GDPR is applicable to companies in third party countries that process personal data of EU persons, including U.S.-based companies.
2. What does the GDPR mean for U.S. companies?
Not all aspects of the GDPR apply to U.S. companies.[6] The GDPR’s extraterritorial oversight is limited to processing activities of EU persons related to (a) offering goods and services (regardless of whether payment is required); and (b) monitoring their behavior to the extent it takes place in the EU.[7] But even these limited provisions can still go a long way. It is often difficult for companies to determine the location of their users (even an IP address is not a clear indicator of a person’s location) and notionally, any EU person who believes a company has improperly processed his or her personal data can complain to a supervisory authority within an EU member state without notifying the potentially offending company in advance.
The potential repercussions for noncompliance with the GDPR are prohibitive. Violations can ultimately result in very high fines (up to €20 million or 4 percent of global annual turnover (whichever is greater)) and/or suspension of receiving EU data.[8] However, it is not yet clear how the GDPR will be enforced in the U.S.
Under the GDPR, only third party countries with privacy laws that the European Commission has determined are “adequate” to the GDPR may currently receive EU data from a source that processes or controls such data. The European Commission has determined that the U.S. does not have privacy laws that are “adequate” to the GDPR without using other “appropriate” safeguards.[9] Therefore, a U.S. company, in principle, may not receive personal data from any EU source without appropriate safeguards in place. Accordingly, it is very important for U.S. based companies to determine if their business practices place them under the purview of the GDPR and, if necessary, implement appropriate safeguards.
3. Does the GDPR affect my U.S. company’s practices?
Many U.S. companies that are not affiliated with an EU subsidiary or partner are not yet in compliance with the extraterritorial requirements of the GDPR. Much of this stems from uncertainty about whether the GDPR applies to their everyday business activities. If your company falls under this umbrella, some questions may help clarify the GDPR’s applicability to your business:10
- If your company offers goods and/or services, free or paid:
- Does my company’s website allow international customers to use the services provided on the website?
- Does my company provide services in exchange for personal data, such as an email address and/or phone number that may be linked to an EU person?
- Does my company offer international shipping on any goods or services?
- Does my company’s website use another language other than English?
- If your company has an online presence:
- Does my company’s website use cookies or any other type of tracking to monitor user behavior?
- Does my company’s website collect personal data (with or without consent of a third party) to monitor activities?
- Does my company share user analytics with third parties?
Affirmative answers to any the above questions may indicate that the GDPR’s extraterritorial requirements may, in fact, apply to your business. Any concerns as to whether the GDPR applies to your current company practices or policies should be discussed with counsel.
4. What are some best practices U.S. companies can use to comply with the GDPR?
If the GDPR does apply to your company, there are some general best practices you can use to mitigate risk and comply with the applicable parts of the GDPR. You should consult with counsel to implement these safeguards and identify other best practices that may be appropriate for your particular industry
- Update your company web site’s privacy policy. Your company’s privacy policy should address GDPR-required areas, such as types of data collected, data retention, and individual user consent to data processing.
- Audit your current collection and recordkeeping practices. Ask the following: Who are the persons from whom you collect data? How did you obtain it? Why was it gathered? Is it secure?
- Create an accountability system. This may include appointing a data protection officer, creating a data breach notification system, training personnel, or other risk management techniques.
In Part 2, we assess the GDPR’s potential effects on the mobility and transportation industry.
For further information about this topic, please contact Johanna H. Jochum (D.C. Office) at (202) 853-3464 or jjochum@babstcalland.com or Kevin T. Wills (Pittsburgh Office) at (412) 394-5694 or kwills@babstcalland.com.
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Energy and Natural Resources Alert
(by Blaine A. Lucas and Robert Max Junker)
In Gorsline, Court Declines to Rule on Broader Issue of Compatibility With Uses in Residential and Agricultural Zoning Districts, but Suggests that Municipalities May Permit Unconventional Natural Gas Drilling in any and all Zoning Districts
The Pennsylvania Supreme Court published its long-awaited opinion in Gorsline v. Board of Supervisors of Fairfield Township on June 1, 2018. Although the majority reversed the Commonwealth Court’s decision affirming the granting of a conditional use for an unconventional natural gas well pad, it did so in a narrow holding, finding that Inflection Energy, LLC (Inflection) did not present enough evidence before the Fairfield Township (Township) Board of Supervisors (Board) establishing that its proposed unconventional gas well pad was similar to other uses allowed in the Township’s Residential-Agricultural Zoning District (R-A District). Unlike most zoning ordinances, the Township’s zoning ordinance did not specifically authorize oil and gas wells. Instead, Inflection had relied upon a “savings clause,” which allowed uses “similar to” the other uses specifically allowed in the R-A District.
Despite headlines and press releases touting the Gorsline decision as a wholesale rejection of oil and gas development in residential and agricultural zoning districts, its ruling was much more limited. In fact, language in both the Gorsline majority and dissenting opinions largely rejects the post-Robinson Township assertion of many shale gas opponents that natural gas wells must be relegated to industrial zoning districts and are fundamentally incompatible with residential or agricultural zoning districts.
Background
Babst Calland’s overview of the Commonwealth Court’s September 14, 2015 decision can be found here. For the Supreme Court, Justice Christine Donohue authored the majority opinion joined by Chief Justice Thomas J. Saylor, Justice David N. Wecht, and Justice Debra McCloskey Todd. Justice Kevin M. Dougherty authored a dissenting opinion joined by Justice Max Baer and Justice Sallie Updyke Mundy.
The majority opinion
Despite all the attention the Gorsline case garnered leading up to the Supreme Court’s decision, the actual holding is that the Board erred in granting a conditional use permit under the Township zoning ordinance’s savings clause because of differences between the proposed well pad and those uses expressly allowed in the Township’s R-A District and Inflection’s failure to address these perceived differences through the development of a factual record.
Following the Board’s approval of Inflection’s application, the Lycoming County Court of Common Pleas reversed, finding the Board’s decision that the proposed well pad was similar to and compatible with other permitted uses in the R-A District was not supported by substantial evidence. The Commonwealth Court reversed the Common Pleas Court and agreed with the Board’s decision, finding that Inflection’s proposed well pad was similar to and compatible with a “public service facility” use and an “essential service” use, based on its decision in MarkWest Liberty Midstream & Resources, LLC v. Cecil Township Zoning Hearing Board. The Commonwealth Court also noted that the Township already permitted four gas well pads within the R-A District, which demonstrated that the use was compatible with other uses in the zoning district.
In reversing the Commonwealth Court, the majority found that the Board’s decision did not contain findings of fact with respect to similarity of use. The majority also disagreed with the Commonwealth Court’s determination that the Board had made witness credibility determinations, and instead found that there was no substantial evidence presented by Inflection to support the Board’s conclusion that Inflection satisfied its burden of proof.
The majority took no issue with the decision in MarkWest, a case where the Commonwealth Court determined that a compressor station was of the same general character as an “essential service” permitted by Cecil Township’s unified development ordinance. However, the majority found that the Commonwealth Court’s reliance on MarkWest was error. Instead, the majority reviewed the record developed before the Board and the text of the Township’s zoning ordinance, and faulted the Board for approving the application on a “clearly inadequate evidentiary record” with “no meaningful interpretive analysis of the language of its existing zoning laws.”
In analyzing the non-residential uses permitted in the R-A District, the majority looked at features that complemented and served the other residents within the district and the public nature of such features and activities. In the majority’s view, the well pad was intended solely for Inflection’s own commercial benefit and did not provide services to the residential and agricultural development in the Township. Notably absent from the majority’s analysis is any discussion of the bonus payments and royalty streams that accrue to residents within the unit or the impact fees received by the Township.
The majority also disagreed with the Commonwealth Court’s reliance on the fact that the Board had already approved four other well pads in the R-A District. The majority again faulted the lack of information about these other well pads in the record and explained that the only inquiry under a savings clause should be about the uses permitted by the zoning ordinance. To decide otherwise would elevate a single approval into a zone-wide amendment of the “savings clause” language.
Due to the determination that Inflection did not meet its burden of proof and that the Board should not have approved Inflection’s application, the majority declined to address the closely-watched constitutional question in its allowance of appeal—objectors’ claimed violations of substantive due process rights and the Environmental Rights Amendment based on their interpretation of Robinson Township. However, the majority opinion concluded with strong language rejecting the objectors’ position and recognizing that zoning decisions are inherently local matters and local municipalities are empowered to “permit oil and gas development in any or all of its zoning districts.” In addition, the majority cautioned that its narrow holding “should not be misconstrued as an indication that oil and gas development is never permitted in residential/agricultural districts, or that it is fundamentally incompatible with residential or agricultural uses.”
The dissenting opinion
Justice Dougherty’s dissent opened by questioning why the majority avoided the important question on the applicability and scope of Robinson Township to the facts of the case and instead engaged in mere error review when the constitutional question was the sole issue of first impression accepted by the Court. In the dissent’s view, this constitutional question is answered by finding no conflict between the Commonwealth Court’s decision and Robinson Township.
The dissent took issue with the majority’s statement that oil and gas development is a “purely industrial use.” Justice Dougherty acknowledged that the actual use of a producing well pad is a passive use, and that any industrial-like activities during construction and drilling are only temporary and do not make a well pad an industrial use of property. The dissent viewed the majority’s reading of the “savings clause” as unduly restrictive, and stated that the majority misapprehended the object of the “similar to” requirement. The dissent would have affirmed the Commonwealth Court’s determination that the Board correctly granted Inflection’s application.
On the Robinson Township question of whether natural gas development is inherently incompatible with residential and agricultural uses, the dissent cited the Agricultural Area Security Law and the Farmland and Forest Land Assessment Act (“Clean and Green”) as an acknowledgement by the General Assembly that oil and gas development is not per se incompatible with agricultural uses. The dissent also cited the Court’s decision in Huntley & Huntley, Inc. v. Borough Council of the Borough of Oakmont as evidence that the Court has not ruled that natural gas development is always inherently incompatible with residential uses. The dissent faulted the objectors for reading Robinson Township too broadly when they claim that natural gas development is inherently incompatible with residential uses, and its impacts can never be mitigated through imposition of conditions.
Impact on current and future cases
The Supreme Court did not give anti-shale activists the bright-line rule they were hoping for in Gorsline, and, to the contrary, criticized the absolutist position advocated by those who read Robinson Township as mandating that oil and gas development be restricted to industrial zoning districts. The next step for the Supreme Court will be to address the Commonwealth Court’s decision in Delaware Riverkeeper Network v. Middlesex Township Zoning Hearing Board, a substantive validity challenge to a township’s zoning ordinance. The Commonwealth Court affirmed the rulings by the local zoning hearing board and Butler County Common Pleas Court, which found that oil and gas development was compatible with residential and agricultural zoning districts. In November 2017, the Supreme Court ordered that the petition for allowance of appeal filed in that case be placed on hold pending disposition of Gorsline. The Commonwealth Court also will have the opportunity to address Gorsline in the pending appeal of Frederick v. Allegheny Township, a substantive validity challenge to a local zoning ordinance heard by the court en banc on February 7, 2018.
Babst Calland will continue tracking developments related to Gorsline and local zoning ordinances. For more information regarding issues relating to land use and municipal implications of the Supreme Court’s decision, please contact Blaine A. Lucas at 412-394-5657 or blucas@babstcalland.com or Robert Max Junker at 412-773-8722 or rjunker@babstcalland.com.
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Energy Alert
(by David W. Ross, Mark A. Lindsay and Erica K. Dausch)
On May 25, 2018, in In re: Sabine Oil & Gas Corporation, 2018 WL 2386902 (2d. Cir. May 25, 2018), the United States Court of Appeals for the Second Circuit affirmed that a bankrupt energy and production company could reject its gas gathering agreements with a midstream company under Section 365 of the Bankruptcy Code because the gas gathering agreements did not create or involve an interest in real property.
Background
Sabine Oil & Gas Corporation (Sabine), an energy and production (E&P) company, filed for Chapter 11 bankruptcy protection in 2015 in the Southern District of New York. Prior to its bankruptcy filing, Sabine entered into gathering agreements (the “Agreements”) with Nordheim Eagle Ford Gathering, LLC (Nordheim), whereby Sabine was required to “dedicate” all of the gas it produced in a designated area to Nordheim, which would then gather and treat the gas. If Sabine could not deliver the minimum required amounts of gas to Nordheim, it was required to make significant deficiency payments.
Section 365 of the Bankruptcy Code permits a debtor to reject pre-petition executory contracts and unexpired leases that the debtor deems to be burdensome, thereby relieving the debtor of the obligation to perform moving forward. Agreements that involve the conveyance or creation of interests in real property (other than unexpired leases) are generally not subject to rejection under Section 365.
Sabine sought to reject the Agreements under Section 365 because Sabine deemed the terms of the Agreements, including the requirement to make significant deficiency payments, overly burdensome. Nordheim argued that the “dedications” contained in the Agreements were “covenants that run with the land” and thereby constituted interests in real property that were not subject to rejection under Section 365.
Because the Agreements were governed by Texas law per their choice of law provisions, the determination of whether or not the Agreements were subject to rejection under Section 365 required the Bankruptcy Court to evaluate Texas real property law and to determine whether or not the Agreements created interests in real property. In May 2016, the Bankruptcy Court ultimately held that the Agreements did not create real property interests notwithstanding the express language in the Agreements that their obligations constitute “real covenants running with the land.” Nordheim appealed to the District Court, which affirmed the Bankruptcy Court’s decision in March 2017. Nordheim thereafter appealed to the Second Circuit Court of Appeals.
Second Circuit Analysis
In affirming the lower court decisions, the Second Circuit held that notwithstanding the express language of the Agreements, under Texas property law, the Agreements were not real covenants that run with the land. Both Sabine and Nordheim agreed that for a real covenant to run with the land under Texas law it must (1) touch and concern the land; (2) relate to a thing in existence or specifically bind the parties and their assigns; (3) be intended by the original parties to run with the land; and (4) the successor to the burden must have notice. Sabine, 2018 WL 2386902 *1. The parties acknowledged that the agreement satisfied prongs 2 through 4, but disagreed on whether the agreement “touches and concerns” the land and, on whether the legal test under Texas law also includes a requirement of horizontal privity. Id.
The Second Circuit held that it need not determine whether the agreement “touches and concerns” the land, because it could decide the case solely on the horizontal privity issue. In that regard, the Second Circuit found that Texas law requires that horizontal privity exist between the parties to an agreement and that requirement was not satisfied in the case. In order for the parties to the original agreement to have been in horizontal privity with one another, there must have been some common interest in the land other than the purported covenant itself at the time the agreement was executed. Id. at *2. The Court stated that horizontal privity typically exists when the original covenanting parties make their covenant in connection with the conveyance of an estate in fee from one of the parties to the other. Id. Although the trend across the country is towards abolition of the horizontal privity requirement, the Second Circuit stated that when applying state law, it is tasked with applying the law of the state as it exists, and that it agrees with the Bankruptcy Court that horizontal privity remains a requirement of Texas real covenant law. Id.
Nordheim argued that horizontal privity of estate was established through separate agreements between the parties which conveyed a pipeline easement and a separate parcel of land. The Bankruptcy Court determined that this separate conveyance was insufficient to establish horizontal privity with respect to the Agreements, and Nordheim failed to cite any authority for the proposition that horizontal privity is satisfied if the covenanting parties have horizontal privity of estate only with respect to property separate from the property burdened by the covenant at issue. The Second Circuit agreed that the separate conveyance could not establish horizontal privity between the parties with respect to the Agreements. Id. at *3.
Alternatively, Nordheim argued that even if the Agreements did not contain real covenants, they created equitable servitudes that nonetheless create a real property interest that cannot be rejected under Section 365. The parties were in agreement that under Texas law, a covenant that does not technically run with the land can still bind successors to the burdened land as an equitable servitude if: (1) the successor to the burdened land took its interest with notice of the restriction, (2) the covenant limits the use of the burdened land, and (3) the covenant benefits the land of the party seeking to enforce it. Id. The Second Circuit held that there was no colorable argument that the Agreements create an equitable servitude because there is no benefit to real property of Nordheim. The court stated, “it is Nordheim as an entity—not its real property—that is benefited by the agreement. Through the agreements, appellants are entitled to receive fees for processing delivered gas and condensate, regardless of where that process takes place, and thus the agreements themselves do not render more valuable land on which appellants have located their processing facilities.” Id.
What’s Next?
Nordheim now has the opportunity to appeal the Second Circuit’s decision to the United States Supreme Court. While that decision remains, this issue will be front and center in the thoughts of E&P and midstream companies as E&P companies in bankruptcy may attempt to reduce costs by seeking to reject what they consider to be above market or commercially unreasonable gathering agreements with their midstream providers.
E&P companies may be motivated to reject such gathering agreements to gain leverage in negotiating more favorable terms such as minimum quantities, monthly gathering fees and deficiency payments or penalties. In contrast, midstream companies may prefer to preserve such agreements with their originally negotiated terms. In light of the Second Circuit’s decision, protecting such agreements from rejection may require a conveyance of some real estate interest within the structure of the gathering agreement. For example, a structure involving the grant of an overriding royalty interest might be considered. Regardless, midstream companies must beware that, notwithstanding careful drafting and an intent by the parties that the agreements contain “covenants that run with the land,” it is possible that such agreements may nonetheless be rejected in bankruptcy. Midstream companies may be wise, given such risks, to seek additional security in the form of mortgages, guaranty or surety agreements or letters of credit to protect themselves if ultimately faced with a financially troubled E&P company. From the viewpoint of the E&P companies, they should beware that midstream companies may seek additional security to protect themselves against potential future downturns in the market.
Babst Calland will continue tracking developments related to bankruptcy and creditors’ rights matters. For more information regarding the intersection of bankruptcy and energy issues, please contact David W. Ross at 412-394-6558 or dross@babstcalland.com, Mark A. Lindsay at 412-394-6514 or mlindsay@babstcalland.com, or Erica K. Dausch at 412-773-8706 or edausch@babstcalland.com.
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Environmental Alert
(by Kevin J. Garber and Jean M. Mosites)
On May 11, 2018, in The Delaware Riverkeeper, et. al. v. DEP and R.E. Gas Development, LLC., the Pennsylvania Environmental Hearing Board issued an opinion upholding well permits and renewals issued by the Department of Environmental Protection in an appeal based in part on Article I, Section 27 of the Pennsylvania Constitution, commonly known as the Environmental Rights Amendment (ERA). EHB Dkt. No. 2014-142-B (consolidated with 2015-157-B) (May 11, 2018).
The ERA provides:
The people have a right to clean air, pure water, and to the preservation of the natural, scenic, historic and esthetic values of the environment. Pennsylvania’s public natural resources are the common property of all the people, including generations yet to come. As trustee of these resources, the Commonwealth shall conserve and maintain them for the benefit of all the people.
The Board previously addressed the ERA in Friends of Lackawanna v. DEP and Keystone Sanitary Landfill, EHB Dkt. No. 2015-063-L (November 10, 2017) (FOL) and Center for Coalfield Justice and Sierra Club v. DEP, EHB Dkt. No. 2014-072-B (August 15, 2017) (CCJ). In another matter involving the Center for Coalfield Justice and DEP permitting action with respect to proposed mining operations, the Board also analyzed the ERA in a decision denying a petition for supersedeas. Center for Coalfield Justice and Sierra Club v. DEP, EHB Dkt. No. 2018-028-R (April 24, 2018). All of these cases analyze Department permitting decisions in light of the Pennsylvania Supreme Court’s June 20, 2017 decision in Pennsylvania Environmental Defense Foundation v. Commonwealth (PEDF), which established a standard of review based on the text of the ERA and Pennsylvania trust law principles.
Factual Background
In Delaware Riverkeeper, two citizens groups, the Delaware Riverkeeper and the Clean Air Council, along with several residents of Middlesex Township (collectively, Delaware Riverkeeper), appealed unconventional gas well permits and subsequent renewals issued to R.E. Gas Development, LLC (Rex). Among other arguments, Delaware Riverkeeper argued that the Department’s issuance of the permits violated its constitutional obligations under the ERA.
Following submission of the permit applications in April 2014, the Department reviewed whether the applications complied with relevant statutes and regulations, specifically the 2012 Oil and Gas Act and related regulations. During its review, the Department received numerous objections and comments, including those from a group of concerned citizens, Mars Parent Group. The Department and Rex reviewed the comments and participated in a Section 3251(a) conference with Mars Parent Group. Following the conference, Rex submitted a response to the Department outlining several actions it was willing to take to address public concerns.
The Department issued the permits on September 12, 2014 and included several special conditions to address the public concerns. Rex requested permit renewals in August 2015. Following the request, the Department became aware of potential abandoned wells near the proposed wellsite, which raised concerns of potential gas migration. The Department requested additional information from Rex, which provided a report summarizing its investigation of abandoned wells. The Department then renewed the permits.
Analysis
Writing for the Board, Judge Steven Beckman reiterated the standard for analyzing ERA challenges to permit actions by the Department set out in CCJ and FOL. The standard requires the Board to determine whether the Department considered the environmental effects of its permitting action and, second, whether the Department correctly concluded that its action will not result in unreasonable degradation, diminution, depletion or deterioration of the environment. Finally, the Board must determine whether the Department’s action satisfied its trustee duties of prudence, loyalty and impartiality towards the beneficiaries of the natural resources affected by the permitting decision.
In claiming the Department did not properly consider the environmental effects of its decision to issue the permits, the Delaware Riverkeeper argued the review of Rex’s application fell short of the review required in CCJ. However, the Board clarified that the analysis set out in CCJ “was not intended to suggest that there was some minimum requirement under Article 1, Section 27 governing the amount of review time that must be undertaken by the Department and the amount of information that must be considered by the Department. The Department’s consideration of the environmental effect of its permitting actions is, we believe, intended to be a flexible standard based on the nature of the activity and the potential impact of the activity on the environmental interests protected under Article 1, Section 27.” The Board stated that “[t]he fact that the consideration did not involve a full blown risk assessment and was not as extensive as Delaware Riverkeeper believes was necessary does not, in our opinion, violate the requirements of Article 1, Section 27.” The Board found that the Department considered the environmental effects of its action satisfying its obligation under the ERA.
The Board next addressed whether the Department’s decision to issue the permits resulted in the unreasonable degradation, diminution, depletion or deterioration of the environment. The Delaware Riverkeeper argued the development allowed by the permits would result in water contamination, fire and explosion risks and air emissions in violation of the ERA. The Board rejected this argument, finding the theories to be speculative, and that the Delaware Riverkeeper failed to meet its burden of proof regarding the likelihood of any theorized impacts.
Finally, the Board addressed the Department’s trustee duties under the ERA, finding the Department’s pre-action analysis to be consistent with its duties of prudence and impartiality. The Board stated “[o]ur understanding of the trustee responsibility does not require the Department to deny permits to any and all activity that will negatively impact the public natural resources and/or the people who use those resources” and that “[t]o hold otherwise would essentially prevent any permitting activity since it is nigh impossible to have development without some environmental impact.” The Delaware Riverkeeper also argued the Department breached its duty of impartiality by “treating this wellsite as if it were no different than any other wellsite” because it failed to consider the children in proximity to the wellsite and the local air quality that was already degraded. The Board found the Department did not violate its duty of impartiality because it considered the interests of various beneficiaries of the public natural resources near the proposed site.
What’s Next?
In Delaware Riverkeeper, the Board followed the ERA analytical approach taken in CCJ and FOL, examining the record to evaluate both the Department’s consideration of the effect of the permitted activity on public natural resources, as well as the actual or potential adverse effects of the permitted activity on the environment. Consistent with Board decisions issued before PEDF, as well as the Pennsylvania Supreme Court decision in Robinson Township v. Commonwealth, the Board’s opinion reaffirms that the ERA “should not be read as preventing all impacts to the environment nor does it call for a stagnant landscape.”
Several other ERA questions remain pending before the Board. Babst Calland will continue tracking legislative, litigation and regulatory developments related to the ERA. For more information regarding interpretation of the ERA, please contact Kevin J. Garber at 412-394-5404 or kgarber@babstcalland.com, or Jean M. Mosites at 412-394-6468 or jmosites@babstcalland.com.
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Attorney Tim Goodman will be presenting a pre-conference workshop “Automated/Autonomous Driving Systems (ADS) Innovation Boot Camp for Automotive Product Liability Litigators” at the American Conference Institute’s Automotive Product Liability Conference, July 18-20, 2018.
Automotive experts forecast that within the next five years, we will be sharing the road with automated/autonomous vehicles on a daily basis. In theory, vehicular automation is intended to increase safety by eliminating the human error component that causes most accidents. However, in practice, the prospect of every OEM developing an autonomous vehicle does not come without concerns, especially relative to automotive product liability. Despite the intended consequences of autonomous vehicles, there are certain outcomes that are leaving members of the legal community scratching their heads. Join attorneys and technical specialists who are helping shape ADS policy in the mobility, transport and safety space.
This workshop will provide insights into this technology, along with the legal and regulatory ramifications. Points of discussion, among other things, will include:
- SAE levels of driving automation
- ADS systems, sensors, connectivity, architecture and related issues
- ADS and self-certification of applicable federal safety standards
- Homologation and regulatory compliance challenges
- Innovative mobility and safety approaches
- Best practices and emerging trends
- Recent legislative and regulatory developments
For more information about the conference and this pre-conference workshop, click here.
Environmental Alert
(by Lisa M. Bruderly and Gary E. Steinbauer)
On April 12, 2018, the U.S. Court of Appeals for the Fourth Circuit in Upstate Forever v. Kinder Morgan Energy Partners, L.P., No 17-1640, held that the Clean Water Act (CWA) regulates point source discharges that reach “navigable waters” through groundwater with a “direct hydrologic connection” to the surface water. With this decision, the Fourth Circuit (which includes Maryland, North Carolina, South Carolina, Virginia and West Virginia) has joined the Ninth Circuit in recognizing the so-called groundwater “conduit theory” of liability under the CWA, a theory environmental groups are relying upon in several CWA citizen suits across the country. Under the groundwater “conduit theory,” separately regulated and permitted wastewater collection basins, impoundments, wells, and/or pipelines that result in groundwater contamination could be the targets for CWA liability, even though it is widely accepted that the CWA does not regulate discharges to groundwater itself. These cases have broad implications for many industries, including steelmaking, pipelines, mining, chemical manufacturing, oil and gas development, and utilities.
Background and District Court Decision
The Upstate Forever case dates back to 2016, when two environmental organizations filed a lawsuit alleging CWA violations stemming from a 2014 pipeline leak. According to the complaint, 369,000 gallons of petroleum products leaked from an underground pipeline. The plaintiffs alleged that the pipeline contents seeped into groundwater and later into two nearby creeks and their adjacent wetlands downgradient from the leak. The leak was fixed within a few days of discovery and approximately 209,000 gallons of petroleum products were recovered through remediation efforts overseen by a state environmental regulatory agency. The plaintiffs, however, alleged that a plume of petroleum contaminants continued to migrate from groundwater to surface water several years after the leak was fixed.
The district court dismissed the case after finding that (1) there was no ongoing point source discharge because the pipeline leak was fixed within days of the leak’s discovery; (2) the migration of pollutants through soil and groundwater is nonpoint source pollution, which is not regulated by the CWA; and (3) the CWA does not apply to claims involving discharges to groundwater that is hydrologically connected to surface water. Because the district court dismissed the plaintiffs’ complaint at an early stage in the litigation, the allegations in the complaint are assumed by the courts to be true.
Ongoing Pollutant Release from Groundwater to Surface Water Considered Sufficient to Bring Citizen Suit
Before addressing the groundwater “conduit theory,” the Fourth Circuit first had to decide whether the plaintiffs’ allegations were sufficient to demonstrate an ongoing violation of the CWA. Citizen suits under the CWA are authorized only upon a showing that the alleged violations are ongoing; lawsuits for wholly past violations cannot be brought by citizens. According to the majority opinion, the CWA does not require the continued release of a pollutant from a point source for the alleged violation to be considered ongoing. Instead, the majority accepted the plaintiffs’ allegations that gasoline from the now fixed pipeline continued to be added to navigable waters from the groundwater and determined that this migration from groundwater to surface water was sufficient to clear the jurisdictional bar under the CWA’s citizen suit provision.
The lengthy dissent in the Upstate Forever decision centered on the argument that ongoing migration of contaminated groundwater from the site of the pipeline leak was not an ongoing violation of the CWA. Because the pipeline (i.e., the point source at issue) had been fixed and was no longer leaking, the dissent noted that the ongoing migration of contaminated groundwater should be considered nonpoint source pollution, which is not regulated by the CWA.
Pollutant Discharges to Groundwater Create CWA Liability if the Groundwater has a Direct Hydrologic Connection to Jurisdictional Surface Waters
After deciding that the plaintiffs had alleged an ongoing violation, the Fourth Circuit turned to the groundwater “conduit theory.” Characterizing it as an issue of first impression for the court, the majority held that pollutants originating from a point source that migrate through groundwater with a “direct hydrologic connection” to the surface water are regulated by the CWA. The majority stated that a “discharge need not be channeled by a point source until it reaches navigable waters.” Rather, a more tenuous connection between the point source and jurisdictional surface water can now support CWA liability in the Fourth Circuit. The court stated that existence of a “direct hydrologic connection” is a fact-specific inquiry, and time, distance, geology, flow, and slope are factors in the analysis.
Based on the facts alleged in the complaint, the court held that the navigable waters at issue were allegedly 1,000 feet or less from the release site and that this “extremely short distance” was sufficient to support an allegation of a “direct hydrologic connection” between the groundwater and surface water. The court also noted that there was no dispute that the pipeline leak caused the contamination at issue and that “measurable quantities” of contaminants had been detected near the leak. Unless the defendant seeks rehearing in the Fourth Circuit or review in the Supreme Court, the Upstate Forever case will be sent back to the federal district court where the parties will engage in discovery and perhaps a trial on the merits.
Fourth and Ninth Circuits Aligned on Groundwater “Conduit Theory”
The Fourth Circuit’s Upstate Forever decision follows a February 2018 decision by the Ninth Circuit on the groundwater “conduit theory.” In Hawai’i Wildlife Fund v. County of Maui, a divided panel from the Ninth Circuit became the first federal appellate court to hold that point source discharges traveling to jurisdictional surface waters indirectly through groundwater could be regulated by the CWA. The Ninth Circuit noted that the path from point source to surface water must be “fairly traceable.” The Fourth Circuit in Upstate Forever noted that its “direct hydrologic connection” test was not functionally different than the Ninth Circuit’s “fairly traceable” test.
As compared with Upstate Forever, the facts, evidence, and procedural posture in County of Maui were vastly different. The facts in the County of Maui case involved the injection of treated sanitary effluent into four permitted injection wells. Relying heavily on the results of a dye tracer test, showing that dye emerged in submarine seeps in the Pacific Ocean 84 days after being injected into the wells, the Ninth Circuit concluded that the treated sanitary wastewater reaching the Pacific Ocean was “fairly traceable” to the county’s injection wells. Like the Fourth Circuit, the Ninth Circuit in County of Maui refused to limit the CWA’s reach to direct discharges from a point source to jurisdictional surface waters and left for “another day the task of determining when, if ever, the connection between a point source and a navigable water is too tenuous to support liability under the CWA.”
The defendant in the County of Maui case has signaled that it will ask the U.S. Supreme Court to review the Ninth Circuit’s decision.
EPA Provides Opportunity to Comment on the “Direct Hydrologic Connection” Concept
The “direct hydrologic connection” concept adopted by the Fourth Circuit in Upstate Forever was based on statements by the U.S. Environmental Protection Agency (EPA) in its past rulemakings. The majority in Upstate Forever used EPA’s statements to support its adoption of the concept, even though on February 20, 2018, EPA questioned the validity of such past statements when it issued a Federal Register notice requesting comments on whether it should clarify the “direct hydrologic connection” concept. EPA is also seeking input regarding whether point source discharges traveling through groundwater before reaching a navigable water should be covered by the CWA or whether such discharges would be better addressed under other federal or state authorities or permit programs. The public comment period on this notice closes on May 21, 2018.
Potential Implications of the Upstate Forever Decision
The Upstate Forever decision has the potential to significantly expand the scope of the CWA to cover a wide range of unplanned and unintentional discharges that reach surface waters through complex underground pathways. Under the current regulatory scheme, it would be impossible to obtain an NPDES permit, or other discharge permit, to address unanticipated leaks from a pipeline, like that at issue in Upstate Forever, and other unintentional releases to groundwater. Furthermore, allowing CWA citizen suits to continue after the source of the discharge has been stopped will increase exposure for entities that have taken actions to correct a leak or to address residual groundwater contamination through remediation.
More litigation over the legitimacy of groundwater “conduit theory” is likely, and environmental groups in the Fourth and Ninth Circuits, and beyond, are likely to expand application of the theory to other scenarios. One of the most common applications, to date, has been use of the argument to assert CWA liability regarding coal ash disposal sites. A different panel of Fourth Circuit judges and the Sixth Circuit are expected to soon issue decisions on the groundwater “conduit theory” in other cases involving coal ash disposal sites. Babst Calland’s Environmental attorneys continue to track these developments. Should you have any questions, please contact Lisa M. Bruderly at (412) 394-6495 or lbruderly@babstcalland.com, or Gary E. Steinbauer at (412) 394-6590 or gsteinbauer@babstcalland.com.
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Environmental Legal Perspective
(by Christopher B. (Kip) Power)
In a decision with potential ramifications for challengers of many different types of environmental permits and approvals, the U.S. District Court for the Southern District of West Virginia (the “Court”) recently dismissed a lawsuit filed by the Sanitary Board of the City of Charleston (the “CSB”) seeking to overturn a decision of the Environmental Protection Agency (EPA) regarding the permissible concentrations of copper in discharges from the CSB’s wastewater treatment plant to the Kanawha River. Sanitary Board of the City of Charleston, West Virginia v. Scott Pruitt, et al., Civil Action No. 2:16-cv-03060 (March 29, 2018 Memorandum Opinion and Order) (Goodwin, J.). After two years of litigation (and more than four years of administrative proceedings prior to that), the Court determined that the decision of the West Virginia Department of Environmental Protection (WVDEP) to omit any limit on discharges of copper in the CSB’s most recent National Pollutant Discharge Elimination System (NPDES) permit rendered the CSB’s challenge to EPA’s action “either hypothetical or [lacking in] imminence.” As a result, the Court ruled there was no longer a justiciable “case or controversy” between the parties, depriving it of subject matter jurisdiction over the dispute.
The case centered on the WVDEP’s promulgation of statewide limits on allowable levels of copper in streams, acting pursuant to its delegated authority under the federal Clean Water Act (CWA). Using the general formula provided in its rules, the WVDEP translated these in-stream standards into specific effluent limits for copper when it issued a NPDES permit to the CSB in 2012. Recognizing that it could not operate in compliance with the assigned copper effluent limits, the CSB developed the necessary factual information and scientific rationale to support development of an alternative, facility-specific water quality standard (using a procedure known as a “water effects ratio” analysis) that would have allowed it to discharge copper in concentrations approximately five times higher than EPA’s nationally recommended criteria without harming the aquatic life the standard is designed to protect. After the WVDEP approved the alternative water quality standard, the CSB also shepherded it through the West Virginia Legislature, which must approve any such changes in WVDEP regulations.
The CWA specifies that changes to state water quality standards must also be approved by EPA before they may become effective. Therefore, the facility-specific standard for copper that had been approved by the WVDEP was submitted to EPA’s Region III office in Philadelphia, Pennsylvania for review. Originally, the CSB’s lawsuit challenged EPA’s failure to timely act upon the proposed alternative standard; after the lawsuit was filed, EPA rejected the new standard, and the CSB then amended its complaint to challenge that decision on the merits.
However, before that challenge could be decided, on June 13, 2017, the WVDEP renewed the CSB’s NPDES Permit for its plant. Based on updated water quality monitoring reports, the agency found the plant’s discharges no longer had a “reasonable potential” to violate the existing copper water quality standards, and therefore the WVDEP did not impose any limits on copper concentrations in the permit. The permit still requires quarterly monitoring and could be reopened to impose an effluent limit for copper if monitoring results justify it. Despite that, the Court ruled that because the CSB is no longer required to meet any copper limits in its discharges, it was unable to demonstrate a “concrete injury” for purposes of Constitutional standing. The Court also rejected CSB’s argument that an exception to the mootness doctrine, for cases that are “capable of repetition, yet evading review” should be applied. Even if the dispute regarding the appropriate copper effluent limit should arise again, the Court did not believe that it was likely to be “quickly rendered moot before a court can render a decision on it.” Therefore, the Court granted EPA’s motion to dismiss the case in its entirety. There is no indication in the Court docket regarding whether or not the CSB plans to appeal the ruling.
For questions about the Court’s decision or the Clean Water Act in general, please contact Christopher B. (Kip) Power at (681) 265-1362 or cpower@babstclland.com.
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Employment and Labor Alert
(by John A. McCreary, Stephen A. Antonelli, and Molly E. Meacham)
On March 6, 2018, the Wage and Hour Division of the U.S. Department of Labor (WHD) announced a new pilot program, the Payroll Audit Independent Determination (PAID) program, which is intended to encourage employers to identify and correct potentially non-compliant practices.
According to DOL’s Q&A page on the PAID program (https://www.dol.gov/whd/PAID/#4) “The PAID program provides a framework for proactive resolution of potential overtime and minimum wage violations under the FLSA. The program’s primary objectives are to resolve such claims expeditiously and without litigation, to improve employers’ compliance with overtime and minimum wage obligations, and to ensure that more employees receive the back wages they are owed—faster.”
PAID will cover potential violations of the FLSA’s overtime and minimum wage requirements, including violations based on alleged “off-the-clock” work, failures to pay overtime at one-and-one-half times the regular rate of pay, or misclassification of employees as exempt from the FLSA’s minimum wage and overtime requirements. Under the program, employers may self-audit their FLSA compliance, and where violations are discovered it must:
i. specifically identify the potential violations,
ii. identify which employees were affected,
iii. identify the timeframes in which each employee was affected, and
iv. calculate the amount of back wages the employer believes are owed to each employee.
Once these calculations are concluded, the employer will contact WHD to discuss the issues for which it seeks resolution. Unless WHD denies the employer’s request to participate in the program at the outset (which could happen, for example, if the employer is already engaged in litigation over a challenged pay practice), WHD will then inform the employer of the manner in which the employer must submit required information, including the following:
i. each of the calculations described above—accompanied by both evidence and explanation concerning how the calculations were made;
ii. a concise explanation of the scope of the potential violations for possible inclusion in a release of liability;
iii. a certification that the employer reviewed all of the information, terms, and compliance assistance materials;
iv. a certification that the employer is not litigating the compensation practices at issue in court, arbitration, or otherwise, and likewise has not received any communications from an employee’s representative or counsel expressing interest in litigating or settling the same issues; and
v. a certification that the employer will adjust its practices to avoid the same potential violations in the future.
After WHD assesses the back wages due, it will issue a summary of unpaid wages. WHD will also issue forms describing the settlement terms for each employee, which employees may sign to receive payment. The release of claims provided in the form will match the previously agreed-upon language and, again, must be limited to only the potential violations for which the employer had paid back wages. Employers are responsible for issuing prompt payment; WHD will not distribute the back wages.
The benefit to employers of engaging in the PAID program is that it enables employers to expeditiously resolve inadvertent minimum wage and overtime violations without litigation. Additionally, although WHD will require payment of all back wages due, WHD will not require additional payment of liquidated damages or civil monetary penalties when employers choose to participate in the program and proactively work with WHD to fix and resolve the compensation practices at issue.
There is a downside, however: employees are not required to waive their private enforcement rights unless they accept payment from their employer, and employers are prohibited from retaliating against the employee for his or her choice (as they are under current law). If the employee chooses to not accept the payment, the employee will not release any private right of action. Employees therefore remain free to pursue legal action to recover liquidated damages in addition to any unpaid overtime or minimum wage claim. Additionally, if the employee chooses to accept the payment, the employee will not grant a broad release of all potential claims under the FLSA. Rather, the releases are tailored to only the identified violations and time period for which the employer is paying the back wages.
Thus, employers that participate in the PAID program run the risk of alerting employees to potential claims, thereby triggering the litigation they hoped to avoid. But on the assumption that most employees do not actually relish the prospect of suing their employer, the PAID program may offer an attractive and cost-effective method to resolve wage and hour issues.
For more information about the PAID program, or for assistance with a self-audit, contact John A. McCreary, Jr. at (412) 394-6695 or jmccreary@babstcalland.com, Stephen A. Antonelli at (412) 394-5668 or santontelli@babstcalland.com, or Molly E. Meacham at (412) 394-5614 or mmeacham@babstcalland.com.
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Environmental Alert
(by Jean M. Mosites and Kevin J. Garber)
Over the past several months, members of Pennsylvania’s House of Representatives have introduced bills to address and eliminate regulatory inefficiencies and burdens that affect both individuals and businesses across the Commonwealth. The bills are part of a regulatory reform package included in the House State Government Committee’s Regulatory Overreach Report, released in mid-January, 2018 by committee chair Daryl Metcalfe (R, Butler). These bills, if enacted into law, would significantly change the way regulations are promulgated, revised and enforced in Pennsylvania.
These state efforts complement recent federal executive and legislative actions on regulatory reform. Shortly after taking office, President Trump issued two regulatory reform executive orders: (1) Reducing Regulation and Controlling Regulatory Costs (E.O. 13771), also known as the two-for-one executive order, which requires agencies to propose two existing rules for repeal for each additional rule promulgated in and after fiscal year 2017; and (2) Enforcing the Regulatory Reform Agenda (E.O. 13777), which requires federal agencies to designate a Regulatory Reform Officer charged with reviewing and making recommendations for the repeal, replacement, or modification of existing regulations. These executive orders address regulatory reform broadly and the long-term impact remains to be seen. There are several other examples where President Trump has issued executive orders targeting specific regulations or rules promulgated during the Obama administration.
In early 2017, Congress used the Congressional Review Act (CRA), which generally authorizes Congress to repeal any rule within 60 calendar days after promulgation, to repeal 14 Obama-era rules, including changes to the stream protection rule under the Office of Surface Mining and to the Bureau of Land Management’s planning procedures. Once a rule is repealed using the CRA, the federal agency is prohibited from reissuing the rule or issuing a new rule “in substantially the same form,” unless otherwise required by law. In addition, the U.S. House of Representatives has introduced at least two pieces of regulatory reform legislation. On January 5, 2017, the “Regulations from the Executive in Need of Scrutiny” or REINS Act, was passed in the House, which would require congressional approval for every new regulation costing more than $100 million (termed “major rules”), in addition to requiring congressional review and approval of previously enacted major rules. On January 11, 2017, the House passed the Regulatory Accountability Act of 2017, which would revise the Administrative Procedure Act to require agencies to consider several new factors when proposing a new regulation, such as the costs and alternatives to the proposed regulation. Both bills await action in the Senate.
The recent Pennsylvania House regulatory reform bills have in some cases borrowed, and in other cases expanded, on the federal regulatory reform efforts. The Pennsylvania House of Representatives’ five-bill regulatory reform package includes:
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- H.B. 1792, an act amending the Regulatory Review Act. This bill was introduced by Rep. Benninghoff (R, Mifflin) and referred to the State Government Committee on September 18, 2017. Rep Benninghoff has stated that the bill was inspired by the recent use of the CRA on the federal level. H.B. 1792, however, would go one step further than the CRA by giving the General Assembly the ability to initiate the repeal of any state regulation, regardless of when it was promulgated, by a concurrent resolution signed by the Governor.
- H.B. 1237, is also an act amending the Regulatory Review Act. This bill was introduced by Rep. Keefer (R, York), referred to the State Government Committee on January 5, 2018, subsequently passed in Committee, and reported to the full House and tabled on February 6, 2018. H.B. 1237 is modeled after the federal REINS Act bill. Under H.B. 1237, any economically significant regulation, which under the Pennsylvania law is defined as any regulation expected to cost more than $1 million, would need to be discussed at a public hearing held by the appropriate committee and be approved by concurrent committee resolution.
- H.B. 209, entitled the “Independent Office of the Repealer Act.” This bill was introduced by Rep. Phillips-Hill (R, York), referred to the State Government Committee on January 25, 2018, and amended in committee on February 6, 2017. H.B. 209, as amended, makes the Office of the Repealer part of the Independent Regulatory Review Commission. The bill would require the review of existing statutes and regulations to identify those that may be appropriate for review, revision, or repeal, and includes, among other things, a two-for-one scheme similar to President Trump’s E.O. 13771.
- H.B. 1960, entitled the “State Agency Regulatory Compliance Officer Act.” This bill was introduced by Rep. Ellis (R, Butler), referred to the State Government Committee on January 5, 2018, passed in Committee, and reported to the full House and tabled on February 6, 2018. H.B. 1960 would require each Commonwealth agency to appoint a Regulatory Compliance Officer (RCO), who would have the authority to resolve noncompliance issues before imposing penalties, provide detailed explanations for each regulatory requirement under the agency’s jurisdiction, and issue opinions to regulated entities regarding their duties under the law. The bill provides that the RCO’s opinion, or failure to provide an opinion upon request, shall be a complete defense in proceedings initiated by the agency under specified conditions.
- H.B. 1959, entitled the “Permit Administration Act.” This bill was introduced by Rep. Rothman (R, Cumberland) and referred to the State Government Committee on January 3, 2018. H.B. 1959 would require agencies to: review current permit decisions and delays and report to the General Assembly; publish a list of all permitting done by the agency; develop an online permit tracking system; and establish a program to review permit delays and resolve issues causing those delays. The permit delay review programs would be administered by third-party professionals, who would review applications subject to delay and transmit applications back to agency for issuance.
The passage of any of these bills in the present or amended form is uncertain. Babst Calland’s Environmental and Energy and Natural Resources attorneys continue to track federal and state regulatory reform efforts, including the bills mentioned above. Should you have any questions, please contact Jean M. Mosites at (412) 394-6468 or jmosites@babstcalland.com, or Kevin J. Garber at (412) 394-5404 or kgarber@babstcalland.com.
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Environmental Legal Perspective
(by Robert M. Stonestreet and Lisa M. Bruderly)
Since its enactment in 1972, the federal agencies who administer the Clean Water Act (the Act), the Environmental Protection Agency (EPA) and the United States Army Corps of Engineers (the Corps), have taken the position that the definition of “waters of the United States” governed by the Act (also known as “jurisdictional waters”) does not include groundwater. Regulation of groundwater therefore falls outside the scope of the Act.
In 2014, the Obama administration proposed the Clean Water Rule to clarify the definition of jurisdictional waters. Both the proposed and final versions of the Clean Water Rule, which was issued in 2015 and is currently suspended, note that EPA and the Corps “have never interpreted the ‘waters of the United States’ to include groundwater.” In fact, the Clean Water Rule clearly states “groundwater, including groundwater drained through subsurface drainage systems” does not qualify as “waters of the United States.” Nothing in the Clean Water Act precludes state governments from regulating groundwater under their own programs as a “water of the state,” which many states have done.
Since the Clean Water Act does not apply to groundwater, a federal Clean Water Act discharge permit (known as an NPDES permit) should not be required to discharge into groundwater, right? Not necessarily. What happens when materials discharged into groundwater later reach a jurisdictional water such as a stream or ocean? Federal district courts that have wrestled with this issue disagree. Certain district courts have concluded that an NPDES permit is not required under these circumstances. Other district courts have ruled that the Act does apply, and therefore pollutants discharged into groundwater without an NPDES permit violate the Act if those pollutants reach a jurisdictional water.
On February 1, 2018, the Ninth Circuit Court of Appeals became the first federal appeals court to squarely address the issue (Hawai’i Wildlife Fund v. County of Maui). The Court ruled that Maui County, Hawaii violated the Act by discharging sanitary wastewater collected at a treatment facility into four permitted underground injection wells without obtaining an NPDES permit. The wells did not lead directly to a jurisdictional water. Rather, a portion of the wastewater eventually entered the Pacific Ocean through the ocean floor some distance from shore after traveling through natural geologic features. The County had operated the injection wells since 1979 with the full knowledge of the Hawaii Department of Health and the EPA – neither of which ever advised the County that an NPDES permit was required to inject wastewater into the wells. This case arose after a coalition of environmental organizations filed a citizen suit against the County under the Act.
In reaching its decision, the Ninth Circuit did not address whether groundwater falls within the definition of “waters of the United States” that are regulated by the Act. Rather, the Court focused its analysis on whether the wastewater discharged into the wells actually reached the ocean. In the Ninth Circuit’s view, the groundwater was merely a conduit through which the pollutants travel into the ocean after being injected into a well. The fact that the pollutants reached the ocean was determined by the Court to be sufficient to create Clean Water Act liability. “That the groundwater plays a role in delivering the pollutants from the wells to the navigable water does not preclude liability under the statute.” This is an important point because the Act requires an NDPES permit only for discharges into “waters of the United States” from a “point source” – for example, a pipe or ditch. By contrast, an NPDES permit is not required for “non-point source” discharges, meaning discharges that consist of sheet flow, rather than a discreet conveyance (e.g., storm water runoff from roads or agricultural areas that flows into a regulated water without first entering a pipe or ditch). According to the Ninth Circuit, those non-point sources do not “collect and convey” pollutants to a navigable water in the same way as the County’s injection wells.
The Ninth Circuit stopped short, however, of adopting what essentially amounts to a strict liability standard endorsed by the district court that would create Clean Water Act liability whenever a pollutant reaches “waters of the United States.” “We . . . disagree with the district court that ‘liability under the Clean Water Act is triggered when pollutants reach navigable water, regardless of how they get there.’” Instead, the Ninth Circuit noted that Clean Water Act liability is appropriate in this case because “the pollutants are fairly traceable from the point source to a navigable water such that the discharge is the functional equivalent of a discharge into the navigable water.” (emphasis added) “We leave for another day the task of determining when, if ever, the connection between a point source and a navigable water is too tenuous to support liability” under the Clean Water Act.
The Ninth Circuit’s decision has potentially far reaching implications. The Ninth Circuit’s “functional equivalent” standard appears to support a theory of expanded Clean Water Act liability for any discharge that may arguably be hydrologically connected through groundwater movement to a water of the United States. This interpretation has broad implications for many industries including those that operate landfills, coal ash or coal refuse impoundments, underground pipelines or storage tanks, or any other activity that potentially impacts groundwater.
Beyond groundwater, the functional equivalent standard could be used by environmental organizations to challenge the permitting exemption for non-industrial storm water discharges to jurisdictional waters. EPA regulations generally exempt non-industrial storm water discharges from parking lots, buildings, and other commercial structures from obtaining an NPDES permit. Certain environmental organizations have previously pressured EPA, and even threatened to sue the agency, over the absence of regulations that require NDPES permits for such discharges. Maui’s reasoning could also potentially support a challenge to EPA regulations that exempt certain agricultural operations from obtaining an NPDES permit.
While the case sets a circuit-wide precedent for imposing Clean Water Act liability for indirect discharges to jurisdictional waters via groundwater for nine western states and Guam, the case also has broader implications for the rest of the country. Other circuit courts of appeal have pending cases involving Clean Water Act liability for groundwater discharges, such as those resulting from leaks from coal ash storage impoundments or pipelines. Those courts are likely to examine the Ninth Circuit’s approach when reaching decisions on pending appeals. Although Maui is not binding precedent on any other circuit court of appeal, Maui would be considered persuasive authority that the courts would likely feel obligated to address in their decisions. If one or more of those courts reaches a decision that is inconsistent with the Ninth Circuit’s approach, it would create a “circuit split.” Disagreement among the circuit courts of appeal increases the likelihood that the United States Supreme Court will agree to review one of the decisions and resolve the issue on a nationwide basis. One thing is for sure, there is certainly more to come soon.
For questions about the Ninth Circuit’s decision or the Clean Water Act in general, please contact Robert M. Stonestreet at 681.265.1364 or rstonestreet@babstcalland.com or Lisa M. Bruderly at 412.394.6495 or lbruderly@babstcalland.com.
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Environmental Alert
(by Lisa M. Bruderly and Gary E. Steinbauer)
On January 22, 2018, the U.S. Supreme Court unanimously held that lawsuits challenging the Obama administration’s 2015 Clean Water Rule (Rule) – a landmark revision to the definition of “waters of the United States” (WOTUS) that arguably expanded the scope of the federal government’s authority under several regulatory programs, including those associated with wastewater discharges and dredge/fill activities under the Clean Water Act (CWA) – must be filed in federal district courts instead of the federal courts of appeal. Nat’l Assoc. of Mfrs. v. Dept. of Def., No. 16-299 (Jan. 22, 2018) (NAM). While the Supreme Court’s decision in NAM did not address the merits of the lawsuits challenging the Rule, it did determine the appropriate forum for those legal challenges.
The decision is significant because it will end the nationwide judicial stay of the Rule, dismiss all appellate-level judicial challenges, and revive more than a dozen federal district court lawsuits challenging the Rule filed by more than 100 parties, including industry groups and 31 states. Among other considerations, the revival of the numerous federal district court cases increases the likelihood that the Rule will be inconsistently interpreted across the United States and lengthens the amount of time before a challenge to the merits of the Rule could reach the Supreme Court. For example, one of the federal district courts with a pending challenge to the Rule previously held that it had jurisdiction and stayed the Rule in 13 states. North Dakota v. U.S. EPA, No. 3:15-cv-59 (D.N.D. August 27, 2015) (staying the Rule in Alaska, Arizona, Arkansas, Colorado, Idaho, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, South Dakota, and Wyoming). Absent further judicial decisions or action by the Agencies to delay the Rule’s effective date, the Rule will soon be in effect in the remaining 37 states, most of which are located east of the Mississippi River and on the west coast. Yesterday, a federal appellate court revived a federal district court lawsuit in Georgia, where 11 of these 37 states have sought to stay the Rule.
In NAM, the Supreme Court reversed a 2015 split decision by the U.S. Court of Appeals for the Sixth Circuit holding that it had exclusive jurisdiction to decide the lawsuits challenging the Rule. Prior to its decision on the jurisdictional question, the Sixth Circuit issued a nationwide stay of the Rule. The Supreme Court’s decision on the jurisdictional question turned primarily on its interpretation of specific language in the CWA governing judicial review of certain U. S. Environmental Protection Agency (U.S. EPA) actions. 33 U.S.C. § 1369(b)(1). Rejecting the federal government’s proposed interpretations of the CWA, the Court held that the Rule did not fall within the eight categories of U.S. EPA actions that can be challenged directly in federal courts of appeal. Instead, lawsuits challenging the Rule must be filed in federal district courts. Although the Supreme Court acknowledged that its decision could lead to conflicting outcomes in the federal district courts, it held that the applicable statutory language was clear and was unpersuaded by the federal government’s judicial efficiency and national uniformity arguments.
The Supreme Court decision in NAM will present challenges to the Trump administration, which has sought to withdraw the Rule in its entirety. On February 28, 2017, President Donald J. Trump issued an executive order that directed the U.S. EPA and the U.S. Army Corps of Engineers (collectively, the Agencies) to withdraw the Rule and rescind or revise the Rule’s definition of WOTUS as appropriate and consistent with the law. Since that time, the Agencies have issued proposals to withdraw or delay the implementation of the Rule. In July 2017, the Agencies proposed to rescind the Rule and re-codify the pre-2015 regulatory definition of WOTUS while they completed the process to reconsider the Rule. More recently, the Agencies proposed to add an applicability date to the Rule, which would make the Rule effective two years from the date the Agencies finalized the proposed regulatory stay of the Rule. At the time these proposals were issued, the Agencies stated that they were necessary to ensure regulatory continuity, because without them, the nationwide judicial stay depended on the continued existence of the Sixth Circuit’s order. The proposals predicted that there could be “possible inconsistencies, uncertainty, and confusion as to the regulatory regime” if the Supreme Court reversed the Sixth Circuit, as it ultimately did in NAM.
When all litigation pending against the Rule at the appellate-level is dismissed in accordance with the Supreme Court’s decision in NAM, the national stay on the Rule will be lifted. The Agencies likely will be unable to finalize the proposals to withdraw or delay implementation of the Rule before the nationwide judicial stay is lifted. Even if the Agencies’ proposals became effective, many of the state attorneys general that intervened in lawsuits to defend the Rule have signaled that they may file separate lawsuits challenging the legality of any final action by the Agencies withdrawing or delaying implementation of the Rule.
While the Rule’s fate and current status are uncertain, continued litigation over the scope of the federal government’s authority under the CWA is almost guaranteed. Regardless of whether the Rule is withdrawn or delayed, affected parties will continue to be subjected to varying interpretations of the definition of WOTUS, either under the Rule or the pre-2015 definition, as the judicial challenges and rulemaking efforts continue.
Babst Calland attorneys will be closely monitoring the developments following the Supreme Court’s decision in NAM. If you have questions regarding the Supreme Court’s decision in NAM and what it means for your business, please contact Lisa M. Bruderly at (412) 394-6495 or lbruderly@babstcalland.com, or Gary E. Steinbauer at (412) 394 6590 or gsteinbauer@babstcalland.com.
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Alert: Environmental
On November 30, 2017, the Pennsylvania Department of Environmental Protection announced the details of highly-anticipated changes to its air permitting program for the oil and gas industry. The Department released in final draft form two air program general permits, “GP-5” and “GP-5A,” as well as a permit exemption known as “Exemption 38.” Plans to revise the air permitting framework were first announced in January 2016 as part of Governor Tom Wolf’s Methane Reduction Strategy for Pennsylvania. The recently updated permits and exemption are not yet in effect or legally binding, which means there may still be an opportunity to influence these critical air permitting documents.
The final draft permits and exemption will be presented to the DEP Air Quality Technical Advisory Committee (AQTAC) at a public meeting scheduled to occur on December 14, 2017 in Harrisburg, Pa. AQTAC advises DEP on the technical, economic and other social impacts of major program changes like this one. In addition to the AQTAC meeting, the Department is informally soliciting feedback from stakeholders to further refine GP-5, GP-5A and Exemption 38 before they become effective. DEP intends to finalize the permits and exemption in the first quarter of 2018 by publishing an official notice in the Pennsylvania Bulletin.
Also slated for discussion at the AQTAC meeting is a forthcoming rulemaking to reduce volatile organic compound (VOC) emissions from existing oil and gas industry sources. In October 2016, the U.S. Environmental Protection Agency finalized a “control techniques guidelines” document that provided states with recommendations for reducing VOC emissions from a range of equipment and processes used by the oil and gas industry. As a result, DEP has until October 2018 to submit regulations for EPA approval. DEP anticipates that this rulemaking will have a collateral effect of reducing methane emissions.
In addition to these oil and gas industry-specific measures, AQTAC will consider a more broadly applicable rulemaking related to air program fees. DEP is proposing to change its air program fee structure to address a funding deficit. This proposal is likely to increase the cost of air permitting in Pennsylvania. The fee proposal would impact the oil and gas industry, as well as other industries.
If you have questions regarding these changes to the Pennsylvania air program and the potential impact on your business, please contact Michael H. Winek at (412) 394-6538 or mwinek@babstcalland.com, Meredith Odato Graham at (412) 773-8712 or mgraham@babstcalland.com, or Gary E. Steinbauer at (412) 394-6590 or gsteinbauer@babstcalland.com.
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