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Corporate Criminal Liability: Legal Causation and the Application of Absolute Vicarious Liability in the XTO Energy Prosecution

March 21, 2014

By: Christopher D. Carusone

In this high-profile criminal prosecution of XTO Energy by the Pennsylvania Office of Attorney General, the scope of corporate criminal liability for the actions of third parties is likely to take center stage later this year in the Pennsylvania state courts.  The route that the Pennsylvania courts take in this dispute will likely define the outer edges of corporate criminal liability for energy companies operating in Marcellus country for years to come.

Background
On September 10, 2013, Pennsylvania Attorney General Kathleen Kane charged XTO Energy, Inc., a subsidiary of ExxonMobil, with criminal violations of the Pennsylvania Solid Waste Management Act and the Clean Streams Law, based on an alleged discharge of waste water in Lycoming County, Pennsylvania.  In so doing, Attorney General Kane used a Pennsylvania Statewide Investigating Grand Jury, ordinarily impaneled to conduct investigations of organized crime and public corruption, to conduct an investigation of the company and its practices.  Employees of XTO Energy, Bosque Disposal Systems, LLC, and agents from the Pennsylvania Department of Environmental Protection (DEP) and Pennsylvania Office of Attorney General (OAG) were called to testify before the Grand Jury.

According to the charges, on November 16, 2010, DEP conducted an unannounced inspection at the company’s site in Penn Township, Lycoming County, Pennsylvania.  The site, referred to in the Grand Jury’s Presentment as the Marquardt site, hosted two wells and a series of mobile storage tanks.  At the time of the inspection, the mobile tanks were being used to store waste water produced from XTO Energy’s wells at the Marquardt site as well as nearby company sites. Although it was raining steadily, the DEP inspector testified that he heard the sound of running water coming from the rear of a waste water storage tank.  Upon closer inspection, he noted that the drain plug had been removed from the rear valve of Tank 18174 and that the rear valve was partially open, allowing the waste water to run onto the ground and into an unnamed tributary.  Tank 18174 was attached to five other tanks that were connected by a manifold system to allow water to run freely between the tanks.  Samples of the water on the ground at the site revealed elevated levels of chlorides, barium, strontium, and total dissolved solids.  Similarly, samples from the tributary revealed elevated levels of chlorides, aluminum, barium, and total dissolved solids.  Records and testimony compelled by the Grand Jury revealed that 57,000 gallons of waste water were unaccounted for at the site as a result of the spill.

In July 2013, the federal government reached an agreement with the company over the incident, based on an alleged violation of the Clean Water Act.  Under the agreement, the company agreed to pay a $100,000 fine and implement a comprehensive plan to improve its waste water management practices. Significantly, the consent decree with the federal government stated that the agreement “expressly does not resolve any enforcement action of the Commonwealth of Pennsylvania under any federal and state law and any such claims are not precluded or limited in any way by resolution of this matter.”  Two months later, the Pennsylvania Attorney General filed its criminal charges against XTO Energy as a corporation predicated on the same incident that was at issue in the federal consent decree.

Following the filing of criminal charges, XTO Energy issued a press release blasting the charges as “unwarranted and legally baseless” and as “an abuse of prosecutorial discretion.”  The company defended itself on the ground that none of its employees intentionally, recklessly, or negligently caused the discharge of water.  Rather, the company noted that the most likely explanation for the spill was that an independent contractor that had been managing the site before the spill did not close the valve properly after a transfer of water.  The company further observed that it acted quickly to remediate the spill and worked cooperatively with state and federal authorities to eliminate any temporary environmental effects, none of which were significant or lasting.  In fact, upon the remediation, which occurred with active guidance from the DEP, the site was fully remediated.  Later, as noted above, the company agreed with federal authorities on reasonable civil penalties and preventative measures—well before the sudden charges from the Attorney General.  Finally, the company observed the potential deleterious message these charges send to operators statewide: namely, if even a small spill occurs and a company takes measures to remediate it in good faith and in cooperation with authorities, the company still risks criminal exposure.

On December 18, 2013, a preliminary hearing was held before Magisterial District Judge James G. Carn in Williamsport, Lycoming County.  During the hearing, the company advanced two primary defenses to the criminal charges.  First, the company argued that all of the charges should be dismissed because the Attorney General failed to present sufficient evidence that its employees were the legal cause of the spill.  Second, the company maintained that the charges under the Clean Streams Law should be dismissed because the Attorney General failed to present sufficient evidence of criminal negligence.  Recognizing the significance of the legal issues presented, Magistrate District Judge Carn took the unusual step of permitting the parties to submit legal briefs, something that is rare in proceedings before the minor judiciary.  Following the submission of briefs, Magistrate District Judge Carn ruled that the Attorney General had established a prima facie case against XTO Energy and bound the charges over for trial.

Analysis of Legal Causation and Vicarious Liability
The dispute over legal causation in this corporate criminal environmental prosecution, which is certain to play out in pretrial motions in the Lycoming County Court of Common Pleas, raises important questions regarding the scope of legal responsibility that drillers like XTO Energy have over incidents occurring at their drill sites and for the actions of their contractors.

The Solid Waste Management Act contains language evidencing the General Assembly’s intent to impose liability on corporations. See 35 P.S. § 6018.606(j) (“With respect to the offenses specified in subsections (a), (b), (c), (d), (e), (f) and (g), it is the legislative purpose to impose liability on corporations”).  The Clean Streams Law contains similar language.  See 35 P.S. § 691.602(f) (“With respect to the offenses specified in this section, it is the legislative purpose to impose liability on corporations as set forth in 18 Pa.C.S. § 307 (relating to liability of organizations and certain related persons)”).  However, of the criminal charges pending against XTO Energy, only the Solid Waste Management Act imposes absolute liability on corporations.  35 P.S. § 6018.606(i) (“With respect to the offenses specified in subsections (a), (b), (c) and (f), it is the legislative purpose to impose absolute liability for such offenses.”).

At the center of the dispute over legal causation is the Pennsylvania Commonwealth Court’s decision in Waste Conversion, Inc. v. Commonwealth, 568 A.2d 738 (Pa. Cmwlth. 1990).  In that case, Waste Conversion Inc. hired Wills Trucking Company to transport processed waste to a disposal facility in Michigan.  Employees of Waste Conversion loaded the processed waste into a truck owned and driven by independent hauler Al Cullenen, who was hired by Wills Trucking Company.  Waste Conversion’s employees loaded the truck to 83,500 pounds, which was 3,500 pounds more than allowable under Pennsylvania law.  While driving the truck, the hauler encountered a weigh station that was being operated by the Pennsylvania State Police.  To avoid the weigh station, the hauler re-routed the truck to a back road.  While attempting to redistribute the load by raising the bed of the trailer in order to be able to negotiate a hill, a substantial amount of waste slid out of the truck and onto the road.  The OAG then filed charges against Waste Conversion, Wills Trucking Company, and the independent hauler under the Pennsylvania Solid Waste Management Act after tracing the spill back to Waste Conversion.  Waste Conversion was convicted after a non-jury trial and appealed its conviction.[1]

On appeal, Waste Conversion Inc. argued that actions of the independent hauler were beyond its control, and that without the ability to control the hauler’s conduct, the imposition of strict criminal liability upon the company violated its right to substantive due process.  The Commonwealth Court disagreed.  In so doing, the Court opined:

The Act is a comprehensive scheme designed to protect the public from health and environmental hazards caused by inadequate solid waste practices.  Appellant, as a corporation licensed to operate in this hazardous business, owes the highest duty of responsibility to insure that the citizens of this state are protected from the dangers necessarily a part of waste disposal.  This was a principle reason for the legislature's imposition of strict vicarious liability.  By undertaking the responsibility to dispose of waste, Appellant has assumed the duty to ensure that it is completed as required by the Act. Appellant cannot absolve itself of this responsibility by transferring it to independent contractors and claiming that it has no control over them.  We hold that, because Appellant has assumed responsibility in the waste disposal process, Appellant maintains control of the independent contractors it hires for the purpose of its waste disposal duties. Appellant's failure to maintain control cannot be used as a defense to avoid liability.

Waste Conversion Inc., 568 A.2d at 742-743.  Both the Pennsylvania Supreme Court and the United States Supreme Court declined to review the case.

In its brief to Magistrate District Judge Carn, XTO Energy argued that the OAG made no attempt to establish who was responsible for opening the rear valve of Tank 18174 or otherwise explain the circumstances resulting in the discharge of the production water.  To underscore the point, XTO Energy pointed to the preliminary hearing testimony of Jeremy Daniel, the former DEP water quality specialist who discovered the discharge, who admitted during cross examination that he did not know who opened the valve.  In response, the OAG argued that such proof was unnecessary under Waste Conversion Inc., and that legal causation was established by the mere fact that XTO Energy caused the production water to be stored at its well site and failed to take the necessary precautions to ensure against accidental discharges.  Indeed, the OAG argued that the identity of the person responsible for opening the valve and causing the discharge was “completely immaterial” to the criminal charges.  In its reply, XTO Energy argued that the OAG’s reliance on Waste Conversion Inc. was misplaced because the Commonwealth Court never considered the application of section 303(d) of the Pennsylvania Crimes Code, which states: “When causing a particular result is a material element of an offense for which absolute liability is imposed by law, the element is not established unless the actual result is a probable consequence of the conduct of the actor.”  18 Pa.C.S. § 303(d). While Magistrate District Judge Carn rejected XTO Energy’s causation arguments at the preliminary hearing, those arguments are certain to be renewed in the trial court.

Initially, XTO Energy faces an uphill battle in the face of the Waste Conversion case. First, the Commonwealth Court’s decision in Waste Conversion is still the law of the land.  Second, the decision in Waste Conversion originated in the Lycoming County Court of Common Pleas, the same court presiding over the XTO Energy case.  Third, the holding in Waste Conversion was predicated in part on Article 1, Section 27 of the Pennsylvania Constitution (relating to Natural Resources and the Public Estate), which 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.”  Pa. Const. art. 1 § 27.  Long ignored, this provision of Pennsylvania’s Constitution has taken on new life as a result of the Pennsylvania Supreme Court’s decision in Robinson Township v. Commonwealth, 83 A.3d 901 (Pa. 2013) (plurality) (holding portions of Act 13 of 2012 violate Pa. Const. art. 1, § 27).

Nevertheless, XTO Energy has several arguments at its disposal that could result in dismissal of some or all of the charges.  First, unlike Waste Conversion, the government cannot prove who opened the rear valve of Tank 18174 or otherwise explain all of the circumstances leading up to the discharge of the waste.  This admission puts into play the precise argument the Commonwealth Court declined to address in Waste Conversion, specifically whether the imposition of absolute liability on a corporation for “acts extraordinarily remote in time and place from a defendant's contact with the actual perpetrator” violates due process.  Waste Conversion, 568 A.2d at 741.  Since the perpetrator in Waste Conversion was known to be the independent hauler, the Commonwealth Court declined to entertain the broader argument.  Second, the OAG argues that the causation principles at issue in Waste Conversion apply to the charges under the Clean Streams Law.  However, those charges are not absolute liability offenses.  See generally Commonwealth v. J.F. Lomma, 590 A.2d 342 (Pa. Super. 1991) (holding that the principles outlined in Waste Conversion did not apply prosecutions under 75 Pa.C.S. § 1575 -- relating to permitting violations of title -- because the crime is not an absolute liability offense).  Third, as noted by attorneys for XTO Energy, the applicability of section 303(d) of the Pennsylvania Crimes Code (relating to causal relationship between conduct and result), which requires the actual result (in this case the spill of production water) to be the “probable consequence of the conduct of the actor” (in this case XTO Energy) was not explicitly discussed in the Waste Conversion case, and is likely to take center stage during pretrial motions to be filed in the trial court, especially since the identity of the person who opened the valve and caused the discharge of the production water is unknown.

All eyes should be on the Lycoming County Court of Common Pleas later this year.  The route that the Pennsylvania courts take in this dispute will likely define the outer edges of corporate criminal liability for energy companies operating in Pennsylvania for years to come.

[1]Hauler Al Cullenen was also convicted after a non-jury trial.   Wills Trucking Company chose not to contest the charges, and was admitted into the Accelerated Rehabilitative Disposition (ARD) program for first-time offenders.