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. e du/thir dc ir c uit_1998/161Filed July 20, 1998

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 97-7115

UNITED STATES OF AMERICA

v.

THE MUNICIPAL AUTHORITY OF UNION TOWNSHIP; DEAN DAIRY PRODUCTS COMPANY, INC, d/b/a Fairmont Products, Inc.

Dean Dairy Products, Inc. d/b/a Fairmont Products, Appellant

On Appeal from the United States District Court for the Middle District of Pennsylvania (D.C. No. 94-cv-00621)

Argued March 19, 1998

Before: SLOVITER, RENDELL and HEANEY,* Circuit Judges

(Filed July 20, 1998)

Gary A. Peters Steven C. Kohl (Argued)

Howard & Howard Bloomfield Hills, MI 48304

Attorneys for Appellant

___________________________________________________ ______________

* Hon. Gerald W. Heaney, Senior Circuit Judge for t he Eighth Circuit Court of Appeals, sitting by designation.Lynn P. Dodge (Argued)

United States Department of Justice

Environmental Enforcement Section Washington, DC 20044

Attorney for Appellee

John G. Roberts, Jr. Hogan & Hartson Washington, DC 20004

Attorney for Amicus-Appellant

American Frozen Food Institute

Paul G. Wallach

Hale & Dorr Washington, DC 20004

Attorney for Amicus-Appellant International Dairy Foods Association, and The Grocery Manufacturers of

America

Kathy D. Bailey

Chadbourne & Parke Washington, DC 20036

Attorney for Amicus-Appellant

Chemical Manufacturer Association, and

American Automobile

Manufacturers Association

OPINION OF THE COURT

SLOVITER, Circuit Judge.

Appellant Dean Dairy Products, Inc., d/b/a Fairmont Products, Inc., appeals the district court's imposi tion of a $4,031,000 civil penalty against it for Clean Water Act violations. Dean Dairy contends that the district c ourt erred when it assessed the economic benefit Dean Dairy ga ined during the period of the Clean Water Act violations on the basis of Dean Dairy's "wrongful profits." Dean Dair y also

2contends that the district court improperly looked to the

financial condition of Dean Dairy's parent company in evaluating whether it could afford the substantial penalty imposed. The American Frozen Food Institute, the Ch emical Manufacturers Association, the American Automobile Manufacturers Association, the International Dairy Foods Association, and the Grocery Manufacturers of Ameri ca support Dean Dairy's appeal as amicus curiae. We ha ve jurisdiction under 28 U.S.C. S 1291.

I.

The underlying facts of this case are undisputed an d are comprehensively set forth in the district court's p ublished opinion, United States v. Municipal Auth. of Union Township, 929 F. Supp. 800 (M.D. Pa. 1996). Briefly stated, Dean Dairy, operating in Union Township, Belleville

, Pennsylvania, is a wholly-owned subsidiary of Dean Foods, Inc., the country's largest milk processor. Since 1 974 Dean Dairy's wastewater, a result of the production of s our cream, cottage cheese, yogurt and ice cream, has be en discharged and treated by Union Township's Publicly Owned Treatment Works (POTW). Union Township collec ted a user fee based upon the volume of wastewater and the amount of conventional non-toxic pollutants treated at the plant, including Total Suspended Solids (or TSS) an d Biological Oxygen Demand (or BOD). In June 1989, pursuant to requirements of the United States Environmental Protection Agency, Union Township iss ued to Dean Dairy an Industrial User Wastewater Dischar ge Permit ("the IU permit") which established monthly average limits and daily maximum limits for TSS and BOD and for

flow volume.

Beginning in July 1989, Dean Dairy exceeded the lim its set forth in its IU permit. Its wastewater, contain ing the impermissibly high levels of BOD and TSS, flowed fr om Union Township's POTW into the nearby Kishacoquilla s Creek, which was damaged as a result. There is no d ispute that because Dean Dairy issued monitoring reports t o Union Township on a monthly basis, it had been awar e of its violations since July 1989.

3In 1994, the United States filed a civil enforcemen t action

against Dean Dairy under the Clean Water Act, 33 U. S.C. S 1251 et seq., for close to 1800 violations of the IU permit

and for numerous interferences with the POTW. Follo wing discovery, the United States moved for and was gran ted summary judgment on the issue of Dean Dairy's liabi lity for the CWA violations. The action against the Municipa l Authority of Union Township was settled and therefo re the Authority is not a party to this appeal. Dean Dairy does not contest its liability for the violations. Its appea l is limited to the amount of the civil penalty imposed.

The district court held a three-day bench trial to determine the appropriate penalty under the Clean W ater Act. Under 33 U.S.C. S 1319(d), a violator of a per mit issued pursuant to the Act shall be subject to a civil pen alty not to exceed $25,000 per day for each violation. This section further provides that in establishing the penalty t he court shall consider the following six factors: "[T]he se riousness of the violation or violations, the economic benefit ( if any) resulting from the violation, any history of such v iolations, any good-faith efforts to comply with the applicabl e requirements, the economic impact of the penalty on the violator, and such other matters as justice may req uire." Id.

The district court found Dean Dairy liable for 1,75 4 violations of its IU permit and 79 instances of int erference with Union Township's POTW between July 1989 and Ap ril 1994. It also found that Dean Dairy continued to vi olate its IU permit even after the United States filed suit. Although Dean Dairy took certain steps to address the violat ions of its permit between 1991 and 1994, the district cour t found

these efforts were belated and ineffective. It was only the construction of a $865,000 pretreatment system, whi ch became operational in April 1995, that succeeded in reducing Dean Dairy's pollutants to permissible lev els.

Important to the issue before us is that Dean Dairy considered various options to meet its permit oblig ations but, as the district court found, "it continued to produce at a volume which it recognized was very likely to gen erate levels of BOD and TSS beyond that allowed by its IU permit. [Dean Dairy] chose not to reduce production volume

because it viewed the concomitant reduction in earn ings as

4too high a price to pay for compliance with the Cle an Water

Act." 929 F. Supp. at 805.

Although the district court applied the six statuto ry factors a court must consider in assessing the appr opriate penalty for a CWA violation, the appellant presents the case as if the court concentrated almost exclusively on the "economic benefit" factor. In fact, the district co urt made extensive findings of fact and issued conclusions o f law on

each of the six factors. See id. at 802-09. The cou rt noted that the history of Dean Diary's violations dated b ack to 1989, that the excessive discharges required the Pennsylvania Fish and Boat Commission to cease stoc king fish in areas of the Kishacoquillas Creek, and that its twoyear delay to take meaningful action to remedy the violations did "not speak highly of its good faith in this

matter." Id. at 803-08.

In connection with its evaluation of the economic b enefit factor, which is the primary basis of the appeal, t he district court acknowledged that the parties had previously stipulated that Dean Dairy did not realize any econ omic benefit from delaying the capital investments neces sary to achieve compliance with its IU permit. This was due to the unusual fact that, by delaying the construction of the pretreatment plant, Dean Dairy was actually losing money because it was paying higher usage fees to the POTW for its increased volume. Thus, Dean Dairy did not reap an economic benefit by delaying the construction of th e pretreatment plant. The court nevertheless found th at Dean Dairy did realize an economic benefit during the pe riod of the violations because it produced "at a volume abo ve that which would have allowed it to operate within its I U permit." Id. at 805.

In making the finding of economic benefit, the dist rict court relied upon a document produced by Dean Dairy during discovery and introduced at trial as Joint E xhibit 18 that outlined various options by which Dean Dairy c ould comply with its permit. The district court noted th at Option #4 of that document indicated that Dean Dairy could drop PennMaid as a customer and thereby reduce the amoun t of wastewater generated. Dean Dairy recognized, howeve r, in Exhibit 18 that losing the revenues from PennMaid w ould

5result in a loss of earnings in the amount of $417, 000 in

fiscal year 1994.*

During the damages trial, the government questioned Fairmont plant manager Dean Koontz about that docum ent in the following exchange:

Counsel for the United States: Let me turn y our attention to Joint Exhibit 18, please. It is entitled Recap of Wastewater Treatment Options . . .

.

***

Mr. Koontz: Okay. Yes. This is the informati on that I

fed to Ron Crock based on the costs that Uni on Township gave us. And he ran some type of an alysis

with it.

Q: Ron Crock is the comptroller for Dean Dai ry Products, is that correct?

A: Yes, he is.

***

Q: And Mr. Crock ran numbers using four opti ons, is that right?

A: Yes it is.

Q: And one of those options includes Fairmon t not building a treatment plant and discharging t o the Authority but cutting back on plant volume t o reduce

___________________________________________________ ______________

* The other three options for wastewater treatment as set forth in Exhibit 18, were, in brief summary:

Option #1: Fairmont builds pretreatment plan t at cost of $700,000 (with obligation to municipal authorities fo r belt press, filter

press and/or reed bed filter press);

Option #2: Fairmont builds pretreatment plan t at cost of $1 million dollars with no obligation to municipal auth orities;

Option #3: Fairmont does not build a pretrea tment plant leading to substantial (in excess of $100,000 a year) o bligation to municipal authorities for belt press, filter press and reed bed filter press.

App. at 15-17.6flow rate which does not allow for growth -- future

growth of the plant. Do you see that?

A: Yes, option four.

Q: Option number four. . . . [I]t has an est imate of the impact on earnings that this option would in volve. Is

that correct?

A: That is the way I read it, yes.

Q: These are numbers that Mr. Crock arrived at. Is that correct, sir?

A: Yes.

Q: Isn't it true that if you reduce volume, you would lose an account by the name of PennMaid acco rding to

the scenario?

A: Yes. This was when we did look at possibi lities of reducing volume. The only customer that we c ould come up with that would have an impact would have been PennMaid because we make only one produ ct for them, cottage cheese. And we could eliminate them as a possible customer, which would have made a ll of us very happy.

Q: It would have made you all happy, and it would also have set you back $417,000 for fiscal year ' 94. Is that

correct?

A: Yes. There would have been a considerable amount of overhead absorption loss by losing that.

App. at 275-77.

In its opinion, the district court commented on Exh ibit

18 as follows: "Production volume at Fairmont was h igher in each year from 1989 to 1993 than it was in 1994, and, therefore, it is reasonable to believe that Fairmon t gained at least $417,000 in earnings annually during the peri od of its violations. On this basis, the court concludes that between July 1989 and April 1994, Fairmont gained approxima tely $2,015,500 by violating its IU permit." 929 F. Supp . at 805. The district court also determined that the figure should be doubled in order to provide a proper deterrent and

7punishment, and accordingly imposed a total penalty of

$4,031,000.

II.

Dean Dairy challenges the district court's analysis of two of the six factors to be considered in imposing a C WA civil penalty - the economic benefit to the violator and the economic impact of a penalty. We consider first its

contention that the district erred as a matter of l aw in using a "wrongful profits" approach to ascertain wh ether Dean Dairy received any "economic benefit" from its Clean

Water Act violations.

A.

The Use of "Wrongful Profits" to

Measure Economic Benefit

Section 1319(d) of the Clean Water Act provides in pertinent part:

Any person who violates . . . this title, or any permit condition or limitation . . . shall be subje ct to a civil penalty not to exceed $25,000 per day for ea ch violation. In determining the amount of a ci vil penalty

the court shall consider the seriousness of the violation or violations, the economic benefit (if any) resulting from the violation, any history of such viol ations, any good-faith efforts to comply with the applic able requirements, the economic impact of the pen alty on the violator, and such other matters as just ice may require.

33 U.S.C. S 1319(d).

The statute does not define the term "economic bene fit" used in this section. It is apparent, however, that the goal of the economic benefit analysis is to prevent a vi olator from profiting from its wrongdoing. In United State s v. Smithfield Foods, Inc., 972 F. Supp. 338, 348 (E.D. Va. 1997), the district court explained that "[c]ourts use economic benefit analysis to level the economic pla ying field

8and prevent violators from gaining an unfair compet itive

advantage."

A similar rationale was also given by the Environme ntal Protection Agency, which emphasized that the reason for considering economic benefit to a violator in asses sing a CWA penalty is to remove or neutralize the economic incentive to violate environmental regulations. In a 1990 Manual to its BEN computer program, established to assist in the calculation of civil CWA penalties, the EPA explained:

An organization's decision to comply with environmental regulations usually implies a commitment of financial resources; both init ially, in the form of a capital investment or one-time exp enditure, and over time, in the form of annual, contin uing expenses. These expenditures might result in better protection of public health or environmental quality; however, they are unlikely to yield any dire ct economic benefit (i.e., net gain) to the organization . If these financial resources were not used for compli ance, they presumably would be invested in projects wit h an expected direct economic benefit to the orga nization. This concept of alternative investment; that is, the amount the violator would normally expect to make by not investing in pollution control, is the b asis for calculating the economic benefit of noncompl iance. As part of the Civil Penalty Policy, EPA uses t he Agency's penalty authority to remove or neutralize th e economic incentive to violate environmental regulatio ns. In the absence of enforcement and appropriate penal ties, it is usually in the organization's best economic interest to delay the commitment of funds for compliance with environmental regulations and to avoid certa in other associated costs, such as operating and main tenance

expenses.

EPA BEN User's Manual I-6 (July 1990), quoted in Fr iends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 890 F. Supp. 470 (D.S.C. 1995) ("Laidlaw I").

Few published cases discuss the "economic benefit" factor of the Clean Water Act in any detail, and th ose that do are, in large part, district court opinions. In Laidlaw, the

9court described economic benefit as: "the after-tax present

value of avoided or delayed expenditures on necessa ry pollution control measures." 890 F. Supp. at 481. T he theory is that economic benefit "represents the opp ortunity a polluter had to earn a return on funds that shoul d have been spent to purchase, operate, and maintain appro priate pollution control devices." Id.

This court has previously recognized that a violato r's economic benefit under the Clean Water Act may not be capable of ready determination. In Public Interest Research Group of New Jersey, Inc. v. Powell Duffryn Termina ls, Inc., 913 F.2d 64 (3d Cir. 1990), we stated:

Precise economic benefit to a polluter may b e difficult to prove. The Senate Report accompanying the 1987

amendment that added the economic benefit fa ctor to section 309(d) recognized that a reasonable approximation of economic benefit is suffici ent to meet plaintiff 's burden for this factor. . . . T he determination

of economic benefit or other factors will no t require an elaborate or burdensome evidentiary showing. Reasonable approximations of economic benefi t will

suffice.

Id. at 80 (citation omitted).

Because of the difficulty of determining the approp riate penalty under the Clean Water Act, the court will a ccord the district court's award of a penalty wide discre tion, even though it represents an approximation. This was emphasized by the Supreme Court when it said, more than a decade ago, "Congress [made the] assignment of th e determination of the amount of civil penalties to t rial judges . . . . Since Congress itself may fix the civil pen alties, it may delegate that determination to trial judges. In thi s case, highly discretionary calculations that take into ac count multiple factors are necessary in order to set civi l penalties under the Clean Water Act." Tull v. United States, 481 U.S. 412, 426-27 (1987).

This has been the approach generally followed by th e courts. In Smithfield Foods, the court recognized t hat it is difficult to prove the precise economic benefit to a polluter, but stated that the economic benefit analysis provi des an

10approximation of "the amount of money a company has

gained over its competitors by failing to comply wi th the law." 972 F. Supp. at 348. See Sierra Club v. Cedar Point Oil Co., 73 F.3d 546, 576 (5th Cir. 1996) ("a court need only make a `reasonable approximation' of economic benef it when calculating a penalty under the CWA") (citatio n omitted); Public Interest Research Group of New Jer sey, Inc. v. Hercules, Inc., 970 F. Supp. 363, 364 (D.N.J. 19 97) ("In assessing a penalty under the Clean Water Act, a di strict court has a great amount of discretion."); United S tates v. Sheyenne Tooling & Mfg. Co., 952 F. Supp. 1420, 142 2-23 (D.N.D. 1996) ("It must be understood, however, tha t despite the directional aid and guidance that the s ix enumerated factors in S 1319(d) provide, the calcul ation of a final penalty may often be imprecise and approxim ate at best. Indeed, the accuracy of the final calculation s, and the figure of penalty that they produce, is as dependan t, or even more so, upon the provision of complete and ac curate evidence, as introduced, developed, and explained a t trial, as it is upon a good evaluation of this information by the court.").

Courts have applied different methods in determinin g the appropriate penalty for a Clean Water Act violation . Some courts have employed a "top down" approach in which the maximum possible penalty is first established, then reduced following an examination of the six "mitiga ting" factors. See, e.g., Sierra Club, 73 F.3d at 574-76; Powell Duffryn, 913 F.2d at 79; Atlantic States Legal Foun d., Inc. v. Tyson Foods, Inc., 897 F.2d 1128, 1142 (11th Cir . 1990); Hawaii's Thousand Friends v. City and County of Hon olulu, 821 F. Supp. 1368, 1395 (D. Haw. 1993); Atlantic St ates Legal Found., Inc. v. Universal Tool & Stamping Co. , 786 F. Supp. 743, 746-47 (N.D. Ind. 1992).

Other courts have used a "bottom up" approach where by the economic benefit a violator gained by noncompli ance is established and adjusted upward or downward using t he remaining five factors in S 1319(d). See , e.g., Sm ithfield Foods, 972 F. Supp. at 354; Friends of the Earth, I nc. v. Laidlaw Envtl. Servs. (TOC), Inc., 956 F. Supp. 588 , 603 (D.S.C. 1997) ("Laidlaw II"). Because the statute d oes not prescribe either method, it appears that a court is free to

11use its discretion in choosing the appropriate meth od. See

Smithfield Foods, 972 F. Supp. at 354.

Had the district court in this case taken a "top-do wn" approach, it would have begun at the maximum penalt y, which was approximately $45,825,000, based on the statutory penalty of $25,000 a day. Instead, the co urt applied the "bottom up" approach, 929 F. Supp. at 8 06, by determining Dean Dairy's economic benefit acquired through the Fairmont plant's production at a volume that resulted in more wastewater than permissible under its permit. These were knowing violations, as its own

document demonstrated it was aware that if it had r educed its wastewater volume by reducing its production, i t would have been in compliance with its IU permit. As Koon tz specifically testified, if Dean Dairy had reduced v olume, it

believed it would have lost PennMaid as a customer. Dean Dairy's own document prepared by Ron Crock, its controller, demonstrated that this loss of PennMaid would have had a negative impact of $417,000 per year.** This

was the basis on which the district court calculate d Dean Dairy's economic benefit as $2,015,500, which when doubled, resulted in the penalty of $4,031,000. Tha t penalty was barely 9% of the maximum statutory pena lty to which Dean Dairy was subject.

It is not surprising that no published case has use d this method of ascertaining a violator's economic benefi t because it is the rare violator who actually loses money by delaying compliance with the law. Typically, a viol ator benefits economically by avoiding or delaying the construction of antipollution equipment that would have

___________________________________________________ ______________

** While the exhibit referred to, and relied upon b y the district court
(and specifically the "impact on earnings" portion, see app. at 18) is susceptible to different interpretations, including an interpretation that earnings could have been affected anywhere from $40 7,748 to $443,000, it was not error, and specifically not clearly erro neous, for the district court to have made a factual finding based upon the documentary evidence, coupled with the testimony of Koontz, tha t the continued sale to PennMaid had a positive impact of $417,000. Furt her, it was not error to conclude as a matter of law that this impact, wh ich by the company's own statements resulted from noncompliant productio n, could be deemed wrongful profits and therefore economic bene fit to Dean Dairy.

12placed it in compliance with its permit. See, e.g., Sierra

Club, 73 F.3d at 574; Hawaii's Thousand Friends, 82 1 F. Supp. at 1396. In Smithfield Foods, the court expla ined that, "[w]hen a company delays or avoids certain co sts of capital and operations and maintenance necessary fo r compliance, the company is able to use those funds for other income-producing activities, such as investin g that money in their own company." Id. at 349. Therefore, it concluded that in that case, "the avoided and/or de layed cost of compliance, and the weighted average cost o f capital (WACC) as a discount/interest rate in the economic benefit calculation, to be both the best and the appropriat e method to determine how much money defendants made on the funds they did not spend for compliance." Id. at 34 9 (footnote omitted).

This case is unusual because Dean Dairy's delay in constructing a pretreatment plant was not beneficia l to its "bottom line"; in effect, Dean Dairy was actually p enalizing itself in failing to promptly build the pretreatmen t plant. Our general assumption of the reasonable capitalist went awry with this company.

There are methods other than the delayed or avoided capital expenditure for ascertaining economic benef it, a fact the appellant and the amici decline to acknowledge. It is significant that neither the statute nor the case l aw supports the contention that the cost-avoidance met hod is the only permissible method of determining the amou nt a polluter has gained from violating the law. In Smit hfield Foods, though the court applied the delayed or avoi ded costs method, it "acknowledge[d] there are various methods for calculating defendants' economic benefit gained from noncompliance." 972 F. Supp. at 349.

In contrast to the situation in Smithfield Foods, t he "costavoided" method of determining economic benefit is not a method that fits the facts that were presented to t he district court because Dean Dairy did not profit by delaying its construction of the pretreatment plant. But it clea rly gained other economic benefits by failing to adopt the met hod that was readily available. The wastewater from the Fair mont plant is created by the required daily cleaning of its vats and other processing equipment. A reduction of prod uction

13would reduce the wastewater. Thus, if Dean Dairy wa nted

to avoid the cost entailed by the purchase of new equipment, it had the option of reducing volume.

The approach adopted by the district court is not i n conflict with the CWA or basic economic principles. A violator who chooses to continue to violate its per mit while experimenting with less costly remedies necessarily subjects itself to the surrender via penalty of any economic benefit it acquired. The fact that the violator has also penalized itself by failing to implement cost-effec tive methods that would have put it into compliance with its permit and thereby save it money is certainly no ba sis to mitigate its penalty.

Requiring a company to reduce the amount of polluti on it creates to comply with its permit is not unreaso nable. As the court in Tyson Foods stated: "There was one sim ple and straightforward way for Tyson to avoid paying civil penalties for violations of the Clean Water Act: After purcha sing the plant, Tyson could have ceased operations until it was able to discharge pollutants without violating the requi rements of its . . . permit. Tyson chose not to do this and it must now bear the consequences of that decision." 897 F. 2d at 1141-42. Similarly, Dean Dairy chose neither what p roved to be the economically sensible option (building th e pretreatment facility) nor the alternative option o f reducing the amount of wastewater produced. Accordingly, it must bear the consequences.

Appellant and the amici argue that the use of the "wrongful profits" method to calculate economic ben efit contravenes EPA policy. They base this argument on the EPA's interim Clean Water Act Settlement Penalty Po licy Guide published in 1995, which states that the "obj ective of the economic benefit calculation is to place violat ors in the same financial position as they would have if they complied on time." App. at 244. The appellant focuses on lan guage in the Guide that explains that "[p]ersons that violat e the Clean Water Act are likely to have obtained an econ omic benefit as a result of delayed or completely avoide d pollution control expenditures during the period of noncompliance." Id. Thus, this reference to delay a nd avoidance and the EPA's creation of computer softwa re

14("the BEN model") to calculate a violator's economi c benefit

from delaying or avoiding compliance has led appell ant to conclude that this is the only approach to determin ing

economic benefit.

However, the EPA guideline itself notes that this approach may not always be applicable. The policy s tates:

[I]f the violator is a privately-owned regul ated utility, the standard BEN model may not be appropriat e. In this situation, the Agency should consider a wrongful profits analysis and seek to recover the pro fits and other competitive market benefits the violat or obtained as a result of operating during the period o f operation. . . . In a few unusual cases, eco nomic benefit may be negative: this means, e.g., operating the old efficient system was more expensive than pur chasing and operating a new, more efficient treatmen t system. When economic benefit is negative, the settl ement
calculation enters zero as the economic bene fit.

App. at 245-46 (emphasis added).

Even the EPA guideline, on which Dean Dairy relies, is receptive to a wrongful profits analysis where appr opriate. But the EPA policy is not applicable here because, by its own express terms, it is not "intended for use by E PA, violators, courts or administrative judges in deter mining penalties at a hearing or trial." App. at 243. See also Laidlaw I, 956 F. Supp. at 601 ("the policy express ly states that it is not to be used by a court in determining a penalty at a trial . . . . [therefore] it will not be consi dered in arriving at an appropriate penalty amount"). Finall y, the conclusive evidence that the "wrongful profits" app roach to economic benefit does not conflict with EPA's polic y is the fact that its representative is on the brief for th e government arguing in support of that approach here

.

We conclude that the district court's method of calculation of the penalty was within its discretio n. We do not suggest that we have any dissatisfaction with t he costavoided method of determining a violator's economic benefit in the usual case. However, under these unusual circumstances, we see no legally significant differ ence in measuring the economic benefit achieved by avoiding the

15costs of antipollution equipment, and the economic benefits

achieved by failing to reduce the volume of polluti on created. Both methods aim to recoup any benefits a violator gained by breaking the law and which gave the viola tor an advantage vis-a-vis its competitors. The penalty th us achieves the leveling of the playing field intended by Congress.

Finally, we reject Dean Dairy's claim that it was "ambushed" and unfairly surprised by the government 's reliance on the "wrongful profits" theory of econom ic benefit. Although the government first identified J oint

Exhibit 18 as the document on which it based the $417,000 figure in its penalty calculation in its c losing argument, the document had already been admitted in to evidence and was the subject of the government's tr ial examination of Koontz, Dean Dairy's plant manager, quoted earlier in this opinion. Dean Dairy did not questio n Koontz on this document nor did it call Ron Crock, its own controller, who prepared the figures in the documen t, for an explanation. If Dean Dairy was content to allow those figures to go to the factfinder without cross-exami ning Koontz and examining Crock, then it cannot reasonab ly argue only after the district court's opinion, fort hcoming six months later, that the figures don't mean what they say.

Dean Dairy vehemently contends that it was given inadequate notice of the government's theory. Our examination of the record establishes that the gove rnment gave Dean Dairy ample notice that it was pursuing t his theory of economic benefit. The government's pretri al memorandum states that "Dean Dairy was operating it s Fairmont plant at a percentage over capacity, thus increasing its profits at the expense of violating" the CWA, and that this "economic benefit, separate from capi tal costs, was substantial for each year of production. " Supp. App. at 748. The government's trial brief also emph asized that Dean Dairy "enjoyed financial benefits during the period of noncompliance" because its "production operations were neither halted nor adversely impact ed by its noncompliance." App. at 768. The government's o pening statement promised to "present evidence showing wha t
Dean itself estimated as the amount of revenue it w ould

16lose if it decreased production to levels that woul d comply

with its permit." Supp. App. at 734. Dean Dairy nev er requested a continuance of the bench trial to answe r those

contentions.

Moreover, although Dean Dairy repeatedly refers to the government's stipulation that Dean Dairy did not re alize any economic benefit from delaying the capital expe nditures needed to achieve compliance with the IU permit, th e government carefully reserved the argument that Dea n Dairy could have received economic benefit from oth er actions. Indeed, at trial government counsel specif ically

stated:

[T]he United States is preserving the argume nt with respect to economic benefit to other actions that the dairy could have taken. In other words, we a re talking about production or other matters aside from the capital expenditures, as well as the mainten ance costs
associated with the actual hardware that was brought on-line at the dairy facility.

App. at 288.

Finally, although six months elapsed after the clos e of the trial during which the parties prepared and sub mitted post trial briefs, which we have examined, Dean Dai ry never argued that it had been unprepared by the government's theory or method of proof. Only after the district court's opinion fixing the penalty did it raise these claims. By then, it was too late. Under these circu mstances, we cannot accept Dean Dairy's claim that it was unf airly surprised by either its use of the "wrongful profit s" approach of economic benefit or the basis of the ca lculation of the penalty.

B.

Consideration of the Finances of Dean Dairy's Parent Company

In analyzing the "economic impact on the violator," one of

the six factors the statute lists as relevant to th e CWA penalty, the district court stated it would look to the

17finances of Dean Dairy's parent, Dean Foods. Among the

reasons it gave were that "Dean Foods was closely i nvolved with Fairmont [Dean Dairy's plant] in evaluating th e options for resolving Fairmont's wastewater problem s, and it had complete control over whether and when Fairm ont would achieve compliance with its IU permit." 929 F . Supp. at 808. The district court also stated that "[a]t t he same time, Dean Foods was siphoning off profits from Fai rmont."

Id.

Dean Dairy contends that it was legal error for the

district court to consider the financial condition of Dean Foods because the parent corporation was not a part y to the action, it did not violate the Clean Water Act, and there was insufficient evidence to pierce the corporate v eil. We reject its contention. Notwithstanding the argument s made in the brief and before us orally, it is important to remember that it was not Dean Foods, but only Dean Dairy, the violator, who was penalized. The reference to D ean Foods' financial statement merely assured that the penalty would not be set at a level above Dean Dairy's abil ity to pay. If the subsidiary does not retain its revenues , as the evidence showed in this case, then its parent'sfina ncial resources are highly relevant. Other courts in CWA cases have looked to the assets and finances of the viola tor's parent in evaluating the economic impact of the pen alty on a violator, see Universal Tool, 786 F. Supp. at 753 ; PIRG v. Powell Duffryn, 720 F. Supp. 1158, 1166 (D.N.J. 198 9), reversed in part on other grounds, 913 F.2d 64 (3d Cir. 1990), and we see nothing improper in the same acti on here.

The consideration of a parent's financial condition in assessing a penalty on a subsidiary is a far cry fr om piercing the corporate veil and holding the parent liable for the actions of its subsidiary; here the penalty was assessed against the subsidiary alone. Furthermore, the dist rict court only considered Dean Foods' assets as one fac tor among others; they were not dispositive. The court simply undertook a fact-specific assessment that examined the role of the parent in the operations of the subsidiary, particularly with regard to the issue of pollution of the nearby waters and actions that could have resolved it.

18Although Dean Dairy contends that any evaluation of its

financial condition would show that it lost over on e million dollars between 1992 and 1995, there was also evide nce that it had over twenty million dollars in assets i nfiscal year 1995. App. at 586-88. In light of the discreti on afforded a district court in determining a penalty, we conclude that the court's examination of the parent 's assets, the basis for which it was done, and the ma nner in

which the information was used was neither clear er ror nor an abuse of discretion.

III.

For the foregoing reasons, the order of the distric t court
will be affirmed.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

19