Opinion ID: 484909
Heading Depth: 1
Heading Rank: 4

Heading: Upset Defense

Text: 25 We hold that the district court erred in allowing Union Oil to raise the upset defense in this enforcement proceeding. Moreover, the district court misapplied the upset defense as codified in 40 C.F.R. Sec. 122.41(n). 26 A. Union Oil's Qualifications to Assert the Defense 1. Federal Law 27 The issue whether Union Oil was entitled under the Act to raise the upset defense involves interpretation of federal law. The district court's findings on this issue are therefore reviewable de novo. See, e.g., Trustees of Amalgamated Insurance Fund v. Geltman Industries, 784 F.2d 926, 929 (9th Cir.), cert. denied, --- U.S. ----, 107 S.Ct. 90, 93 L.Ed.2d 42 (1986). 28 The district court found that Union Oil was entitled to assert the upset defense under Marathon Oil, 564 F.2d at 1253, 1272-73, and under 40 C.F.R. Sec. 122.41. We disagree. 29 This is an enforcement action in which Sierra Club alleged that Union Oil failed to comply with the terms of a permit issued by the California Water Board. Union Oil was essentially asking the district court to modify its permit to include an upset provision. This the district court was not entitled to do. To obtain modification of its permit, Union Oil should have acted through the proper administrative channels. Because Union Oil failed to exhaust its administrative remedies, it is bound by the terms of the permit issued by the California Water Board. 30 A party must exhaust its administrative remedies before it can obtain judicial review of an agency decision. McKart v. United States, 395 U.S. 185, 193, 89 S.Ct. 1657, 1662, 23 L.Ed.2d 194 (1969). The purpose of the exhaustion rule is to allow an administrative agency to perform functions within its special competence--to make a factual record, to apply its expertise, and to correct its own errors so as to moot judicial controversies. Parisi v. Davidson, 405 U.S. 34, 37, 92 S.Ct. 815, 817, 31 L.Ed.2d 17 (1972). At the time the permit was issued and reissued, Union Oil had several administrative routes that it could have taken to protest the permit's terms. The NPDES program authorizes permittees to seek modifications of their permits in response to current judicial decisions and new EPA regulations. 40 C.F.R. Sec. 122.62. In addition, when a state permit issuer submits a proposed permit to the EPA Administrator for review, the Administrator is authorized to object to the permit's terms. 33 U.S.C. Sec. 1342(d). Review of the Administrator's actions may be had in the appropriate circuit court of appeals. 33 U.S.C. Sec. 1369(b)(1). The Act further provides that [a]ction of the Administrator with respect to which review could have been obtained under paragraph (1) of this subsection shall not be subject to judicial review in any civil or criminal proceeding for enforcement. 4 33 U.S.C. Sec. 1369(b)(2). 31 Union Oil failed to seek any type of administrative review of its permit's terms since its appeal of the original permit in 1974. If Union Oil desired modification of its permit in the wake of Marathon Oil or the adoption of 40 C.F.R. Sec. 122.41, it should have petitioned the California Water Board for review of the permit. When the EPA Administrator failed to object to the permit's terms, Union Oil should have appealed from that decision. Union Oil failed to follow the administrative steps that would have allowed the issuing agency to address Union Oil's claims. Union Oil only initiated criticism of its permit in an enforcement action before the district court. Therefore, Union Oil failed to exhaust its administrative remedies and was precluded from raising the upset defense in the district court. 32 Union Oil argues that the doctrine of exhaustion of administrative remedies does not apply here because the upset defense was available to Union Oil under Marathon Oil and 40 C.F.R. Sec. 122.41. The upset defense is not, however, an implicit element of Union Oil's permit under Marathon Oil or 40 C.F.R. Sec. 122.41. Marathon Oil stated that the absence of an upset defense from a federally issued permit violated the Federal Water Pollution Control Act. Marathon Oil, 564 F.2d at 1272-73. Therefore, when the EPA itself issues a permit, it must, under Marathon Oil, include an upset defense. 5 In this case, however, a state agency, not the EPA, issued the permit. The Act explicitly allows states to substitute federal effluent limitations and standards with more stringent state limitations and standards. 33 U.S.C. Sec. 1370. The state's denial of the upset defense is an example of a state imposing standards more stringent than the correlative federal standards. Therefore, the absence of the upset defense in Union Oil's permit does not violate the Federal Water Pollution Control Act, and Marathon Oil does not mandate its presence in the permit. 6 33 The EPA's regulations promulgated under the Act likewise do not provide Union Oil with an automatic upset defense. 40 C.F.R. Sec. 122.41 states that the upset defense must be incorporated into the permit either expressly or by reference to the relevant C.F.R. sections. Because Union Oil's permit contains neither an express incorporation nor an incorporation by reference, the defense is not a part of the permit. In addition, while the EPA under this section must include the upset defense in all permits it issues, the regulations explicitly provide that states may omit upset defenses from permits. 40 C.F.R. Sec. 123.25(a). 2. California law 34 Union Oil contends that even if federal law does not mandate the inclusion of an upset defense, California law does. Because this question involves the interpretation of state and federal law, we review the district court's determinations de novo. In re McLinn, 739 F.2d 1395, 1397 (9th Cir.1984) (en banc) (state law); Trustees of Amalgamated Insurance Fund, 784 F.2d at 929 (federal law). 35 Union Oil argues that the California Water Board was not permitted under California law to omit the upset defense from a permit unless it made proper findings of necessity for doing so. Again, Union Oil is improperly making this argument during an enforcement proceeding. Union Oil should have pursued its administrative remedies before the state agency and the EPA. Union Oil's failure to exhaust its administrative remedies bars it from criticizing the permit's terms in this action. Union Oil argues, however, that under California law, the upset defense is an automatic element of Union Oil's permit. 36 California Water Code Sec. 13377 (West Supp.1987) provides: 37 [T]he state board or the regional boards shall, as required or authorized by the Federal Water Pollution Control Act, as amended, issue waste discharge requirements ... which apply and ensure compliance with all applicable provisions of the act and acts amendatory thereof or supplementary, thereto, together with any more stringent effluent standards or limitations necessary to implement water quality control plans, or for the protection of beneficial uses, or to prevent nuisance. 38 Union Oil argues: (1) that the California Water Board violated this law by issuing a permit without an upset defense when it failed to make findings of the necessity of this more stringent standard, (2) that when a state fails to pass a more stringent standard, the federal standard governs, and (3) that the governing federal standard is 40 C.F.R. Sec. 122.41(n), which provides an upset defense. Thus, Union asserts that the federal upset defense regulation applies to Union Oil's permit. 39 Union Oil's argument is incorrect. California Water Code Sec. 13377 governs the state agency's setting of standards, 7 but the fact that the agency may not have complied with the statute does not implicitly insert an upset provision into Union Oil's permit. The state's method of adopting a more stringent standard should be subject to scrutiny only at the permit issuance stage. Moreover, even if the federal upset regulation did apply, it would not require that an upset defense be inserted into Union Oil's permit because 40 C.F.R. Sec. 122.41 requires that the defense be inserted either explicitly or by reference to the relevant regulations, neither of which occurred here. 40 We hold that Union Oil was not entitled to use the upset defense to excuse any of the exceedances of its NPDES permit limitations. 41 B. District Court's Application of the Upset Defense 42 The district court misapplied the upset defense to Union Oil's alleged permit violations. The upset defense, as codified at 40 C.F.R. Sec. 122.41(n), protects a permittee from liability only when the permittee proves that highly unusual circumstances made preventing pollution difficult. The regulation imposes numerous stringent requirements, both substantive and procedural, that must be satisfied before a court may allow use of the upset defense. 43 The district court found in the broadest terms that all of Union Oil's permit violations were excusable on upset defense and other grounds. The court applied the upset defense, as codified at 40 C.F.R. Sec. 122.41(n), only in adopting its definition of upset as an exceptional incident in which there is unintentional and temporary noncompliance with technology based permit effluent limitations because of factors beyond the reasonable control of the permittee. 40 C.F.R. Sec. 122.41(n). The district court ignored both substantive and procedural requirements for application of the upset defense. The court's interpretations of the regulation are conclusions of law that are reviewable de novo. Trustees of Amalgamated Insurance Fund, 784 F.2d at 929. The district court's finding of fact are reviewable on a clearly erroneous basis. United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948). 1. Substantive Deficiencies 44 a. Water Quality-Based Exceedances 45 The district court erred in applying the upset defense to exceedances of water quality-based permit limitations. The EPA regulation permits use of the upset defense only with respect to technology-based permit exceedances. 40 C.F.R. Sec. 122.41(n)(1). 46 The federal Administrator and state boards may, under the Act, impose water quality-based standards or technology-based standards. 8 The federal government establishes technology-based effluent standards based on polluters' technological and economic ability to control effluent levels. Technology-based limitations require application of the best practicable control technology currently available, as defined by the Administrator. See 33 U.S.C. Sec. 1311(b)(1)(A). These limitations require that each permittee within a given industrial subcategory restrict its effluent levels to certain numerical amounts. 47 States establish water quality standards that specify the uses to be made of a body of water and the maximum levels of pollutants allowable in view of those uses. Water quality standards are designed to ensure the survival of wildlife in navigable waters and to protect recreational activities in and on the water. 33 U.S.C. Sec. 1312(a). In contrast with technology-based standards, which are based on the feasibility of limiting effluent levels, water quality-based limitations relate to the environmental effects of different effluent levels. 48 While the EPA considered applying the upset defense to water quality-based exceedances, see 47 Fed.Reg. 52,079 (1982), it later rejected this application as impractical: 49 [I]t is apparent that it is not practical to extend the upset defense to violations of water quality-based limitations. Failures of pollution control equipment can occur on water quality limited stream segments. However, water quality standards are established to protect uses of the water, and are legally required to be met at all times.... Any defense for upsets must ensure that water quality standards are achieved at all times throughout the upset.... [and] would require a showing that water quality standards continued to be achieved in all stream segments, and for all pollutants, potentially affected by the discharge. 50 .... 51 Since it would be almost impossible for a permittee to establish the upset defense, the proposed extension [to water quality-based limitations] would be illusory.... 52 49 Fed.Reg. 38,038 (1984). 53 The record indicates that at least twenty-two of the permit violations were water quality-based, involving visible oil on San Pablo Bay, settleable solids, and coliform violations. The district court erred in holding that the upset defense as provided in 40 C.F.R. Sec. 122.41 excused these violations of the permit's water quality-based limitations. 54 b. Operator Error 55 The district court stated that a few exceedances (minor in magnitude), during the five-year period at issue, were caused by very unusual human errors that are excusable in light of time span and number of acceptable readings. Memorandum at 9-10. The court does not make clear whether it makes this analysis under the upset defense provision. If the analysis was based upon the upset defense, it was clear error. The upset provision clearly states that noncompliance caused by operational error is not an upset. 40 C.F.R. Sec. 122.41(n). We conclude below that these exceedances were not excusable on any other grounds. 56 c. Inadequate Facilities 57 The upset provision does not apply to noncompliance caused by improperly designed or inadequate treatment facilities. 40 C.F.R. Sec. 122.41(n)(1). The record indicates that Union Oil's facilities were not adequate to handle heavy rainfall. Union Oil's supervisor of environmental control engineering stated in his declaration in support of Union Oil's motion for summary judgment that the capacity of Union Oil's storm basins is generally sufficient to contain the excess wastewater occurring during any storm of a magnitude which is expected to occur on the average of once every ten years. Declaration of Donald W. DeBuse in Support of Union Oil Company of California Motion For Summary Judgment at 8. If the plant was only designed to handle rains of a magnitude occurring every ten years, the statistical chance is very high that unusual rains will cause exceedances of permit limitations over the life of the plant. 58 The inadequacy of Union Oil's facilities in this case is underlined by the fact that Union Oil's permit also adjusts upwardly the limitations for periods of heavy rainfall. Union Oil's pollution during the winters of 1981 and 1982 exceeded even the limitations reflecting this upward adjustment. By providing this stormwater runoff adjustment, which varies according to amounts of rainfall, the California Water Board was indicating what levels of pollution should occur in a properly designed and adequate plant when heavy rains take place. A plant like Union Oil's that is incapable of adhering even to these adjusted limitations is inadequate. On the basis of inadequate equipment alone, all of the violations attributed by Union Oil to heavy rain should not have been excused on the upset defense ground. 2. Procedural Deficiencies 59 The district court made no findings as to whether Union Oil complied with the procedural requirements for showing an upset. A permittee who wishes to raise the defense of upset must show: 60 (1) that an upset occurred and that the permittee can show the cause; 61 (2) that the facility was properly run at the time of the upset; 62 (3) that the permittee provided the proper notice of the upset; 63 (4) that the permittee conformed with remedial requirements. 64 40 C.F.R. Sec. 122.41(n)(3). In addition, the burden of proof is on the permittee to show compliance with these requirements. 40 C.F.R. Sec. 122.41(n)(4). 65 The district court applied none of these procedural rules. It did not place the burden of proof on Union Oil for use of the defense. While the record contains evidence that Union Oil failed to identify causes for several violations and provided insufficient notice in some cases, the district court held that the upset defense excused Union Oil in all cases. Failure to require that the permittee satisfy all of the procedural requirements specified in 40 C.F.R. Sec. 122.41(n)(3) is improper. 66 The district court's failure properly to apply the upset defense regulation in itself justifies reversal of its finding of no liability as to the allegedly rainfall-related exceedances.