United States Court of Appeals for the Second Circuit Affirms $104.69 Million Judgment in Favor of New York City Against Exxon Mobil for MTBE Contamination Based on Common Law Claims, Opening the Door to Future Litigation That Will Include Companies and Individuals That Likely Never Would Have Been Named in the Past.
Following an eleven week trial presided over by Judge Sheira Scheindlin in the Southern District of New York, the jury awarded New York City judgment in the amount of $104.69 million against Exxon Mobil for Exxon Mobil’s alleged contribution to the contamination of Station Six wells in Jamaica, Queens. The trial proceeded in three phases. In Phase I, the City established that it had good faith intent to begin construction of the Station Six facility within the next fifteen years and that it intends to use the Station Six wells within the next fifteen to twenty years as a back-up source of drinking water. In Phase II, the jury found that MTBE would be in the “capture zone” of the wells when they began operating, and that the concentration of MTBE would peak at a concentration of 10 ppb by 2033. In Phase III, the City proved by a fair preponderance of the credible evidence that a reasonable water provider in the City’s position would treat the water to reduce the levels or minimize the effect of the MTBE on the combined outflow of the wells in order to use the water as a back-up source of drinking water. The jury found Exxon Mobil liable to the City based on State tort theories: negligence, trespass, public nuisance and failure to warn. Finally, the jury found that the City’s total damages arising from the contamination of the Station Six facility was $250.5 million, that this must be reduced by $70 million, reflecting the anticipated cost of remediating pre-existing PCE contamination, and that 42 percent of the remainder of the injury to the City should be attributed to companies other than Exxon Mobil, leaving $104.6 million as Exxon Mobil’s share of the City’s damages. The jury took into account testimony that, because of mixing of brands prior to distribution, the gasoline sold by every station in Queens likely contained some of Exxon’s gasoline, and that Exxon was responsible for approximately 25 percent of gasoline sold in Queens during the relevant period. In addition, the jury found that leaks of gasoline occurred regularly at gas stations.
The United States Court of Appeals for the Second Circuit affirmed the verdict in a lengthy decision on July 26, 2013, which provides fodder for numerous law school final exam questions in Civil Procedure and Torts. The decision, however, may go far beyond its pedagogical implications. Without resort to strict liability statutes like the Navigation Law, and a damage claim that seemed speculative at best, the Second Circuit Court of Appeals has set out a road map for the State of New York and water purveyors to seek substantial damages against any company that has contributed to groundwater contamination within the area from which groundwater can be expected to eventually migrate to the wells, even if the contaminants are not expected to reach the wells in significant concentrations for many years.
The City purchased the Station Six Wells in 1996 with the goal of using the wells in the future as a back-up for the City’s water supply. In April 2000, MTBE was first detected in Station Six Wells at readings between 0.73 ppb and 1.5 ppb. By January, 2003, MTBE levels reached 350 ppb in one of the wells. However, none of the wells had been used for the drinking water distribution system and construction of the planned treatment system had not yet begun. In October 2003, the City sued Exxon and twenty-six other petroleum companies, complaining of injuries to the City’s water supply from gasoline containing MTBE. All defendants settled except Exxon Mobil.
Exxon Mobil argued that the case was not “ripe” for adjudication, because it was speculative whether the City would ever use the Station Six Wells, but, if the City’s claims were ripe, they were barred by the applicable statute of limitations. The Second Circuit held that the City’s claims were ripe because the City did not bring suit until testing showed the presence of MTBE in the wells, “and the question whether the injury was significant enough for the City to prevail on its claims under New York law was a question for the jury.” That the City might not use the wells for fifteen years did not preclude the finding that the claims are ripe. The Court further noted that New York’s statute of limitations applicable to toxic torts does not apply to the continuing wrong doctrine. When an injury to person or property is from exposure to a toxic substance, the person injured must commence suit within three years of when he or she knew or should have known of the injury. Thus even though the presence of MTBE in the groundwater is continuous, the statute of limitations runs from the first discovery of injury. For this reason, the Court reasoned, dismissing the City’s claims on ripeness grounds would foreclose the possibility of relief because of the statute of limitations, creating “a hardship and inequity of the highest order.”
Certain holdings of the Second Circuit will be cited frequently in future litigation. For example, in its discussion of negligence, the Court found “Exxon’s timely knowledge of the particular dangers of MTBE, combined with evidence about remedial measures available as early as the 1980’s, was sufficient to allow the jury to determine that Exxon breached the standard of ordinary care.” Remarkably, the Court then gave as an example of how Exxon could be found to have breached that standard by observing that “Exxon could have installed remediation systems at its stations, which would have permitted station operators to begin the clean-up process as soon [as] they detected a gasoline leak.”
With regard to trespass, the Court rejected Exxon’s argument that the City failed to establish an interference with its water rights because there was no proof that MTBE would exceed the Maximum Contaminant Level (“MCL”) established for MTBE. Noting that New York courts “have held that a plaintiff may suffer injury from contamination at levels below an applicable regulatory threshold”, the Court agreed with the City that the jury could find that a reasonable water provider would have treated the MTBE contaminated water at Station Six.
In its discussion of public nuisance, the Second Circuit considered the holding in an MTBE case in Nassau County in which the trial court concluded that, to be liable for public nuisance, the defendant’s actions must have taken place on land that was “neighboring or contiguous.” That standard was not met in the case before the Second Circuit, but it did not deter the Court from affirming the judgment. The Second Circuit said that the Nassau County case had not been subjected to appellate review, and it believed that, upon further review, New York law will not be found to be so restrictive. Although the Court said that, under the facts presented, the nuisance claim would be sustained even if the “neighboring or contiguous” standard applied because “Exxon’s extensive involvement in the Queens gasoline market belies any claim that its conduct was too geographically remote to sustain liability for public nuisance,” the possibility that the “neighboring or contiguous” requirement may not apply will encourage injured parties to stretch the reach of their nuisance claims.
Finally, the City appealed the lower court’s dismissal of the City’s claim for punitive damages, which “are awarded to punish a defendant for wanton and reckless or malicious acts and to protect society against similar acts.” The Second Circuit agreed with the lower court that “the vast majority of the conduct that produced the City’s injury led to persistent levels of MTBE in the capture zone of Station Six that are well below the MCL in place at the time the conduct occurred.” This fact was relevant because, although a reasonable jury could conclude that the City was injured by MTBE levels below the MCL, “punishing [Exxon] for its contribution to this injury would not advance a strong public policy of the State or protect against a severe risk to the public.” Significantly, however, the Second Circuit said that it expressed no view on the applicability of punitive damages “in other MTBE cases before the District Court.”
Conclusion
It is safe to say that the Second Circuit’s decision provides ample incentive for the State and private water purveyors to expand the scope of cost recovery litigation throughout the State of New York. Although the Second Circuit referred to the “capture zone” of the Station Six wells, because of its affirmance of the finding that some Exxon Mobil gasoline likely was in most of the gasoline delivered to stations within this capture zone, the outer limits of the capture zone or its significance for purposes of cost recovery litigation did not have to be explored.
Future litigation, however, can be expected to focus on the concept of a “capture zone” by reference to studies done pursuant to the Source Water Assessment Program (“SWAP”). This program was mandated by 1996 amendments to the federal Safe Drinking Water Act. The New York State Department of Health developed the New York State SWAP, and this resulted in the Long Island SWAP. The Long Island SWAP was developed by an engineering firm, CDM, under contract with the New York State Department of Health, and the Suffolk and Nassau County Departments of Health Services. Using computer modeling and geographic information systems, source water assessments were performed for all public water supplies in Nassau and Suffolk Counties. The resulting source water assessments defined capture zones within which contaminants potentially would reach each Nassau and Suffolk County public supply well within two years, five years, twenty-five years, fifty years, seventy five years, and one hundred years.
The Summary Report for the Long Island Source Water Assessment Program makes clear that the studies are planning tools: “It is important to remember that the source water assessments only indicate the potential for contamination of a supply well, based upon the likelihood of the presence of contaminants above ground in the source water recharge area and upon the possibility that any contaminants present can migrate down through the aquifer to the depth at which water enters the well screen. In most cases, the susceptibility, or potential, for contamination has not resulted in actual source water contamination. If contamination of a well source is identified, water suppliers either provide treatment or withdraw the well from service, so that all potable water distributed to residents of Nassau and Suffolk Counties meets all applicable drinking water standards.”
As a result of the Second Circuit’s decision, zone of capture analysis, coupled with the discovery of contaminant concentrations in water below Maximum Contaminant Levels, may suffice to draw huge numbers of companies into litigation that likely never would have been named as defendants in the past. This in turn will engender defenses based on ripeness and the statute of limitations. If Company “A” has a record of discharging volatile organic chemicals (“VOCs”) and is in the portion of the capture zone of a public water supplier that suggests contaminants will be drawn into the public supply well within twenty-five years, when is a case against “A” “ripe”, and when does the statute of limitations begin to run? If the public supply well already has VOCs present at concentrations sufficient to require either shut-down of the well, or treatment before potable water is released to the public, it is safe to say that treatment will continue for many years, in part, due to polluters within twenty-five year capture zones.
Future court decisions will address the level of proof required in order for a distant upgradient polluter that is within a SWAP defined capture zone of a public supply well to be found liable to the water supplier for damages to its supply wells. Until such clarification is received, the State and public water suppliers may be tempted to add any polluter they can find to their cost recovery lawsuits who are within a Source Water Assessment Program capture zone, regardless of how far away, or the projected time it will take for contaminants to reach the supply well from that polluter’s site. Given the high cost of defending such lawsuits, all or most such defendants may be expected to enter into settlements rather than incur the cost of a defense.
The ability to mount a vigorous defense in order to assure a reasonable settlement has been diminished by the Second Circuit’s ruling. While the law is clear that the polluter should pay, the risk that innocent companies and individuals will be drawn into litigation that they cannot afford to defend against has risen dramatically. We can only hope that the State and water purveyors will exercise their new-found powers judiciously. If they do not, defendants can be expected to join together to share the cost of motions that will help to clarify the rules for including far away polluters in lawsuits seeking indemnification or contribution for environmental remediation costs.
