Presenting a live 90-minute webinar with interactive Q&A Environmental Audits: Navigating E-Disclosure, Privilege, Exceptions, Voluntary Disclosure and Other Issues Ensuring Compliance with Environmental Laws, Responding When Violations Are Discovered
TUESDAY, JULY 7, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
Today’s faculty features:
Joseph P. Koncelik, Counsel, Tucker Ellis, Cleveland Gregory F. Linsin, Partner, Blank Rome, Washington, D.C. Thomas J. P. McHenry, Partner, Gibson Dunn & Crutcher, Los Angeles
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Environmental Audits: Navigating E-Disclosure, Privilege, Voluntary Disclosure and Other Issues
July 7, 2015– Strafford Webinar
Thomas J.P. McHenry 333 South Grand Avenue Los Angeles, California 90071 [email protected] (213) 229-7135
. Key Issues in Environmental Auditing . EPA’s New E-Disclosure Program . State Audit Programs . Voluntary Disclosure . Privilege Issues . Responding to Enforcement Actions . Questions & Answers
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. What? – Systematic, periodic and documented review of environmental practices and operations
. Why? – Opportunity to proactively identify and address issues to ensure compliance – Reduced risk and exposure to civil and criminal liability (EPA and state audit policies) – Requirement of corporate, industry or other standards and certifications – SEC disclosure obligations – “What you don’t know, will hurt you!”
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. When? – Regular program – Disclosure obligations may be triggered
. Who? – Senior management oversight and support – Independent auditor (in-house or third party)
. How? – Structured program and procedures – Reporting system – Corrective action – Follow-up
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. Pros – Promotes a culture of compliance – Encourages self-policing and attention – Identification and correction prior to discovery by the regulators – Opportunity to fix problems and make a fresh start when new companies are purchased or acquired – Reduce or eliminate gravity based penalties – Limit likelihood of criminal prosecution – Combine with OSHA, social responsibility and other audit components – It’s the right thing to do! But only, if it’s done right.
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. Cons – Significant investment of time and resources – Triggers possible legal obligation to report – Triggers costs of corrective or remedial action – Audit documentation can serve as basis of subsequent enforcement – Lack of understanding of privilege protections – Does not function as a “shield” from prosecution
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. In August 2008, EPA launched a pilot program for an electronic self- disclosure system called “E-Disclosure” – Allowed online reporting of environmental violations – 6 states (AR, LA, NM, OK, TX) reported all violations – Remaining states limited to Emergency Planning Community Right to Know Act (EPCRA) violations
. EPA also floated idea of doing away with self-disclosure program entirely
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. In June 2015, EPA hosted 2 webcasts describing the agency’s plan for expanding the full program nationwide
. Intended to streamline the implementation of disclosures under the EPA Audit Policy and the Small Business Compliance Policy (issued in April 2000)
. The webcasts were open to the public and allowed stakeholders to: – Learn how the new system will be designed and implemented – Share comments and ask questions about the approach – Prepare for the expected Fall 2015 launch
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. Tier 1 Disclosures – Includes EPCRA violations that meet all Audit Policy or Small Business Compliance Policy conditions – Excludes CERCLA 103/EPCRA 304 chemical release reporting violations or EPCRA violations with significant economic benefit – System automatically issues an electronic Notice of Determination (eNOD) confirming that violations are resolved with no assessment of civil penalties, conditioned on the accuracy and completeness of the submitter’s eDisclosure
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. Tier 2 Disclosures – Includes all non-EPCRA violations and EPCRA violations meeting only conditions 2-9 (i.e., discovery was not systematic) – System automatically issues an Acknowledgement Letter (AL) noting receipt of the disclosure and promising that EPA will make a determination as to eligibility for penalty mitigation if and when it considers taking enforcement action for environmental violations
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Most EPCRA eNOD Tier 1 violations EPA Disclosure E-Disclosure screening Portal & spot checks Tier 2 All other new AL disclosures
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. Step 1: Register to file with the centralized web-based portal (CDX) . Step 2: Submit violation disclosure report – Within 21 days of discovery . Step 3: Certify compliance – Correct violations within 60 days of discovery for Audit Policy (within 90 days for Small Business Compliance Policy) • Tier 1 disclosures: No extensions • Tier 2 Audit Policy: 30 day extension upon request, 90 additional days with justification • Tier 2 Small Business Policy: 90 day extension upon request, 180 additional days with justification – Submit compliance report within 60 days of disclosure for Audit Policy (within 90 days for Small Business Compliance Policy)
*Note the different deadlines for correcting violations (60 days after discovery) vs. reporting compliance (60 days after disclosure). Disclosure can occur up to 21 days after discovery.
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. Confidential Business Information (CBI) – Portal accepts only sanitized (non-CBI) data – Follow-up CBI must be submitted manually
. New Owners – May use the portal to disclose violations – However, submissions and resolutions will continue to be processed manually
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. Pre-Existing Disclosures – Outstanding EPCRA violations can be resubmitted as Tier 1 within 90 days of launch – Disclosures subject to audit agreement or significant settlement negotiations will be resolved with NOD, CAFO, or CD – All others treated as Tier 2; Federal Register notice announcing E-Disclosure launch will serve as Acknowledgement Letter (AL)
. All other disclosures (to EPA HQ and Regions) must come through portal
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. Summer 2015 – Public comment and feedback – System build-out and testing
. Fall 2015 – E-Disclosure launch – Federal Register notice
. Within 90 days of launch: Resubmit outstanding EPCRA disclosures
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. EPA presentation slides: http://www2.epa.gov/sites/production/files/2015- 06/documents/edisclosurewebinarpresentation_0.pdf
. 2 page information sheet: http://www2.epa.gov/sites/production/files/2015- 06/documents/edisclosureinformationsheet.pdf
. EPA contact: Phillip Milton, [email protected], (202) 564-5029
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Thomas McHenry
Contact: Tom is a partner in Gibson Dunn’s 333 South Grand Avenue Los Angeles office and a member of the firm's Environment and Natural Resources Los Angeles, CA 90071-3197 practice. He practices general Tel: 213.229.7135 [email protected] environmental law with an emphasis on air quality, hazardous waste, environmental diligence, land use and energy issues. Tom has broad experience with air quality compliance and permitting. He has advised companies on new source review, emission reduction credits and rulemaking issues and has handled enforcement and compliance issues before all the major air districts in California and the California Air Resources Board.
21 Voluntary Disclosures • EPA versus State Audit Laws/Policies • Do’s and Dont’s • EPA’s New Owner Audit Policy
JOE KONCELIK TUCKER ELLIS LLP [email protected] (216) 696-2373 OHIOENVIRONMENTALLAWBLOG.COM U.S. EPA Audit Policy Nine Conditions (All Nine 100% of gravity; Eight of Nine 75% )
1. Systematic Discovery- Through an audit or compliance management system (required for 100% forgiveness 2. Voluntary Disclosure- Violations not discovered by required monitoring, sampling or auditing 3. Prompt Disclosure- Within 21 days of discovery unless under EPA audit agreement 4. Independent Discovery- Facility not the subject of EPA investigation or Citizen’s Suit 5. Correction- Within 60 days or expeditiously as practicable. Should notify EPA if more than 60 days to fix. 6. Prevent Recurrence- Take steps to prevent recurrence (ex: improvement to compliance management system) 7. No Repeat Violations- Same or closely related violations didn’t occur w/in 3 year (five years for multi-facility) 8. Certain Violations Excluded- Serious harm or endangerment 9. Cooperation with U.S. EPA- Provide information requested by EPA and cooperate with the Agency
23 State Audit Program States with Audit Privilege Policies or Laws
Privilege Only Laws: AZ, AR, IN and OR
Immunity Laws: NJ, RI, MN
Privilege & Immunity Laws: AK, CO, IA, KS, KY, MI, MS, NE, OH, SC, SD, TX, UT, VA, WY
Policies: AZ, AK, CA, CT, DE, FL, HI, IN, ME, MD, MA, NM, NY, NC, OK, OR, PA, TN, VT, WA, WY
[Information from U.S. EPA Website]
24 EPA vs. State Audit Laws
Privilege – Varies by State • (reporting deadline, period to correct, def. “audit”, etc.) – Not admissible in evidence or produce in discovery in civil or administrative proceedings • Persons with information can’t be compelled to testify – Generally all communications regarding an environmental audit and audit report or privileged • Includes environmental consultants • Pay close attention to document management requirements – Exceptions • Criminal proceedings, legally required information, waiver, obtained in bad faith or for fraudulent purposes, necessary to prevent imminent harm or endangerment, information is personal knowledge obtained outside context of audit, existed prior to the audit
More Flexibility – Less stringent reporting requirements – Correction within a reasonable amount of time
25 Voluntary Disclosure Pro’s and Con’s of Disclosure
Pro’s Con’s – Return to compliance w/o fear – U.S. EPA Guidance not law of future action – Violations become public – Civil penalty forgiveness – Third party suits – Potential avoidance of criminal – Limited scope of “non- actions, unless recommendation provision” for • “prevalent management criminal actions philosophy or practice concealed • DOJ or condoned violations” • EPA Crimes Section • “high level corporate officials involvement or willful blindness” – State and federal independent – EPA general commitment won’t enforcement authority use audit materials against – “Cooperation” company • Waiver of A-C privilege or Work Product in criminal context
26 Voluntary Disclosure Some Do’s and Dont’s Regarding Disclosure
1. Only perform if prepared to fix- understand the cost of returning to compliance. Be aware of deadlines for correcting. 2. Pay attention to disclosure timeframes- when did you learn of the violation (e-mail, date of audit report, etc.) 3. Prepare for investigation following disclosure- EPA and/or State will likely visit your site. Document what you have done to correct violations. Prepare for site visit. 4. Disclose potential violations- Even if still investigating disclose because no protection for violations not disclosed 5. Multiple facilities- Be aware of potential for inspections of non-reporting facilities once a disclosure is made. Consider risk of not performing company-wide audit. 6. Nuances of State and even divisions w/i State Agencies- Each state has unique aspects of their policies. Even divisions of the same state agency can have different interpretations of the language. Discuss hypotheticals with in-house counsel at the State agency. 7. Be aware of missing reports or permits- Clients may submit permit applications, missing reports or amended reports which can trigger enforcement. Appropriate to consider disclosure prior to submission.
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EPA’s New Owner Policy Incentives to Purchasers with Preexisting Compliance Issues
• Waiver of Economic Benefit portion of the Penalty? • Potentially ECO BEN limited to period post acquisition to compliance • Policy modifies EPA’s Nine Conditions 1. Systematic Discovery (Condition 1)- Pre-acquisition due diligence recognized as one time event 2. Voluntary Disclosure (Condition 2)- Monitoring, sampling and auditing considered “voluntary” 3. Prompt Disclosure (Condition 3)- Up to 45 days following closing or 21 days after discovery (whichever is longer) 4. Excluded Violations (Condition 8)- Imminent and substantial endangerment violations could be eligible if occurred prior to ownership 5. Cooperation (Condition 9)- Must cooperate with EPA in determining if conditions as modified were met
28 EPA’s New Owner Policy “New Owner” Status New Owner for Nine (9) Months Post-Closing
Certify as to the following: • Prior to purchase, new owner not responsible for compliance at the facility; • Did not cause the violations; • Could not prevent their occurrence; • Violation originated with the prior owner; • Buyer did not have the largest ownership interest share of the seller; and • No common corporate parent
29 EPA’s New Owner Policy Impact on Merger’s and Acquisitions Buyers • Traditional Phase I won’t capture most noncompliance issues; • Due diligence- Include compliance audits? • Cleanup seen as the bigger risk versus compliance; • Limited Time to Report- 45 days post closing or 21 days (whichever is longer) – Audit Agreement- Extends time periods for new owner status and reporting – Individually Upon Discovery- More confidentiality, but less flexibility on timing; • Impact on indemnification clauses (voluntary reporting exclusion)
Sellers • No protection from EPA enforcement if Buyer discloses violations; • “No tell clauses” - EPA comments such clauses are potentially void as against public policy
30 Privilege and Environmental Audits & Pre-Disclosure Evaluation of the Enforcement Risks
July 7, 2015
Gregory F. Linsin | Blank Rome LLP Phone: 202.772.5813 Mobile: 202.340.7806 Email: [email protected]
Privilege and Environmental Audits
. Recognizing scope and limits of privilege in context of environmental audits is essential – Attorney client privilege – Work product doctrine – Self-critical analysis privilege – State environmental assessment privilege . Need to plan from outset to ensure availability of privilege and protect against waiver
32 Why Protect Available Privileges?
. Fosters open communication among counsel, auditor, and client . Ensures that privileged communications are not disclosed in audit context or subject to discovery in subsequent litigation . Enables client that uncovers noncompliance to manage disclosure effectively . Attorney-client privilege will NOT shield FACTS developed during audit from disclosure 33 Attorney Client Privilege and Work Product Doctrine Protection . Attorney Client Privilege
– Communications between attorney and client – For the purpose of seeking legal advice – Virtually complete protection . If privilege not waived . Work Product Doctrine Protection – Prepared in anticipation of litigation – Work produced by lawyers and non-lawyers – Qualified protection against disclosure . “substantial need” and “undue hardship” exception 34
Attorney Client & Work Product Cases
. AVX Corp. v. Horry-Land Co., 2010 WL 4884903 (D.S.C. 2010) – Environmental report prepared by consulting firm was not covered by attorney client privilege – Consultant was providing environmental services directly to the client . Andritz Sprout-Bauer, Inc. v. Beazer East, Inc., 174 F.R.D. 609 (M.D. Pa. 1997) – Documents related to environmental consulting work that were prepared for purpose of obtaining or giving legal advice were protected by attorney client privilege
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Self-Critical Analysis and State Environmental Assessment Privileges
. In theory, the self-critical analysis privilege was intended to apply to nearly all audit report information, including underlying facts developed during audit . Scope of state environmental assessment privileges vary by state . Neither is widely recognized by federal courts or agencies . Number of states with environmental audits privilege and/or immunity laws: – environmental audit privilege laws: 5 – environmental audit immunity laws: 2 – environmental audit privilege and immunity laws: 19 . http://www.epa.gov/region05/enforcement/audit/stateaudit.html
36 Self-Critical Analysis and State Environmental Assessment Privilege Cases
. Lara v. Tri-State Drilling, 504 F. Supp. 2d 1323 (N.D. Ga. 2007) – Notes unclear history and application of self-critical analysis privilege – Refuses to apply the privilege absent express recognition by Georgia courts or legislature
. AVX Corp. v. Horry-Land Co. – Strictly construes definition of “environmental audit” and “environmental audit report” under the South Carolina environmental privilege statute – Report at issue did not meet statutory definition and thus was not shielded by the privilege
. Andritz Sprout-Bauer, Inc. v. Beazer East, Inc. – “There is no authority before us which suggests that Pennsylvania or Virginia has adopted the self-critical analysis test.”
37 EPA and DOJ Policy on Privilege
EPA Policy on Privilege DOJ Policy . “Presumably no” waiver of attorney client privilege or work product for . Recognizes “cooperation” “cooperation” for civil self-disclosure through disclosure of relevant . http://www.gpo.gov/fdsys/pkg/FR-2000-04-11/pdf/00-8954.pdf . Privileges raised during the course of the facts investigation must be made in good faith . Does not require waiver of . EPA opposed to statutory and regulatory audit privileges and immunities privilege
Selective Waiver = Waiver . In re Qwest Communications, 450 F. 3d 1179 (10th Cir. 2006) – Company’s voluntary production of documents to government agency constituted waiver of attorney-client privilege and work-product protection – Tenth Circuit declined to acknowledge validity of “selective waiver doctrine”
38 Pre-Disclosure Evaluation of Civil v. Criminal Enforcement Risks . Based on complete factual record developed during environmental audit, counsel must critically evaluate: – Whether environmental violations occurred – Whether disclosure will meet audit policy requirements – Whether EPA and DOJ will view the violations as civil or criminal offenses
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Civil v. Criminal Risks – cont’d
. Can be challenging to predict with confidence because: – Low intent standard for environmental criminal offenses – Preponderance v. beyond a reasonable doubt – Must consider discretionary policy factors, e.g.: . Pervasiveness of misconduct . Pre-existing compliance program . Extent of environmental harm . Potential exposure of individuals
40 EPA Incentives Under Audit Policy
. For civil violations – Complete relief from gravity-based penalties if part of systematic compliance effort, (D)1-(D)9 of the Audit Policy terms are met – Reduction of 75% of gravity-based penalties if (D)2-(D)9 are met . No criminal referral by EPA if conditions D(2) through D(9) are met – No systematic discovery requirement as long as self-policing, discovery, and disclosure were conducted in good faith and the entity adopts a systematic approach to preventing recurrence of the violation . EPA has not referred for criminal prosecution where regulated entity: – Uncovered violation through environmental audits or due diligence; – Promptly disclosed and expeditiously corrected those violations; and – Met all other conditions of Section D of the policy. . EPA’s policy statement does NOT shield entity from DOJ’s exercise of independent prosecutorial discretion
41 DOJ Guidance on Prosecutorial Discretion
. Factors considered in exercising prosecutorial discretion – Voluntary disclosure – Cooperation, including disclosure of relevant facts – Preventative measures and pre-existing compliance programs – Pervasiveness of noncompliance – Internal disciplinary action – Subsequent remedial measures . http://www.justice.gov/sites/default/files/opa/legacy/2008/08/ 28/corp-charging-guidelines.pdf . http://www.justice.gov/enrd/selected-publications/factors- decisions-criminal-prosecutions
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Questions?
Gregory F. Linsin | Blank Rome LLP Phone: 202.772.5813 Mobile: 202.340.7806 Email: [email protected]