Federal Court Rules That Punitive Damages May Be Recovered By A Public Water District As A Result Of Groundwater Contamination

October 14, 2008

A California district court recently held that a local water district was entitled to pursue a claim for punitive damages relating to a company’s release of a chemical that contaminated drinking water.  See Santa Clara Valley Water Dist. v. Olin Corp., 2008 WL 3876166 (N.D. Cal.) (unpub.)  In that case, Plaintiff Santa Clara Valley Water District brought suit against Olin Corporation for its alleged release of perchlorate into unlined pits that migrated into the groundwater, allegedly causing a 10-mile plume and resulting in damages over $4 million.  The Water District sought punitive damages for its claims of restitution and negligence.

The court held that the Water District’s claim for negligence may warrant punitive damages.  Under California law, punitive damages are awarded if the plaintiff shows by clear and convincing evidence that the defendant is guilty of “oppression, fraud, or malice.”  Cal. Civ. Code § 3294.  The Water District alleged that by 1986 Olin knew that its disposal practices may have contaminated the groundwater and that despite this knowledge, the company took no action to change its practices for the next 12 years, investigate the potential scope of contamination, or alert anyone to the contamination.  The Water District argued, and the court agreed, that this conduct could demonstrate “malice” in that the defendant engaged in “despicable conduct … with a willful and knowing disregard of the rights and safety of others.  Olin Corp., 2008 WL 3876166, at *2.  The court also rejected Olin’s defense that the Water District did not suffer direct injury as a result of Olin’s actions, which is a requirement for an award of punitive damages.  The court held that the Water District suffered direct injury because it was responsible for supplying clean water and was therefore obliged to clean up the contamination.

The court, however, rejected the punitive damages claim in regards to the restitution theory.  The restitution claim focused on Olin’s failure to reimburse the Water District for response costs relating to the contamination.  The court reasoned that Olin’s action — failure to pay based on its belief that it is not legally obligated to pay — did not impose on the Water District “cruel and unjust hardship as required to sustain a claim for punitive damages.  Otherwise, the court concluded, every claim for restitution would merit punitive damages.

Even so, the court’s determination that a public agency may recover punitive damages in a negligence action related to contamination may have far reaching impacts.  Potentially, such an award may be available in any case where there is evidence that the defendant failed to change its practices that caused contamination, at least based on the reasoning in this decision.  At a minimum, this will often be a factual issue that may be difficult to resolve prior to trial, which may significantly increase the scope of a defendant’s potential liability associated with the contamination.

Gibson, Dunn & Crutcher has particular experience in environmental litigation, including claims related to groundwater contamination and perchlorate, and punitive damage claims.

To learn more about the firm’s Environment and Natural Resources Practice, please contact the Gibson Dunn attorney with whom you work, or any of the following: 

Jeffrey D. Dintzer – Los Angeles (213-229-7860, [email protected])
Brett H. Oberst – Los Angeles (213-229-7189, [email protected])
Peter E. Seley – Washington, D.C. (202-887-3689, [email protected])

2008 Gibson, Dunn & Crutcher LLP

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