1. The Company Stewardship Matrix - Risk Creation / Reduction & Transfer

Company Stewardship that integrates corporate growth with value preservation and public expectations of environmental, health, safety and financial disclosure is becoming a central focus of corporate leaders. Events such as the asbestos crisis that bankrupted 70 major companies, coupled with expanding litigation over an endless list of new targets (e.g., silica, welding fumes, mold, and diesel exhaust), and recent financial disclosure mandates and scandals have changed corporate needs and created new response options for threats to corporate viability. As some in the government occasionally whisper, while the regulatory goals of the 1960s may not have found continued support, they created new duties that exposed risks and helped foster a plaintiffs’ bar and prosecutors that are increasingly impacting corporate action.

Over the last half of the 20th Century, insurance, EHS, legal, human resources, PR, compliance and financial experts have performed their duties (often thanklessly), in near isolation, without grasping the catastrophic potential of their lack of integration, or even understanding each other's worlds. Today’s Company Stewardship evolution may differ from company to company as it begins to take shape, but generally shares a common elements: a leadership team that identifies and addresses "nightmare" risks across corporate "silos." Nightmare risks are created by the potential for product liability recall, toxic torts and both physical and financial disasters that can overwhelm resources, management personnel, and ultimately lead to the ruin of corporate value built over decades of hard work and contributions to society.

Our defense of hundreds of investigations and cases tells us that although there has been massive improvement in all areas of corporate expertise, the bits and pieces have only begun to be successfully integrated on a wide scale. Yet, without integration, we see repeated "bet the company" situations that grow harder to contain as plaintiffs’ lawyers gain more resources for new case investment and as government agencies see increased "political" needs for stricter enforcement and new regulation (that creates "free" evidence for the plaintiffs’ lawyers). Is there any doubt that after the recent Texas refinery tragedy, we will see new attempts to further criminalize the EHS laws or that the resulting enforcement will be used to support punitive damage claims, perhaps in the billions?

The insurance industry is responding to the "appearance of risk" by creating new specific exclusions for the latest craze of plaintiffs' cases (e.g., the 2004 silica and 2000 mold exclusions). Moreover, coverage denials based on "interpretations" of old or existing policy exclusions (e.g., "willful" acts or "pollution") are being used to deny coverage for new cases for which coverage was arguably intended, making our insurance law practice group extremely busy. The press also is increasing corporate risk by its tendency to publicize crisis, tragedy, disaster and failures, often at the cost of reputations, stockholder and retirement plan value, and community employment benefits.

Corporate Stewardship analyzes these and other risk drivers across company structures to educate and prevent miscommunication that increases risk. For example, insurance exclusions not understood by PR, operations or EHS staff can result in well meaning statements about "pollutants" that can support coverage denials. Similarly, new exclusions (e.g., silica) in 2004-05 renewals may not be understood to create a heightened need to improve warnings and labels to reduce future risks—tasks that normally fall within EHS groups. Nor might such exclusions reach the General Counsel’s office for alternative risk reduction strategies, such as old policy collection from acquisitions and company historical files for "archeology and valuation" to create coverage and defense assets for future cases (that "occurred"—based on first exposure—when the policies were in place). Similarly, in assessing both materiality of financial risks of toxic tort claims for reporting purposes, and creating risk transfer mechanisms to address them, cross fertilization of Company Stewardship teams with a risk reduction focus can provide extraordinary value.

Too often, company EHS and operations personnel do not realize that information such as interviews, findings and company reports obtained by government agencies during major disaster and loss investigations are used by plaintiffs and government agencies to create massive liability risks. Moreover, perceived friendly insurance investigators may become adverse in a coverage denial case and do not share the same privileges and risks of company personnel.

A lack of "cross over" training for disaster responders in dealing with the government and the press can result in significant threats to company value. Risk and safety auditors and operations personnel without "cross over" training that teaches them the basics of liability risks, and right and duties, can have severe consequences as shown by the recent Chemical Safety And Hazard Investigation Board (CSHIB) report of the 2003 CTA Acoustics explosion in Kentucky. The CSHIB report on the dust explosion that killed seven and injured 37 provides a road map for action even beyond the product stewardship effort suggested by the CSHIB. According to the report, company memos and safety committee meeting minutes from 1992 through 1996 showed a concern about creating explosive dust hazards when cleaning the production line, yet management took no protective action. The CSB states that the manufacturer of the product from which the explosive dust was created failed to inform customers of the explosion hazard following a catastrophic explosion and fire at another facility where a similar product was used. The manufacturer supposedly drafted a letter to its customers to alert them to the danger, but never sent it. Assuming the accuracy of the CSB report, a Company Stewardship team would have mandated actions far beyond those suggested by the CSB.

While CEOs naturally worry about product liability and class action litigation risks, staff they direct to reduce risks may not comprehend the key role and impact of arcane regulations such as the ones that create Material Safety Data Sheet (MSDS)—which must be brutally accurate, and the need for consistent labels and signs that clearly disclose hazards, create and fulfill duties. These regulatory obligations create duties and form the basis of "cover up" or "willful" conduct allegations to support punitive damage requests when improperly fulfilled, and defenses when they are proper and justified. When put in the context of millions or billions in "nightmare" liability risks, approving resources for audits of facilities, processes, and records, and sampling, lab analysis, and product protections for MSDS and warning improvements, makes good economic and social policy sense.

Because a comprehensive Company Stewardship matrix has yet to be published, and "bet the company" crisis are not routinely encountered by management personnel, Company Stewardship lessons generally are learned by defense counsel over hundreds of investigations and decades of experience. The horror stories that result from a career of investigation and defense work make an excellent matrix from which to assist Company Stewardship teams appreciate the interaction of risk creation, reduction and transfer mechanisms, and can be used to facilitate Company Stewardship efforts. Together with our clients that have entrusted us with the defense of their cases, we have embarked on these efforts and expanded our Stewardship resources by calling on varied experts, both inside and outside the firm, to conduct company "nightmare" risk audits and program improvements. While it is difficult to engineer, embrace and implement programs that "bust turf silos," we believe the effort should begin with an examination of potential "nightmare" risks by a small leadership team committed to address them with both internal and outside resources. The team should set a timetable for its efforts and the goal should be to provide the CEO with their analysis and prioritized risk reduction, management and transfer options.

More information on Patton Boggs Company Stewardship counsel is available from Henry Chajet in Washington DC (202-457-6511) HChajet@pattonboggs.com, and Mark Savit in Denver, Colorado (303-830-1766) MSavit@pattonboggs.com.

2. CERCLA: Proposed Mine Site Settlement

The Department of Justice, Vanderbilt Gold Corporation and Mineral, Metal & Mining Management Company have reached a proposed CERCLA settlement regarding removal and response costs associated with the Morning Star Mine Site, an inactive open mine pit within the Mojave National Preserve. The Department of the Interior ("DOI") expended approximately $1,000,000 responding to "time critical" releases and threats of releases of hazardous substances at the site.

Vanderbilt Gold Corporation and Mineral, Metal & Mining Management Company agreed to reimburse DOI for its past and future response costs, conduct a removal action at the mine site, and deposit $1 million into the Department of the Interior’s Natural Resource Damage Assessment and Restoration Fund.

The proposed settlement illustrates that industries, with a few proactive steps, may be able to minimize harm to the environment and thereby avoid excessive response and restoration costs. If a company suspects potential threats of releases, it should consider taking the following actions:

• Immediately dispatch qualified personnel to respond to and contain any potential release. A company’s utilization of experienced personnel at the earliest possible moment serves to contain the potential release and is often more cost effective than reimbursement of government response costs.

• Contact counsel to evaluate the potential liability under federal and state environmental laws, prepare an appropriate legal strategy to minimize that liability, and assure that proper federal and state officials are contacted. Because many state and local laws overlap with applicable federal environmental laws, a company may often be able to save significant costs by implementing a response that satisfies all applicable requirements.

• Contact local regulators and officials early in the process. Effective communication with appropriate officials regarding the potential situation can often save companies from expending unnecessary sums in response to a release. A company’s proactive efforts in this regard often builds good will with regulators and officials and fosters a collaborative approach to implement a sensible solution.

For information on Patton Boggs partners with extensive experience in defending CERCLA and natural resource damage claims, contact Mark N. Savit in the Denver office, Msavit@pattonboggs.com 303-830-1776.

3. ACGIH / DOL / HHS Sued Over Threshold Limit Values

The US District Court for the Middle District of Georgia recently rejected Motions to Dismiss an NMA and IBSA lawsuit brought by Patton Boggs against the American Conference of Industrial Hygienists’ (ACGIH) issuance of Threshold Limitation Values (TLVs) and the federal government. At issue is the government’s incorporation of scientifically unsupported TLVs as regulatory mandates, and the deceptive trade practices engaged in by ACGIH in proposing and adopting unsupported TLVs for silica, nPB, copper and diesel exhaust.

The Court held that there is are valid questions of law and fact that should proceed to discovery regarding whether the US Government’s use of ACGIH TLVs, adopted in secret by government and university TLV Committee and Board Members, without disclosing authors, their credentials or their conflicts, nor subjecting them to accepted scientific procedures like independent peer review, constitutes a violation of the Administrative Procedure Act by violating the Federal Advisory Committee Act (FACA). The Court found that even though FACA itself does not create a private right of action, a FACA violation can violate the Administrative Procedures Act that does create a private right to sue. The Court also held that the Georgia Deceptive Trade Practices Act is applicable to ACGIH. The Court reasoned that if the TLvs are false or misleading under that statute, they are subject to injunction, regardless of ACGIH’s contention that they were not a commercial competitor of Plaintiffs and not withstanding the ACGIH claim of freedom of speech. The ruling permits the Plaintiffs to move ahead to discovery to find proof of the conflicts, bias, improprieties and lack of science that Patton Boggs found when it last sued ACGIH over the trona TLV four years ago. In that case, ACGIH agreed to publicly withdrawal the TLV and issued an apology to industry acknowledging the lack of health effect supporting the withdrawn TLV.

4. Independent Contractor MSHA Liability

A new decision by the Federal Mine Safety and Health Review Commission makes it clear that the Department of Labor’s Mine Safety and Health Administration’s (MSHA) authority to cite a production operator for an independent contractor’s violations is not unlimited. MSHA has always had the authority to cite a production operator, an independent contractor or both for an independent contractor’s violations. The decision illustrates the degree to which a thorough independent contractor screening program, contractual language and intelligent oversight of independent contractors can insulate an operator from MSHA liability for health and safety violations committed by the independent contractor.

In its March 18, 2005 decision in Secretary of Labor v. Twentymile Coal Co., the Commission held that MSHA abused its discretion when it cited a production operator for violations on mobile equipment that was owned and operated by an independent contractor. The production operator, Twentymile Coal Co., had hired an independent contractor, Precision Excavating, Inc., to remove clay from a coal refuse pile at a mine owned and operated by Twentymile.

Twentymile had checked Precision’s safety record, confirmed that Precision was familiar with all applicable MSHA standards and regulations and provided a safety guide that explained the need to pre-shift all mobile equipment and to correct any safety defects on the equipment. Under the contract between the Twentymile and Precision, Precision was required to comply with those standards and regulations and to inspect its own equipment. Twentymile did not directly supervise Precision’s employees or its work, and Twentymile’s employees were not working on or near the refuse pile.

Nevertheless, an MSHA inspector decided to cite Precision and Twentymile because he felt that there was a "serious problem" with contractor violations at the mine. He felt that Twentymile had contributed to the violations by failing to inspect Precision’s mobile equipment. He also thought that Twentymile had control over the cited conditions because Twentymile operated the mine and could order Precision to leave the site. He also wanted to "teach them a lesson."

The Commission held that this wasn’t enough, and it set forth clear guidelines to when it is proper to cite a production operator for an independent contractor’s violation. First, the Commission asked who was in the best position to prevent the violations. If the production-operator is in the best position to correct a violation, due to its size or expertise, then it may be cited for a contractor’s violation.

Second, the Commission looked at Twentymile’s involvement in Precision’s work at the site. If a production operator doesn’t provide the equipment or the manpower for the job and doesn’t supervise the contractor’s work, this is an indication it should not be cited. Here, Twentymile’s involvement was "nothing more than prudent oversight of the contractor’s compliance with the contract," and that wasn’t enough to justify MSHA’s decision to cite Twentymile.

Third, the Commission asked whether Twentymile contributed to the violations. MSHA claimed that Twentymile contributed to the violations by failing to inspect Precision’s equipment. The Commission rejected that claim, noting that there’s no regulation that requires operators to inspect contractor’s equipment. The Commission also recognized that after the fact, someone can almost always identify something that a production operator could have done to prevent a violation. To justify a citation, however, the operator’s contribution must be significant or, if the operator fails to take some action to prevent a violation, that failure must be significant.

Finally, the Commission asked whether any criteria of MSHA’s Enforcement Guidelines had been satisfied. MSHA instructs its inspectors to cite an operator where the operator has: (1) contributed by either act or omission to a contractor’s violation; (2) contributed to the continued existence of the contractor’s violation; (3) allowed its own employees to be exposed to the hazard; or (4) control over the violative condition. The Commission stated that "a criterion is not established satisfied unless the production operator’s involvement in the violation extends beyond the minimal level that would found with regard to virtually every independent contractor violation," and it held that Twentymile’s involvement here wasn’t enough.

This decision does not change the law that production operators can be issued citations and be penalized for violations committed by contractors. Instead, it places rational limits on MSHA’s exercise of its enforcement discretion. Citations can still be issued to the mine operator for contractor violations under a variety of circumstances, such as: if the contractor rarely works at mines and is not familiar with the mining environment; or is not familiar with MSHA’s standards and regulations; or is particularly small in size; or will be supervised directly by the operator; or will be working hand in hand with the operator’s employees. Under these circumstances, MSHA’s authority to cite the operator for the contractor’s violations likely will be upheld.

However, the Commission’s decision makes it clear that operators should design and implement a contractor risk reduction program that: (1) screens contractors for safety and health performance and capabilities, (2) uses contractual provisions ensuring that the contractor is familiar with and complies with MSHA standards and regulations and (3) carefully administers the contractor’s compliance with the terms of the contract. While these steps won’t eliminate an operator’s liability for all contractor’s violations, they will certainly reduce the risk to the operator. We suggest that the same risk reductions actions and theories apply to large independent contractors that employ smaller subcontractors.

Patton Boggs’ health and safety attorneys have over 70 years experience in counseling employers in developing and implementing programs to reduce client risks from regulatory violations caused by other parties that can also increase risks of civil litigation liability. Draft independent contractor programs, check lists, policies, contract and purchase order provisions, and compliance guidelines are readily available for tailoring to specific client needs. For assistance, please contact Henry Chajet, hchajet@pattonboggs.com (202)457-6511; John Austin, jaustin@pattonboggs.com (202)457-6167 in DC or Mark Savit, msavit@pattonboggs.com in Denver (303)830-1776.

5. Fall Hazards—Roofing Contractor Fined $172,600

OSHA has cited a Grand Forks, ND roofing contractor $160,000 for failing to protect workers from fall hazards. The penalties result from five willful violations and four serious violations issued in October of 2004 and January of 2005 at two separate job sites.

Since 1997 the Bismarck Area OSHA office had inspected the contractor nine times and issued several fall hazard citations. These citations are part of a special emphasis program at the Bismarck Area OSHA Office targeting fall hazards in construction. Additionally, Minnesota OSHA has cited the company nine times for fall hazards since 1998.

The contractor was also issued four serious citations related to scaffolding with an additional proposed penalty of $12,000 dollars. A citation for failing to maintain an injury log brought the grand total of penalties to $172,600.

6. Targeted Inspections—"Widespread Safety and Health Hazards" Result in $104,000 in Fines

A Connecticut manufacturing plant has received 51 serious and other-than-serious citations totaling $104,000 in proposed penalties. An OSHA News Release described the violations as "A wide cross-section of safety and health hazards."

The manufacturer was inspected as part of a program targeting worksites whose lost workdays are higher than average. The citations issued on the inspection run the gamut from electrical hazards and unguarded machine parts to the failure to properly communicate hazards and record injuries.

7. Training and Emergency Response—Serious and Repeat Citations Lead to $109,000 in Penalties

A cheese maker received citations totaling $109,000 in penalties after an inspection at its Idaho plant. Many of the citations were related to the lack of planning and training at the plant. The plant received serious citations for lacking an emergency response plan, hazardous material training, and a respiratory protection program. A repeat citation was issued for the lack of lockout/tagout procedures. Several other-than-serious citations were issued as well

8. Explosion—OSHA and Illinois Manufacturer Reach $300,000 Settlement

A settlement has been reached in an OSHA matter arising from the April, 2004 explosion at an Illinois plastics plant. The explosion caused the deaths of five workers and seriously injured three others.

The settlement resulted in penalties of $300,000. Other conditions of the settlement require the company to employ specialists and conduct audits of other plants in order to minimize safety management deficiencies at the new plant being built to replace the old one, much of which was destroyed in the explosion.

9. Guarding and Lockout/Tagout—$89,100 in Fines After Employee is Dragged Into Machinery

A Massachusetts metal plant has received proposed penalties of $89,100 after an accident in which an employee received crushing injuries from a metal-forming machine. The manufacturer received 29 serious violations from OSHA during inspections. The inspections revealed that the machine in question was not properly guarded and that lockout/tagout procedures were not enforced. The inspections also resulted in citations for other instances of unguarded machinery and several other violations. Many of the other citations stemmed from unusually high levels of cadmium at the facility.

The Patton Boggs E H & S Group consists of attorneys who have resolved client problems in environmental, energy, natural resource and safety and health law since the late 1960s. With lawyers in Washington DC, Alaska, Colorado, Texas, and Northern Virginia, we have experience with EPA, OSHA, MSHA, NIOSH, DOT, OPS, Coast Guard, NTSB, FAA, FDA, CSP, the Chemical Safety Board, and almost every other federal and state government EH&S agency here and in many foreign governments around the world. We speak a variety of languages, have backgrounds in business, science, engineering, industry and government and combine preventive law counseling with courtroom and lobbying expertise to achieve results. For more information go to: http://www.pattonboggs.com or contact Henry Chajet (hchajet@pattonboggs.com) at 202-457-6511, Mark Savit (msavit@pattonboggs.com) at 202-457-5269, Cole Wist (cwist@pattonboggs.com) at 303-894-6159, John Austin (jaustin@pattonboggs.com) at 202-457-6167 or Willa Perlmutter (wperlmutter@pattonboggs.com) at 202-457-5223.