Environmental Groups Score Victory in Selenium Lawsuit

By: Raabia Wazir, Staff Member

On October 3, 2011, a coalition of conservation and environmental groups completed a two million dollar settlement with Arch Coal and its subsidiaries over continued and repeated selenium violations at six coal mining sites in southern West Virginia.[1] Selenium is a natural occurring element that poses no threat to humans when present in low levels, but when it exceeds Safe Drinking Water Act threshold levels of 0.05 parts per million, selenium exposure can cause damage to the liver, the kidneys, and to the nervous and circulatory systems.[2] In fish and other wildlife, ingestion of toxic amounts of selenium can cause total reproductive failure, birth defects and damage to gills and internal organs.[3]

The settlement is the most recent of a series of legal victories for groups trying to force the coal industry to clean up runoff pollution from mines into surrounding streams and ground water. The fight over selenium began in 2003, when the EPA released the Draft Programmatic Environmental Impact Statement on Mountaintop Mining/Valley Fills in Appalachia, a broad federal report that turned up repeated violations of selenium water quality standards. [4] In 2004, a U.S. Fish and Wildlife Service reported further selenium problems downstream from major mining operations.[5]

Most significantly, last year, U.S. District Judge Robert Chambers cracked down on the coal industry for failure to meet compliance deadlines for selenium cleanup in Ohio Valley Environmental Coalition, Inc. v. Hobet Min., LLC[6] and Ohio Valley Environmental Coalition, Inc. v. Apogee Coal Co., LLC[7] for violations of the Clean Water Act (CWA) and the Surface Mine Control and Reclamation Act (SMCRA). Judge Chambers ordered the Patriot Coal subsidiaries to install a “fluidized bed reactor" to biologically treat water discharge from the mine, the corporate-wide cost of which was disclosed by Patriot to be nearly 400 million dollars over 30 years.[8] Lawyers for the citizens groups involved in the suits argued that these costs indicate that selenium-contaminated sites should not be permitted at all because “treatment becomes a long-term responsibility that could outlive the coal companies and then fall on the public.”[9] However, despite continued legal victories by environmental activists, currently no such restrictions have been enforced.

[1] Press Release, Ohio Valley Environmental Coalition, Groups Secure Agreement from Arch Coal to Treat Pollution from Coal Mines (October 3, 2011),http://www.ohvec.org/press_room/press_releases/2011/10_03.html.

[2] Sierra Club, Toxic Selenium: How Mountaintop Removal Coal Mining Threatens People & Streams (April 2009), available athttp://www.sierraclub.org/coal/downloads/Seleniumfactsheet.pdf.

[3] Id.

[4] Ken Ward Jr., Selenium showdown: Key hearing over coal’s water pollution begins today before Judge Chambers, The Coal Tattoo (August 9, 2010),http://blogs.wvgazette.com/coaltattoo/2010/08/09/selenium-showdown-key-hearing-over-coals-water-pollution-begins-today-before-judge-chambers/

[5] Id.

[6] Ohio Valley Envtl. Coal., Inc. v. Hobet Min., LLC, 723 F. Supp. 2d 886 (S.D.W. Va. 2010).

[7] Ohio Valley Envtl. Coal., Inc. v. Apogee Coal Co., LLC, 744 F. Supp. 2d 561 (S.D.W. Va. 2010).

[8] Ken Ward Jr., Environmental groups hail selenium ruling as 'game changer', West Virginia Gazette. September 1, 2010, http://wvgazette.com/News/MiningtheMountains/201009010983.

[9] Id.

Oil and Gas Industry Resisting New Regulations

By: Elizabeth Watson, Staff Member

There is ongoing disagreement between American oil companies and the federal government in regard to oil and natural gas exploration and production in the United States. But which side is more convincing? Are the oil industry’s hands unnecessarily tied by the federal government, or are increasing regulations justified?

The National Petroleum Council estimates that oil and natural gas production in North America has the capacity to double by 2035, if the federal government will untie the industry’s hands.[1] The industry looks to the new rules for onshore production, the de facto moratorium recently lifted in the Gulf of Mexico, and the postponing of scheduled lease sales on the outer continental shelf as examples of the federal government’s recent restrictions on operations.[2]

To support the assertion that untied hands leads to greater production, the industry cites the states’ experiences who, by loosening restrictions on the “hydraulic fracturing technique used in shale gas production,” to extract oil, saw much economic gain.[3] In considering production success, the pattern, according to oil companies, is clear—“[r]egulatory and environmental reviews were largely the responsibilities of state and local governments, and disagreements could often be resolved at the local level.”[4] Oil companies worry if the federal government does not lessen restrictions that foreign companies will avoid working here because it is too costly, time consuming, and often involves government challenges played out in administrative reviews and federal court.[5] This in turn will decrease American jobs, decrease the amount of revenue the federal government receives from oil leases, and increase American dependence on foreign energy.[6]

The Obama Administration opposes these claims and points to the “use it or lose it” policy of federal oil and gas leases and the industry practice of “lease squatting” as the reasoning behind oil industry complaints.[7] The Interior Department, the regulatory body that assigns federal leases, provides a five to ten year exploratory period for a company to find oil and natural gas.[8] The federal government claims this period fully allows oil companies to assess a lease and determine its viability. The oil industry itself acknowledges that the “use it or lose it” doctrine is not a new development, but argues the doctrine has always restrained the oil and gas industry because, from the time a lease is issued, “the clock starts ticking.”[9] Enforcing this policy provides no greater obstacle than it did in the past. Additionally, in an effort to discourage the practice of “lease squatting,” where oil companies hold onto large tracts of land for many years without development, the administration proposes to almost triple prices at this year’s offshore lease sale (December 14, 2011), to “ensure areas with the greatest resource potential are developed.”[10] And, to further appease those holding leases affected by the six-month moratorium following the BP oil spill, Obama has extended leases for another year. [11]

The problem with this debate is that both sides are persuasive according to where one sits and what one seeks to protect. Consider this fact: the Department of Energy’s Energy Information Administration found that from 2005 to 2010, 34 percent of all exploration wells drilled dry, and eight percent of all development wells drilled dry, with oil companies paying the federal government for leases regardless of success.[12] The argument supporting loosened regulations on oil companies looks to the amount of risk and money involved in the oil production process, and advocates freedom and time to make wise development choices. After all, the companies are the industry experts. Furthermore, the federal government receives great revenues from the oil industry. With more leases and production, the government makes more money.

However, looking at the same facts listed above, those supporting greater regulation of oil companies also look to the success rate and risk involved, but through a different lens. They argue that drilling, with such potential devastating effects, necessitates strict oversight from Congress and regulatory agencies. One need only recall the recent BP oil spill to find support for this argument. Furthermore, many reject that increased production in itself is a positive, as opposed to looking for alternative fuel sources.

So, what happens next, and who is right? We will have to watch the upcoming lease sales and pending court cases, such as ExxonMobil v. Salazar, to see. It is hard to believe that this debate will ever be fully resolved because it concerns deeply held political beliefs.

[1] Lucian Pugliaresi, The Lessons of the Shale Gas Revolution, The Wall Street Journal, September 30, 2011, at A13.

[2] House Natural Resources Committee, Democrats Attempt to Resurrect Old “Use It or Lose It” Myth (March 24, 2011), http://naturalresources.house.gov/News/DocumentSingle.aspx?DocumentID=230630.

[3] Lucian Pugliaresi, The Lessons of the Shale Gas Revolution, The Wall Street Journal, September 30, 2011, at A13.

[4] Id.

[5] Id.

[6] House Natural Resources Committee, Democrats Attempt to Resurrect Old “Use It or Lose It” Myth (March 24, 2011), http://naturalresources.house.gov/News/DocumentSingle.aspx?DocumentID=230630.

[7] Deborah Solomon, U.S . News: U.S. to Resume Lease Sales For Oil Drilling in the Gulf, The Wall Street Journal, August 20, 2011, at A3.

[8] House Natural Resources Committee, Democrats Attempt to Resurrect Old “Use It or Lose It” Myth (March 24, 2011), http://naturalresources.house.gov/News/DocumentSingle.aspx?DocumentID=230630.

[9] Id.

[10] Deborah Solomon, U.S. News: U.S. to Resume Lease Sales For Oil Drilling in the Gulf, The Wall Street Journal, August 20, 2011, at A3.

[11] Id.

[12] House Natural Resources Committee, Democrats Attempt to Resurrect Old “Use It or Lose It” Myth (March 24, 2011), http://naturalresources.house.gov/News/DocumentSingle.aspx?DocumentID=230630

ExxonMobil, Russia, and the “Reset” of Relations

By: John Wathen, Staff member

In late August, American oil giant Exxon-Mobil announced an agreement with Russia’s state-owned oil company, Rosneft.[1] The deal grants Exxon, America’s largest corporation, access to the oil fields underneath the Arctic Ocean, which the United States Geological Survey estimates holds one-fifth of the world’s undiscovered oil and natural gas.[2] In exchange, Rosneft, who has long wished to break into the international oil market, will acquire oil fields in Texas and the Gulf of Mexico.[3] Russian Prime Minister Vladimir Putin, who exhibited his enthusiasm for the deal by personally presiding, has stated that the eventual total combined investment could be as large 500 billion dollars, a boon to the Russian oil industry.[4] This deal comes on the heels of an announcement in March by the Obama administration that US/Russian relations must undergo “reset”, as tensions between the two nominal allies have become increasingly strained in the last few years.[5]

The Obama administration should do all it can to facilitate this deal, including easing restrictions on offshore drilling in Alaska and the Gulf of Mexico. Demonstrating a willingness to allow American private companies to partner with Russian business interests will prove America’s commitment to the “reset” of relations. Additionally, long term agreements such as this will ensure a steady supply of oil to the United States. The energy potential of the Arctic Circle, which up until now has been largely untapped, is enormous.[6] The United States cannot afford to hesitate in developing these fields to ensure an adequate share in the benefits. As the partnership is presented to American regulators for approval, long term energy security considerations coupled with a new urgency in US/Russian relations should supersede environmental concerns. A healthy political and economic relationship with Russia, which currently produces more oil than Saudi Arabia,[7] is important to American security and prosperity. This partnership, which is hopefully indicative of future Russo-American business agreements, will go a long way in developing that relationship.

[1] Andrew E. Kramer, Exxon Wins Arctic Oil Deal with Russians, N.Y. Times, Aug. 30, 2011,http://www.nytimes.com/2011/08/31/business/global/exxon-and-rosneft-partner-in-russian-oil-deal.html?pagewanted=1

[2] Id.

[3] Id.

[4] Id.

[5] Desmond Butler, Obama: US has ‘Reset’ Relations with Russia, Associated Press, June 24, 2010,http://www.msnbc.msn.com/id/37892671/ns/politics-white_house/t/obama-us-has-reset-relations-russia/#.ToptO-yTNPw

[6] Steve Levine, Horse Trading with Russia Wins Exxon the Arctic Goal, Foreign Policy (Aug. 30, 2011, 11:19 AM),http://oilandglory.foreignpolicy.com/posts/2011/08/30/horse_trading_with_russia_wins_exxon_the_arctic_gold

[7] Id.

China’s New Restrictions on Rare Earth Metals and the Implications for US Policy

By: Travis Van Ort, Staff Member

China’s Ministry of Land and Resources announced last week that it would be tightening controls on rare earth metals by cracking down on unauthorized exploration and production of these elements.[1] China has also indicated that “it is restricting exports of [these metals] to conserve scarce supplies and curb environmental damage caused by mining,” but foreign governments have complained that similar limits have not been placed on domestic consumers of rare earths.[2]

Rare earth metals are a group of 17 elements that are key components for high tech and clean tech goods. These elements are used in flat screen TVs, cell phones, wind turbines, electric car batteries,[3] and even military technology, such as missiles.[1][4] China currently produces approximately 97 percent of the world’s supply of these metals, but has only around 30 percent of the world’s reserves.[5] The U.S., Australia, Canada,[6] and Russia[7] also have varying amounts of reserves of these metals. These elements are vital to the modern high tech economy, and China’s actions during its reign as essentially a monopoly producer require quick policy responses from the U.S. government. China’s largest rare earths producing company has indicated that the short supply of rare earths is an irreversible trend, that China does not want to remain the world’s major supplier of rare earths, and will slowly shift its focus to supplying domestic demand.[8] China has reduced exports in recent years, cutting the export quota significantly last year,[9] as it has tried to build up its own industry, which has caused the U.S. and Europe to pressure China to treat all buyers equally.[10]

There are three possible policies the U.S. can pursue to address Chinese actions on rare earths: bring a case in the World Trade Organization, direct government assistance, such as loan guarantees and subsidies, to growing domestic production capacity for rare earths, and encourage research into alternative technologies or materials that lessen the need for rare earths. Action in the WTO is probably the least desirable option. While the U.S. may be able to make out a case under certain provisions of the WTO agreements, depending on the specifics of the regulations and how they are implemented, China would likely have an arguable defense.[11] Since a WTO case takes time to resolve and would not change China’s status of monopoly producer of rare earths, U.S. government action to encourage rare earth production or the creation of alternatives is preferable. The U.S. could encourage domestic production by offering subsidies or loan guarantees to assist in financing mining projects and in implementing the necessary environmental protections, and could also help expedite the licensing process, since it takes seven to ten years to get a permit to open a new mine.[12] Congress introduced bills in both houses last year to help on some of these issues,[13] but more can and should be done. Investment in new mines is needed sooner rather than later because it can take three to five years for a mine to reach full production.[14] The government can also encourage research into alternatives to rare earths for their high tech and clean tech applications. The Department of Energy has encouraged this by offering $30 million to fund such research,[15] but as the demand for both clean tech and high tech increases, more research will be necessary to provide alternatives for all of the current and future applications that use rare earths. These alternatives could be even more necessary since some estimates indicate that there may be shortages of at least two of the rare earth metals in the next five to ten years.[16]

A U.S. policy response that both incentivizes domestic production and encourages research into rare earth alternatives is necessary to allow the high tech and clean tech uses of rare earths to expand without facing shortages or even greater price increases with these materials.

[1] Elaine Kurtenbach, China Orders Tighter Controls on Rare Earths, Associated Press, Sept. 26, 2011,http://news.yahoo.com/china-orders-tighter-controls-rare-earths-030235815.html.

[2] Id.

[3] Id.

[4] China Steps Up Regulation of Rare Earth Industry, China Daily, Sept. 27, 2011,http://www.chinadaily.com.cn/usa/business/2011-09/27/content_13801484.htm.

[5] Kurtenbach, supra note 1.

[6] Id.

[7] Maria Gallucci, $30 Million in DOE Grants for Green Technologies Free of Rare Earth Elements, Reuters, April 29, 2011, http://www.reuters.com/article/2011/04/29/idUS86627191420110429.

[8] Zhou Yan, Limited Rare Earths the New Norm, China Daily, Sept. 16, 2011,http://www.chinadaily.com.cn/usa/2011-09/16/content_13716809.htm.

[9] Keith Bradsher, China Said to Widen Its Embargo of Minerals, N.Y. Times, Oct. 19, 2010,http://www.nytimes.com/2010/10/20/business/global/20rare.html?src=mv&ref=homepage.

[10] Kurtenbach, supra note 1.

[11] General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. A-11, 55 U.N.T.S. 194 (Articles III and X I are provisions under which the action could be brought and Article XX offers general exceptions to GATT’s applicability).

[12] Gallucci, supra note 7.

[13] James T. Areddy, U.S. Congress Spurs Rare Earth Race, Wall St. J., Oct. 1, 2010,http://blogs.wsj.com/chinarealtime/2010/10/01/us-congress-spurs-rare-earth-race.

[14] Bradsher, supra note 9.

[15] Gallucci, supra note 7.

[16] Id.

What New USDA Regulations Mean for the Hops Industry

By: Joe Schuler, Staff Member

Under a regulation finalized in late 2010 and set to take effect in 2013, brewers who label beer as organic must use organic hops.[1] The requirement is a result of an amendment adopted by the USDA.[2] The National List of Allowed and Prohibited Substances details substances that may be used in products marketed as organic.[3] The National Organic Standards Board recommends changes to the list, with the USDA giving final approval.[4] Currently, inorganic hops may be used because it consists of less than five percent of the product, but that will no longer be the case once the regulation takes effect in 2013.

This is a welcome change for growers of organic hops. Many lobbied for the change because they had difficulty selling their product.[5] Brewers were more likely to use the inorganic variety simply because it tends to be cheaper to produce.[6] Of course, the new regulation should mean increased demand for the organic variety.

According to the American Organic Hop Growers Association, there are approximately 100 acres of organic hops currently grown in the U.S., with a capacity to double in one year.[7] It seems likely that this will become a reality. In fact, it seems that organic farmers will see a complete reversal of fortunes – going from struggling to find a market to struggling to meet demand. This in part stems from the fact that it usually takes two years to produce a full hops crop, and because of uncertainty about the varieties of organic hops that brewers will desire.[8]

It is however a clear win for organic growers. For consumers, it may be a mixed bag. Organic beer prices may rise, at least in the short term. However, for consumers who choose to buy beer labeled as organic, they will now get a product that better fits that label. It is hard to see that as anything other than a win.

[1] Rule Change May Prompt Increase in Organic Hops, More Variety of Organic Beers to Choose From, Wash Post Sep. 30, 2011, http://www.washingtonpost.com/business/technology/rule-change-may-prompt-increase-in-organic-hops-more-variety-of-organic-beers-to-choose-from/2011/09/30/gIQA4WP98K_story.html

[2] Id.

[3] National Organic Program, http://www.ams.usda.gov/AMSv1.0/ams.fetchTemplateData.do?template=TemplateJ&navID=NationalListLinkNOPNationalOrganicProgramHome&rightNav1=NationalListLinkNOPNationalOrganicProgramHome&topNav=&leftNav=NationalOrganicProgram&page=NOPNationalList&resultType=&acct=nopgeninfo (last visited October 3, 2011)

[4] Id.

[5] Abram Goldman-Armstrong, New Rules for Organic Hops, THE NEW BREWER, March/April 2011, 67, 68.

[6] Id.

[7] Id.

[8] Id.

The Politics of Hemp Production in Kentucky

By: Vanessa Rogers, Staff Member

Much controversy has steamed from the production and cultivation of hemp in Kentucky.Proponents support hemp production by turning to Kentucky’s successful past in the industrial production of hemp. In the 1800s, when the production of hemp was legal, Kentucky accounted for half of the industrial hemp production in the United States.[1] Critics advocate against hemp production because hemp contains THC and could be used as a recreational drug.[2] The issue of hemp has been introduced on several occasions to the Kentucky Legislature.[3]

Just this year Senate Bill 30 was introduced in Kentucky. The bill proposed to define industrial hemp and THC in a way so as to exclude industrial hemp production from the definition of marijuana, thereby making its industrial production legal. In addition, the bill gave the Department of Agriculture the authority to regulate and oversee hemp production. Such provisions would have required the Department of Agriculture to license industrial hemp producers. The Sheriff would have been required to monitor and randomly test industrial hemp fields. Licensees were to provide the Department of Agriculture with names and addresses of any grower or buyer of industrial hemp, and copies of any contracts the licensee may have entered into relating to industrial hemp.[4] Senate Bill 30, like many other similar bills introduced in the Kentucky Legislature, did not become law. It was introduced to the Senate and then referred to the Agriculture committee where it died.[5]

The question then becomes, why do bills like Senate Bill 30 die before becoming law? One of the reasons may be due to federal efforts to reduce the cultivation of marijuana.[6] Hemp and marijuana physically look similar[7]thereby making it harder for law enforcement to distinguish between the cultivation of hemp and the cultivation of marijuana. It is not an easy political move for a representative to open the door to hemp as long as the issue of marijuana exists in society.[8] In fact, the United States Congress “has displayed much more interest in eradicating anything that resembles drugs than in drawing lines between legitimate and illegitimate substances.”[9] Thus it may be a political faux pas to challenge the federal government’s strong belief in this. For now, any production of hemp is illegal in the state. If another hemp bill is introduced in the Kentucky Legislature, it is likely that it too will fail like numerous other Kentucky bills.

[1] Economic Impact of Industrial Hemp in Kentucky, By Dr. Eric C. Thompson, Dr. Mark C. Berger & Steven N. Allen, Center for Business and Economic Research at the University of Kentucky, (July 1998), http://www.votehemp.com/PDF/hempstudy.pdf.

[2] Susan D. Dwyer, The Hemp Controversy: Can Industrial Hemp Save Kentucky?, 86 Ky. L.J. 1143,1168-69 (1998).

[3] S.B. 30, 2011 Leg., Reg. Sess. (Ky. 2011); S.B. 14, 2010 Leg., Reg. Sess. (Ky. 2010); S.B. 131, 2009 Leg., Reg. Sess. (Ky. 2009); H.B. 100, 2001 Leg., Reg. Sess. (Ky. 2001); H.B. 855, 2000 Leg., Reg. Sess. (Ky. 2000).

[4] S.B. 30, 2011 Leg., Reg. Sess. (Ky. 2011).

[5] Id.

[6] Thompson, supra note 1,

[7] Syzygyastro, Hemp and Marijuana, Hubs.com,http://syzygyastro.hubpages.com/hub/hemp-and-marijuana, (Last visited Oct. 2, 2011).

[8] Dwyer, supra note 2, at 1169.

[9] Id.

Measurement Extension May Skew Greenhouse Gas Emission Data

By: Phillip Robinette, Staff Member

In an attempt to better understand the quantity and origin of our country's greenhouse gas emissions, Congress enacted a mandatory reporting requirement for the oil and natural gas industry.[1] Oil and gas facilities emitting at least 25,000 metric tons are required to report their yearly Methane and Carbon Dioxide emissions from equipment leaks and venting and several other types of previously unreported emissions.[2] This reporting seemed crucial because the data on greenhouse gas emissions from the natural gas industry has been called into question in recent years. While some statistics show that natural gas only produces about half as much emissions as coal fired plants, that number may be significantly reduced if emissions were measured during the entire process of gas production.[3] Because natural gas is seen by many as a possibility in cleaner burning energy, largely due to the new extraction method known as fracturing, this data collection seemed critical. The accuracy of this data could help determine the future of America's energy production and its effect on American's health. However, the implementation by the Environmental Protection Agency (EPA) has been criticized by the industry and generated a lawsuit.

The dispute arose in large part due to the fact the industry claimed it needed more time “in order to complete initial equipment inventories and to secure internal resources to report data to EPA in accordance with the rule requirements.”[4] In response to the exhortations of the oil and natural gas industry, the EPA has altered the rules of its reporting and will grant an extension for the industry to use what is currently used in the industry, the “best available monitoring methods” (BAMM) until June 20, 2012.[5] The BAMM allows calculations from supplier data, engineering calculations, and even company records.[6]

The Environmental Defense Fund (EDF) has criticized the BAMM as a less reliable methodology that may hamper and skew data collection.[7] The EDF and the Sierra Club have also challenged the assertion that the oil and gas industry were not capable of complying with the new reporting methods in the time required.[8] They base this challenge on the fact that the EPA was largely relying on three industry letters which they allege provide no empirical data for why implementation would not be possible in the time required. There was also concern over the possibility of indefinite extension of the BAMM because of a change in the language of the regulation from allowing extensions only under “extreme circumstances”, typically classified as safety threats or technical impossibilities, to “unique or unusual circumstances”.[9] The criticism of the quality of the BAMM data may be apt but due to the brevity of the extension it seems that the concern of bad data will largely be circumvented when the more accurate method is implemented. However, this concern does seem more worrisome when compared to the lax standards used by the EPA to grant the current extensions and is only exacerbated by the change to looser language in the regulation.

[1] See generally 40 C.F.R. 98.

[2] Id.

[3] Natural gas, electronics groups sue EPA over emission-reporting rules, EENEWS(February 1, 2011), htttp://www.eenews.net/public/Greenwire/2011/02/01/2.

[4] 76 Fed. Reg. 37303.

[5] 76 Fed. Reg. 37300.

[6] Mandatory Reporting of Greenhouse Gases ‐ Petroleum and Natural Gas Systems, Revisions to Best Available Monitoring Method Provisions: EPA’s Response to Public Comments, EPA.gov, http://www.epa.gov/climatechange/emissions/downloads11/documents/Subpart-W-response-to-comments.pdf.

[7] Id.

[8] Id.

[9] Id.

The Right Track: Should Kentucky Mandate Synthetic Thoroughbred Racetrack Surfaces?

Kate Remias, Staff Member

Headlines of a Thoroughbred’s career or life ending injuries have long prompted questions of causation and fault, but a new variable is being brought to the forefront of this blame game: track surfaces. Synthetic track surfaces are being hailed as the safety savior to a troubled sport, and California has gone so far as to require the state’s major tracks have synthetic surfaces.[1] This begs the question of whether Kentucky should follow suit.

Supporters of synthetic surfaces offer impressive numbers backing superior safety claims, but critics posit that data is incomplete. Supporters point to improved safety statistics, such as 2010 data indicating synthetic tracks had fewer career ending incidents than dirt and turf tracks,[2] or a two-year study revealing synthetic tracks had fewer fatalities per start than natural surfaces.[3] Critics, however, say the tracks do not reduce injuries, they create different ones; reducing fatal or career ending fractures and chips but increasing soft-tissue damage.[4] Some veterinarians noted synthetics decrease injuries to the front-end of the horse but increase hind-end injuries. [5] Synthetic surfaces have potential, but there is still a legitimate fear of the unknown weighing heavily against mandating these surfaces.

The need for mandating track surface standards is mitigated by market forces already protecting safety standards. When horses are injured physically, the industry is injured fiscally. After Barbaro’s breakdown, officials noted the injury would cause decreases in fans and ticket sales. [6] Eight Belles’ breakdown induced headlines calling for the end of Thoroughbred racing.[7] Market forces incentivize safety, and the Kentucky Thoroughbred racing industry responds to those forces. Absent regulation, Kentucky’s Turfway Park was the first United States success story of a synthetic main track.[8]Keeneland used a synthetic training track the year prior, and was an integral force in introducing synthetics to the American market.[9] Market forces already guiding Kentucky’s industry safety standards mitigate the need for outside regulation, especially where there are still questions regarding long term safety consequences.

While synthetic surfaces certainly have potential, currently insufficient data coupled with market forces already protecting safety indicate mandating synthetics is not yet necessary.

[1] Press Release, Cal. Horse Racing Bd., Board Mandates Synthetic Surfaces (May 25, 2006), available at http://chrb.ca.gov/press_releases/2006_05_25_press_release.pdf.

[2]Career-Ending Did Not Finish Stats by Track, Keeneland,http://www.keeneland.com/lists/copy/copy.aspx?Page=Career%20Ending (last visited Sept. 26, 2011).

[3]The Jockey Club Releases Updates Statistics from the Equine Injury Database, The Jockey Club (Dec. 15, 2010), http://www.jockeyclub.com/mediaCenter.asp?story=470.

[4] Andrew Wolfson, Horse Deaths Drop on Synthetic Tracks: Quality Varies and Cost, Upkeep High,Courier-Journal.com (Aug. 18, 2008, 4:21 AM),http://www.courier-journal.com/article/20080818/EXTRAS03/808180406/Horse-deaths-drop-synthetic-tracks.

[5] Amanda H. Duckworth, Right Direction: Racetrack Vets See Fewer Catastrophic Injuries, But More Hind-End Problems, The Blood-Horse, Dec. 8, 2007, at 6988, available athttp://www.bloodhorse.com/pdf/synthetic_surfaces_special_report_120807.pdf.

[6] Matt Hegarty, Barbaro’s Injury Could be Bad for Business: Would-be Racing Fans Turned off to Sport by Witnessing Mishap, NBC Sports (May 24, 2006, 2:35 PM),http://nbcsports.msnbc.com/id/12935222/.

[7]See Andrew Beyer, For Whom Is Eight Belles’s Toll?, Wash. Post, (May 12, 2008),http://www.washingtonpost.com/wp-dyn/content/story/2008/05/11/ST2008051102458.html; Ed Berliner,Death at The Kentucky Derby: Eight Belles Tolls for Thoroughbred Racing, Bleacher Report (May 3, 2008) http://bleacherreport.com/articles/21227-death-at-the-kentucky-derby-eight-belles-tolls-for-thoroughbred-racing.

[8] Hegarty, supra note 6.

[9]Id.

Can a take-over protect directors and officers from personal liability resulting from pending shareholder derivative actions?

By: Robert Proudfoot, Staff Member

On April 5, 2010, 29 Massey Energy employees were killed in the Upper Big Branch coal mine disaster in West Virginia.[1] Accusations of negligence and criminal wrong doing led to federal and state regulatory scrutiny, wrongful death tort claims on behalf of the victims, and derivative shareholder suits against directors and officers.[2] In reaction to this disaster and its fallout, Massey’s stock price plummeted and Alpha Natural Resources opportunistically offered to take over the beleaguered company.[3] Shareholders, concerned that the merger would stop their derivative action suits for lack of standing under Delaware General Corporation Law §259(a), sued for injunctive relief in the Delaware Court of Chancery to block the merger.[4]

Derivative actions are lawsuits by shareholders against directors and officers on behalf of the corporation to recoup losses caused by the breach of fiduciary duties of the directors and officers.[5] Successful suits make the directors and officers personally liable to the corporation for their actions.[6] As was the case for Massey directors and officers, such liability is usually covered by directors and officers insurance.[7]

The Delaware Court of Chancery ruled in In re Massey Energy Co.that shareholder suits against the Massey board of directors could not stop a merger between Massey and Alpha even though such a merger would render any shareholder action effectively moot for lack of standing.[8] While the Delaware court recognized the potential conflict of interest and inequity, it permitted the merger to continue on the grounds that Alpha could sue the Massey Board of Directors as the new owner of the shareholder claim under Del. C. §259(a).[9]

The court cited Lewis v. Anderson when it listed the two exceptions to this strict standing requirement for shareholder actions after a merger: “(1) where the merger itself is the subject of a claim of fraud; and (2) where the merger is in reality a reorganization which does not affect plaintiff's ownership of the business enterprise.”[10] Had Massey attempted the merger solely to circumvent the shareholder action, the derivative action would have been able to continue under the first exception listed in Lewis v. Anderson.[11] To prove such an allegation is a tall order indeed and the court declined to find such a fraudulent abuse of corporate power for the purposes of granting the injunction against the merger.[12]

This theory of standing during mergers has broad implications for the corporate governance for publicly traded natural resource companies, food producers, and energy utilities – especially during disasters or scandals with ongoing shareholder derivative actions. Shareholders should be aware that they will lose standing for any derivative actions after a merger and such actions will be transferred as a property right to the new corporation.[13] It is up to the newly merged corporation to bring its own suit against the very old board of directors that negotiated the merger deal in the first place, a situation ripe for potential conflicts of interest.[14] The court also suggested that the Massey shareholders, as new Alpha shareholders after the merger, demand Alpha bring a suit against Massey directors and officers. If Alpha declined to take action, then the shareholders could sue the Massey board of directors in what is called a double derivative suit.[15] In its opinion, the court recognized the improbability of a double derivative action as a realistic option against the Massey board of directors.[16] The court also pointed out that value of the director and officer liability insurance should have been priced into the deal because of the realistic chance of Alpha later recovering it in a suit.[17] With Massey’s director and officer liability insurance valued at $95 million, this would have represented “no trifle sum” to Massey shareholders during the $8.5 billion merger.[18]

[1] Ian Urbina, No Survivors Found After West Virginia Mine Disaster, The New York Times (April 9, 2010), http://www.nytimes.com/2010/04/10/us/10westvirginia.html

[2] Kevin LaCroix, In a Must Read Opinion, Delaware Court Rejects Bid to Block Massey Merger, The D & O Diary (June 2, 2011),http://www.dandodiary.com/2011/06/articles/shareholders-derivative-litiga/in-a-mustread-opinion-delaware-court-rejects-bid-to-block-massey-merger/

[3] Alpha Natural Resources Acquires Massey Energy Company, Creating A Global Leader In Metallurgical Coal Supply, Alpha Natural Resources,http://alnr.client.shareholder.com/releasedetail.cfm?ReleaseID=582243(last visit September 25, 2011)

[4] LaCroix, supra note 2

[5] Seth Aronson et al, Practicing Law Institute, Shareholder Derivative Actions: From Cradle to Grave 325 (2011)

[6] Id.

[7] Id. at 424.

[8] In Re Massey Energy, Co., 2011 WL 2176479 (Del. Ch. 2011), available athttp://amlawdaily.typepad.com/massey%20decision.pdf

[9] Id.

[10] Lewis v. Anderson, 477 A.2d 1040, 1044 (Del. 1984) (citing 8 Del. C.§ 259(a)); Id. at 1047 (citing Heit v. Tenneco, 319 F. Supp. 884 (D. Del. 1970)); see also Lewis v. Ward, 852 A.2d 896, 902 (Del. 2004) (reaffirming Lewis).

[11] In Re Massey Energy Co., 2011 WL 2176479 at *3.

[12] Id. at 76.

[13] Id.

[14] Id. at 75-6.

[15] Id. at 74-5.

[16] In Re Massey Energy, Co., 2011 WL 2176479 at 74-5 (Del. Ch. 2011), available athttp://amlawdaily.typepad.com/massey%20decision.pdf

[17] Id. at 65.

[18] Id.