Natural Resource Damages: New Jersey’s New Approach

Title:
Natural Resource Damages: New Jersey’s New Approach
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New Jersey Law Journal
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The New Jersey Department of Environmental Protection ("NJDEP") recently has taken dramatic new steps to require persons responsible for discharges of hazardous substances to investigate and restore injuries to natural resources resulting from the discharges, and to compensate the State for damages based on the value those natural resources otherwise would provide to the public. Although the State's authority to recover these natural resource damages is not new, NJDEP's requirement that responsible parties assess and restore natural resource injury at every site taking part in an administrative cleanup program represents a radical departure from past practice. This initiative, taken in the form of amendments to the Technical Requirements for Site Remediation, N.J.A.C. 7:26E-1.1 et seq. ("Tech. Regs"), has ignited fierce opposition by industry leaders and provoked litigation by an industry coalition challenging the new regulations.

Natural resources are defined broadly under New Jersey law to include "all land, biota, fish, shellfish, and other wildlife, air, water and other such resources." N.J.A.C. 7:26E-1.8. Historically, the State has asserted authority under both the common law and state and federal statutes to seek natural resource damages from parties responsible for a discharge. Although exceptions exist, early natural resource damage awards and restoration projects for the most part were associated with discharges to navigable waterways and were based on assessments initiated or conducted by the State. Under NJDEP's new regulations, however, responsible parties, rather than a federal or state agency, are required to assess natural resource injury. Further, the requirement to assess the injury applies to all sites where an ecological assessment is conducted during a remedial investigation, rather than only to those sites identified and selected by a natural resource trustee. Finally, the new approach uses an administrative process, rather than a civil judicial process, to recover natural resource damages.

NJDEP's new requirements are significant because they potentially apply to thousands of sites across the state, from gas stations with leaking underground storage tanks to large industrial facilities with contamination problems and inactive hazardous waste sites. At each site where natural resources such as groundwater or wetlands are impacted, restoration or replacement of these resources, and compensation to the State for the lost services provided by the resources (e.g., loss of potable water supply or drainage) will result in substantial costs to business. Further, corporate decision-making relating to the selection of a particular remedial action will be complicated by natural resource damage considerations (e.g., the damages assessed for residual contamination vs. the cost of a full cleanup). Despite the broad scope of NJDEP's new regulations, some progress in limiting the reach of the program has been reported by a stakeholder task force convened by NJDEP. This reported progress includes proposals for agency guidance and criteria that would (1) limit under certain circumstances the requirement to restore and to pay natural resource damages associated with groundwater and wetlands and (2) provide de minimis exceptions.

Sources of Authority for Natural Resource Damages
Although NJDEP's natural resource damage regulations and proposals are new, the agency and the Attorney General's office long have maintained that the State possesses the legal authority to obtain damages and injunctive relief from parties responsible for discharges that injure natural resources. The State's right to this relief is rooted in the common law's Public Trust Doctrine, which provides that public lands, waters, and other resources are held in trust by the government for the benefit of its citizens. Historically, the purpose of the Public Trust Doctrine was to protect water resources for navigation and commerce, waterways being the principal means of transportation and a source of food. Thus, the doctrine originally evolved to allow recovery by the State of natural resource damages in cases involving discharges to navigable waterways and tidelands.

The State also derives authority to investigate and restore natural resource injury under state and federal environmental statutes. For example, the Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 et seq. ("Spill Act"), authorizes NJDEP to commence an action against a responsible party in Superior Court for the costs of restoration and replacement, where practicable, of natural resources damaged by a discharge. The Commissioner of NJDEP, as the designated state natural resource trustee, also may seek natural resource damages under the federal Oil Pollution Act of 1990, the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), and the Clean Water Act.

Despite these sources of authority for the State to assess and restore natural resource damage, it is not clear that NJDEP's new regulations, which compel a responsible party to undertake these activities, will withstand legal challenges on procedural and substantive grounds brought by an industry coalition.

Examples of NRD Settlements
Prior to development of the new program, the NJDEP Office of Natural Resource Damages ("ONRD") and the Attorney General's office obtained natural resource damage settlements at oil spill and other hazardous waste sites in New Jersey pursuant to the State's existing statutory authority. For example, in July 1995, the Norwegian oil tanker Jahre Spray released 56,400 gallons of crude oil into the Delaware River when strong winds caused an oil transfer line to rupture, damaging nearby wetlands and mudflats. According to NJDEP, a $22,000 settlement was reached that will be used for fisheries and wetland restoration projects. Similarly, as a result of a 570,000 gallon oil spill in 1990, Exxon Corporation agreed to fund a $10 million wetlands acquisition and restoration project in the Arthur Kill. This settlement resolved natural resource damage claims brought by federal, New Jersey, and New York State and local trustees.

More recently, under the specter of increasing natural resource damage awards pursuant to CERCLA, the State has recovered natural resource damages as part of overall settlements associated with site cleanups at multiple-party hazardous waste sites. For example, defendants in the Helen Kramer Landfill Superfund case recently settled natural resource damage claims with the state and federal government under CERCLA and the Spill Act as part of an overall $105 million settlement. This settlement requires the defendants to purchase and conserve a 151-acre parcel of wetlands and wooded uplands near the site at a cost of approximately $960,000, and to pay $191,000 to state natural resource trustees in compensation for natural resource damages. The conservation plan is designed to replace damaged wetlands and to provide aquifer recharge in the upland areas to compensate for wetlands and groundwater impacted at the site.

Similarly, at the Caldwell Trucking Site in Fairfield, New Jersey, the State settled natural resource damage claims with nine defendants to address natural resource injury resulting from discharges of hazardous substances from unlined lagoons. The settlement includes (1) a wetlands restoration project, (2) funding for the acquisition of upstream wetlands, aquifer recharge areas, and adjacent upland buffer areas in the Passaic River watershed, and (3) funding for enhancements to the public water supply. The natural resource damage settlement is part of a $35 million settlement package addressing federal and State cleanup costs and Spill Fund claims, including $984,434 to compensate for loss of an aquifer affected by site operations.

In contrast to the new approach taken by NJDEP, however, it often has been the responsible parties in these large-scale hazardous-waste-site cases who press to resolve natural resource damage claims as part of an overall settlement package in order to avoid the possibility of future claims for natural resource damages that might be brought by public trustees.

NJDEP's Initiative
According to recent agency press releases, representatives of ONRD, the NJDEP Site Remediation Program, and the New Jersey Division of Law have been working for some time to integrate more fully into NJDEP's site cleanup process the assessment and restoration of natural resource injury. See NJDEP Site Remediation News (December 1998). In order to accomplish this goal, NJDEP has amended its Tech. Regs to require parties responsible for a discharge to address injuries to natural resources. NJDEP also recently has proposed additional amendments to the Tech. Regs and informal guidance to develop further the assessment and restoration process.

According to the agency, the new natural resource damage assessment process proceeds as part of a responsible party's overall site investigation, as follows: Under the Tech. Regs, a responsible party already is required to conduct a baseline ecological evaluation during the initial site investigation. See N.J.A.C. 7:26E-3.11. If this evaluation identifies contaminants of concern and a pathway to "environmentally sensitive areas" (e.g., surface water, wetlands, potable water sources, wildlife areas), the responsible party must conduct a complete remedial investigation of ecological receptors, which now will include an assessment of any natural resource injury. See N.J.A.C. 7:26E-4.7. Under NJDEP's proposed amendments to the Tech. Regs, the assessment will be conducted in accordance with applicable natural resource damage assessment guidance prepared by the National Oceanic Atmospheric Administration ("NOAA") and the U.S. Department of Interior ("DOI"), the primary federal natural resource trustees. 30 N.J.R. 2373, 2389 (July 6, 1998). According to NJDEP, once the remedial investigation is complete, any natural resource injury at the site will be identified and all information necessary to develop a restoration plan will be available. If impacts to natural resources are evident, the Site Remediation Program case manager will involve ONRD to oversee the assessment and restoration efforts.

Rather than including in the Tech. Regs a discrete set of new provisions that directly address natural resource injury and damages, however, the agency "quietly" introduced the new requirements in its final 1997 rule by inserting new and modified provisions throughout the Tech. Regs. See 29 N.J.R. 2278, 2392 (May 19, 1997). The agency defined the terms natural resource "injury" and "damage"; redefined "remedial action costs" to include "natural resource damages"; expressly required responsible parties to characterize all natural resource injuries as part of every remedial investigation of ecological receptors; and required responsible parties to consider during the remedy selection process the "potential natural resource injury" resulting from the remedy.

More recently, in July 1998, in response to the Legislature's enactment of the Brownfield and Contaminated Site Remediation Act, see P.L. 1997, c. 278, NJDEP proposed amendments to the Tech. Regs and other rules. See 30 N.J.R. 2373. As part of this larger rulemaking effort, NJDEP proposed further amendments relating to natural resource damages. The agency proposed to incorporate by reference into the requirements for remedial investigations a list of federal NOAA and DOI guidance to assess natural resource injury and damages. The agency also made clear its position that the definition of "damages" under its program includes natural resource damages authorized by State law, not just those authorized by CERCLA. As discussed below, this last point is significant in that NJDEP takes the position under State law that all natural resources, located on public or private property, are subject to the new requirements.

Interestingly, although the existing and proposed amendments to the Tech. Regs expressly require a responsible party (1) to assess natural resource injury at sites that proceed to the remedial investigation phase, and (2) to consider the potential for a proposed remedy to cause natural resource injury, neither the existing nor proposed Tech. Regs contain a clearly expressed requirement to restore natural resources as part of an overall site remedy or otherwise to compensate the State for natural resource damages.

Despite the lack of any express requirement in the Tech. Regs, NJDEP has publicly stated its intent to require responsible parties, as part of the site cleanup process, to restore natural resources and to compensate the State for lost natural resource services resulting from the injury. See, e.g., NJDEP Site Remediation News (December 1998). For example, the agency has indicated that No Further Action letters will indicate the status of natural resource injury at the site in question. The agency also has stated that a Remediation Funding Source will have to be established for a restoration project, and that a Remediation Agreement or Administrative Consent Order will be necessary if the responsible party intends to conduct a restoration project separately from the site cleanup. Finally, NJDEP has suggested that restoration projects may be conducted more cost-effectively if the responsible party, rather than the agency, were to undertake the effort. Thus, although the current regulations are vague, and perhaps vulnerable to challenge on this point, NJDEP intends to require responsible parties to restore natural resources as part of the overall remedy for a site.

Several of the general provisions of the Tech. Regs, in conjunction with the new requirements, arguably provide NJDEP with a basis to require restoration of natural resource injury. For example, most remedial actions require NJDEP approval, and a responsible party must demonstrate that a remedial action is "appropriate." Each remedial action also must comply with all federal, state and local regulations and requirements. Finally, as a practical matter, to obtain a No Further Action letter from NJDEP, a party generally must address each of the impacts identified in its remedial investigation.

Indeed, the agency has expressed a strong preference that responsible parties conduct natural resource restoration projects as part of their site cleanups, rather than defer restoration or pay damages to the State. In part, NJDEP's new approach, and its preference that responsible parties do the work, may be attributed to the agency's lack of resources to assess and restore natural resources. The agency has indicated, however, that, if a responsible party prefers to "cash out," or if a site cleanup is too far along to incorporate natural resource restoration, ONRD will manage the restoration apart from the site cleanup. Any funds recovered from responsible parties by ONRD will be used to restore natural resources.

Defining Natural Resource Injury and Damage
Under the new regulations, NJDEP has defined natural resource injury as any adverse change or impact resulting from the discharge (e.g., groundwater contamination), including any impairment of services provided by the resource (e.g., loss of a potable water supply). See N.J.A.C. 7:26E-1.8. Natural resource damages have been defined as the amount of money required to restore, rehabilitate, replace or otherwise compensate for natural resource injury. Thus, as part of the site cleanup process, NJDEP will seek restoration of the resource itself and compensation for lost services, presumably through resource enhancement (e.g., purchase of and setting aside for restricted use aquifer recharge areas).

At sites where discharges have occurred, natural resource injury may result directly from the discharge or indirectly from the proposed remedial action. See 29 N.J.R. 2392. If a discharge directly causes natural resource injury (e.g., hazardous substances impair wetlands function), NJDEP will require an assessment of the injury and restoration of the natural resource, if possible, as part of the overall remedy for the site. The agency presumably also will seek damages, in the form of natural resource enhancement, for lost services resulting from the natural resource injury. If, instead, the proposed remedy at a site is likely to cause natural resource injury (e.g., dewatering of wetlands), NJDEP will require the responsible party to consider this impact during the remedial action selection process and to mitigate the impact to the extent possible. In these circumstances, too, the agency may seek compensation for the impact to and lost services associated with the natural resource.

As noted above, NJDEP has proposed to incorporate by reference NOAA and DOI guidance developed under CERCLA and the Oil Pollution Act of 1990 ("OPA") upon which responsible parties may rely in conducting a natural resource injury assessment. One reason articulated by NJDEP for the use of federal guidance is that claims made by federal natural resource trustees also may be resolved pursuant to the State process. Despite the incorporation by NJDEP of this federal guidance for natural resource damage assessments, additional guidance for assessments at typical sites requiring remediation clearly is necessary.

Specifically, NJDEP proposes to incorporate guidance on DOI's "Type A" assessment procedures, which consist of a standard computer model for simplified assessments of coastal and marine environments and the Great Lakes. NJDEP also proposes to incorporate several guidance documents prepared by NOAA primarily for use under the OPA. Although this guidance includes methods that may be broadly applicable, it is not clear that the guidance addresses directly the issues faced at typical sites requiring remediation in New Jersey. NJDEP has not yet expressly proposed to incorporate DOI's more complicated Type B procedures, which are general and site-specific procedures for assessments and currently are under review by DOI. Indeed, all of these federal procedures have been challenged by states, industry, and environmental groups in the D.C. Court of Appeals, and, following remand on several occasions, recently have been upheld by the Court.

The DOI Type B procedures have been the subject of particularly contentious debate at the federal level. One method to calculate natural resource damages that is contained in the Type B procedures is contingent valuation, which has been criticized severely because it may be based on public opinion surveys. For example, if historic contamination from a gravel pit has contributed to the reduction of the trout population in a stream, members of the public would be asked what price they would be willing to pay to have that stream restored to a condition that would allow the return of trout. The results of this survey could be used to determine the amount of damages that would be assessed against the responsible party. At this point, NJDEP has not signaled whether it will use this controversial method of valuation under its program.

NJDEP has offered additional guidance of its own. Although these proposals are not binding on the agency, in a recent presentation to the regulated community, NJDEP provided informal guidance on identifying natural resource injury, calculating natural resource damages, and proposed limitations on the new requirements. For example, the agency contends that natural resource injury to groundwater or surface water exists when concentrations of contaminants linked to the discharge exceed applicable water quality standards. For the purpose of identifying natural resource injury associated with groundwater, NJDEP has stated that assessment should address the physical characteristics of the contamination, the physical and geographical setting of contamination, and the proposed remedy. NJDEP has indicated, however, that it will not pursue compensation for injuries to groundwater if the contaminant plume is contained on-site and has not impacted other natural resources (e.g., wetlands or surface water). The agency also has proposed that, when natural attenuation is the selected remedy for groundwater, natural resource damages may be calculated by using the aerial extent of groundwater contamination, the recharge rate of groundwater for the water planning area, and the average water rate. Presumably, as part of the overall plan for a site, the responsible party must propose a restoration plan equal in value to that calculated under the above formula.

As suggested by the above discussion, among the most controversial aspects of the program is the application of NJDEP's new regulations to sites where groundwater is impacted. This may be due to the sheer number of sites where groundwater is affected or the fact that identifying injury to groundwater is inherently more difficult. Most probably, however, it is because the regulated community anticipates that groundwater injury may be the most expensive type of natural resource injury to address. For instance, injury may occur not just to groundwater impacted by contamination, but also to the aquifer from which groundwater is removed during remediation or treatment. Under current NJDEP proposals, a pump and treat remedy may cause compensable natural resource injury by removing groundwater from the aquifer during remediation, thus rendering it unavailable to the public for use. Compensation for lost use may be required regardless of whether the groundwater actually is used for potable or other purposes. As a result of the admittedly broad reach and nature of the new program, NJDEP has indicated that it is continuing to develop and refine methods for calculating natural resource injury and damages associated with groundwater, particularly for pump and treat remedies, and to establish exceptions for de minimis impacts.

For wetlands, sediments, or flora and fauna, NJDEP has proposed that natural resource injury exists when an observable or measurable injury can be documented. The agency has stated that, with respect to wetlands, it will seek restoration based upon the wetland functions and values that existed prior to the discharge. The agency claims that it will not seek compensation for injuries caused by construction activities unless the construction is associated with the proposed remedy and impacts jurisdictional wetlands. If activities within wetlands are authorized by a Statewide General Permit and do not require mitigation, the agency also will not pursue natural resource damages.

The agency's proposals to define and limit compensable natural resource injury are a good first step. Additional efforts by NJDEP, however, to provide more certainty on the scope and nature of the program and to establish reasonable limitations on the requirements to restore natural resources and pay damages are necessary and appropriate. As did the Site Remediation Program in the 1980s, this new program needs time to mature and evolve. At this point in time, however, NJDEP's natural resource damage regulations and guidance justifiably concern the regulated community because of the uncertainty in and broad reach of the new program.

Compare CERCLA
Only in recent years has the regulated community begun to fully understand the impact of CERCLA's natural resource provisions as applied to site cleanups. As efforts to reform CERCLA proceed, natural resource damage proposals are under attack at the federal level from all sides. NJDEP's new natural resource assessment regulations and proposals, however, are even farther reaching than CERCLA's natural resource damage provisions. Thus, some of the regulated community's concerns over the State's new program may stem from the timing of its introduction in relation to the recent CERCLA reform efforts, as well as the differences between the two programs.

For example, CERCLA defines natural resources to include those resources "belonging to, managed by, held-in-trust by, appertaining to, or otherwise controlled by the United States. . .[or] any State." 42 U.S.C. §9601(16). Thus, the CERCLA definition of natural resources limits recovery to "publicly held" resources -- resources that government substantially regulates, manages, or controls. State of Ohio v. U.S. Dep't of Interior, 880 F.2d 432, 460-61 (D.C. Cir. 1989). In contrast to this limitation on natural resource damages under CERCLA, NJDEP takes the position that all natural resources lying within the State, both public and private, are within the reach of its site remediation program. See 30 N.J.R. 2376; N.J.A.C. 7:26E-1.8. Thus, CERCLA does not address "purely private" resources, while NJDEP's new program, on its face, is unbounded by public/private property distinctions.

CERCLA provides additional limitations that are not contained in NJDEP's regulations and proposal. For example, for the majority of sites covered by CERCLA, excluding NPL, federal facilities, and certain other sites, the statute of limitations for a natural resource damage claim is three (3) years from the date of discovery of the natural resource injury and its connection to a hazardous substance release. See 42 U.S.C. §9613(g)(1). Further, trustees may recover only damages that "occurred" after December 11, 1980, regardless of the timing of the release. Id. §9607(f)(1). In contrast, the Spill Act applies retroactively, and it is not clear under New Jersey law or NJDEP's regulations how, or whether, statutes of limitation will be applied to limit recovery for historic natural resource injuries. Finally, CERCLA provides a monetary cap -- $50,000,000 for each release -- for natural resource recovery, a limit that is not apparent under State law. See id. §9607(c). Thus, at sites in New Jersey where historic impacts to natural resources can be documented, it is not clear what relief, if any, a responsible party will be able to obtain from statutory or other limitations on natural resource damages.

Under CERCLA, natural resource trustees are authorized to recover damages in federal court and take advantage of a rebuttable presumption if established procedures are followed. The trustee must prove its case, however, including a causation element, under a preponderance of the evidence standard. In fact, federal courts are just beginning to address issues associated with the burden of proof and the use of the rebuttable presumption in CERCLA natural resource damage litigation, and Congress is reviewing these controversial issues as part of CERCLA reform efforts. Under NJDEP's new program, however, NJDEP seeks to compel responsible parties to restore natural resources and to pay natural resource damages administratively, rather than through the judicial process. Thus, challenges to NJDEP's calculation of natural resource damages, to the reasonableness of NJDEP's approval of restoration plans, and to the required contents of these plans, likely will be reviewed under the arbitrary and capricious standard in an appeal brought in the Appellate Division. The distinction between NJDEP's administrative program and the use of civil judicial process to recover natural resource damages is significant.

Finally, under CERCLA, the agency responsible for the remedial investigation and cleanup at a site – the U.S. Environmental Protection Agency – is not authorized to seek natural resource damages. The federal natural resource trustees, who statutorily are authorized to seek damages, include NOAA, DOI, and other federal agencies that manage federal lands. Under the NJDEP program, the natural resource trustee and the agency overseeing the remedial investigation are one in the same. The State, and indeed some in the regulated community, may argue that a unified system is efficient and reduces transaction costs. Others may claim, however, that separation of the functions increases objectivity in the decision to pursue natural resource damages. The significance of this distinction, if any, may become apparent as the process unfolds.

The Natural Resource Damage Debate
NJDEP's new amendments to the Tech. Regs and other natural resource injury proposals have lit a firestorm of criticism by a regulated community already engaged in the national debate over natural resource damages. Interpretation and reform of the CERCLA process to assess natural resource damage continues to be the subject of debate in the courts and among members of Congress, industry, and environmental interest groups. Recent congressional efforts in the House and Senate to reform CERCLA reveal stark differences among the Clinton Administration, Democrats, and Republicans on various issues relating to natural resource damages, including the cap on damage awards, the use of the rebuttable presumption or record review for challenges to damage assessments, and the statute of limitations.

In the wake of NJDEP's 1997 amendments to the Tech. Regs, representatives of the New Jersey Site Remediation Industry Network, an interest group formed to address site remediation issues, and other interested groups met recently with NJDEP to express concern about the new requirements. A stakeholder task force was established in February 1998, and has met monthly since then, to address the concerns of the public. Representatives of NJDEP, industry, real estate development, consultant and environmental group interests make up the task force.

In addition, members of an industry coalition formed to address NJDEP's new program have filed a notice of appeal in New Jersey Superior Court to challenge NJDEP's natural resource damage regulations. See New Jersey Site Remediation Industry Network et al. v. New Jersey Dep't of Envtl. Protection, Docket No. A-005272-97T3. The appeal attacks NJDEP's new program on both procedural and substantive grounds. Procedurally, the coalition argues that NJDEP did not provide notice of, or an opportunity for the regulated community to comment upon, the new natural resource damages regulations. Substantively, the coalition argues that NJDEP lacks authority to compel parties to assess or restore natural resource damage within the administrative site cleanup process, that the program conflicts with other environmental laws and regulations, and that the administrative process violates the New Jersey Constitution. A briefing schedule has been set for the appeal, with initial briefs due in February 1999.

For industry representatives, the issue ultimately appears to be not whether the State has the right to seek recovery for natural resource injury, but whether NJDEP may do so under the administrative Site Remediation Program, and what methods, formulas, and limits should be used in assessing natural resource injury and calculating natural resource damages. The business community is concerned that linkage of natural resource damages to the Site Remediation Program will stall site cleanups, and redevelopment and brownfields efforts will decline, as a result of the contentious nature of, and uncertainty surrounding, natural resource damages. The business community also is concerned that, if natural resource damages are to be assessed administratively, responsible parties may be deprived of both legal defenses and the more favorable burden of proof that are available in the civil judicial context.

It is not clear at this point whether sufficient progress is being made by the stakeholder task force to forestall the industry lawsuit. According to industry representatives, little, if any, progress has been made by the task force on an acceptable means to separate the natural resource damage assessment process from the Site Remediation Program. Industry representatives also view NJDEP's current groundwater valuation proposals as extremely contentious, particularly as those proposals may relate to existing and planned groundwater pump and treat remedies. At the same time, some progress has been made by the task force and NJDEP in providing additional guidance and certainty for the program, and in identifying safe harbors ( i.e., no damages for impacted groundwater contained on-site) and de minimis exceptions.

Although the future of NJDEP's natural resource regulations and proposals remains uncertain, the agency clearly has signaled its intent to address natural resource damages as part of the site remediation process. Given the State's broad statutory authority to restore natural resources and to recover damages, parties investigating and remediating sites in New Jersey can expect that NJDEP increasingly will seek to resolve natural resource damage claims as part of the overall remediation plan and settlement for a site. The extent to which this resolution is time-consuming and costly, or is resolved through civil judicial or administrative process, depends, in part, on the work of the stakeholder task force and the outcome of the industry coalition's lawsuit.

The authors gratefully acknowledge the assistance of Steven T. Senior, an associate with Riker Danzig, in preparing this article.