Supreme Court Reins In The Reach Of Superfund

Monday, June 1, 2009 - 01:00

In a decision anticipated by some to be delivered by a more divided United States Supreme Court, the High Court ruled 8 to 1 in Burlington Northern & Santa Fe Railway Co. v. United States ("Burlington Northern") that Shell Oil Company ("Shell") could not be held responsible under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for remediation costs at a contaminated site merely because it delivered chemicals to the site.1 Rather, to be an arranger, the Court held that the party must take " intentional steps to dispose of a hazardous substance." In addition, the Supreme Court found that CERCLA does not require joint and several liability where a district court finds a reasonable basis for apportioning the parties' liability for environmental cleanup costs, suggesting that significant deference may be given to a district court's appointment scheme. In doing so, the Court circumscribed the extent to which the government can stretch the plain language of the statute to hold parties liable for its remediation costs and allowed a district court's apportionment scheme to defeat joint and several liability, leaving the government on the hook for several million dollars of cleanup costs. The Court's decision and the actual outcome likely will not sit well with federal environmental authorities, who have attempted for some time to extend the reach of CERCLA.

Background

CERCLA imposes liability on a host of potentially responsible parties ("PRPs"), which are defined to include (a) the current owners or operators of the contaminated site, (b) the former owners or operators of the contaminated site if the disposal giving rise to the contamination occurred during their ownership or operation, (c) persons who arranged for the disposal of hazardous substances at the contaminated site and (d) persons who transported the hazardous substances to the contaminated site. Liability among the PRPs generally is imposed jointly and severally and without regard to fault, though in certain cases, where the harm or injury has been divisible, courts have apportioned liability amongst the PRPs.

In Burlington Northern , the Supreme Court addressed the questions of what it means to be an "arranger" under CERCLA and when liability can be apportioned amongst PRPs. The case initially was brought by the California Department of Toxic Substances ("DTSC") and the United States Environmental Protection Agency ("EPA"), which sought to recover more than $8 million in remediation costs they incurred in responding to substantial soil and groundwater contamination at a former agricultural chemical storage and distribution facility in Arvin, CA. Brown & Bryant Inc. ("B&B") owned and operated the facility between 1960 and its insolvency in 1989. B&B began its operations on a 3.8-acre parcel of former farmland in 1960 and, in 1975, expanded its operations onto an adjacent 0.9-acre parcel, which it leased from the predecessors in interest to Burlington Northern & Santa Fe Railway Company and Union Pacific Transportation Company (collectively, the "Railroads"). Until its insolvency, B&B used the parcels to store and distribute various pesticides and other chemical products it purchased from suppliers, such as Shell Oil Co. ("Shell").

After B&B's insolvency, DTSC and EPA undertook remedial actions to address contamination at the site. The agencies brought cost recovery actions against the Railroads, as owners of a portion of the B&B facility, and against Shell, as an arranger. In addition, the Railroads independently incurred more than $3 million in cleanup costs in response to a government order to do so. The following year, the Railroads brought a cost recovery action against B&B, which subsequently was consolidated with cost recovery actions filed by the agencies.

Limitations On Arranger Liability

Under Section 107(a)(3) of CERCLA, a person "who arranges for disposal or treatment" of hazardous substances is strictly liable for the contamination. The United States District Court for the Eastern District of California held that Shell was liable under Section 107(a)(3) because Shell arranged for the sale of agricultural pesticides to B&B with actual knowledge that spills would occur during the delivery and unloading process. On appeal, the United States Court of Appeals for the Ninth Circuit upheld the district court's determination that Shell was liable as an arranger. Dispositive to the Ninth Circuit's analysis was the fact that Shell was aware that its products were being spilled during the delivery process to B&B and, even though Shell did not intend to dispose of the chemicals in the traditional sense of the word, the court held that CERCLA's definition of "disposal" includes unintentional processes such as "leaking" and "spilling." According to the Ninth Circuit's decision, the party facing arranger liability need not intend to dispose of the product if, as the evidence showed, a release was a foreseeable byproduct of the sale.

In a decision that likely surprised the Justice Department, the Supreme Court reversed the Ninth Circuit on the issue of arranger liability. While acknowledging that the question whether arranger liability attaches to a person is a "fact intensive and case specific" endeavor, the Supreme Court ruled that a person must enter into the sale of a product with the intent that a portion of the product be disposed in order to trigger arranger liability. Mere knowledge by a seller that its product will be spilled by the buyer is not enough to make the seller liable as one who arranges for disposal of hazardous substances. The Court reached its decision by relying on the plain language of section 107(a)(3). Noting that CERCLA does not specifically define what it means to "arrange for disposal," the Court turned to the ordinary meaning of the phrase. Finding that "arrange" ordinarily implies "action directed to a specific purpose," the Court held that an entity must take intentional steps to dispose of a hazardous substance to qualify as an arranger. Accordingly, the Court held that Shell was not liable as an arranger, even though Shell was aware that some of the pesticides it shipped to B&B were spilled each time the pesticides were transferred from the common carrier to B&B's storage tanks. The Court pointed to the absence of evidence that Shell intended for the spills to occur and further noted that Shell took steps to encourage its distributors to reduce the likelihood of such spills by providing them with detailed safety manuals, requiring them to maintain adequate storage facilities and giving discounts to distributors that took safety precautions. The Court's adherence to the plain language of the statute and consideration of these factors shows a careful balancing of the statute's reasonable reach with the public interest in recovering cleanup costs from parties engaged in activities that cause pollution.

Discretion To Apportion Liability Among PRPs

In general, liability for cleanup costs under CERCLA is joint and several. A limited exception, however, has been recognized by courts where a PRP shows that there is a reasonable basis for apportioning liability among the PRPs. Despite the Railroads' "scorched earth, all-or-nothing approach to liability" and the agencies' "refusal to acknowledge the potential divisibility of the harm" at the B&B facility, the district court found that the harm was divisible and capable of apportionment and declined to hold Shell and the Railroads jointly and severally liable for the entire amount of the response costs incurred by DTSC and EPA. In the absence of any arguments by the parties about how liability for the contamination should be allocated, the district court created its own apportionment scheme. To arrive at Shell's share of liability for the agencies' response costs, the district court estimated the percentage of chemicals that leaked from Shell's activities. For the Railroads, the district court multiplied three proportions to determine their liability: (1) the percentage of the overall site owned by the Railroads; (2) the percentage of time the Railroads leased the parcel to B&B relative to B&B's total operations at the site; and (3) the fraction of hazardous products attributable to the Railroads' parcel. Next, the district court added fifty percent of that amount, to account for calculation errors, to the product of the proportions to determine the Railroads' liability. On these grounds, the district court ruled that Shell was liable for six percent and the Railroads were liable for nine percent of DTSC and EPA's response costs.

The Ninth Circuit, however, reversed the district court's apportionment of liability between Shell and the Railroads. Even though the Ninth Circuit concluded that the contamination was conceptually traceable to Shell and the Railroads, it held that the record was insufficient to establish a reasonable basis for apportionment. On appeal, the Supreme Court reversed the Ninth Circuit and upheld the district court's original finding that the Railroads were liable for only nine percent of the remediation costs at the site. Contrary to the Ninth Circuit, the Supreme Court held that the district court's findings reasonably supported the apportionment of liability and, therefore, the Railroads were not jointly and severally liable for the governments' remediation expenses. In particular, the Court pointed to the district court's findings that the primary contamination at the facility was located in an unlined sump and an unlined pond located in the portion of the facility farthest from the parcel owned by the Railroads and that the spills of hazardous chemicals on the parcel owned by the Railroads contributed to no more than ten percent of the total site contamination. Moreover, the contamination attributed to the pesticides purchased from Shell was confined to the parcel owned by B&B; no traces of the pesticide were discovered on the parcel owned by the Railroads. On the basis of these facts, the Court concluded that it was reasonable for the district court to use the size of the leased parcel, the duration of the lease and the concentration of the contamination to apportion liability. Accordingly, the Court concluded that the district court reasonably apportioned the Railroads' liability at nine percent. As a result of the Court's decision regarding apportionment, DTSC and EPA will be unable to recoup the vast majority of their cleanup costs.

Lessons For The Future

The Supreme Court's decision preserves the distinction between selling new products for productive use and disposing of chemicals as waste. The continued viability of the useful products defense should give manufacturers and sellers of products containing hazard substances comfort that they are unlikely to be held liable for the unintended disposal of portions of those products after they have been transferred to a transporter or a purchaser. This notwithstanding, companies engaged in the sale and delivery of commercially useful products containing hazardous chemicals should not do so with a blind eye to the ultimate use of the product. Rather, such companies should ensure to document that they are in fact selling useful product that will be under the control of the purchaser when on site and, where appropriate, provide cautionary measures to encourage careful handling and storage of its products.

As for divisibility of harm and the apportionment of damages, Burlington Northern stands for the proposition that courts do not need to impose joint and several liability in every case as apportionment is appropriate where there is a reasonable basis for determining the contribution of the relative parties. The reasonable basis, however, need not rely on a mechanical formula, as evidenced by the district court's creative approach to determining an appropriate percentage of liability to allocate to the Railroads. Thus, in the future, district courts may have some leeway in determining how to allocate liability, even in the absence of scientific data about each parties' relative contributions to the contamination at a particular site. Accordingly, we expect that subsequent cases will further define this issue. We note, however, that as reviewed by the Supreme Court, the facts in Burlington Northern were ideal for apportioning liability: the chemicals causing the contamination could be traced to discrete parcels of the site; a greater volume of the activities causing the contamination took place at one site than the other; and the time period in which the pollution-causing activities took place at each parcel differed considerably. In a case where the facts are more ambiguous as to each party's contribution to the contamination, proving that a reasonable basis for apportionment exists is likely to continue to be a substantial hurdle, even for companies with limited responsibility for the harm.

By permitting the district court to develop its own allocation scheme, the Supreme Court also chipped away at federal environmental authorities' ability to blindly pursue joint and several liability without first considering divisibility. The decision also gives PRPs some guidance about what factors form a reasonable basis for apportionment. In this respect, the Court's ruling has the potential to make apportionment more routine, which could substantially alter how the government and PRPs negotiate and assign Superfund liability and raise questions as to how orphan share liability will be allocated.

An additional factor to consider is what, if any, action Congress will take to counteract the setbacks the Burlington Northern decision delivered to the government's ability to recover response costs. The combination of an administration that is focused on the enforcement of environmental laws, an active EPA and the general composition of the congressional committees overseeing environmental legislation could create a friendly atmosphere for any proposed legislation to expand CERCLA's reach. As of this writing, no such legislation has been introduced.

1 No. 07-1601, which was consolidated with Shell Oil Company v. United States, No. 07-1607. Both were decided on May 4, 2009, by the United States Supreme Court.

David R. Berz and Annemargaret Connolly are Partners at Weil, Gotshal & Manges LLP, where they practice environmental law. They were assisted in the preparation of this article by Erin Yates, an environmental associate at the firm.

Please email the authors at david.berz@weil.com or annemargaret.connolly@weil.com with questions about this article.