Project: Corporate Counsel Part II (Compliance Readiness) - Law Firms Keeping Up With Safety And Environmental Challenges

Monday, August 1, 2005 - 01:00

Perhaps the greatest public policy success story of the last 20 years has been internalization of an environmental compliance ethic by major corporations. Issues that in the 1970s and 1980s demanded almost daily attention from in-house counsel now have become the province of manufacturing, engineering and public relations staff.

At the same time, the post-9/11 world has created new regulatory challenges, especially for companies that handle hazardous materials. In addition, environmental advocacy groups, having lost political influence, have shifted back to an emphasis on litigation. These suits are typically aimed at government, but industry and agriculture can suffer "collateral damage." We also are on the cusp of a new push to "internalize" recycling obligations on manufacturers and marketers, with potentially significant impacts throughout the distribution chain.

Compounded by the scrutiny generated by Sarbanes-Oxley, these developments create new headaches for corporate counsel. Perhaps the most difficult is early identification of trends that are important to a particular company. Even companies with substantial internal legal resources can have a hard time keeping up with developments, much less spotting new trends on the horizon.

What Challenges Face Business, Industry And Agriculture?

A quick survey of a disparate set of business industrial and agricultural categories reveals the variety of challenges on the horizon.

Electronics manufacturers and marketers need only look across the Atlantic to see what is coming: new pressures to collect their products after consumer use, in the name of recycling or resource conservation. In light of the current makeup of the House and Senate, the European Union Directives of the last several years are not likely to be adopted nationally in the U.S., at least initially. However, since aggressive activity on the state level is likely, it may not be long before uniform, nation-wide programs begin to look very attractive. The need to prevent a checkerboard of conflicting recycling and labeling requirements led the battery industry, almost a decade ago, to support federal adoption of the "Mercury-Containing and Rechargeable Battery Management Act," and this precedent may merit consideration for other industry sectors. Combined with a well-publicized industry-coordinated recycling program, that law headed off what otherwise promised to be an extraordinarily burdensome series of separate state enactments.

Agribusiness today faces a pollution control landscape much like that which confronted manufacturers three decades ago. Activists are pushing for greater control of farming practices through the Endangered Species Act (ESA), the Clean Water Act and the Clean Air Act. In recent years, for example, litigation challenging the EPA's failure to adequately address ESA concerns associated with pesticide use has resulted in de facto limitations on orchard size in several states. Although new regulations have been adopted to avoid these problems in the future, those regulations are being challenged in court. Unless legislative protection can be obtained - itself difficult absent a "train wreck" - these pressures can only be expected to increase.

Communications companies also face new challenges. Those who build or rely on transmission towers should pay heed to the way the ESA has been used against agriculture; they may soon face similar challenges. In addition, the complications and slow pace of international revisions of hazardous materials transportation rules already are constraining development of new technologies to power portable devices - both batteries and fuel cells. A regulatory regime that takes five years to update cannot help but constrain innovation in fields where a six-month product life cycle is the norm.

Airlines and airports are facing assertions that inadequate warnings have been given to employees and passengers about exposure to hazardous exhaust chemicals, most recently under threat of suit under California's notorious "Proposition 65." The attention to the implications of historic fuel spills at terminal facilities, which first arose two decades ago under the Underground Storage Tank and Superfund statutes, also continues to lead to enforcement actions and big penalty assessments.

Historic Early Warning Systems May Not Be Adequate

Notwithstanding these trends, the tools that corporate counsel traditionally have relied upon for early warnings are weakening. For example, many trade associations have found it impossible to maintain the broad-based committee structures that traditionally flagged and headed off potentially troubling developments. Today, most associations rely on task forces formed to address problems that already have emerged - thus weakening the early warning role. The fact that so much activity is arising on the state level also is a challenge to some Washington-based associations.

Corporate compliance auditing programs also are not receiving the level of management scrutiny they once did. In addition, as the regulatory environment has changed, these programs may no longer be properly structured or focused on the most important issues of concern. For example, when environmental compliance auditing began 20 years ago, companies were just implementing programs to comply with new regulatory regimes. Today, computerized systems are in place to track ongoing compliance. But, as several companies whose operations require maintenance of large refrigeration equipment recently have discovered, those systems may not fully satisfy evolving regulatory and reporting obligations. Nor are they always properly implemented.

In addition, legal counsel typically are no longer being regularly included in audit evaluations. This may make institutional sense, but also limits privilege protections. Combined with almost universal communication via email, this can be a recipe for disaster.

Caution in the area of compliance auditing is particularly important in an atmosphere where ambitious prosecutors are looking to pursue purported criminal violations. "Knowing" violations of most environmental or safety regulatory programs is a potential criminal offense. Where an audit has identified an incident of noncompliance, but prompt steps have not been taken to correct it, a company has substantially increased its potential exposure.

Responding To The Challenges

The result of these developments is a new series of challenges for corporate counsel. Some are relatively routine. For example, counsel readily can take steps to confirm that auditing and evaluation programs are well designed and implemented, and that timely follow-up occurs. Counsel also should consider establishing a mechanism to confirm that the company is keeping up with required paperwork - not just permits, regular monitoring and exceedence reports, but also the maintenance of emergency response plans. These are the easiest areas for enforcers to review. And deficiencies can lead to substantial penalties and corporate embarrassment.

Some challenges are more novel. For example, spotting potential liability-increasing trends, and encouraging corporate strategies to deal with them, presents both practical and, often, internal political obstacles. One of the most effective ways to address the trend-identification problem is to identify experienced outside counsel, confirm their familiarity with your industry or business, and then pick their brains.

An additional benefit of such an effort is that well-informed corporate counsel are in an improved position to help the company develop strategies to favorably influence these trends. Responding to emerging international environmental and transportation safety standards and liability protocols is a good example. For companies that produce and assemble products on several continents, these soon will surpass in significance (if they have not already) domestic regulatory programs and liability schemes. Yet existing corporate institutional mechanisms typically are nowhere near as effective as they should be to anticipate and deal with them.

Moreover, particularly with the flattening of corporate staff structures, counsel may be the only member of the management team in a position to recognize the importance of proposals and developments, to flag them for attention of CEOs or government relations and communications personnel, or - in many companies - to address them.

It has been said that the only surprise senior management likes is profits beyond the business plan. A key job of corporate counsel is to avoid surprise. In the areas of environmental compliance, transportation safety and occupation health protection, this means finding an efficient way to keep an eye on state, national and international scientific and regulatory developments, and to prepare now for their implications. Of course, counsel must still respond to litigation and compliance enforcement proceedings. But that burden can be considerably eased if a company has in place a good early warning system.

David B. Weinberg, Chair of WRF's Chemicals, Safety & Environment Practice, has 30 years of experience in administrative and environmental law, specializing in environmental, occupational health and safety, transportation and pesticide regulatory matters. He negotiated the first settlement of a governmental Superfund suit more than 20 years ago and has since litigated and negotiated similar matters in two dozen states. He also was deeply involved in developing significant portions of the federal Resource Conservation and Recovery Act, CERCLA ("Superfund"), and such specialized legislation as the Battery Management Act and three dozen states' lead acid battery recycling legislation. David can be reached at (202) 719-7102. This article originally appeared in the Spring 2005 issue of the WRF publication Chemicals, Safety & Environment Update.

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