Consent Decrees and Settlement Agreements May Be in Serious Jeopardy

By Partner Earl Hagström and Associate Barry Bryan
August 8, 2019

The United States Supreme Court has granted review in an environmental contamination case that is anticipated to have significant impacts on the regulation of toxic waste sites, environmental litigation, private property rights, the viability of settlement agreements and Consent Orders and insurance of contaminated sites. Risk managers, industrial operators, and their attorneys are advised to keep a close eye on this decision, and to the Court's specific reasoning as counsel in developing future litigation strategies and strategies to address the re-opening of previously "done deals".

Background

The Supreme Court granted review in this case, Atlantic Richfield Company v. Montana Second Judicial District, Silver Bow County, the Hon. Katherin M. Bidegaray, 2017 MT 234 (2017), cert. granted __ U.S.L.W. __ (No. 17-1498), on June 10, 2019. Briefing is due this fall, so a decision is not expected until next year. The case pits private property owners against a multinational oil company, Atlantic Richfield Company ("ARCO"). ARCO is a successor to the Anaconda Copper Mining Company, which operated a copper smelter in the towns of Butte and Anaconda in Montana (the "Anaconda Site").

US EPA designated the Anaconda Site as a Superfund site under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") in 1983, and ordered ARCO to remediate arsenic and other contaminants in 1998. CERCLA allows EPA to sue or otherwise order current and historical property owners and operators, and anyone else with virtually any connection to a contaminated site to fund or perform a cleanup. ARCO's cleanup, which covers both the historical footprint of the smelting operations and multiple other properties contaminated by those operations was approved by US EPA and is still in progress.

Ten years later, in 2008, the owners of these surrounding properties sued ARCO in Montana State court on various common law grounds for nuisance and trespass, and for restoration damages. ARCO is challenging this latter claim, which is the only one that will be reviewed by the United States Supreme Court. Montana common law allows property owners to seek the full cost of removing all contamination from their property above and beyond typical damages, like diminution in value of land or lost profits. Owners may make this claim if they have "reasons personal" for it, such as a historical connection to the land. Many other states have similar damages schemes.

The property owners were never subject to an order from US EPA despite owning these contaminated properties. The owners sought damages that would be placed in a trust, which could only be accessed after the US EPA remedy had been completed. The work would be performed by the owners' consultants and engineers, not by ARCO.

The Montana Supreme Court Decision

The restoration damages claim has not yet gone to trial. ARCO argued to the Montana Supreme Court that the property owners could not bring the restoration damages claim at all because CERCLA bars it. CERCLA's stated goal is to clean up contaminated sites so that they no longer pose a hazard to human health, and to prevent further migration of contaminants to contaminate other sites. CERCLA prohibits cleanups that do not meet specified regulations, guided by the National Contingency Plan ("NCP"). It also requires that anyone who wishes to "challenge" the chosen cleanup must do so in federal court under specified circumstances.

However, CERCLA also includes a "savings clause," which is found in many environmental regulations such as the Clean Air Act and Clean Water Act. These clauses allow states to impose additional liabilities related to the regulated environmental hazards. For example, this is why California can impose stricter fuel efficiency standards on motor vehicles than the federal government sets.

The Montana Supreme Court was called upon to resolve this tension - does the restoration damages claim involve an impermissible "challenge" to EPA's cleanup or is it an additional liability imposed by the state of Montana under its common law liability scheme? To reach an answer, the Court analyzed three issues:

  • Issue One: Whether the Property Owners' claim constitutes a challenge to EPA's selected remedy, and thus does not comply with CERCLA's timing of review provision.
  • Issue Two: Whether the Property Owners are "Potentially Responsible Parties," and thus cannot proceed with their chosen restoration activities without EPA approval.
  • Issue Three: Whether the Property Owners' claim otherwise conflicts with CERCLA, and is thus preempted.

The Montana Supreme Court decided all three issues in the property owners' favor, setting up the United States' Supreme Court review.

Issue One: Remedy Challenge?

The Montana Supreme Court found the restoration damages suit would not "challenge" the remedy. CERCLA regulations do not define this term. Reviewing nationwide case law, the Montana Supreme Court determined that an action is a challenge if it would alter or delay EPA's remedy. The court found the owners' claim would not, as the owners' seek to fully restore the property, not just clean it up to a safe level. Further, the funds could only be accessed, and the work only begin, once ARCO had completed the work it had been ordered to do.

One judge dissented, offering a potential preview of the Supreme Court's decision. The dissent defined "challenge" more broadly - anything "related to the goals of the cleanup." Under this definition, the restoration damages claim certainly meets this standard - both involve cleaning up the same contamination. The dissent also presented facts not addressed by the majority - that the owners' desired restoration would require destruction of a soil cap placed by ARCO. Not only would this "alter" US EPA's selected remedy, it could potentially result in contaminated dust being emitted to the air during the work, causing contaminants to migrate - which cannot square the stated goals of CERCLA.

Issue Two: Are the Property Owners PRPs?

CERCLA prohibits any "potentially responsible person" ("PRP") from taking any action to clean up a site designated under CERCLA without US EPA consent. CERCLA is a broad liability scheme that allows courts to hold liable any individual or entity defined by CERCLA as a "person," which can include the current owner of a property, even if they did not cause the contamination. CERCLA does allow such innocent persons to prove their innocence and avoid liability.

The Montana Supreme Court rejected ARCO's argument that the owners are PRPs and so could not take actions to clean up the Anaconda Site without US EPA's approval. The court found that a party can only become a PRP if they are involved in a CERCLA action, and as the owners never had been, they could not be PRPs and had no obligation to receive consent from US EPA.

Issue Three: CERCLA Preemption

Finally, ARCO argued that CERCLA "preempts" the restoration damages claim. Federal law, when authorized by the constitution, enjoys supremacy over other law, and voids laws in conflict with it. Preemption can be found in two ways. First, where the law expressly states that it occupies an entire field of law. This type of preemption does not appear here, as shown by the savings clause discussed above. The other is conflict preemption, which occurs where the federal law does not occupy the field, but a law necessarily conflicts with the purpose, goals, or implementation of that law.

ARCO argued that the restoration damages claim presents such a conflict. The Montana Supreme Court disagreed, largely for the reasons it found no "challenge" to the selected remedy, and because of the presence of the savings clause.

Predicted Impacts

Both parties have strong arguments, and so it is impossible to predict the Supreme Court's decision. The case pits a major corporation against landowners seeking to enforce traditional property ownership rights. In addition the US EPA's authority to determine when a remedy is sufficiently protective of human health and the environment is being called into question.

The dissent has provided a roadmap for the Supreme Court to reverse the Montana decision without needing to invoke the more difficult question of the collision between federal government power and common law. It could find that plaintiff's requested restoration damages simply do in fact materially impact the clean-up, leaving the question of when CERCLA authority ends and common law rights begin unanswered. This scenario would provide more - but not total - assurances to industry groups and their insurers receive finality in the cleanups they agree to with US EPA, and work plans could stress the need for long term monitoring, or permanent engineering solutions that cannot be altered to fit the fact pattern at the Anaconda Site.

A decision for the property owners creates much more uncertainty for interested parties, and could increase tension between risk managers and insurers, who will likely seek a release of coverage obligations when agreeing to fund EPA-selected remedies. Insurers are advised to take great care in any settlement language they agree to in funding hazardous waste remediation sites to ensure they do not take on unnecessary and extraordinary risk while also meeting the full scope of their coverage obligations. A decision for the property owners could also encourage more suits of this nature that may not have otherwise been filed due to the uncertainty of the place of common law and restoration damages claims within the CERCLA scheme.

Industrial actors, particularity those who, like ARCO, acquire legacy toxic sites, will be at risk for massive cleanups beyond that which will prevent a human health hazard (restoration damages claims do not require a cost/benefit analysis), and may not have adequate risk protection for previously completed sites, or for sites where restoration damages claims were not anticipated. This may require new litigation strategies, such as suing non-responsible landowners to obtain PRP designations from courts and/or regulators so that they must participate in negotiations with EPA, rather than file separate lawsuits in state court.

Any changes to the legal framework for CERCLA litigation will need to be assessed after the Supreme Court's decision and specific reasoning has been revealed, and perhaps even the ultimate result of the restoration damages claim in a Montana trial court. For now, interested parties are strongly advised to monitor this litigation, and to consider strategies they can take now to ensure they receive adequate risk protection for their EPA or state regulator-approved cleanups and to consider strategies to address previously closed sites in the Supreme Court upholds the Montana decision.