Alert May 18, 2009

Supreme Court Endorses Apportionment of Liability and Clarifies Arranger Liability for Useful Products Under CERCLA

The U.S. Supreme Court’s decision in Burlington Northern & Santa Fe Railway Co. v. United States (“Burlington Northern”) represents a stark shift away from joint and several liability under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). The Court held that a reasoned estimate of the share of hazardous substances a responsible party contributed to the total amount of contamination at a site was enough to warrant apportionment solely of that share of clean-up costs to the party, leaving the government without recourse for a substantial orphan share. Although the Court purported to apply long-established principles under CERCLA, the evidence that the Court held sufficient to establish a reasonable basis for apportionment marks a change in law. Prior to Burlington Northern, federal courts routinely rejected arguments for apportionment based on more and stronger evidence.

In a separate holding, the Court also ruled that, in the context of a transaction involving the sale of a useful product, an entity may qualify as an arranger under CERCLA when it takes intentional steps to dispose of a hazardous substance. The Court acknowledged that determining whether arranger liability attaches is fact intensive and case specific. In this instance, the Court held that an entity selling a useful product in bulk could not be found liable as an arranger merely because it knew its product was often spilled after delivery to its customers. In such a circumstance, the Court said, knowledge that spills may occur is not commensurate with an intention to dispose of, rather than to sell, the product.

Burlington Northern Facts

In Burlington Northern, Brown and Bryant, Inc. (“B&B”) operated a chemical distribution business that purchased pesticides from suppliers such as Shell Oil Company (“Shell”). B&B initially opened its business on a 3.8 acre parcel of its own land in 1960. In 1975, B&B expanded its operations onto an adjacent 0.9 acre parcel, located to the northwest of the B&B parcel, that it leased from two railroad companies (the “Railroads”). Both B&B’s parcel and the Railroads’ parcel were graded toward a sump and drainage pond located on the southeast corner of B&B’s parcel.

During its operations, B&B stored and distributed numerous hazardous chemicals on its property, including D-D pesticide sold by Shell. Shell initially shipped its pesticides to B&B by common carrier in 55-gallon drums, but later began shipping the D-D pesticide in bulk. The District Court found that B&B assumed stewardship over the D-D when the common carrier entered its facility.

When the D-D arrived at the site, it was transferred from the tanker trucks to a bulk storage tank located on the B&B parcel. Spills often occurred when B&B transferred the D-D from the bulk storage tank to vehicles. Also, because D-D is corrosive, its storage led to numerous tank and valve failures.

Shell was aware that spills of its pesticide products were commonplace among its distributors. As a result, in the late 1970s, Shell took several steps to encourage the safe handling of its products, including (i) providing distributors with a detailed safety manual, (ii) instituting a voluntary discount program for distributors that made improvements in their bulk handling and safety programs, and (iii) requiring distributors to obtain inspections and provide self-certification of compliance with applicable laws and regulations. The B&B facility was inspected twice, and in 1981, B&B certified to Shell that it had made a number of recommended improvements. Despite its efforts, delivery spills, equipment failures, and the rinsing of tanks and containers resulted in pesticides contaminating soil and groundwater at the site.

After B&B became insolvent, the EPA and the California Department of Toxic Substances Control (“CDTSC”) undertook cleanup efforts at the site. In 1991, EPA issued an administrative order that required the Railroads to perform certain remediation activities. Seeking to recover some of their response costs, the Railroads sued B&B, and that lawsuit was consolidated with two CERCLA recovery actions brought by EPA and CDTSC against Shell and the Railroads.

In a detailed opinion, the District Court found that the predominant activities conducted on the Railroads’ parcel were storage and rinsing of tanks and containers. In contrast, mixing, formulating, loading and unloading of the agricultural chemicals were predominately carried out on the B&B parcel. The District Court also found that the spills of hazardous substances that occurred on the Railroads’ parcel contributed to no more than 10% of the total site contamination.

The District Court held that there was a reasonable basis for determining the portion of the clean-up costs attributable to operations on the Railroads’ property. It determined the Railroads’ precise liability by multiplying (i) the percentage of the area of the overall site that was owned by the Railroads (0.19), by (ii) the percentage of time that B&B operated on the Railroads’ parcel as compared to the duration of B&B’s operations on its own parcel (0.45) and by (iii) the percentage of the overall site contamination that was caused by the two substances that had been spilled on the Railroads’ parcel (0.66). After rounding up to 6%, the court allowed for calculation errors of up to 50%, and held the Railroads responsible for 9% of the total CERCLA response costs for the site.

The Ninth Circuit reversed. It ruled the evidence was insufficient “to establish the precise proportion of contamination that occurred on the relative portions of the site,” and it noted that neither the duration of the lease nor the size of the leased area were a reliable measure of the harm caused by the activities on the parcels.

The District Court also held that Shell was liable as an “arranger.”  The Ninth Circuit affirmed. Stating that an entity could arrange for disposal “even if it did not intend to dispose” of a hazardous substance, the Ninth Circuit agreed that Shell had arranged for the disposal of a substance through its sale, delivery and degree of control over transfer of its products to B&B.

Apportionment of CERCLA Liability

Burlington Northern is the first case in which the Supreme Court has considered whether, and to what extent, liability is joint and several under Section 107(a) of CERCLA, 42 U.S.C. §9607(a). The statute is silent on the issue. In the absence of clear statutory language, the Court observed, circuit courts have looked to Section 433A of the Restatement (Second) of Torts as the “universal starting point.”  Under Section 433A, joint tortfeasors are jointly and severally liable unless they can show either that there are distinct and segregable harms, or “there is a reasonable basis for division according to the contribution of each.”

As any Superfund practitioner knows, in applying the Restatement to the CERCLA context, courts essentially created a presumption against divisibility and in favor of joint and several liability. In nearly all the cases cited by the Supreme Court, in fact, the courts ruled that the defendant failed to demonstrate a reasonable basis for apportionment. See, e.g., U.S. v. Chem-Dyne Corp., 572 F. Supp. 802, 811 (S.D. Ohio 1983) (“volume of waste of a particular generator is not an accurate predictor of risk associated with the waste because the toxicity or migratory potential … generally varies independently [of] the volume of the waste”); O’Neil v. Picillo, 883 F.2d 176, 178 (1st Cir. 1989) (affirming district court’s rejection of apportionment based upon volumetric contribution for de minimis generators where wastes had migrated from drums and relative impact of volume, toxicity and migration potential on the environment was unclear). Compare In re Bell Petroleum Servs., 3 F.3d 889, 904 (5th Cir. 1993) (accepting volumetric apportionment where defendants engaged in similar chrome-plating activity and expert testimony supported calculations).

In more recent decisions, district courts have continued to impose a high evidentiary burden and have rejected volumetric arguments for apportionment where multiple contaminants have commingled in the environment. See, e.g., U.S. v. Agway, Inc., 193 F.Supp.2d 545, 551 (N.D.N.Y. 2002) (rejecting volumetric apportionment where defendants failed to present evidence regarding toxicity, migratory potential and “synergistic capacities” of hazardous substances); U.S. v. Manzo, 279 F.Supp.2d at 562, 572 (D.N.J. 2003) (rejecting volumetric apportionment where defendants presented insufficient evidence regarding volume and failed to present evidence regarding relative toxicity or migratory potential of various contaminants); U.S. v. Vertac Chemical Corp., 364 F.Supp.2d 941, 956-58 (E.D. Ark. 2005) (rejecting use of production records as proxy for volumetric apportionment where court found evidence was insufficient to establish that waste generation was proportional to production and defendant failed to produce evidence of relative toxicity, migratory potential, degree of migration and synergistic effects or capacities of the various hazardous substances).

Although the Supreme Court purported to apply the same principles followed in these lower court decisions, the Court’s opinion leaves no doubt that it has changed the way in which the standard is to be applied. Contrary to the result reached by the Ninth Circuit, and many other courts in similar circumstances, the Court ruled that the Railroads were not jointly and severally liable for all clean-up costs. For purposes of establishing a reasonable basis for divisibility, it is enough to show that the portion of costs attributable, in this case, to the Railroads could be reasonably estimated based on the relative amount of their contribution to the total, undifferentiated mass of contamination.

The Court stated:

Although the evidence adduced by the parties did not allow the court to calculate precisely the amount of hazardous chemicals contributed by the Railroad parcel to the total site contamination, or the exact percentage of harm caused by each chemical, the evidence did show that fewer spills occurred on the Railroad parcel and that of those spills that occurred, not all were carried across the Railroad parcel to the B&B sump and pond from which most of the contamination originated.

The Court upheld the District Court’s apportionment even after concluding that one of its findings – that the two substances released on the Railroads’ parcel accounted for only two-thirds of the contamination requiring remediation at the site – was not supported by the evidence in the record. The Court determined this error to be harmless because the District Court had included a 50% margin of error in apportioning the Railroads’ share of liability, and therefore reached the same result.

At a minimum, the Burlington Northern decision demonstrates that even where multiple hazardous substances have commingled, evidence documenting the precise contribution of a liable party is not required to avoid joint and several liability. More generally, the Court’s application of the reasonableness standard marks a change from a near presumption in favor of joint and several liability to a more fair and reasonable apportionment of each party’s allocable share of responsibility.

Scope of Arranger Liability

Included among the “potentially responsible parties” that may be liable under CERCLA is “any person who by contract, agreement, or otherwise arranged for disposal or treatment … of hazardous substances owned or possessed by such person, by any other party … at any facility.”  42 U.S.C. §9607(a) (emphasis added). CERCLA does not define the term “arranged for” but broadly defines “disposal” to include the “discharge, deposit, injection, dumping, spilling, leaking or placing any solid waste or hazardous waste into or on any land or water so that such solid waste or hazardous waste or any constituent thereof may enter the environment or be emitted to air or discharged into any waters including ground waters.”  42 U.S.C. §9601(29) (adopting the definition of “disposal” contained in the Solid Waste Disposal Act, 42 U.S.C. §6903(3)).

In Burlington Northern, the Supreme Court first described the extremes of the arranger liability spectrum: (i) liability would clearly attach “if an entity were to enter into a transaction for the sole purpose of discarding a used and no longer useful hazardous substance,” and (ii) liability would clearly not attach “merely for selling a new and useful product if the purchaser of that product later, and unbeknownst to the seller, disposed of the product in a way that led to contamination” (emphasis added). The Court then described the following permutations that fall along that spectrum, which require a fact-intensive, case-specific inquiry: “cases in which the seller has some knowledge of the buyer’s planned disposal or whose motives for the ‘sale’ of a hazardous substance are less than clear.” 

Because CERCLA does not expressly define what it means to “arrang[e] for” disposal of a hazardous substance, the Court looked to the term’s ordinary meaning, which it said “implies action directed at a specific purpose.”  Based upon this definition, the Court determined that in the context of the sale of a useful product an entity may qualify as an arranger only “when it takes intentional steps to dispose of a hazardous substance.”  The Court rejected the governments’ reference to the term “disposal,” which includes such unintentional acts as “spilling” and “leaking,” as support for the position that arranger liability should attach when an entity sells a product knowing that some disposal may occur as a collateral consequence of the sale itself. The Supreme Court stated:

[W]hile it is true that in some instances an entity’s knowledge that its product will be leaked, spilled, dumped or otherwise discarded may provide evidence of the entity’s intent to dispose of its hazardous wastes, knowledge alone is insufficient to prove that an entity ‘planned for’ the disposal, particularly when the disposal occurs as a peripheral result of the legitimate sale of an unused, useful product.

The Court also noted that the evidence revealed Shell took numerous steps to encourage B&B to reduce the likelihood of spills, such as providing detailed safety manuals and discounts for entities that took safety precautions, and this evidence weighed against an intent to dispose of hazardous substances. The Court did not, however, provide further guidance regarding what type and how much evidence would support an inference that an entity intended (i.e., planned) for disposal of hazardous substances to occur. Moreover, the Court did not clarify how such evidence of intent to dispose should be weighed against evidence of intent to avoid disposal.

In her dissent, Justice Ginsburg said she would have upheld the Ninth Circuit’s conclusion that Shell qualifies as an arranger. Justice Ginsburg first noted that Shell initially shipped its products to B&B in 55-gallon drums, which mitigated against spills or leaks during delivery and transfer, but later required B&B to maintain a bulk storage tank because of the economic advantages of such shipment for Shell. Second, Shell specified the equipment to be used in transferring the chemicals from the delivery truck to the bulk storage tanks, and it was indisputable that leaks and spills occurred every time such deliveries were made. Although she agreed that mere knowledge may not be enough to establish arranger liability, Justice Ginsburg argued that Shell arranged for the disposal of hazardous substances under the present facts because it contributed to the releases based on the control it held over the mode of delivery and transfer of the pesticides. In other words, the control Shell imposed over the transfer operations, and the associated releases, sufficiently demonstrated the intent to dispose of the hazardous substances.

Despite Justice Ginsburg’s opinion, the majority opinion does not mention “control” or explain how or whether evidence of control is relevant to an entity’s intent to dispose of a hazardous substance.

Conclusion

The Court’s apportionment holding in Burlington Northern dispels the commonly held conception that there is a nearly irrebuttable presumption against divisibility of harm in cases where hazardous substances have commingled. The Court’s holding makes clear that documentation establishing the precise amount of hazardous substances contributed by a particular liable party or the exact percentage of harm caused by such substances released at a site is not required to avoid joint and several liability.

The Court’s decision in Burlington Northern also should be considered together with U.S. v. Atlantic Research Corp., 551 U.S. 128, 127 S.Ct. 2331 (2007). In Atlantic Research, the Court ruled that one potentially responsible party may bring a CERCLA Section 107(a) cost recovery claim against another. Id. at 2339. For purposes of its opinion, the Court said it assumed without deciding that Section 107(a) provides for joint and several liability. Id. at 2339, n. 7. Under Burlington Northern, costs may be apportioned on such a claim if there is a “reasonable” basis for determining the contribution of each responsible party to the harm.

The import of the Court’s arranger holding in Burlington Northern is less clear. As the holding is in the context of a sale of a useful product, its impact may be limited. For example, the Court’s opinion did not discuss other situations like toll manufacturing or cite cases relating to potential “arranger liability” in such contexts, even though such cases were referenced in briefs filed with the Court. The opinion confirms that a case-by-case, fact intensive analysis will continue to be required, and the lower courts will still have to determine what type and how much evidence is necessary to establish intent to dispose of a hazardous substance outside the context of garden variety waste disposal transactions.