June 01, 2015

Issues to Consider in CERCLA Settlements

Sudhir Burgaard

Parties involved in actions brought under the Comprehensive Environmental Remediation, Compensation and Liability Act (CERCLA) have many factors to consider in determining whether they should enter into settlement agreements, including how a settlement would offset remaining parties’ liability and, where an agency is involved, the level of deference a district court will afford the agency’s determination that a consent decree is fair and reasonable. The Ninth Circuit recently issued two decisions that are germane to these issues, but first a little background information.

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Courts have recognized two competing methods of accounting for a nonsettling party’s share of liability in light of settlements by other potentially responsible parties (PRPs)—the Uniform Comparative Fault Act (UCFA), and the Uniform Contribution Among Tortfeasors Act (UCATA). The UCFA and the UCATA are uniform model acts proposed by the National Conference of Commissioners on Uniform State Laws. The UCFA is sometimes referred to as the proportionate share approach because under this method, liability is allocated in proportion to each party’s degree of fault. When an injured party settles with one of multiple tortfeasors, the settlement reduces the nonsettling parties’ liability by the proportionate share of the settling party’s liability. The claimant therefore bears the risk that the settling party may have settled for less than its equitable share of liability.

The UCATA is sometimes referred to as the pro tanto approach. Under this approach, when an injured party settles with one of multiple PRPs, the remaining parties’ liability is reduced by the dollar value of the settlement. If the settling party settled for less than its proportionate share of liability, then the nonsettling parties will end up paying for more than their liability shares.

A court’s decision to apply the UCFA or UCATA method could materially affect PRPs’ decisions of whether and when to settle. Under the UCFA approach, the nonsettling parties are liable for no more than their equitable share of liability, regardless of the settlement amount. But under the UCATA approach, the nonsettling parties bear the risk that the settling parties may have settled for less than their pro rata share of liability, leaving the nonsettling parties jointly and severally liable for the difference between the claimant’s damages and the settlement amount.

Circuit courts have differed on whether district courts should apply the UCFA or UCATA approach. The Seventh Circuit has adopted the UCATA approach, while the First and Ninth Circuits have refused to adopt either approach and instead, allow a court broad discretion in determining the most equitable method of accounting for private party settlements.

The one part of CERCLA that addresses how a settlement affects the liability of nonsettling parties states that a settlement with the United States or a state “reduces the potential liability of the others by the amount of the settlement.” 42 U.S.C. § 9613(f)(2). In Akzo Nobel Coatings, Inc. v. Aigner Corp., 197 F.3d 302, 308 (7th Cir. 1999), the Seventh Circuit found that statutory language that contribution claims “shall be governed by Federal law” implies that the law that should be applied to determine how a settlement impacts nonsettling parties’ liability should be nationally uniform. 42 U.S.C. § 9613(f)(1). Reasoning that adopting the UCFA as a federal rule would undermine this section, the Seventh Circuit held that district courts should apply the pro tanto approach expressly set forth in section 9613(f)(2) to contribution claims brought under section 9613(f)(1).

The First Circuit, on the other hand, declined to adopt a uniform approach in determining how a settlement affects the liability of nonsettling parties. Rather, the First Circuit found that CERCLA gives district courts discretion in determining the most equitable method of allocating response costs among responsible parties and that determining how a settlement affects the liability of nonsettling parties is within that discretion. See Am. Cyanamid Co. v. Capuano, 381 F.3d 6, 20–21 (1st Cir. 2004). CERCLA is silent as to how a settlement agreement between private parties affects the contribution liability of nonsettling parties, but section 9613(f)(1) does state that “[i]n resolving contribution claims, the court may allocate response costs among liable parties using such equitable factors as the court determines are appropriate.” The First Circuit read this provision as giving the district court discretion in determining the most equitable method of accounting for how settlements may affect the liability of nonsettling parties. Id.

Addressing the question for the first time, the Ninth Circuit recently issued a holding similar to that of the First Circuit. In AmeriPride Services v. Texas Eastern Overseas (AmeriPride), No. 12-17245 (9th Cir. 2015), the Ninth Circuit found that the requirement in section 9613(f)(2) that courts apply the UCATA pro tanto approach for government settlements and the lack of such a requirement for private party settlements indicate that Congress did not intend to impose a uniform requirement for determining how private party settlements impact nonsettling parties’ liability. AmeriPride, No. 12-17245 at 19 (quoting Keene Corp. v. United States, 508 U.S. 200, 208 (1993) (“[W]here Congress includes particular language in one section of a statute but omits it in another . . . it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.”)).

Rather than adopting the Seventh Circuit’s approach, the Ninth Circuit agreed with the First Circuit in holding that in allocating liability to a nonsettling party, a district court is not required to apply either the UCFA or the UCATA, but rather has discretion to determine the most equitable method of accounting for settlements between private parties. The court also refused to adopt the UCFA approach as a uniform rule because, unlike the UCATA approach, the UCFA approach does not encourage early settlements, and therefore, does not carry out the policy goals of CERCLA, to protect the public health and the environment “by facilitating the expeditious and efficient cleanup of hazardous waste sites.” Id. (quoting Carson Harbor Vill., Ltd. v. Unocal Corp., 270 F.3d 863, 880 (9th Cir. 2001) (en banc)). The First, Seventh, and Ninth Circuit decisions underscore the importance of determining whether the UCFA or UCATA approach, or some other method, will maximize a party’s settlement leverage. For parties considering entering settlement agreements in CERCLA actions, it is important to determine early on what approach the district court will apply, as it could materially affect settlement decisions and outcomes.

Another issue of concern for parties and agencies considering entering into CERCLA settlements, and particularly consent decrees, is the level of deference that courts will afford an agency’s determination that the settlement terms are fair and reasonable. The seminal case on judicial review of CERCLA consent decrees is United States v. Cannons Engineering Corp. (Cannons Eng’g), 899 F.2d 79 (1st Cir. 1990). In setting forth the standard that district courts should follow in evaluating consent decrees, the First Circuit looked at congressional intent and stated that “the trial court’s review function is only to ‘satisfy itself that the settlement is reasonable, fair, and consistent with the purposes that CERCLA is intended to serve.’” Id. at 85 (quoting H.R. Rep. No. 253, Pt. 3, 99th Cong., 1st Sess. 19 (1985)). In order to approve a CERCLA consent decree, a district court must find that the agreement is “based upon, and roughly correlated with, some acceptable measure of comparative fault, apportioning liability among the settling parties according to rational (if necessarily imprecise) estimates of how much harm each [potentially responsible party] has done.” Cannons Eng’g, 899 F.2d at 87. The Ninth Circuit agreed in Turtle Island Restoration Network v. United States Department of Commerce, 672 F.3d 1160, 1165 (9th Cir. 2012), stating that “[a] district court may approve a consent decree when its terms are ‘fair, reasonable and equitable and does not violate the law or public policy.’”

The judicial approval process for consent decrees involves what the First Circuit called a “double layer of swaddling.” The first layer occurs when the district court reviews the agency’s determination of the fairness and reasonableness of the settlements, while the second layer arises when an appellate court determines whether to defer to the district court’s determination that the consent decree is fair and reasonable.

When an agency that is a party to a consent decree has found that a consent decree is fair and reasonable, courts have often deferred to the agency’s determination for a number of reasons, including that CERCLA has a policy of encouraging settlements, the settlement was constructed by a governmental entity acting in the public’s interest, the agency has expertise concerning site cleanup, and the parties, who are often sophisticated, reached an arms-length agreement. See, e.g., United States v. Cannons Eng’g Corp., 720 F. Supp. 1027, 1036 (D. Mass. 1989).

The presumption of validity is highest when the U.S. Environmental Protection Agency (EPA) is a party to the consent decree, given EPA’s expertise in environmental matters. The Ninth Circuit recently indicated that the presumption may be lower, however, for state-sponsored consent decrees. See Arizona v. City of Tucson, 761 F.3d 1005 (9th Cir. 2014). In that case, a state agency, the Arizona Department of Environmental Quality (ADEQ), had informed the district court of the factual bases for its conclusions that the CERCLA consent decrees in which it was involved were fair and reasonable—namely that it had interviewed 800 witnesses and reviewed 100,000 pages of documents. While the ADEQ did not explain how it calculated each PRP’s allocation of liability, it explained that it followed the EPA’s guidelines in order to determine the settlement figures. Nonetheless, the Ninth Circuit held that the district court did not fulfill its responsibilities to independently assess the adequacy of the agreements or provide a reasoned explanation for its decision and that it had to engage in a substantive analysis of the settlement terms.

Critics of the decision point out that although the agency in that case was an arm of a state, and not the federal government, it still has environmental expertise and should have been afforded deference. The dissent in Arizona v. City of Tucson urged that district courts should defer to state-sponsored settlements when the court finds that the settlement is fair and reasonable and benefits the public. Although the issue on appeal was whether the district court abused its discretion in approving the consent decrees, the majority also decided to what degree a district court ought to defer to a state agency’s decision to enter into an early settlement with PRPs.

The Arizona v. City of Tucson decision could make it more burdensome to enter into CERCLA consent decrees. Interested parties have filed petitions for certiorari to the U.S. Supreme Court. See, e.g., ABB Inc. v. Ariz. Bd. of Regents (Feb. 11, 2015), State of Ariz. v. Ashton Co. Contractors & Eng’rs (Feb. 20, 2015). By expanding the level of judicial scrutiny required to approve these consent decrees, the Ninth Circuit decision significantly broadens the scope of judicial review and increases the burden on states to present detailed evidence to a district court supporting the reasonableness and fairness of settlements. Congress intended for states to be extensively involved in CERCLA enforcement, but this decision discounts the role that state agencies play in the consent decree approval process. Agencies and PRPs will be watching should certiorari be granted.

Sudhir Burgaard

Ms. Burgaard is a senior associate at Morris Polich & Purdy, LLP, in Los Angeles, California, and is a member of the editorial board of Natural Resources & Environment.