July 23, 2015 Articles

How to Minimize the Risk of Arranger Liability

Lessons learned from recent cases.

By John J. DiChello – July 23, 2015

Companies in the business of selling products containing hazardous substances, particularly used or old products, or that have acquired businesses with historical practices or properties involving the sale, storage, or disposal of such products or substances, may be confronted with a slew of legal claims if the substances somehow are discharged into the environment. Few claims, however, keep general counsel for such companies up at night more than a claim for cost recovery or contribution based on “arranger liability” under section 107(a)(3) of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. § 9607(a)(3). This is so because a party found liable as an arranger under CERCLA may be required to pay millions of dollars in response costs and natural resources damages.

Background on Section 107(a) of CERCLA
Section 107(a) of CERCLA imposes liability for the response and cost of cleaning up environmental contamination by hazardous substances on four classes of potentially responsible parties, one of which is “arrangers.” 42 U.S.C. § 9607(a). An “arranger” is

any person who by contract, agreement or otherwise arranged for disposal or treatment, or arranged with a transporter for transport for disposal or treatment, of hazardous substances owned or possessed by such person, by any other party or entity, at any facility or incineration vessel owned or operated by another party or entity and containing such hazardous substances.

42 U.S.C. § 9607(a)(3) (emphasis added).

CERCLA, however, does not define the phrase “arranged for disposal.”

In the landmark decision of Burlington Northern & Santa Fe Railway Co. v. United States, 556 U.S. 599 (2009), the Supreme Court of the United States clarified what it means to “arrange[ ] for disposal” of a hazardous substance under section 107(a)(3) of CERCLA. InBurlington Northern, an oil company and other entities sold pesticides and chemicals to Brown & Bryant, Inc. (B&B), which operated a facility for the storage and distribution of agricultural chemicals. 556 U.S. at 602–3. Leaks and spills often occurred at the facility when common carriers delivered chemicals and during the process of transferring the chemicals between trucks and tanks on-site for storage and when distributed to B&B’s customers. Id. at 603–4. It was undisputed that the oil company had actual knowledge of leaks and spills. Id. at 604–5, 612–13. Notably, the oil company attempted, albeit unsuccessfully, to reduce the number of releases by providing its distributors with safety manuals, requiring the distributors to maintain adequate storage facilities, and offering discounts to distributors that implemented improvements at their facilities. Id. at 604, 612. Based on the oil company’s knowledge of releases, the government argued that the company was an “arranger” under section 107(a)(3) of CERCLA and should be responsible for a portion of the costs to remediate contamination at the site. Id. at 605, 612.

Reversing the ruling of the United States Court of Appeals for the Ninth Circuit holding the oil company liable under CERCLA, the Court held that the oil company did not constitute an arranger because, despite the company’s knowledge of releases, it did not enter into the sale of chemicals to B&B “with the intention that at least a portion of the product be disposed of during the transfer process.” Id. at 612. The Court reasoned that “under the plain language of the statute, an entity may qualify as an arranger under § 9607(a)(3) when it takes intentional steps to dispose of a hazardous substance.” Id. at 611. The Court added that

[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.

Id. at 612.

Because the oil company took numerous steps to reduce the occurrence of leaks and spills, the oil company’s mere knowledge that releases continued, without more, was insufficient to show that the company specifically intended to dispose of chemicals. Id. at 613.

The Court provided additional guidance on the type of evidence that could satisfy the intent element for purposes of arranger liability under CERCLA. Specifically, the Court stated that “CERCLA liability would attach under § 9607(a)(3) if an entity were to enter into a transaction for the sole purpose of discarding a used and no longer useful hazardous substance,” but “an entity could not be held liable as an arranger 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.” Id. at 610–11. The Court acknowledged the existence of a gray area between these two extremes where “the seller has some knowledge of the buyers’ planned disposal or whose motives for the ‘sale’ of a hazardous substance are less than clear.” Id. at 611. Those instances require a fact-intensive inquiry of the nature of the transaction that “looks beyond the parties’ characterization of the transaction as a ‘disposal’ or a ‘sale.’” Id. at 610.

How to Minimize the Risk of Arranger Liability

Following Burlington Northern, federal courts throughout the country have analyzed fact patterns falling within the “gray area” of arranger liability under CERCLA and, in doing so, have identified several considerations bearing on the element of intent required to establish liability. Companies that sell new or used products containing hazardous substances should heed the guidance of those courts and take certain precautions to minimize their exposure to liability.

Below is a non-exhaustive list of ways that businesses can seek to prevent arranger liability based on “lessons learned” from recent arranger liability cases:

1.         Perform a careful, thorough due diligence review before acquiring another company. Make sure you are aware of all historical practices and properties that may have involved the storage, use, or disposal of hazardous substances.

2.         Select only reputable distributors and contractors to transport hazardous substances. Know your vendors.

3.         Provide customers and distributors with detailed product safety manuals and instructions regarding the safe handling, storage, and use of the product.

4.         Require distributors to maintain safe and adequate storage facilities.

5.         Request periodic access to distributors’ storage facilities to conduct inspections.

6.         Require distributors and contractors to acknowledge and agree that they are aware of the risks of handling, storing, and using the product.

7.         Require distributors and contractors to agree to fully comply with all applicable laws regarding storage, handling, and use of hazardous substances.

8.         Specify in agreements with customers that the purpose of the transaction is the sale of a product and not disposal. Likewise, if you are not engaging in a transaction with the intention of disposing of hazard substances, do not include language that could be interpreted as supporting such intent.

9.         Treat sales and disposals differently within your business. Create different internal procedures and processes for each and use different vendors for sales and disposals.

10.       Avoid using terms like “scrap” or “disposal” to describe a legitimate sale of used products.

11.       Require customers and distributors to indemnify, defend, and hold you harmless from claims relating to disposal of hazardous substances, and/or name you as an additional insured on liability policies.

12.       If you are aware of leaks or spills of hazardous substances by distributors or customers, take steps to minimize the possibility of future releases by those entities. Affirmatively prevent spills.

13.       Do not accept or assume authority to control hazardous substances after you sell them to customers.

14.       If you are selling a used product, adequately prepare the item for sale by removing any hazardous substances and ensure hazardous substances cannot be released from the product during transport or storage.

15.       Treat used, but useful, products containing hazardous substances as assets on your balance sheet.

16.       If you hire a contractor to dispose of hazardous substances, avoid involvement in transporting or storing the substances.

While there is no bright-line rule for determining the existence of intent for purposes of CERCLA arranger liability, the precautionary measures outlined here should serve as useful guideposts to businesses seeking to reduce their exposure to arranger liability.

Keywords: environmental litigation, arranger liability, CERCLA

John J. DiChello is a partner with Blank Rome LLP in Philadelphia, Pennsylvania.

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