The Facts
Georgia Power Company, an electric utility, used electrical transformers to generate electricity. When it stopped using transformers, Georgia Power inspected them, tested them for PCBs, and discarded transformers that were unusable or contained PCBs at levels exceeding 50 parts per million pursuant to Toxic Substances Control Act (TSCA) requirements. Georgia Power also retained certain transformers for its own reuse and sold at auction transformers that could be repaired and reused after it drained and removed the oil from them. The oil removal process drained all oil except for a thin sheen within the transformers and on certain inner parts. Georgia Power left some of the drained transformers uncapped and exposed to moisture prior to sale, making the internal components susceptible to damage.
During the 1980s, Ward Transformer Company was in the business of purchasing used transformers, repairing and reconditioning them, and then reselling them. Ward purchased 101 used transformers from Georgia Power at four different auctions. Ward also bid on additional lots of transformers sold by Georgia Power but lost to other bidders. Some of the transformers that Ward acquired included oil that had not been drained or residual oil containing PCBs. After reconditioning and rebuilding some of the transformers in accordance with its customers’ specifications, Ward resold all 101 transformers in working condition to third parties for a profit. None of the transformers were sold for scrap. PCB-laden oil was discharged at the Ward site during the time that Ward stored and worked on the transformers.
Around the same time, Savannah Electric and Power Company, which later merged with Georgia Power, replaced all its transformers that contained PCBs. In doing so, Savannah Electric sold 20 transformers at auction to Electric Equipment Company of New York (EECNY). None of the transformers had been drained of oil containing PCBs. The transformers were functioning and in good shape, lacked problems or defects, and required no remanufacturing other than alteration of outdated voltage configurations in some instances. EECNY shipped the transformers to the Ward site, and after Ward updated the voltage configurations of certain transformers, Ward sold all 20 transformers for a profit. PCBs were released at the Ward site at that time.
Procedural History
Consolidation Coal Company (Consol) and Duke Energy Progress, Inc. (Progress) initiated cleanup at the Ward site pursuant to an administrative settlement with the U.S. Environmental Protection Agency, and PCS Phosphate Company, Inc. (PCS) subsequently joined the remediation efforts by a trust agreement with Consol and Progress. Consol and Progress then sued Georgia Power, PCS, and others seeking contribution for cleanup costs under section 107(a)(3) of CERCLA. PCS counterclaimed and asserted a cross-claim against Georgia Power and others for contribution. Consol, Progress, and PCS contended that Georgia Power “arranged for disposal” of PCBs under CERCLA when it sold the used transformers with oil containing PCBs to Ward. They argued that Georgia Power had a dual intent—to gain revenue by selling the transformers, on the one hand, and to get rid of PCBs, on the other hand—and that this “secondary motive” was sufficient to create arranger liability.
The Court’s Analysis
In affirming the district’s court grant of summary judgment in favor of Georgia Power, the Fourth Circuit in Georgia Power held that Georgia Power lacked the requisite intent for disposal articulated by the Supreme Court in Burlington Northern and Fourth Circuit case law. The Fourth Circuit concluded that no direct evidence existed that Georgia Power intended to arrange for the disposal of PCBs when it sold used transformers. Rather, the evidence showed that Georgia Power sold transformers at auction to generate revenue and achieve the greatest commercial advantage. The mere fact that Georgia Power called the sales of used transformers “scrapping” and “disposals” in its internal documents, the Fourth Circuit stated, did not demonstrate that Georgia Power possessed the necessary intent to dispose for purposes of arranger liability because it was clear Georgia Power used those terms to reflect transformers that were “actually sold” to others. The Fourth Circuit added that Georgia Power’s testing of PCB concentrations in used transformers before sale reflected its efforts to comply with TSCA, not any intention to dispose of PCBs.
The Fourth Circuit in Georgia Power also did not find any circumstantial evidence of Georgia Power’s intent to dispose of PCBs. To reach this conclusion, the Fourth Circuit applied the following four factors enumerated in Pneumo Abex Corp. v. High Point, Thomasville and Denton Railroad Co., 142 F.3d 769 (4th Cir. 1998), for determining whether a party arranged for the disposal of a hazardous substance or merely sold a valuable product:
1. whether the parties intended for the materials to be reused entirely or reclaimed and then reused;
2. the value of the materials;
3. the usefulness of the materials in the condition sold; and
4. the state of the product at the time of transfer.
The Fourth Circuit concluded that these factors, taken individually or together, counseled against a finding that Georgia Power intended to dispose of PCBs.
As to intent for reuse of the product, the Fourth Circuit concluded that the evidence showed Georgia Power sold the used transformers entirely for reuse and Ward intended to reuse the transformers to the fullest extent. There was no evidence that Georgia Power or Ward intended for the transformers to be scrapped or sold for parts as reclaimed materials. Moreover, at the time of sale, Georgia Power and Ward did not have any agreement or understanding on how Ward would handle the PCB-containing oil or parts. Indeed, Georgia Power had no knowledge of or control over Ward’s use of the transformers that it purchased and did not know anything about Ward’s reuse of the oil and oil-coated parts containing PCBs. The Fourth Circuit reasoned that Ward’s decision not to reuse oil or parts coated with oil did not imply that Georgia Power intended to dispose of oil when selling the transformers because the specifications of Ward’s customers and Ward’s own business judgment dictated the way in which Ward processed and rebuilt the transformers.
As to the value of the materials sold, the Fourth Circuit found that the used transformers sold by Georgia Power had marketable commercial value. Georgia Power sold the used transformers at competitive auctions for amounts “in excess of scrap value” so that they could be resold to third parties. Ward, for its part, profited from the resale of the transformers, reselling most, if not all, of the transformers to third parties for “thousands of dollars more than what Ward paid Georgia Power” after rebuilding and reconditioning them. In addition, the Fourth Circuit noted there was no evidence that Ward paid less for transformers based on the presence or absence of PCBs—a fact that would have suggested Georgia Power intended to get rid of waste when it sold the used transformers. In fact, the undrained transformers carried more value with oil and oil-coated parts because they could not function without them. And the presence of residual PCB-oil sheen in drained transformers did not increase Ward’s repair and rebuilding costs or affect the auction price of the transformers. Simply put, there was no evidence that the sale of used transformers to Ward amounted to “an intended PCB disposal arrangement.”
Furthermore, the Fourth Circuit concluded that the concentration of PCBs did not factor into the usefulness of the transformers sold by Georgia Power. Although Georgia Power decided to keep some of the used transformers rather than sell them, its decision was not motivated by the content of PCB in the transformers. Rather, Georgia Power retained certain used transformers based on their age, obsolescence, the need for a particular transformer type, and the nature and extent of necessary repairs. The Fourth Circuit further reasoned that Ward was not required to remove oil containing PCBs from the transformers that it purchased from Georgia Power; its customers’ specifications dictated removal of that oil.
With respect to the state of the product at the time of sale, the Fourth Circuit stated that the evidence showed the transformers including PCB-oil were not leaking and were capped when Georgia Power sold them to Ward. No evidence existed that any transformers leaked or spilled during the sale transfer. In other words, the transformers containing PCBs were contained when sold but became hazardous when used by Ward.
Lastly, in addition to the Pneumo Abex factors, the Fourth Circuit in Georgia Power analyzed whether Georgia Power had knowledge of any spills of oil containing PCBs by Ward. The court concluded that Georgia Power did not have even knowledge of the disposition and processing of the transformers after Ward purchased them, much less knowledge of spills. The only evidence regarding knowledge of any kind concerned Georgia Power’s general expertise in transformers and PCB-laden oil. The Fourth Circuit stated that, based on Georgia Power’s “clear intent to sell a valuable product on a competitive market, and its lack of specific knowledge regarding how Ward would process the transformers, the ‘knowledge’ factor [was] of no aid to Consol and PCS.” For these reasons, the Fourth Circuit affirmed the district court’s ruling that Georgia Power lacked the requisite intent for arranger liability under section 107(a)(3) of CERCLA.
The Fourth Circuit also concluded that the Pneumo Abex factors did not support an inference that Savannah Electric (which merged into Georgia Power) intended to dispose of PCBs when it sold 20 used, but useable and working, transformers at auction. The Fourth Circuit reasoned that Savannah Electric intended for the transformers to be reused entirely, the transformers retained significant value, the transformers were in useful condition, and the transformers did not leak at the time of sale. The circumstances, the Fourth Circuit noted, “[fell] squarely on the side of a legitimate sale and against arranger liability.”
Following this ruling, Consol and PCS filed a petition for rehearing en banc pursuant to Federal Rule of Appellate Procedure 35. The Fourth Circuit, however, denied the petition without opinion on April 17, 2015.
Lessons Learned
The Fourth Circuit’s decision in Georgia Power reaffirms that the element of intent for purposes of arranger liability under CERCLA is difficult to prove and requires a fact-intensive determination. That determination involves several factors: (1) whether the parties intended for the product to be reused entirely or sold for parts; (2) the value of the product; (3) the usefulness of the product; (4) the state of the product when sold; (5) the seller’s knowledge of the disposal; and (6) the ownership, possession, and control of the product at the time of disposal.
Georgia Power also underscores the importance of taking certain precautions to minimize the risk of arranger liability under CERCLA. For example, if a company sells a used product, as Georgia Power did, it should prepare the item for sale by removing hazardous substances to the greatest extent possible and ensuring such substances cannot be released from the product during sale or transport. Moreover, following the example of Georgia Power, a company may create different internal procedures and processes for sales of products, on the one hand, and disposals of waste/scrap, on the other hand. And while the use of terms like “scrap” and “disposal” did not hurt Georgia Power’s defense, a company should choose other ways to describe its legitimate sale of used products to avoid any confusion or basis for arguing arranger liability.
Keywords: environmental litigation, hazardous substance, disposal, arranger liability, Georgia Power
John J. DiChello is a partner with Blank Rome LLP in Philadelphia, Pennsylvania.