July 23, 2015 Articles

The Law by Circuit on Arranger Liability

Recent decisions from the First, Second, Third, Fourth, Fifth, Seventh, and Ninth Circuits.

By John J. DiChello – July 23, 2015

Section 107(a) of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. § 9607(a)(3), imposes liability for the response and cost of cleaning up environmental contamination by hazardous substances on four classes of potentially responsible parties (PRPs), including “arrangers.” 42 U.S.C. § 9607(a). CERCLA defines an “arranger” as “any person who . . . arranged for disposal . . . or arranged with a transport for transport for disposal . . . of hazardous substances.” 42 U.S.C. § 9607(a)(3).

In Burlington Northern & Santa Fe Railway Co. v. United States, 556 U.S. 599 (2009), the Supreme Court explained what it means to “arrange for disposal.” In short, a party must “take[] intentional steps to dispose of a hazardous substance” to be liable as an arranger. The Court also provided guidance on the type of evidence that could satisfy the intent element for purposes of arranger liability. For example, a party’s knowledge that its product will be spilled by others may constitute evidence of that party’s intent to dispose, but knowledge, without more, is insufficient to prove the necessary mens rea. Moreover, “CERCLA liability would attach . . . 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.” Most cases fall between the latter two extremes and demand a fact-intensive inquiry.

Several federal circuit courts of appeals have applied the dictates of Burlington Northern in addressing transactions falling between the two extremes in cases of putative arranger liability under CERCLA. Those cases confirm that the requisite intent for arranger liability is difficult to define precisely and requires a case-specific, highly factual analysis. The case law also shows that the intent element is quite difficult to prove. This article summarizes the post-Burlington Northern circuit court cases.

First Circuit

United States v. General Electric Co., 670 F.3d 377 (1st Cir. 2012). General Electric (GE) manufactured electric capacitors containing Pyranol, an insulating material made from polychlorinated biphenyls (PCBs). 670 F.3d at 379–80. To be useful to GE, the processed Pyranol must have met certain purity specifications; any Pyranol falling short of the standards was considered “scrap Pyranol” and stored in 55-gallon drums in designated scrap areas. Id. at 380. After accumulating “a glut of scrap Pyranol,” GE entered into an informal arrangement with Frederic H. Fletcher, a paint manufacturer, in which Fletcher purchased scrap Pyranol from GE at bargain prices to use as a plasticizer additive for his paint. About 10 years later, after Fletcher purchased 3,600 drums of scrap Pyranol, Fletcher began missing payments. GE nonetheless delivered three more shipments of scrap Pyranol to Fletcher. Fletcher subsequently informed GE that the quality of its scrap Pyranol had declined in recent years, and proposed that GE retrieve from his property drums of Pyranol that he could not use and he would pay for the usable drums. Id.at 380–81. GE ignored Fletcher’s proposal. Id. at 381. Roughly 20 years later, the United States Environmental Protection Agency discovered hundreds of drums of scrap Pyranol on Fletcher’s property and sought to recover costs associated with the cleanup from GE, alleging that GE “arranged for disposal” of hazardous substance under section 107(a)(3) of CERCLA.

The United States Court of Appeals for the First Circuit affirmed the district court’s judgment holding GE liable as an arranger because GE “purposefully entered into the arrangement with Fletcher with the desire to be rid of scrap Pyranol.” Id. at 391. The First Circuit reasoned that GE viewed the scrap Pyranol not as a legitimate, useful product, but as waste. Id. at 384, 386. For example, GE stored the scrap Pyranol in second-hand, 55-gallon drums labeled as “scrap” and “waste” in salvage areas; pursued arrangements to reduce its stockpile of scrap Pyranol, including transferring it to landfills; subjected the scrap Pyranol to minimal quality control; and did not market the scrap Pyranol as a viable product to anyone other than Fletcher. Id. at 385–86. Indeed, there was no evidence that any market for scrap Pyranol even existed. Id. at 386. This evidence showed that “any profit derived from selling scrap Pyranol to Fletcher was subordinate and incidental to the immediate benefit of being rid of an overstock of unusable chemicals.” Id. at 385.

In addition, the court in General Electric concluded that GE’s actions and inaction in dealing with Fletcher further evinced GE’s intent to dispose of hazardous substances. In particular, GE knew that some of the scrap Pyranol was unusable; during the final years of the GE-Fletcher arrangement, GE controlled the amount and quality of the scrap Pyranol delivered to Fletcher and the number of transfers increased drastically, even after Fletcher missed payments; despite Fletcher’s complaint that GE provided contaminated and unusable scrap Pyranol, which claim GE verified through its own testing, and Fletcher’s request that GE pick up the unusable drums from his property, GE simply wrote off Fletcher’s debt and left Fletcher with the burden of disposing of the scrap Pyranol. Id. at 390–91. This conduct, the court stated, shows that “[t]hough the initial arrangement . . . may not have, in express terms, directed Fletcher to dispose of GE’s scrap Pyranol, GE certainly understood this would be the result of its actions and took the conscious and intentional step of leaving Fletcher to dispose of the materials.” Id. at 391. In other words, GE attempted to dispose of waste through the guise of a legitimate, arm’s-length transaction. Therefore, the First Circuit concluded that GE was liable for arranging for disposal of a hazardous substance under CERCLA.

Second Circuit

DVL, Inc. v. Niagara Mohawk Power Corp., 490 F. App’x 378 (2d Cir. 2012). InDVL, the United States Court of Appeals for the Second Circuit affirmed the district court’s denial of plaintiff DVL, Inc.’s motion for partial summary judgment on its arranger liability claim and grant of summary judgment on that claim in favor of defendants Niagara Mohawk Power Corporation (and its related entities) and General Electric Company. 490 F. App’x at 380. In that case, DVL acquired property on which a scrap or salvage yard known as the Caputo Garage was once located.DVL, Inc. v. Niagara Mohawk Power Corp., 811 F. Supp. 2d 579, 584 (N.D.N.Y. 2010). That property contained PCB contamination. Id. GE owned and operated a plant near the DVL site that manufactured capacitors and electrical components that used PCBs, but GE did not store PCBs on or deliver PCBs to the DVL site. For its part, Niagara provided electrical service in the area and employed distribution line transformers containing PCBs. Id. at 585. The evidence showed that a vendor obtained retired transformers from Niagara and, after stripping them, shipped transformer shells to certain sites, but not to the DVL site/Caputo Garage. DVL argued that GE and Niagara qualified as arrangers under section 107(a)(3) of CERCLA because historically those parties discarded and conveyed for disposal waste containing PCBs and therefore “intentionally disposed of PCB waste on the DVL site.” Id. at 595.

The Second Circuit affirmed the district court’s summary judgment rulings that DVL failed to offer sufficient evidence that GE and Niagara disposed or arranged for the disposal of PCB at the DVL site. 490 F. App’x at 383. As to GE, DVL offered no evidence of activities with any connection whatsoever to the DVL site, instead citing only evidence of GE’s conduct at its manufacturing plant, the presence of PCB at that site, and GE’s historical practices and disposal of PCBs at sites separate from and unrelated to the DVL property. This evidence did not show that GE disposed or intended to dispose of waste at the DVL site. DVL’s evidence that Niagara arranged for the disposal of PCB at the DVL site was similarly lacking. While Niagara provided electrical service in proximity to the DVL site using transformers containing PCBs and unmarked transformers were observed at the DVL site, DVL presented no evidence that Niagara transformers were sent to or disposed of on the DVL site or that the transformers found at the DVL site originated from Niagara.Id. at 384. Absent any evidence that GE or Niagara took intentional steps to discard PCBs at the site at issue, those parties could not be liable as arrangers under section 107(a)(3) of CERCLA.

Third Circuit

Litgo New Jersey Inc. v. Commissioner, N.J. Department of Environmental Protection, 725 F.3d 369 (3d Cir. 2013). The United States Court of Appeals for the Third Circuit in Litgo briefly addressed arranger liability under section 107(a)(3) of CERCLA. In that case, soil and groundwater beneath property owned by Litgo New Jersey Inc. was contaminated with, among other things, volatile organic compounds such as trichloroethylene and perchloroethylene (PERC or PCE). 725 F.3d at 373. From the early 1900s through the 1980s, the Litgo property housed at various times a facility for manufacturing pipes and fittings; the Columbia Aircraft plant, which manufactured machine precision parts for the military using equipment owned by the United States; and warehouses leased to commercial and industrial tenants, including JANR Transport. Each of these activities contributed to contamination at the Litgo property. Of equal significance, a nearby site owned by Signo Trading International stored hazardous waste generated by the United States, which had contracted with Resource Technologies Services (RTS), a reputable hazardous waste transporter, for its disposal at Signo’s property. Id. at 374. Following a fire at the Signo site in the 1980s, state regulators required licensed haulers to remove hazardous wastes off-site to licensed facilities, and RTS shipped thousands of containers of materials, including hazardous waste, to the JANR warehouse on the Litgo property on behalf of the United States. Those materials were stored improperly and eventually spilled and leaked from their containers. Litgo initiated an action against the United States and other parties, alleging that they were liable for the costs of remediation at the Litgo property under CERCLA. Id. at 376–77.

In a fairly clear-cut case of arranger liability under CERCLA, the district court determined following trial that the United States was liable for a portion of the cleanup costs at the Litgo site because it “arranged for the disposal of some of the hazardous waste that was ultimately stored at the JANR warehouse.” Id. at 377–78. The district court rejected the United States’ argument that they should not be liable because they arranged for storage, rather than disposal, of the waste. Litgo v. Martin, No. 06-2891 (AET), 2010 U.S. Dist. LEXIS 57390, at *84–85 (D.N.J. June 8, 2010). The district court reasoned that the “key difference between storage and disposal appears to be that storage is intended to be temporary,” while “the evidence suggests that when the United States . . . contracted with . . . RTS they intended to permanently get rid of what they believed to be waste products.” Id. at *85. The percentage of costs allocated to the United States, however, was minimal (2 percent) because the United States was not directly involved in the transportation of substances to the Litgo property, in storing the substances at the property, or in treating or disposing of the substances, and exercised reasonable care regarding transportation of the substances by entrusting them to a reputable hazardous waste disposal contractor. 725 F.3d at 380. Furthermore, the United States had no knowledge that RTS or Signo would fail to properly dispose of the wastes. 2010 U.S. Dist. LEXIS 57390, at *125.

Litgo challenged a number of the district’s court rulings on appeal, including its allocation of CERCLA costs among the defendants. 725 F.3d at 378. The Third Circuit in Litgo reaffirmed that the United States was liable solely because it arranged for disposal of hazardous substances to the JANR warehouse. Id. at 383. The court also upheld the allocation of costs to the United States, noting that Litgo and other parties played a larger role in the contamination-producing events by concealing the contamination and resisting remediation, but the United States simply “arranged for hazardous waste to be disposed of by what was then considered to be a reputable contractor, and the waste reached the JANR warehouse only because of third-party actors.” Id. at 388.

Fourth Circuit

Consolidation Coal Co. v. Georgia Power Co., 781 F.3d 129 (4th Cir. 2015).Georgia Power Company, an electric utility, used electrical transformers to generate electricity. 781 F.3d at 144. 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 the Toxic Substances Control Act requirements. Id. at 144–45. Georgia Power sold at auction those transformers that could be repaired and reused after it drained and removed the oil from the transformers. Id. at 145. During the 1980s, Ward Transformer Company—which was in the business of purchasing used transformers, repairing and reconditioning them, and then reselling them—purchased 101 used transformers from Georgia Power at four auctions. Id. at 145, 151. Some of the transformers that Ward acquired included oil that had not been drained or residual oil containing PCBs. Id. at 145. After reconditioning and rebuilding some transformers in accordance with its customers’ specifications, Ward resold all 101 transformers in working condition to third parties for a profit. Id.at 145–46. None were sold for scrap. Id. at 146. PCB-laden oil was discharged at the Ward site during the time that Ward stored and worked on the transformers.

In addition, in 1980, Savannah Electric and Power Company, which later merged with Georgia Power, replaced all its transformers that contained PCBs. Id.Savannah Electric sold 20 such transformers at auction to Electric Equipment Company of New York (EECNY), none of which had been drained of oil containing PCBs. The transformers were in good shape, lacked problems, 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.

Consolidation Coal Company and Duke Energy Progress, Inc., initiated cleanup at the Ward site pursuant to an administrative settlement with the United States Environmental Protection Agency, and PCS Phosphate Company, Inc., subsequently joined the remediation efforts pursuant to 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. Id. at 146–47. Consol, Progress, and PCS sought to recover the cleanup costs from Georgia Power and others who sold transformers to Ward or sent transformers to the Ward site, alleging that they “arranged for disposal” of PCBs under section 107(a)(3) of CERCLA.

The United States Court of Appeals for the Fourth Circuit in Georgia Power affirmed the district’s court grant of summary judgment in favor of Georgia Power because Georgia Power lacked the requisite intent for disposal for purposes of CERCLA arranger liability. 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. Id. at 150. Rather, the evidence showed that Georgia Power sold transformers at auction to generate revenue. The mere fact that Georgia Power called the sales of used transformers “scrapping” and “disposals” in its internal documents 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 also did not find any circumstantial evidence of Georgia Power’s intent to dispose of PCBs. To reach this conclusion, the Fourth Circuit applied four factors enumerated in Pneumo Abex Corp. v. High Point, Thomasville & Denton Railroad Co., 142 F.3d 769, 775 (4th Cir. 1998), for determining whether a party arranged for the disposal of a hazardous substance or merely sold a valuable product: (1) “the intent of the parties to the contract as to whether the materials were to be reused entirely or reclaimed and then reused”; (2) “the value of the materials sold”; (3) “the usefulness of the materials in the condition in which they were sold”; and (4) “the state of the product at the time of transferral (was the hazardous material contained or leaking/loose).” Id. at 148–49. The Fourth Circuit concluded that these factors, taken individually or together, counseled against a finding that Georgia Power intended to dispose of PCBs. Id. at 155.

First, 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. Id. at 151. There was no evidence that Georgia Power or Ward intended for the transformers to be scrapped or sold for parts as reclaimed materials. Id. at 151–52. Moreover, at the time of sale, Georgia Power and Ward did not have any agreement on how Ward would handle the PCB-containing oil or parts. Second, the Fourth Circuit found that the used transformers sold by Georgia Power had marketable commercial value. Id. at 152–53. 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. Id. at 152. 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. Id. at 152–53. In addition, 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. Id. at 153. Third, the Fourth Circuit concluded that the concentration of PCBs did not factor into the usefulness of the transformers sold by Georgia Power. Fourth, the Fourth Circuit stated that the evidence showed the transformers including PCB-containing oil were not leaking and were capped when Georgia Power sold them to Ward. Id. at 154. No evidence existed that any transformers leaked during the sale transfer. Lastly, in addition to the Pneumo Abex factors, the Fourth Circuit analyzed whether Georgia Power had knowledge of any spills of oil containing PCBs by Ward and 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. Id. at 154–55.

Furthermore, in circumstances “fall[ing] squarely on the side of a legitimate sale and against arranger liability,” the Fourth Circuit in Georgia Power concluded that Savannah Electric (which merged into Georgia Power) did not intend to dispose of PCBs when it sold 20 used, but useable and working, transformers at auction because 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. Id. at 155. 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.

Fifth Circuit

Celanese Corp. v. Martin K. Eby Construction Co., 620 F.3d 529 (5th Cir. 2010).Martin K. Eby Construction Company was contracted to install an underground water pipeline that crossed several other underground pipelines, including Celanese’s methanol pipeline. 620 F.3d at 530. While excavating the area containing Celanese’s pipeline, an Eby employee accidentally struck and damaged the pipeline with a backhoe. The employee “did not know what he had struck,” nor did he prepare a report of the incident. The Celanese pipeline subsequently leaked, which required Celanese to repair the pipeline and perform remediation. Celanese sought to recover its cleanup costs from Eby under CERCLA, arguing that Eby was an arranger under section 107(a)(3) because it “consciously disregarded” the “obligation to investigate what it hit” while excavating. Id. at 531.

Affirming the district court’s judgment, the United States Court of Appeals for the Fifth Circuit in Celanese held that Eby could not be liable as an arranger because it did not take intentional steps or plan for the release of methanol from Celanese’s pipeline. Id. at 533. The court reasoned that Eby did not know it had struck the pipeline, much less intend to damage it. The court also noted that the Supreme Court in Burlington Northern “declined to impose arranger liability for a defendant with more culpable mens rea,” namely, the defendant oil company that arranged for the shipment of chemicals despite knowing that leaks and spills would occur. In these circumstances, Eby could not qualify as an arranger under CERCLA.

Vine Street LLC v. Borg Warner Corp.776 F.3d 312 (5th Cir. 2015). Five years after Celanese, the Fifth Circuit revisited the scope of arranger liability in Vine Street. In that case, Norge, a former subsidiary of Borg Warner, designed, installed, and sold dry cleaning equipment to College Cleaners, including dry cleaning machines and a drainage system that included water separators that released wastewater into the sewer and recycled PERC for future use. Vine Street, 776 F.3d at 314–15. Norge also sold PERC to College Cleaners. Id. at 314. From time to time, PERC was released into the sewer through the water separators. Norge modified the design of the water separators to minimize the loss of PERC, which was expensive, but PERC continued to escape from the sewer system and eventually impacted soil and groundwater beneath College Cleaners and a neighboring property. Id. at 314–15. Vine Street LLC, the purchaser of both properties, initiated remediation and sought to recover a portion of the cleanup costs from Borg Warner under section 107(a)(3) of CERCLA on an arranger liability theory. Id. at 315.

Relying on Burlington Northern, the Fifth Circuit in Vine Street reversed the district court’s judgment and concluded that Norge did not constitute an “arranger” because it did not intend to discharge PERC. Id. at 320. The court reasoned that while Norge knew that PERC would escape the water separators and enter the sewer system and that a discharge was inevitable, Norge intended for the water separators to recycle PERC for future use, not to dispose of it. Id. at 318–321. Norge also designed its dry cleaning equipment such that College Cleaners could reuse PERC. Id. at 319–20. Indeed, Norge developed additional measures to reduce discharge after learning that the water separators were not completely effective, which “cut[s] against a finding of intent.” Id. at 319.

Furthermore, in evaluating evidence of Norge’s intent to dispose of PERC, the Fifth Circuit in Vine Street concluded that the business relationship and transaction between Norge and College Cleaners “centered around the successful operation of a dry cleaning business—not around the disposal of waste.” Id. at 318–19. Stated differently, no evidence suggested that “Norge engaged in a subterfuge to disguise the disposal of PERC as a legitimate transaction surrounding the operation of a dry cleaning business.” Id. at 319. The “purpose of the transaction” between Norge and College Cleaners was to sell PERC and dry cleaning equipment, both unused, useful products that were necessary to operate College Cleaners’ dry cleaning business. Id. at 318–19. Therefore, Norge lacked the necessary intent to qualify as an arranger under CERCLA.

Seventh Circuit

NCR Corp. v. George A. Whiting Paper Co., 768 F.3d 682 (7th Cir. 2014). From 1954 to 1971, NCR Corporation was the exclusive manufacturer and seller of emulsion for carbonless-copy paper. 768 F.3d at 686. That emulsion used Aroclor 1242, a PCB, as a solvent. PCBs were dumped with wastewater into the Lower Fox River in Wisconsin by NCR when producing carbonless paper, as well as by paper mills involved in the paper recycling business. Id. at 686, 688. Recyclers purchased NCR’s leftover scraps of carbonless copy paper, which is known as “broke,” washed off the PCBs and chemicals, and recycled the pulp to make paper. Id. at 686–88. The principal reason is that production of paper from recycled broke is less expensive than producing paper from scratch. Id. at 688. Decades later, in 2007, NCR performed remediation of PCB contamination at the Lower Fox River site and sought contribution for the response costs from the recyclers. Id. at 686–87, 689.

Although the district court in NCR allocated all response costs to NCR and concluded NCR was not entitled to contribution from the recyclers for cleanup at operable units 2 through 5, P.H. Glatfelter Company and WTM Company argued on appeal that NCR should have been liable as an arranger under section 107(a)(3) of CERCLA based on the sale of broke to recycling mills by NCR’s corporate predecessor, Appleton Coated Paper. Id. at 703–4. Glatfelter argued that Appleton Coated arranged for the disposal of PCBs when it sold broke to the recycling mills for reprocessing. Id. at 704. The significance of this argument is that a finding adverse to NCR on the arranger liability theory would make NCR liable for response costs at operable unit 1 and increase NCR’s exposure for contribution. Id.

The Seventh Circuit in NCR affirmed the district court’s ruling following trial and held that Appleton Coated did not constitute an arranger under CERCLA. Id. at 707. The court found that Appleton Coated’s “main purpose in selling broke was not to get rid of it, but instead to place it on a competitive market and recoup some of its costs of production.” Id. at 705. It is important to note that Appleton Coated invested significant resources in recapturing broke, recorded the broke as an asset on its balance sheet, and would have disposed of broke differently if no market for it existed. Id. at 704-5. In addition, Appleton Coated did not sell containers of PCBs in an effort to get rid of them; instead, it sold a product that is not inherently dangerous and often does not contain any PCBs. Id. at 705. In addition, the broke had value to the recyclers given the higher cost to produce paper from scratch. Id. at 704, 706.

The Seventh Circuit rejected Glatfelter’s argument that Appleton Coated should be subject to arranger liability simply because it intended to discard the broke with knowledge that recyclers would separate the paper fibers in the broke from PCBs and discharge the PCBs in the river. Id. at 705-6. Such a rule, the court stated, would “sweep almost any entity that ever touches the product under arranger liability,” including the original producer of the Aroclor, which intentionally sold it to NCR knowing that some portion would be discarded down the line. Id. at 706. That would expand arranger liability far beyond the bounds set in Burlington Northern.

The Seventh Circuit also noted that “[e]ven selling with perfect knowledge that the buyer will dispose of the materials at some point in the future cannot on its own qualify as arranging for disposal,” adding that “it is also important to look at the party’s intent.” In that case, Appleton Coated had no control, by contract or otherwise, over the PCBs in the broke once the recyclers obtained the broke; the recyclers were free to sell the broke to another entity, contract with a disposal company to get rid of it, take it to a landfill, or dump into the river.

Lastly, the Seventh Circuit in NCR stated that while broke is not a “new and useful product,” the product was “a useful input that also contained hazardous material.”Id. at 707 (emphasis in original). The court emphasized that sales of a new, useful product represent only one end of the continuum and that sales “for more than token amounts and that take place on a competitive market” of products that are useful, like broke, could remove the products from the realm of arranger liability. Therefore, NCR was not liable as an arranger under section 107(a)(3) of CERCLA.

Ninth Circuit

Team Enterprises LLC v. Western Investment Real Estate Trust, 647 F.3d 901 (9th Cir. 2011). Team Enterprises operated a dry cleaning store that used PERC as part of the cleaning process and in turn generated wastewater containing that chemical. 647 F.3d at 906. To filter and recycle wastewater for reuse, Team used a machine produced by R.R. Street & Co. called the Puritan Rescue 800. That machine returned distilled PERC to Team’s dry cleaning machines and deposited the wastewater into an open bucket. Team disposed of the wastewater containing PERC by pouring it down a sewer drain, thereby contaminating soil on the property. After the state regulator directed Team to perform remedial action, Team sought to recoup the costs of that remediation from Street under section 107(a)(3) of CERCLA. Team argued that Street was liable as an arranger because it designed the PERC-distilling machine “in such a way as to render disposal inevitable”; failed to warn Team about the risk of contamination that would result from improper disposal; and exercised control over the disposal process. Id. at 909–10.

The United States Court of Appeals for the Ninth Circuit in Team Enterprisesaffirmed the district court’s order granting summary judgment to Street and held that Street was not subject to arranger liability because Street did not sell the Rescue 800—a useful product—with the specific intent of disposing of PERC. Id. at 909. According to the court, “to satisfy the intent requirement, a company selling a product that uses and/or generates a hazardous substance as part of its operation may not be held liable as an arranger under CERCLA unless . . . the company entered into the relevant transaction with the specific purpose of disposing of a hazardous substance.” Id. (emphasis in original). The court stated that the design of the Rescue 800 did not suggest that Street intended for the disposal of PERC; at most, the design showed that “Street was indifferent to the possibility that Team would pour PERC down the drain,” which is insufficient to establish arranger liability. Moreover, the court refused to infer intent from Street’s failure to warn because doing so would expand the scope of arranger liability beyond its intended parameters. Finally, according to the court, evidence that Street provided an instruction manual to Team directing users to pour wastewater into a bucket was merely a recommendation and was not enough to establish that Street exercised actual control over Team’s disposal of PERC such that Street qualified as an arranger. Id. at 910. Street, therefore, was not subject to CERCLA arranger liability.

Hinds Investments, L.P. v. Angioli, 445 F. App’x 921 (9th Cir. 2011). Around the time that the Ninth Circuit decided Team Enterprises, the court also issued a short, unpublished decision in Hinds Investments affirming the district court’s dismissal of the arranger liability claim of defendant/third-party plaintiff Team Enterprises, LLC, against third-party defendant Cooper Industries Ltd. 445 F. App’x at 923. In that case, Team leased property from the plaintiffs to operate a dry cleaning business.Hinds Investments, L.P. v. Team Enterprises, Inc., No. CV F 07-0703 LJO GSA, 2010 U.S. Dist. LEXIS 3233, at *3 (E.D. Cal. Jan. 14, 2010). Cooper was the successor-in-interest to a former manufacturer of dry cleaning equipment whose Martin Sales American Laundry Machinery division franchised “One Hour Martinizing” dry cleaners with Team. Id. at *3–4. Team used a Martin 30.0 Dry Cleaning Machine on the plaintiffs’ property that was installed pursuant to Martin’s specifications and allegedly “was manufactured and/or designed by Martin to use PCE and to dispose of PCE into the environment.” Id. at *4. The plaintiffs brought claims against Team to recover costs to clean up PCE contamination at their property, and Team sought contribution from Cooper arguing that it “arranged for the disposal of hazardous substances.” Id. at *3–4.

The district court in Hinds Investments concluded that Team failed to sufficiently allege a claim for arranger liability because it made “no attempt to allege control of [the] discharge in that it merely concludes disposal of PCE and equipment installation pursuant to Martin specifications,” which allegations are “too far removed to attempt to impose arranger liability on Cooper.” Id. at *13–14. The court also found that Team offered no evidence that equipment design involving disposal of hazardous substances invokes CERCLA liability; alleged only that the Martin 30.0 machine used a hazardous substance that was later disposed of; and alleged nothing more than Cooper’s “effective design/manufacture of dry cleaning equipment and installation specifications to invoke the useful product defense for Cooper.” Id. at *18–19. In addition, the court noted arranger liability cannot be imposed on a party such as Cooper, which did not own or possess the hazardous substances or have authority to control or a duty to dispose of them, adding that “‘control over’ the design of dry cleaning machines and provision of instructions on their use is insufficient ‘by themselves’ to hold a manufacturer/seller liable as an arranger.” Id. at *19–20. The court further reasoned that Team’s allegations regarding provisions of the franchise agreement that gave Martin control of the quality of the services, required Team to adhere to Martin’s practices, and gave Martin the ability to inspect dry cleaners, did not establish arranger liability because Team “fail[ed] to tie such franchise agreement provisions to PCE disposal.” Id. at *20–21.

The Ninth Circuit in Hinds Investments agreed with the district’s court’s findings, noting that (1) “Team’s allegations, taken as true, are too far removed to attempt to impose arranger liability on Cooper,” and (2) “Team failed to allege facts showing that Cooper entered into a dry cleaning franchise agreement for the purpose of disposing of [PERC] or that Cooper exercised actual control over the disposal process.” Hinds Investments, 445 F. App’x at 923. Therefore, Cooper could not be liable as an arranger.

Keywords: environmental litigation, hazardous substance, disposal, arranger liability, Georgia Power

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

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