Environmental Law Update — The Fallout of EPA’s New Regulation of PFOA and PFOS as CERCLA Hazardous Substances

Since our last update column, the Environmental Protection Agency (EPA) and the Securities and Exchange Commission (SEC) have taken significant environmental regulatory actions. In April 2024, the SEC stayed its new climate disclosure regulations promptly after enacting them due to a resulting barrage of lawsuits. In June 2024, EPA issued regulations limiting specific power plant emissions. The US Supreme Court’s recent invalidation of the Chevron deference doctrine, which for the past 40 years allowed trial courts to defer to federal agencies’ interpretation of the agencies’ regulations, will have lasting implications. Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024). We will discuss the Court’s decision in our next update. EPA’s latest action in its ever-increasing regulation of per- and polyfluoroalkyl substances (PFAS) has an immediate, mostly overreactive, effect on transactions affecting real property and businesses.

The New PFAS Regulations and Enforcement Policy

As the name suggests, PFAS are a class of thousands of “forever chemicals” that may take hundreds of years to degrade in the environment. Under EPA’s final regulation that became effective on July 8, 2024, two widely used PFAS, perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS), are now classified as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 USC § 9601 et seq., also known as Superfund.

In support of its rationale for its recent listing of PFOA and PFOS as hazardous substances, EPA stated that PFAS exposure has been linked to cancers, effects on the liver and heart, and immune and developmental damage to infants and children. Depending on the outcome of the US federal elections in November 2024, EPA may propose to list additional PFAS chemicals as CERCLA hazardous substances as it continues to implement its PFAS Strategic Roadmap to regulate PFAS further.

As noted in the most recent Environmental Update, EPA has also proposed changes to regulations under the Resource Conservation and Recovery Act (RCRA), 42 USC § 6901 et seq, by adding nine PFAS compounds, their salts, and their structural isomers to its list of hazardous constituents in Title 40 of the Code of Federal Regulations, Part 261, Appendix VIII. As of mid-August 2024, EPA has not yet promulgated this regulation, but it may do so before the end of the current Presidential term.

In addition to the final regulation listing PFOA and PFOS as CERCLA hazardous substances, EPA has issued a separate CERCLA enforcement discretion policy that makes clear that EPA will focus enforcement on parties who significantly contributed to the release of PFAS into the environment, including parties that have manufactured PFAS or used PFAS in the manufacturing process, federal facilities, and other industrial parties. The policy also notes that EPA does not intend to pursue entities when equitable factors do not support seeking response actions or costs under CERCLA. These entities include municipal landfills, water utilities, airports, farmers, and local fire departments.

Managing the Effect of the New Regulations and Policy

The new and expected PFAS regulations and policies create concerns for lawyers who assist their clients in identifying and evaluating risks in buying, selling, or financing real property and businesses. The Phase I environmental assessment reports required by buyers and lenders may complicate or even jeopardize deals unless the consultant correctly determines the likelihood of any PFAS-related risk affecting the target property.

The following example illustrates that an accurate assessment of PFAS risk is possible. This often requires legal counsel and clients to review draft environmental reports and request appropriate revisions carefully. Additional work, such as the detailed contour map review discussed below, may be needed to adequately evaluate the consultant’s determination that PFAS are a concern.

1. The Transaction: A client wants to purchase a business that does not use any PFAS compounds. There is no evidence that the business has ever used PFAS. There are other industrial property uses in the area. The lender, the client’s representation, and the warranty insurer require the client to obtain a Phase I environmental site assessment (ESA). What could go wrong?

2. The Draft Phase I Report: Thankfully, in this scenario, the client requires the consultant to issue the Phase I ESA report in draft form for review and comment. The draft report identifies a neighboring industrial facility as a “Notable Finding” because of the facility’s suspected use of PFAS. The Notable Finding designation is not defined in the ASTM E1527-21 Phase I assessment standard. Nonetheless, consultants sometimes use it to describe matters that do not rise to the level of a Recognized Environmental Condition or a de minimis condition. Because of the publicity surrounding PFAS and PFAS litigation matters, however, a PFAS Notable Finding is a concern for the transaction and must be adequately explained or, if warranted, deleted in the final report.

3. EPA’s Online PFAS Database: EPA’s Enforcement and Compliance History Online (ECHO) database includes a list of North American Industry Classification System (NAICS) codes for industries known to use or handle PFAS. This database was generated based solely on whether any companies in each broad NAICS code were known to use PFAS rather than whether PFAS were used by specific companies or types of companies within a NAICS code. The consultant who prepared Phase I for the client in this scenario applied the limited analysis required by ASTM E1527-21 to determine whether the adjacent industrial facility was upgradient to the target property. The consultant determined that it was upgradient and stated in the draft report that the operations on the adjoining property were a Notable Finding due to the potential use of PFAS and the resulting potential for migration to the downgradient target property. The executive summary section of the draft report discussed the PFAS issue at length, based solely on these two assumptions.

4. Pushing Back With Site-Specific Facts: The client was understandably concerned that the lengthy discussion of the potential migration of PFAS to the target property would adversely affect their ability to obtain financing. They were also concerned about their ability to obtain representation and warranty insurance for environmental matters and about the future marketability of the property. We scheduled a call with senior management of the environmental consulting company to discuss whether (a) the industrial property is upgradient and (b) if so, there are any exposure pathways—i.e., air, groundwater, or surface water—that would allow workers or other occupants of the target property to be exposed to PFAS.

• The industrial property is not upgradient of the target property. The consultant resolved this issue by obtaining and reviewing a more detailed contour map than required to comply with the ASTM Phase I standard. This map indicated that the industrial property is sidegradient. Because groundwater and surface normally flow in a downgradient direction, the risk of groundwater or surface water migrating to the target property is low.
• There is no PFAS exposure pathway. The consultant acknowledged that the target property is connected to the municipal water supply and that the municipality obtains the water supply from a source located a significant distance away from the property. There are no private wells on the target property. Based on the nature of operations at the adjacent property, the draft report concluded that there was no risk of airborne exposure to PFAS.

Takeaways

PFAS have become the latest hot topic in environmental regulation and litigation. Although it has been described as the “new asbestos,” unlike asbestos, PFAS have been historically used in many everyday consumer products. These include food packaging, cookware, and clothing. PFAS have been discharged into public water supply sources. In contrast, the exposure pathway for asbestos is limited to inhalation of airborne particles of friable material.

Our scenario is an unfortunate example of consultant overreaction to PFAS issues. EPA’s broad list of NAICS codes associated with PFAS use may contribute to such overreactions. When possible, attorneys should collaborate with clients to focus their environmental consultants on the specific facts that affect the target property. Attorneys can also, as in our example, identify and stop misapplication of the Phase I ASTM standard regarding PFAS issues. For instance, if the company at the adjacent property were listed in EPA’s ECHO database as a hazardous waste generator regulated under RCRA instead of as a possible PFAS user, the consultant would not have classified the adjacent property as a Notable Finding under the ASTM Phase I standard. In both the RCRA scenario and our PFAS scenario, the adjacent property is located sidegradient to the target property, there are no known releases of hazardous substances, and the exposure pathways were eliminated. Thus, the consultant’s draft report applied a more stringent and inconsistent standard in the PFAS scenario.

Attorneys should also evaluate when the consultant needs to perform additional work to assess PFAS risks adequately. The type and scope of further work should focus on what is required to identify whether or to what extent PFAS may be a concern for a particular target property or business transaction. As shown in our example, the consultant determined the adjacent property at issue was sidegradient rather than downgradient by reviewing a particularly detailed contour map. Consulting firms are marketing a variety of PFAS services. Some of these services may fit your client’s needs, but others may not be needed or, at worst, produce negative or inconclusive results.