State Settlement Policies Offer Flexibility and Potential Win-Win Opportunities in an Otherwise Tough Enforcement Situations

Companies and others considering Supplemental Environmental Projects (SEPs) as part of an environmental settlement should carefully evaluate the limitations and opportunities available under both applicable state and federal rules before making a commitment to do a SEP. Skillfully crafted settlement agreements that make use of state SEP authorities may offer the flexibility that the parties and others seek, but which federal policy alone cannot deliver.

SEPs are environmentally beneficial projects that a company or other environmental defendant agrees to undertake in partial settlement of an enforcement action. These projects are popular with community members, regulators and environmental advocates as they go beyond what is required by law and typically involve some form of environmental risk reduction. In addition to helping to restore frayed relationships that can result from a violation, the enforcing agency (state and/or federal) can substantially mitigate penalties, based on the cost of the SEP – mitigating potentially up to 100 percent of the designated penalty, but more usually 80 percent of the after tax penalty cost – in exchange for the legal commitment to perform the project.

A new, authoritative study entitled Supplemental Environmental Projects: A Fifty State Survey with Model Practices shows a remarkable proliferation of states with SEP policies.¹ Up more than 50 percent from 10 years ago, 32 states have instituted formal polices through legislation, regulations, or guidelines.² The study further shows that another 17 states and the District of Columbia rely on informal, unwritten SEP practices.

Initiated by the American Bar Association’s Environmental Justice Committee of the Section of Individual Rights and Responsibilities, chaired by Holland & Knight Senior Counsel Nicholas Targ and prepared by the Hastings College of the Law, including Holland & Knight Associate Chelsea Holloway.

Not all SEP policies are the same, and care should be taken to understand the nuances of applicable state and/or federal policy. For example, EPA’s Final SEP Policy and various SEP memoranda (known collectively as EPA SEP Policy) are shaped by the federal Constitution, as well as some idiosyncratic features of federal procurement law, notably the Miscellaneous Receipts Act and the Anti-Deficiency Act. Further, a recent Internal Revenue Service ruling has raised questions about EPA SEP practices in general.

While some state SEP policies closely track EPA’s, many states have SEP policies that afford greater flexibility. This flexibility may permit settling parties to undertake projects that they, communities, and others want, but which EPA’s policy, by itself, does not allow. For example, unlike EPA’s SEP Policy, some state policies allow donations of funds to non-governmental organizations for the purpose of undertaking specific projects (e.g., purchase and maintenance of ecologically important lands). Other state policies require only a geographic nexus between the affected community and location of the project, whereas EPA’s Policy requires, among other things, both a geographic nexus and a nexus between the impacted resource and the SEP.

SEPs continue to be a fast evolving area of law and policy, and there may well be SEP-related federal legislation offered during this congressional session. To maximize the benefits of SEPs to all stakeholders and to the settling party, it may be useful to look to the flexibility of State SEP Policies. Expert assistance that uses the flexibility of state law and policy can help improve outcomes for all involved when facing the challenges of an enforcement action.

1 Supplemental Environmental Projects: A Fifty State Survey with Model Practices, Steven Bonorris, editor (ABA-Hastings College of the Law) (2006).

² Association of State and Territorial Solid Waste Management Officials, “Supplemental Environmental Projects: Survey of States and Territories (1997).