Changing The Rules of the Game: The Anticipated Impact of the U.S. Supreme Court’s Burlington Northern Decision Upon Product Manufacturers, Brownfields Redevelopers and Lenders at Contaminated Sites

On May 4, 2009, in an 8-1 decision, the U.S. Supreme Court issued a groundbreaking decision in which it significantly limited the scope of “arranger” liability under the federal Superfund law, and dramatically limited the applicability of “joint and several” liability in favor of a tort-based liability allocation methodology that requires a factual examination of each contaminated site. Burlington Northern & Santa Fe Railway Co. et al. v. United States, 556 U.S. ___ (2009).

The Supreme Court’s express endorsement of cleanup cost liability allocations using tort-based principles under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, or the federal Superfund statute) is likely to result in more unfunded cleanups for contaminated properties, and far less CERCLA liability for product manufacturers, owners and operators of contaminated property who did not cause or contribute to contaminated conditions (including Brownfields developers), and lenders who did not cause or contribute to contaminated conditions (even after foreclosure). The decision is prompting sweeping reconsideration of past and ongoing cleanup cost negotiations between government agencies and responsible parties, and is also expected to result in increased utilization of other federal environmental statutes such as the Resource Conservation and Recovery Act, as well as state environmental statutes, to try to regain some of the blunt impact that the threat of CERCLA joint and several liability has had on cleanup cost negotiations with the government.

The Underlying Facts in Burlington Northern Are Common at Many Manufacturing Sites

Shell Oil Company was selling pesticides and other chemical products to an agricultural chemical distribution business known as Brown & Bryant (B&B). Shell required that one of its pesticides products, D-D, which was initially sold in drums, instead be delivered in bulk from tanker trucks to B&B’s bulk storage tanks. The chemical product was then transferred to bobtail trucks, pull rigs and other equipment, with leaks and spills occurring often. Shell took steps to encourage the safer handling of its products, including instituting a self-certification of compliance program. Even though B&B certified that it had made a number of improvements to its facility, it was still known to be a relatively sloppy operator – and product spills were known to occur.

Burlington Northern and Union Pacific (the Railroads) owned a railroad siding and loading dock comprising 0.9 acres of land that was contiguous to the B&B facility and was routinely used for shipping and receiving operations by B&B. Waste water and chemical runoff from the Railroad land as well as the adjacent B&B land were allowed to flow into an unlined drainage pond, which in turn contaminated the underlying ground water.

B&B’s operations extended across the remainder of the facility, and included several areas of spills and releases. B&B was clearly responsible as the owner and operator of a facility that had caused soil and groundwater contamination, but was financially insolvent.

Liability for Cleanup Costs

As is typical in CERCLA cases, in Burlington Northern the government sought to recover all cleanup costs – about $8 million – from the available and financially solvent responsible parties under CERCLA. Under the federal Superfund statute, four different classes of parties can potentially have liability for the cleanup of hazardous substances released to the environment:

1. the current owner and operator of the facility
2. the former owner or operator of the facility at the time the hazardous substance was released
3. any person who “arranged for” disposal or treatment of hazardous substances at the facility
4. transporters who shipped hazardous substances to or from the facility

The Railroads, which incurred approximately $3 million in additional cleanup costs pursuant to an administrative order with EPA, brought suit against B&B to recoup those costs. The two proceedings were consolidated in the U.S. District Court.

After a bench trial, the U.S. District Court found both the Railroads and Shell responsible for the government’s cleanup costs, but did not apply a joint and several standard of liability. Instead, it evaluated a variety of factors and ultimately concluded that the Railroads were responsible for 9 percent of the government’s costs, and that Shell was responsible for 6 percent of those costs.

On appeal, the Ninth Circuit found that Shell could be held liable under a “broader” type of arranger liability if the disposal of hazardous substances was a “foreseeable byproduct” of the customer transaction in question, even if Shell did not intend to dispose of the hazardous substances at the B&B site. Under the Ninth Circuit’s holding, it did not matter that the product being transported was a useful product intended for sale. The Ninth Circuit also determined that, even though response costs could be allocated among the parties, the record did not contain a reasonable basis for doing so, and therefore found the Railroads and Shell to be jointly and severally liable for all of the government’s response costs.

Product Manufacturer Intent, Not Knowledge or Control, Is Key to “Arranger” Liability

The U.S. Supreme Court reversed the Ninth Circuit’s decision. The Court found that Shell could be found liable as an “arranger” only if Shell intended to actually dispose of a hazardous substance at the B&B site. The Court identified two extreme cases:

1. An entity could be found liable as an arranger if it entered into a transaction for the purpose of discarding a used and no longer useful hazardous substance.
2. An entity could not be found liable as an arranger if it sold a new and useful product which later, without its knowledge, was disposed of in a way that caused contamination.

Because CERCLA does not specifically define what is meant by “arrang[e] for” disposal of a hazardous substance, the Court said that this phrase must be given its ordinary meaning. In common usage, “arrange” implies action directed to a specific purpose. Therefore, an entity may qualify as an arranger only when it takes intentional steps to dispose of a hazardous substance. The entity’s state of mind is relevant. The Court favorably cited to Shell’s efforts to improve handling practices and environmental practices at the facility, and ultimately concluded that Shell had no “arranger” liability under CERCLA because Shell did not intend to dispose of or spill hazardous substances at the B&B site even though Shell had knowledge of B&B’s sloppy practices, including product spills.

As a practical matter, Burlington Northern excludes from CERCLA liability product manufacturers that sell products containing hazardous substances to customers, even when customers then mishandle or dispose of such products. In some circumstances, product manufacturers may still be liable if customer spillage was intended by the manufacturer; however, mere knowledge that spills and leaks might occur as a peripheral result of a legitimate sale of a useful product is not enough to conclude that the manufacturer “planned” for the disposal as an “arranger.”

The Bottom Line: Manufacturers that properly package and ship products containing hazardous substances to customer sites, and take prudent steps to inform customers of proper management practices for products containing hazardous substances, should not incur CERCLA liability for customer spills at customer sites based on the Burlington Northern decision.

The Court’s Decision Substantially Limits Presumed Reliance on Joint and Several Liability in Cleanup Cost Negotiations and Litigation, and Expressly Endorses Liability Allocation Using Tort-Based Principles Regardless of “Orphan Share” Unfunded Cleanup Costs

The Supreme Court also places substantial new constraints on joint and several liability in strongly endorsing reliance on the Restatement (Second) of Torts to allocate cleanup costs in CERCLA cases. Joint and several liability is a blunt tool in tort law, and is often (and easily) rebutted based on fact-based inquiries and tort-allocation principles. While the Court made clear that responsible parties bear the burden of demonstrating that the harm at issue is divisible, and of presenting facts sufficient to support a liability allocation, the facts of Burlington Northern and the law in the Restatement (Second) of Torts provide ample opportunities to avoid joint and several liability, and assume only a fraction of total cleanup costs, at many, if not most, CERCLA sites.

The Court does not acknowledge the dramatic reach of its decision. For example, although the Court cited to several Circuits that had, in select cases, applied tort-based liability allocation principles in CERCLA cases, the Court did not acknowledge other Circuits and hundreds of CERCLA cases that had endorsed the use of joint and several liability in CERCLA cases more generally. The Court also did not acknowledge any of the theories often used to justify joint and several liability in CERCLA cases, such as equity-based allocation principles, legislative intent, the propriety of more generous interpretations of remedial statutes addressing health and environmental safety, and the implications of creating more “orphan shares” and otherwise unfunded cleanups at contaminated sites.

Instead, the Court first chastises the parties for pursuing a “scorched earth” defense in which a party was either fully liable – or fully not liable – rather than providing the Court with a solid evidentiary basis for apportioning liability. (The case had generally been briefed, and argued, on the issue of joint and several liability – neither party had pursued apportionment factual arguments after the Ninth Circuit’s decision rejecting apportionment.) The Court then went on to review the facts considered by the District Court in allocating liability in the case, and concluded that the factors cited by the lower court – the percentage of the site owned by the railroad in relation to the entirety of the site, the length of time of railroad operations in relation to facility operations, the contaminants present (and requiring cleanup) at the railroad site in relation to those at the rest of the facility – were appropriate in upholding the lower court’s allocation decision.

As a practical matter, the decision represents a dramatic shift from prior cases in which the courts have endorsed the use of joint and several liability to require available and financially solvent responsible parties to pay for the full costs of cleanup, even if the parties’ conduct only caused a small fraction of the contamination. The Court pointed to United States v. Chem-Dyne Corp., 572 F. Supp. 802, in which the District Court for the Southern District of Ohio had concluded that joint and several liability was not required in every case brought under CERCLA, but could be apportioned on a “divisibility of harm” basis, relying on the Restatement (Second) of Torts, §433A. The Supreme Court cautioned that a responsible party has the burden of proving that a reasonable basis for apportionment exists. Ultimately, the Court concluded that the record in the District Court provided an adequate basis for the lower court’s decision and that apportionment was therefore reasonable and proper in this case.

The Bottom Line

The Burlington Northern case fundamentally changes CERCLA liability. Its ripple effect on corporate liability (and balance sheets), property redevelopment and financing, and negotiating or litigating remediation cost allocation disputes with the government or other responsible parties is not yet fully known. However, as a practical matter, Burlington Northern means:

• Product manufacturers that did not intend for their customers to spill or release useful products into the environment should not be liable for cleanup costs under CERCLA.
• Owners, operators, generators of hazardous wastes and transporters are still strictly liable under CERCLA, but have full access to tort allocation tools to demonstrate – and pay for – only their “fair share” of liability if they can successfully prove that the harm is divisible.
• Government agencies or other parties seeking to compel the cleanup of contaminated property will have a substantially higher burden to counter fact-intensive tort allocation arguments, and may be left with unfunded cleanup costs when responsible parties are only required to pay a limited, “fair share” portion of the total cleanup costs.

The decision has major ramifications on pending CERCLA disputes, but also provides an opportunity to revisit and potentially re-open past CERCLA allocation decisions, particularly those with ongoing or uncertain future funding obligations.

The U.S. Supreme Court decision is available for review at http://www.supremecourtus.gov/opinions/08pdf/07-1601.pdf.