PFAS Designation Rule Will Impact Operational Compliance, Enforcement, Litigation and Policy

Although the U.S. Environmental Protection Agency (EPA) proposed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also known as the federal Superfund law (PFAS Designation Rule) in September 2022, it has been a topic of discussion for the agency and the regulated community for at least a decade. Despite a relatively short (60-day) comment period and significant industry backlash, the EPA finalized the PFAS Designation Rule on April 19, 2024, and designated two of the most commonly used PFAS – PFOA and PFOS – and their salts and structural isomers as "hazardous substances" under the federal Superfund law. The law became effective on July 8, 2024, and with it comes a cadre of obligations and potential liability for the regulated community. This Holland & Knight alert explores some of the more significant impacts of this new rule on industry.

Operational Compliance Considerations

Release Reporting

The federal Superfund law imposes obligations on owners or operators of facilities that store or handle designated hazardous substances to report to the National Response Center (NRC), or a delegated state or local agency, releases of hazardous substances that meet or exceed its reportable quantity within a 24-hour period. The EPA has made clear that the PFAS Designation Rule will trigger the applicability of release reporting requirements for these substances under CERCLA Sections 103 and 111(g) as well as accompanying regulations, and Section 304 of the Emergency Planning and Community Right-to-Know Act (EPCRA). The EPA has assigned a reportable quantity (RQ) of one pound for PFOA and PFOS. This means that anyone in control of a facility must immediately notify the NRC (or a delegated state or local agency) if they have knowledge of a release of PFOA or PFOS exceeding the RQ. Additionally, facility owners and operators must immediately notify local and/or state emergency response coordinators when there is a release of PFOA and PFOS above the one-pound RQ in a 24-hour period.

Disposal Guidance

The disposal of hazardous substances has long been a complex issue, fraught with potential liabilities and regulatory hurdles. The PFAS Designation Rule has added another layer of complexity to this landscape. The improper disposal of PFAS can have severe consequences, especially now that PFOA and PFOS are classified as hazardous substances under CERCLA. Parties responsible for releasing these substances can be held liable for a wide range of costs, including:

• Cleanup Costs. The expenses associated with investigating and remediating PFAS contamination can be exorbitant, often reaching millions of dollars if groundwater is impacted. This includes the costs of conducting site assessments, removing contaminated soil, remediating water bodies, and implementing long-term monitoring and treatment systems. The EPA's preliminary assessment/site inspections (PA/SIs) at over 700 military installations illustrate the extensive scope and cost of such investigations.
• Natural Resource Damages. CERCLA allows for the recovery of damages for injuries to natural resources, such as groundwater, surface water and soil, caused by the release of hazardous substances. These damages can be substantial, as they aim to restore the injured resources to their precontamination condition. The case of the Clark Fork River Basin in Montana, where a settlement of $260 million was reached for environmental injuries from mining activities, is an example of the potential magnitude of natural resource damage claims under CERCLA.
• Fines and Penalties. In addition to cleanup costs and natural resource damages, responsible parties can also face significant fines and penalties for violating reporting and cleanup requirements under CERCLA and EPCRA. These can range from more than $69,000 per day for noncompliance to criminal penalties for intentional or egregious violations. The EPA's PFAS Enforcement Discretion and Settlement Policy Under CERCLA may offer some leniency for PFAS-related claims, but the risk of third-party litigation under CERCLA remains a significant concern.

Given the high stakes connected with the improper disposal of hazardous substances, it is imperative to adopt safe and compliant disposal methods for the safe and proper disposal of PFOA and PFOS. The EPA's 2024 Interim Guidance on the Destruction and Disposal of PFAS (PFAS Disposal Guidance) provides valuable insights into the available options, emphasizing the importance of minimizing releases of PFAS to the environment.

• Thermal Treatment. High-temperature incineration in hazardous waste combustors, such as commercial incinerators, cement kilns and lightweight aggregate kilns, can effectively destroy PFAS. However, this method requires meticulous monitoring and control to ensure complete destruction and minimize the formation of harmful byproducts. The EPA's PFAS Disposal Guidance emphasizes that temperatures must exceed 1,100 C (2,012 F) and there must be sufficient "residence time" for complete mineralization – destruction – of PFAS. Additionally, the EPA recommends conducting comprehensive testing, including the analysis of all waste streams for PFAS and potential byproducts, to ensure the efficacy of the thermal treatment process.
• Landfilling. Though landfilling is a common disposal method for many wastes, its suitability for PFAS is a subject of ongoing debate and research. Landfills can act as long-term storage for PFAS, but there are concerns about potential leaching into groundwater and release through landfill gas, particularly for soluble and volatile PFAS. The EPA recommends using hazardous waste landfills (Subtitle C) with robust containment systems for PFAS disposal, especially for wastes with high PFAS levels. Even in hazardous waste landfills, however, the potential for PFAS release through leachate and landfill gas remains a concern, as highlighted in the EPA's PFAS Disposal Guidance.
• Underground Injection. This method involves injecting liquid PFAS waste into deep geological formations, typically Class I nonhazardous industrial and hazardous waste wells. Although this method can effectively isolate PFAS from the environment, it is limited by the availability of suitable injection sites and the need for stringent regulatory approvals, including "no-migration petitions" demonstrating that the waste will remain in place for up to 10,000 years. The EPA's PFAS Disposal Guidance emphasizes the importance of proper siting, engineering and operational controls to ensure the long-term containment of PFAS in injection wells. However, the long-term fate and transport of PFAS in the subsurface environment remains uncertain, and further research is needed to fully understand the potential risks associated with this disposal method.

Government, academic and private institutions all over the world continue to work on strategies for the proper and safe disposal of PFAS. Despite these efforts, the EPA acknowledges that more research is needed.

Impact on Transactional Due Diligence

The EPA's designation of PFOA and PFOS as hazardous substances under CERCLA is a significant development in environmental law, with profound impacts on environmental liability and due diligence. The new PFAS Designation Rule should affect most real estate and corporate transactions, albeit differently.

Before panicking about this new realm of potential liability, it is important to remember the fundamental goal behind conducting environmental due diligence: to identify potential environmental liabilities. Once liabilities have been identified, stakeholders must then decide whether to proceed with a transaction and attempt to allocate those risks based upon the user's level of risk tolerance and leverage in the transaction.

Some may try to use the PFAS Designation Rule and environmental due diligence process as a mechanism for obtaining new leverage in transactions, as PFAS compounds have been identified in a wide range of locations (e.g., in the Himalayas) with no readily apparent source of PFAS contamination. But is this the proper objective of due diligence?

Instead, prospective purchasers and their advisers should be discussing whether there is a likely source of PFAS contamination on or near the target site and what that might mean for the transaction before any due diligence is conducted. Certain industries are more likely to be potential sources of PFAS contamination, including textile manufacturers, paper companies, electronics manufacturers, semiconducting facilities, chrome plating facilities, food packaging facilities and wire manufacturers. Military installations, airports, petroleum refineries, bulk chemical transporters, storage facilities and landfills are other potential sources of PFAS contamination. The environmental database companies now routinely flag sites with these types of prior or current uses.

For corporate transactions, it will also be important to focus on the structure of the transaction. Will real property be acquired as part of the transaction? Will it be owned or leased? Depending on the nature of the transaction, the prospective purchaser may be able to seek indemnification or obtain protection through escrowed funds to address potential PFAS contamination from prior uses on the site, particularly if those uses are not going to continue. Purchasers should also consider conducting a limited environmental compliance review and requesting access to permits, safety data sheets and product inventories to obtain a better understanding of whether PFAS compounds were used or disposed of on-site.

Prior to the PFAS Designation Rule, PFAS compounds were considered to be "non-scope" considerations under the American Society of Testing Materials (ASTM) International's standard for Phase I Environmental Site Assessments (Phase I ESAs), known as ASTM E1527-21. Phase I ESAs are a critical first step in identifying potential environmental liabilities and obtaining certain statutory liability protections under CERCLA. With the new hazardous substance designation, however, Phase I ESAs now need to evaluate the potential presence of PFOA and PFOS contamination on the target property or as a component of the corporate transaction. Given the EPA's recently promulgated and new national drinking water standards for PFAS, the potential listing of nine PFAS compounds under the Resource Conservation and Recovery Act (RCRA) and state regulation of several PFAS compounds, prospective purchasers and their advisors should be having candid conversations about what types of PFAS compounds should be evaluated as part of due diligence. Any additional level of diligence should involve a review of historical property uses, including past manufacturing and waste disposal practices, and the on- and off-site use of specific PFAS-containing materials and compounds. In some cases, depending on the objectives of the transaction, the Phase I ESA may recommend a "Phase II" subsurface investigation to confirm the presence or absence of PFAS contamination. Purchasers should recognize that sellers may be resistant to allowing access to conduct invasive investigations.

The EPA's Enforcement Discretion and Settlement Policy under CERCLA provides some reassurance by prioritizing EPA enforcement actions against parties that have "significantly contributed" to PFAS contamination. However, the risk of third-party litigation under CERCLA remains a significant concern, particularly if PFAS compounds were used on the site.

Tools that parties can use to mitigate risk where PFAS compounds may be a concern include the following:

• Robust Contractual Protections. Incorporating comprehensive environmental representation, warranty and indemnification provisions into transaction agreements will be key. These provisions can allocate environmental risks and liabilities between parties, providing a degree of legal protection in the event that PFAS use and potential releases are identified. Indemnification clauses, in particular, can be instrumental in shifting the financial burden of costly PFAS investigations and remediation from one party to another. In corporate mergers and acquisitions, purchasers should also consider acquiring a Representations and Warranties Insurance policy to provide an additional layer of protection (although the carrier is not likely to offer coverage if PFAS contamination is known or a likely concern).
• Environmental Insurance. Environmental insurance policies can serve as a financial safety net against potentially costly PFAS investigations and remediation. It is essential for policy purchasers to carefully review policy terms, exclusions and endorsements to ensure adequate coverage for PFAS-related risks. Although PFAS exclusions are becoming increasingly common in insurance policies, many insurers are willing to provide coverage for claims arising out of PFAS liability at the right price. Securing coverage for these liabilities can be a prudent investment. Additionally, many stakeholders involved in the transaction (e.g., purchaser, seller, lender, affiliates, etc.) should be able to obtain coverage under a single environmental insurance policy.
• Voluntary Cleanup Programs. If due diligence investigations confirm releases of PFAS at a site or facility, purchasers may wish to enroll in voluntary cleanup programs under state law. Remediation under these programs can offer a pathway to address PFAS contamination under state oversight, potentially leading to regulatory closure and liability protection from government claims. These programs also often provide technical assistance and financial incentives to facilitate cleanup efforts, offering a viable option for mitigating PFAS costs.
• Advice and Counsel. Seeking counsel from environmental attorneys and consultants experienced with navigating PFAS liability issues is critical. Their knowledge of the intricacies of state and federal PFAS regulations, conducting thorough due diligence and developing effective risk management strategies can be the difference between a successful transaction and a costly legal quagmire.
• All Appropriate Inquiries. The presence of PFOA and PFOS on a property can now trigger CERCLA's strict liability regime, a legal framework that can ensnare a wide array of parties, including buyers, sellers, lenders and even prior owners and operators in a web of liability for cleanup costs and potential litigation. Fortunately for purchasers, CERCLA includes statutory liability protection for parties that conduct pre-closing environmental due diligence and satisfy the EPA's "All Appropriate Inquiries" Rule (AAI Rule). To comply with the AAI Rule, prospective purchasers must perform "all appropriate inquiries" into the previous ownership and uses of a facility and take "reasonable steps" with respect to contaminants at the property post-closing. As of Feb. 13, 2023, Phase I ESAs completed under ASTM E1527-21 meet the requirements of the AAI Rule. Now that certain PFAS compounds are officially considered "hazardous substances" under CERCLA, purchasers should make every effort to avail themselves of CERCLA's statutory liability protections.

The PFAS Designation Rule's Impact on Superfund Litigation and Liability

More than 800 contaminants are designated as "hazardous substances" under CERCLA. The addition of these two ubiquitous PFAS compounds will undoubtedly expand liability under the law. But does it matter if parties had knowledge that a substance was considered "hazardous"? Liability under CERCLA casts a wide net, as potentially responsible parties (PRPs) include four categories of persons or entities: 1) current owners and operators of property impacted by hazardous substances, 2) owners and operators at the time hazardous substances were disposed of at the property, 3) "generators" and parties that "arranged for the disposal" of hazardous substances to the property and 4) transporters of hazardous waste that selected the property where the waste was dumped. A recent appellate court decision reaffirmed that knowledge is not a factor in the liability scheme, at least with respect to arranger liability.

The U.S. Court of Appeal for the Fourth Circuit Court recently held that "arranger" PRPs may be held liable under CERCLA for disposal activities regardless of whether they knew the materials were hazardous. In so holding, the court considered claims brought against many companies that arranged for the disposal of waste into seven landfills in Maryland. The defendants argued they could not be held liable for disposal of the materials under CERCLA because they did not know the waste contained hazardous substances. The district court sided with defendants, finding a "scienter" – or knowledge – requirement was necessary to establish arranger liability under CERCLA. A three-judge panel of the Fourth Circuit disagreed and swiftly reversed the decision, holding the district court's opinion went against established CERCLA precedent. Specifically, the Fourth Circuit held that to sufficiently claim arranger liability under CERCLA, the complaint must include allegations that a defendant-arranger acted with intent to dispose of waste and that the waste was "in fact hazardous." Importantly, the Fourth Circuit did not require that a plaintiff allege that a defendant knew its waste was hazardous.

The Fourth Circuit reasoned that 1) CERCLA's clear language does not include a knowledge requirement for arranger liability and 2) requiring knowledge as a prerequisite to liability conflicts with CERCLA's broader statutory scheme. The court explained that Congress enacted CERCLA to hold defendants strictly liable for the release of hazardous substances and that a requirement of scienter would thwart this purpose.

Now that PFOA and PFOS are considered hazardous substances under CERCLA, entities that arranged for the disposal of waste that contained those contaminants could be held liable under CERCLA regardless of whether they knew those substances were part of their waste stream.

Entities with a history of generating or disposing of PFAS should also consider the expansion of tort cases to include CERCLA claims. That is, tort plaintiffs may now have a "hook" for CERCLA claims, and courts may welcome cost-recovery actions under CERCLA whenever PFOA or PFOS are detected in soil, sediments, surface water and groundwater. Additionally, the PFAS Designation Rule expands liability for cleanup and remediation because it may give the EPA or plaintiffs seeking cost recovery another avenue to cleanup of PFAS-contaminated media.

EPA's PFAS Enforcement Discretion and Settlement Policy

The EPA issued its "PFAS Enforcement Discretion and Settlement Policy Under CERCLA" on April 19, 2024, in an effort to make clear that it intended to use its enforcement discretion to provide some degree of comfort for various municipal entities and farmers applying biosolids to land. In the policy, the EPA explained that it will focus on holding responsible entitles that "significantly contributed" to the release of PFAS into the environment, including parties that manufactured PFAS or used PFAS in their manufacturing process, federal facilities and other industrial parties. In the context of CERCLA sediment sites (which is likely to be the overwhelming majority of PFAS Superfund sites), implementing the policy may prove difficult in practice. At most sediment sites, a substantial majority of the PFAS entering the system will likely be from combined sewer overflow (CSO) and municipal separate storm sewer system (MS4) discharges. To the extent PFAS compounds become a risk and remedy driver, the EPA may struggle to identify the parties who are primarily responsible within the meaning of the "Enforcement Discretion Policy." With respect to discharges to the CSOs, identifying those parties will require a review of large numbers of indirect dischargers over time, a task that is further complicated by the fact that many of those discharges will predate the advent of the national pretreatment program in 1972 (given that PFAS manufacturing dates to the 1930s).¹ And the task will only be more complicated with respect to discharges from MS4s.

These tasks are further complicated by the fact that PFAS, in part due to their forever nature, are ubiquitous in water (and elsewhere), making the process of tracing PFAS contamination back to the "source" exceedingly difficult. In addition, while the Enforcement Discretion policy references manufacturers of PFAS, the manufacture of a chemical compound, as opposed to the generation of a hazardous waste product, is not an independent basis for CERCLA liability. While there will be industrial PRPs at sediment sites that discharged PFAS-laden hazardous substances directly into sediment sites (through fire suppression systems and manufacturing processes), the EPA may have to choose between orphan shares, enforcing against CSOs and MS4s, and imposing liability on industrial and commercial PRPs who have no known connection to PFAS in those instances where PFAS become risk and remedy drivers at current and future CERCLA sites.

Potential Impacts on EPA's Implementation

Petition to Challenge Rule Making

The U.S. Chamber of Commerce and various industry groups (collectively, Petitioners) filed a petition on July 10, 2024, in the U.S. Court of Appeals for the District of Columbia Circuit challenging the PFAS Designation Rule. Chamber of Commerce of the United States of America, et al v. EPA, et al., Case No. 24-1193 (D.C. Cir. 2024). Petitioners have raised numerous issues with the PFAS Designation Rule, including whether EPA appropriately considered costs in promulgating the rule. In their brief, Petitioners note that the EPA failed to adequately consider the "enormous cost" of its novel rule and ultimately ran two analyses – one that did not consider costs and a new alternative that did – and determined that the rule was warranted. Petitioners also highlight that in support of the new alternative analysis, the EPA released a 300-page cost-benefit analysis that the public had never seen and had no opportunity to comment on. The EPA has yet to file its brief and oral arguments have not been scheduled.

Given the broad applicability of federal Superfund liability and the impacts of a hazardous substance designation, it is expected that this Petition will be considered by the U.S. Supreme Court regardless of the case's outcome at the D.C. Circuit Court of Appeals.

Incoming Trump Administration

The first Trump Administration demonstrated a deregulatory approach to environmental regulation; a similar, if not more aggressive, approach is expected under a second Trump term. The Trump White House will have various tools in its arsenal to challenge the PFAS Designation Rule, including initiating a new rulemaking to modify or revoke the rule, reducing the EPA budget and allocating fewer resources to PFAS programs under CERCLA and issuing national policy guidance to EPA regions instructing them to delay the implementation or enforcement of the rule, among others. In addition to executive and administrative actions, the incoming Trump Administration could also work with Congress to modify CERCLA via legislative mechanisms, such as proposing amendments to CERCLA to exclude PFAS or create exemptions for certain industries. Given the impact of the PFAS Designation Rule to many regulated communities, the incoming Trump Administration is likely to use various executive, administrative and legislative approaches to limit or completely eliminate the PFAS Designation Rule. But regulation of PFAS at the state level could continue, absent a preemption ruling by a court.

To learn more about the proposed rule, please contact the authors or a member of Holland & Knight's Emerging Contaminants and PFAS Team.

Notes

¹ In addition, the EPA routinely names as PRPs municipal entities with CSO and MS4 discharges at sediment sites because those pipes are often large contributors of historic and ongoing loadings of hazardous substances. Industrial parties should expect to see municipal parties attempt to leverage the Enforcement Discretion Policy with respect to PFAS into broader enforcement protection for their CSO and MS4 discharges.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.