Supreme Court Decision Diminishes the Scope and Sting of CERCLA Liability for Some

May 6, 2009

In a nearly unanimous decision authored by Justice Stevens, the Supreme Court in Burlington Northern & Santa Fe Railway Co. v. United States took much of the sting out of a party’s Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) liability if that party makes a reasonable showing that its contribution to the contamination at issue is divisible.[1] The Court also explained the scope of “arranger” liability under the statute.

Background

Brown & Bryant, Inc. (“B&B”) operated an agricultural chemical distribution facility for decades in Southern California at which toxic chemicals were stored, distributed and, as it turns out, released into the environment.  Although B&B conducted some remediation, it soon became insolvent leaving the EPA and California environmental authorities to foot the majority of the cleanup bill.  The agencies brought CERCLA cost recovery actions against two Railroads, as former owners of a portion of the facility, and Shell Oil Company, as an arranger.

While B&B operated its facility on most of its own land, it did lease from the two Railroads a small portion (19%) of adjoining land for nearly half of its operating years.  There was no dispute that the Railroads were largely absentee landowners and did not operate the facility. 

Shell Oil Company’s involvement at the facility was different in kind but also limited.  Shell manufactured and delivered new and useful chemicals to the facility.  It was undisputed that Shell did not contract with B&B for the purpose of disposing the chemicals.  Shell was aware, however, that delivery of one of the chemicals often involved leaks and spills of that chemical.  Shell took “several steps to encourage the safe handling of its products” including providing distributors with “detailed safety manuals” and offering a discount program to clean handlers.

After a 6-week bench trial, the district court issued a “lengthy order” concluding, among other things, that Shell was liable as an arranger and that the record supported a “reasonable basis” to apportion the Railroads’ liability for cleanup costs.  The Ninth Circuit affirmed the district court’s finding of Shell’s liability but reversed the district court’s apportionment of liability.

Arranger Liability

The Ninth Circuit affirmed the district court’s conclusion that Shell was liable as an arranger because, in its view, an entity need not “intend to dispose of the product.”  Rather, flowing from the Ninth Circuit’s construction of the definition of “disposal,” it found Shell liable because releases of the chemical were “a foreseeable byproduct of” Shell’s sale to B&B.  The Ninth Circuit’s ruling would have significantly expanded the class of persons subject to arranger liability beyond the “traditional” bounds–entities that sent hazardous substances to a facility for the purpose of disposing of them.

The Supreme Court rejected the Ninth Circuit’s analysis, particularly its emphasis on the term “disposal.”  The Court analyzed the statute’s phrase “arranged for disposal” in view of the plain meaning of the term “arrange.”  The Court held that an entity may qualify as an arranger only when it takes “intentional steps to dispose of a hazardous substance.”  And that an entity’s “knowledge alone” that the product may be leaked, spilled or discarded is insufficient to prove the requisite intent, particularly when that activity occurs “as a peripheral result of the legitimate sale of an unused, useful product.”  The Court found no evidence that Shell intended the disposal of any chemicals at the facility.

Joint & Several Liability

The Supreme Court adopted the view commonly accepted by the lower courts, and the Ninth Circuit below, that the statute does not demand joint and several liability in every case.  Like those courts, the Court looked to the Restatement (Second) of Torts for guidance and concluded that apportionment of CERCLA liability is proper when there is a “reasonable basis for determining the contribution” of multiple parties to a single harm.

Unlike the Ninth Circuit, however, the Court accepted the district court’s calculation of the Railroads’ liability based on three measures:  the percentage of the site owned by the Railroads (19%), the percentage of time that the Railroads’ land was part of the facility’s operations (45%), and the fact that the two chemicals released on the Railroad parcel contributed to two-thirds of the overall site contamination (i.e., 19% x 45% x 66% = 6%).  The Court also approved of the district court’s upward adjustment to 9% to provide for “calculation errors.”

In so holding, the Court acknowledged the criticisms the Ninth Circuit lodged at the district court’s conclusions–that the district court relied on estimates rather than specific and detailed records, and the measures used by the district court (e.g., size of land area leased) were not sufficiently reliable measures of the harm flowing from the Railroads’ property–but nevertheless found that the facts in the record “reasonably supported the apportionment of liability.”  Buttressing the Court’s decision was the district court’s “detailed findings” that the pollution at the facility primarily came from the B&B property and that the Railroad parcel contributed to no more than 10% of the total site contamination.

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The Court’s holdings in Burlington Northern could significantly impact CERCLA litigation.  As an example, in two decisive moves, the Court has potentially raised the risk factor associated with voluntary cleanups.  First, its decision on arranger liability has limited the pool of PRPs to pay for cleanup costs.  And second, its endorsement of apportionment at the liability stage of proceedings (as opposed to the allocation stage), has left a much larger bag–indeed, potentially all of the orphan shares–in the hands of the entity that first footed the bill for cleanup costs.

The full repercussion of the Court’s holdings is left to be seen.  The apportionment ruling, in particular, raises a whole host of questions and issues concerning the contours of “reasonable” apportionment.  Gibson Dunn will be tracking the development of these issues and will update its clients on significant rulings.