On May 4, the U.S. Supreme Court handed down its 8 to 1 decision in the much anticipated case of Burlington Northern & Santa Fe Railway Co., et al v. United States et al. (556 U.S.___ (2009)), which challenged the traditional notion of joint and several liability under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund") and challenged a new, expansive notion of arranger liability under CERCLA. The Supreme Court overturned the Ninth Circuit Court of Appeals' broad interpretation of arranger liability and may have lowered the bar for how Potentially Responsible Parties ("PRPs") can demonstrate apportionment liability, therefore avoiding CERCLA's expansive joint and several liability scheme.


No Arranger Liability

This case involved the contamination of an agricultural chemical distribution facility owned by a now-insolvent company, Brown & Bryant, Inc. ("B&B"), which had purchased chemical products from Shell Oil Company ("Shell"). Some of the chemicals spilled onto B&B's 3.8-acre parcel and on a 0.9-acre adjacent parcel leased from Burlington Northern & Santa Fe Railway Co. and Union Pacific Railroads Co. ("Railroads"). After EPA and the California Department of Toxic Substances Control ("DTSC") spent over $8 million cleaning up the contaminated site, it sought reimbursement from the Railroads and Shell, as PRPs that EPA and DTSC believed had profited from B&B's operations and were liable under CERCLA's broad liability scheme. The Railroads had already spent $3 million remediating contamination of their parcel.

EPA alleged Shell was liable because it arranged for disposal of a hazardous waste through its selection of common carriers to transport its hazardous product and its requirement that B&B purchase the hazardous product in bulk, which Shell knew would require the transfer of the chemicals from trucks to storage tanks, where spills and leaks were common. As such, EPA contended that even though Shell was not a "traditional" arranger of hazardous waste disposal, one who intentionally contracts with another party to dispose of hazardous waste, Shell was still liable under this expansive interpretation of arranger liability. EPA alleged this even though Shell shipped the chemicals FOB destination, which means that B&B took responsibility for the chemicals once they arrived at the facility.

Overturning the Ninth Circuit Court of Appeals, the Supreme Court held that Shell could not be held liable as an arranger of disposal of hazardous waste, where the evidence failed to show that Shell took any intentional steps to dispose of its hazardous sales product during the transfer of its product from a common carrier to B&B's storage tanks. Shell's selection of the common carrier and mere knowledge of continued accidental spills during the transfer process did not constitute a plan for intentionally arranging for the disposal of a hazardous waste, particularly where Shell took intentional steps to reduce accidental spills through issuing instructions and providing financial incentives for B&B to reduce the likelihood of transfer spills.

The Supreme Court affirmed that the determination of "arranger liability" remains a fact-specific, case-by-case determination and that an entity's knowledge that its product will be leaked, spilled, dumped, or otherwise discarded may provide evidence of the entity's intent to dispose of its hazardous waste. However, mere knowledge is not sufficient to prove that the entity "planned for" disposal, particularly when it is the accidental by-product of the sale of an unused and useful product. Therefore, a practical consequence of this case is that Courts are less likely to find "arranger liability" for entities that make intentional efforts to reduce accidental spills of unused, useful product. In addition, fewer entities with "arranger liability" will mean greater shares of liability for PRPs, which may cause more heated disputes between PRPs for the remaining liability.

No Joint and Several Liability

EPA alleged that the Railroads were owners of a portion of the facility during the period of time when the hazardous releases occurred, making the Railroads strictly liable for cleanup costs. This fact was not in dispute before the Supreme Court, but the Railroads disputed the Ninth Circuit's finding that the Railroads' liability should also be joint and several, thus making the Railroads liable for portions of the cleanup costs that were not their fault. Joint and several liability allows the EPA to sue a single PRP for the cost of the entire cleanup, leaving that PRP with the burden of locating and suing other PRPs for their fair share contribution of the cleanup costs under a contribution claim.

The Supreme Court overturned the Ninth Circuit's finding of joint and several liability for the Railroads and affirmed the factors the District Court used as its reasonable basis for apportioning and limiting the Railroads' liability to 9% of the total $8 million clean up costs – (1) the fact that the Railroads' parcel comprised only 19 percent of the B&B facility; (2) that B&B operated on the Railroads parcel only 45 percent of the time; (3) that B&B released 10 times more hazardous chemicals from its property than were released from the Railroads' property; and (4) that only two of the three hazardous substances representing two-thirds of the overall site contamination were released in sufficient quantities from the Railroads' parcel. Using these factors, the District Court multiplied 0.45 by 0.19 by 0.66 to arrive at 6% liability and added another 3% liability (50% of the 6% base liability) to account for estimates for a total of 9% liability.

The Supreme Court was willing to overlook the Ninth Circuit's objections that the District Court only used estimated figures, did not account for the degree of harm caused by each type of pollutant, and failed to demonstrate that the two types of pollutants released from the Railroads' parcel really accounted for two-thirds of the volume of hazardous waste because the District Court's apportionment calculation appears to have been conservative. Even though the record lacked evidence that the two pollutants represented two-thirds of the volume of waste, the record showed that 90 percent of the volume came from the B&B parcel. In addition, the 50% upward adjustment in base liability essentially rendered the unsupported two-thirds volume assumption harmless because if the volume of the waste had been 100%, then the base liability would have been 9% (0.19 times 0.45 times 1.0 rounded to 9%).

There is good reason to believe that this case signals a new openness to apportionment liability arguments. The Supreme Court has limited time to hear appeals and is not obligated to hear most appeals. Therefore, according to the Justices, they often hear appeals to establish a lasting precedent. Furthermore, the District Court went to extraordinary lengths to make its apportionment findings. Because Shell and the Railroad focused their arguments on why they should not be liable at all, a gamble that paid off for Shell, the District Court was left to fill in the gaps. It drafted an opinion spanning 185 pages with detailed findings to support its apportionment. Therefore, a practical consequence of this case is that when it is fairly clear that a PRP falls within CERCLA's liability scheme, the PRP should provide the Court with a reasonable basis for apportionment liability. This will likely focus future Superfund disputes on the whether there is a "reasonable basis" for apportionment.

Another potential consequence may be a push to restore the expired Superfund business tax on the chemical industry. If fewer parties qualify as "arrangers", some PRPs are insolvent, other PRPs can reasonably apportion their liability, and general revenues pay for the orphan share of the clean up costs, instead of revenues from the Superfund tax, then the financial burden for the clean up costs falls on the general taxpayer, instead of the chemical industry and its customers. Indeed, in this case, with Shell having no arranger liability, B&B's insolvency, and the Railroads having only 9% liability, EPA and the State of California are left to pay 91% of the cleanup costs unless they can find additional PRPs. High profile cases like this, along with a filibuster-proof majority in the Senate looking for sources of revenue to finance the President's budget plan, could create momentum to revive the Superfund tax.

After almost three decades and thousands of cases interpreting CERCLA, the legal community had almost resigned itself to the inevitability of joint and several liability once a client was found to be a PRP. Spreading the pain of liability on others through contribution claims was the prevailing wisdom. This week, the Supreme Court reminded everyone that even retroactive, strict, and joint and several liability statutes can evolve. With new life breathed into how CERCLA is being interpreted, it is essential for CERCLA defense strategies to evolve with it. Affected businesses should carefully weigh their strategic options when a PRP letter arrives. The Sheppard Mullin team has specialized knowledge and experience in environmental law and is well-equipped to advise clients on CERCLA and other evolving environmental issues in a wide variety of practice areas.