Controversy surrounding a Clean Air Act consent decree has served to highlight changes in environmental enforcement brought about by a June 5, 2017 memorandum from the United States Attorney General announcing a general prohibition on settlement payment to third parties. Memorandum for All Component Heads and United States Attorneys, Prohibition on Settlement Payments to Third Parties, (Office of the Attorney General, June 5, 2017) (“June 5 Memorandum”). Attorneys in the environmental community immediately recognized that this prohibition would have implications for environmental settlements that included Supplemental Environmental Projects (“SEPs”) (projects undertaken in settlements by defendants, that are not required for compliance, that result in a reduction in penalties, see Issuance of the 2015 Update to the 1998 U.S. Environmental Protection Agency Supplemental Environmental Projects Policy (U.S. EPA March 10, 2015) (“SEP Policy”), as well as mitigation projects (projects undertaken by defendants as part of the overall injunctive relief to mitigate alleged harms due to past violations and which do not generally result in a penalty reduction), see Securing Mitigation as Injunctive Relief in Certain Civil Enforcement Settlements (2nd edition)(U.S. EPA Nov. 14, 2012) (“Mitigation Policy”). After the Attorney General Policy was announced, the Environmental and Natural Resources Division (“ENRD”) of the Department of Justice issued guidance on the application of the June 5 Memorandum to cases handled by ENRD. Settlement Payments to Third Parties in ENRD Cases, (Office of the Acting Assistant Attorney General, ENRD, January 9, 2018) (“ENRD Policy”). This policy sets forth a limited exception to third-party payments when the payments directly remedy harm to the environment.
The changes that can be expected in enforcement brought about by the DOJ policy announcement have been exemplified by the proceedings in a Clean Air Act enforcement settlement now pending before the United States District Court for the District of Columbia, United States v. Harley-Davidson, Inc. Civil Action 1:16-cv-01687 (EGS). The case involves alleged violations of section 203 of the Clean Air Act by Harley-Davidson, Inc. and related entities (“Harley-Davidson.”) Harley-Davidson is alleged to have manufactured and sold devices which could defeat the emissions controls on Harley-Davidson motorcycles. In a consent decree lodged contemporaneously with the complaint on August 18, 2016, Harley-Davidson agreed to pay a civil penalty of $12 million, cease sale of the defeat devices, offer to buy back existing defeat devices, and engage in other compliance-related activities directly related to sale and use of the defeat devices. In addition to these undertakings, Harley-Davidson also agreed to spend $3 million on an Emissions Mitigation Project (“Mitigation Project”). That Mitigation Project, spelled out in an Appendix to the Consent Decree, involved a wood-burning appliance changeout and retrofit project, to be implemented by The American Lung Association of the Northeast. Essentially, Harley-Davidson would give $3 million to The American Lung Association for the purpose of bringing about the replacement of older wood-burning appliances with newer models that had lower pollutant emissions. This project would be implemented solely in the northeast United States and was likely to be performed in only one state.
The consent decree had not yet been entered when the June 5 Memorandum was issued. In reviewing the consent decree in light of the June 5 Memorandum, the United States concluded that the decree did not conform to the policy prohibiting payments to third parties. While the June 5 Memorandum did allow a payment to third parties that “directly remedies the harm that is sought to be redressed, for example, harm to the environment,” DOJ concluded that the Mitigation Project, with its limited geographical scope, did not sufficiently redress harm for excess emissions that had occurred nationwide. Consequently, a replacement consent decree was lodged on July 20, 2017. This new consent decree omitted the previous Mitigation Project, but contained all the other terms of the previous consent decree. There was no new substitute for the Mitigation Project, however, so the new decree resulted in a $3 million reduction in Harley-Davidson’s overall obligations in the settlement. As required by regulation, DOJ solicited public comment on this new decree.
Several states and environmental groups filed comments opposing the new consent decree. This opposition was grounded on the deletion of the Mitigation Project without provision for a comparable substitute. The commenters argued that the United States had given up a valuableaspect of the original consent decree without securing any commensurate benefit. The commenters also disagreed that the revision of the consent decree was mandated by the June 5 Memorandum. On December 11, 2017, the United States moved to enter the revised consent decree. In its motion to enter the United States reiterated its position that the Mitigation Project in the original decree did not comport with current DOJ policy on payments to third parties. The United States also described its efforts to negotiate a substitute for the Mitigation Project, but stated the parties had been unable to agree on a substitute. Given the penalty and injunctive relief that were still part of the settlement, the government argued that the new decree still met the test for fair, reasonable, and in the public interest.
After the motion for entry was filed, several of the commenters filed notices of intent to submit amicus briefs. In a January 8, 2018 order, the Court required submission of the amicus briefs by January 31, 2018, with the government to respond by March 1, 2018. One day after the order, on January 9, the ENRD Policy was issued.
The ENRD Policy, which weighs in at 9 pages versus the one page of the June 5 Memorandum, sets out in more detail the circumstances in which third-party payments will be allowed. In doing so it attempts to provide additional clarity, but also raises some additional questions. For example, with respect to mitigation, it states that such projects should be scrutinized “to ensure that the project does not mitigate harm out of proportion with the harm that resulted from the unlawful conduct” and notes that client agencies such as EPA may have applicable mitigation policies. While this statement would seem to indicate that settlements consistent with EPA’s mitigation policy would be acceptable, clearly this was not the case with the Harley-Davidson settlement. Also, the Harley-Davidson settlement revision seems to indicate that proportionality may be judged not only as being too much but also too little. Recall that the stated reason for rejecting the Harley-Davidson Mitigation Project was its limited geographic scope. Does this mean that a more extensive (and expensive) nationwide wood stove project would have found favor, or would the cost of such project have been seen as disproportionate to the harm as well, in light of the other corrective steps being undertaken by Harley-Davidson.
The ENRD Policy also creates some confusion in regard to SEPs. It states that SEPs are acceptable because EPA’s SEP Policy “expressly prohibits all third-party payments.” This is not completely accurate. While EPA’s SEP Policy does prohibit cash donations to third parties, see SEP Policy at 17, it expressly acknowledges that a defendant may use a third party to implement an SEP, see SEP Policy at 26-27, much as was contemplated as the role of The American Lung Association in the Harley-Davidson Mitigation Project. Presumably, payments to a third-party SEP implementer would be allowable under the ENRD Policy, but its use of an incorrect reading of the EPA SEP policy to justify the SEP exemption to the third-party payment prohibition does create some unnecessary uncertainty.
One additional aspect of the ENRD Policy is noteworthy. The policy states that while it does not apply to administrative actions taken by federal agencies prior to a referral to DOJ, it does apply if DOJ agreement is required for the agency action. This would then appear to make the ENRD Policy applicable to administrative enforcement actions for which DOJ concurrence is required if EPA is seeking administrative penalties higher than a statutory threshold, such as the provisions of sections 113(d)(1) and 205(c)(1) of the Clean Air Act. This requirement significantly broadens the potential reach of the ENRD Policy, as it is not unusual for EPA to invoke these provisions and seek DOJ approval of administrative enforcement actions.
The government has filed its response to the amicus briefs, reiterating the points it made in the original motion to enter, and also relying upon the subsequently issued ENRD Policy. While it is unlikely that the Harley-Davidson court will reject the consent decree, given the deference courts usually accord to such settlements, the proceedings have served to highlight that SEPs and mitigation projects, while still allowed in settlement of enforcement cases, will get heightened scrutiny when any payments to third parties are involved.