On July 7, 2017, the D.C. Circuit Court of Appeals issued a decision striking down portions of US EPA’s Definition of Solid Waste (DSW) Rule, which defines when certain hazardous secondary materials (i.e. recyclable materials generated as the remainder of industrial processes) become “discarded” and thus subject to regulation as a solid waste. The Rule, issued in 2015, was the latest effort to define “solid waste” under the Resource Conservation and Recovery Act (RCRA), 42 U.S.C. §§6901 et. seq., and was challenged by both industry and environmental groups. Squire Patton Boggs was actively involved in the appeal on behalf of an industrial intervenor-movant.

In a per curiam decision, the Court sided with the industry petitioners in large part, dismissed the environmental groups’ challenges, and vacated two key aspects of the 2015 DSW Rule. First, the Court vacated the fourth prong of the “legitimacy” test to distinguish between “true” and “sham” recycling, which must be met to qualify for exclusion from regulation as a solid waste. Second, the Court vacated most of the “Verified Recycler” Exclusion and reinstated the pre-existing 2008 “Transfer-Based” Exclusion. In so ruling, the Court also severed and retained requirements from the vacated 2015 exclusion relating to emergency preparedness and containment standards.

Legitimacy Factor 4 Rejected

In the 2015 DSW Rule, US EPA established four mandatory “legitimacy” criteria to differentiate legitimate from “sham” recycling. “[B]ecause EPA’s waste disposal regulations are acknowledged to be very costly to meet, ‘there is an incentive for some handlers to claim they are recycling when, in fact, they are conducting . . . disposal.’ To prevent such evasion, EPA polices the line ‘between ‘legitimate’ (i.e., true) recycling and ‘sham’ (i.e., fake) recycling.” Opinion at 6 (internal citations omitted).

In order to be deemed legitimate, the 2015 DSW Rule required the recycling activity to meet all four of the following Legitimacy Factors: (1) the hazardous material must provide a useful contribution to the recycling process; (2) the recycling process must produce a valuable product or intermediate; (3) the generator and recycler must manage the hazardous secondary material as a valuable commodity; and (4) the product of the recycling process must be comparable to a legitimate product or intermediate. See 40 CFR §260.43.

Although the Court upheld Legitimacy Factor 3, it ruled that Factor 4 was unreasonable as applied to recyclable materials which have commercial product analogues. If such recyclable materials are even slightly more hazardous than their commercial analogues, they would not meet Legitimacy Factor 4 and therefore would constitute a solid waste under RCRA, even if they posed no significant risk to human health or the environment. Consequently, the Court found that the Factor 4 test is “not a reasonable tool for distinguishing products from wastes” and is unreasonable as applied across the board to all hazardous secondary material recycling. See Opinion at 13-14.

Verified Recycler Exclusion Vacated

In the 2015 DSW Rule, US EPA established the Verified Recycler Exclusion at 40 CFR §261.4(a)(24), which provided that hazardous secondary materials sent to a third-party recycler were exempt from regulation as solid wastes under RCRA so long as the materials were sent to a “verified recycler” having either a RCRA permit or a RCRA variance from US EPA or an authorized state and certain other operational requirements (such as emergency preparedness and containment standards, discussed below) are met.

The Verified Recycler Exclusion replaced the prior Transfer-Based Exclusion from the 2008 DSW Rule, which exempted hazardous secondary materials sent to a third-party recycler so long as the generator had made “reasonable efforts” to ensure that the recycler met standards for legitimate recycling. Whereas the 2008 Transfer-Based Exclusion exempted materials based on the generator’s reasonable efforts to verify the third-party recycler’s legitimacy, the 2015 Verified Recycler Exclusion transferred this legitimacy confirmation responsibility to US EPA or an authorized state by requiring that the third-party recycler hold either a RCRA permit or variance.

Industry petitioners argued that the more stringent oversight requirement in the Verified Recycler Exclusion was based upon US EPA’s unreasonable presumption that recycling by a third-party inherently carries a greater risk that the hazardous secondary materials will be discarded than in the case of generator-controlled recycling, which does not require a RCRA permit or variance to be exempt under the 2015 DSW Rule. US EPA argued that various studies suggested that the recycling of low-value materials by third-party recyclers does carry a higher risk of discard, but the Court found that these theoretical studies were not a sufficient basis for the Verified Recycler Exclusion’s more stringent oversight requirements: “EPA fails to provide sufficient linkage between theory, reality, and the result reached.” Opinion at 29-32. Consequently, the Court vacated the 2015 Verified Recycler Exclusion and reinstated the 2008 Transfer-Based Exclusion.

Severed Provisions Retained

Although it vacated the 2015 Verified Recycler Exclusion, the Court considered whether any aspects of the exclusion were “severable” and therefore could be upheld: “We will sever and affirm a portion of an administrative regulation only when we can say without any substantial doubt that the agency would have adopted the severed portion on its own.” Opinion at 35.

Here, the Court concluded that two aspects of the Verified Recycler Exclusion were severable and should be upheld to address regulatory gaps from the 2008 Transfer-Based Exclusion. First, the Court upheld the emergency preparedness and response requirements at 40 CFR Part 261, Subpart M, which require the generator to have certain processes and equipment in place, such as use of fire control systems, to minimize the risk of fire, explosion or unplanned release that could threaten human health and the environment.

Second, the Court upheld the Verified Recycler Exclusion’s containment standards, which require that recyclable materials be held in a “unit” that is in good condition (e.g. not leaking) and designed to prevent releases to the environment, is properly labeled or otherwise subject to a system (such as a log) to immediately identify the materials contained in the unit, and that all contained materials placed in the unit are compatible.

Petroleum Refining Spent Catalysts

By vacating the 2015 Verified Recycler Exclusion and reinstating the 2008 Transfer-Based Exclusion, the Court essentially eliminated any third-party recycler exemption for petroleum refining spent catalysts, designated as K171 and K172, because spent catalysts were not eligible for the 2008 Transfer-Based Exclusion. The Court found that “[a]t no point in the record does EPA propose keeping the Transfer-Based Exclusion and repealing its spent catalyst disqualifier.” Opinion at 35. However, the Court noted that it would be willing to consider further argument on this point: “If EPA, or any party, wishes to disabuse us of our substantial doubt with a petition for rehearing, we will of course reconsider as necessary.”

In sum

By reinstating the 2008 Transfer-Based Exclusion, the Court’s ruling significantly expands the RCRA regulatory exclusion for third-party recycling of hazardous secondary materials (except for petroleum refining spent catalysts). However, by severing and upholding the 2015 DSW Rule’s emergency preparedness and containment standards, the Court’s ruling has added additional regulatory conditions to this 2008 exclusion. By contrast, the Generator-Controlled Exclusion under the 2015 DSW Rule was not challenged and is unaffected by the ruling. While there is much in this decision for industry to cheer, generators and recyclers of hazardous secondary materials will need to carefully consider and adhere to both the 2008 Transfer-Based Exclusion and the 2015 DSW Rule’s emergency preparedness and containment standards in order to ensure that third-party recycling of such materials remains exempt from hazardous waste regulation under RCRA.