A recent decision of the Ninth Circuit Court of Appeal rejected a lower court finding that the US government had no responsibility for cleaning up site contamination arising, in part, from work done to support the government's wartime equipment needs. The decision clarifies and reinforces the Ninth Circuit's stance that US government entities cannot typically avoid liability at these contaminated sites, where contracts for construction and service of military equipment were often specific and demanding.

The case at issue involved a contaminated California aeronautical manufacturing plant. In a bench trial over five years ago, a federal court determined that the US government had no responsibility for any past or future costs under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). The court found 100 percent of the millions of dollars in past and future cleanup costs should instead be paid by the military contractor operating at the site. The court concluded it was the contractor, and not the government, that was in charge of making decisions at the site, including how to maintain equipment and clean up spills.

The Ninth Circuit vacated that ruling in its October 4, 2017 decision in TDY Holdings, LLC v. United States of America, Case No. 15-56483 (9th Cir. 2017), finding error in the federal court's analysis of how cleanup costs should be allocated between military contractors and the federal government. With language sure to comfort businesses owning historical environmental liabilities, the Ninth Circuit observed that "encumbering a military contractor with 100 percent of CERCLA cleanup costs that were largely incurred during war-effort production was a 180 degree departure from our prior case law…" (Id. at 12.)

The Ninth Circuit concluded that the lower court misapplied two of its authoritative decisions – United States v. Shell Oil Co. and Cadillac Fairview/California, Inc. v. Dow Chem. Co.\noting that they were not "outliers" as the lower court had indicated. Both cases considered the allocation of CERCLA cleanup costs between military contractors and the US government and, in both cases, the Ninth Circuit affirmed district court judgments allocating 100 percent of cleanup costs to the government. These cleanup costs were considered part of the "war effort for which the American public as a whole should pay." (TDY Holdings, supra at 11.)

In recent cases, defense contractors have not received a zero allocation, and are not likely to do so in most cases after the TDY Holdings decision. Indeed, in TDY Holdings, the Ninth Circuit did observe that some deviation from the Shell and Cadillac decisions was warranted based on distinguishing facts. Key issues were control over operations (including contract-required work specifications), contractual indemnities, and the overall business relationship. In this case, the government exercised less control over day-to-day operations at the site and did not contractually agree to indemnify its contractor for cleanup costs, as had occurred in Shell and Cadillac. But here, the US government and military contractor had a lengthy course of dealing where, from 1970 to 1999, the government paid between 90 and 100 percent of the CERCLA cleanup costs. Further, the government was the contractor’s primary customer, and required the military contractor to use two of the hazardous chemicals at issue. These factors, among others, compelled the Ninth Circuit to remand the case to the lower court for a reallocation.

This decision is likely to become a touchstone for military contractors engaged with the US government on environmental cleanup actions and cost allocations. It may influence contractors’ decision making on the key issue of whether to bring the government (often a continuing key customer) into cleanup actions at the outset.

As the Ninth Circuit opined, saddling military contractors with all environmental cleanup costs is a departure from established case law, particularly when the contamination occurred as the contractor was engaged in war-effort production.