Ninth Circuit Limits Useful Product Exception to Arranger Liability Under CERCLA

In an expansive reading of arranger liability under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”),[1] the Ninth Circuit Court of Appeals recently found several businesses potentially liable for response costs arising from the sale of by-products containing hazardous substances, including a company engaged in the sale of recycled lead products as one of its primary business activities. The court in California Department of Toxic Substances Control v. Alco Pac., Inc. (“CDTSC v. Alco Pac”) found the record insufficient to establish as a matter of law that the useful product exception does or does not apply in the case, but refused to apply a bright line test to determine its applicability. The court held instead that “the trier of fact must consider the totality of circumstances in determining the proper characterization of the relevant transactions.”[2]This decision narrows the application of an already limited defense to CERCLA liability. It also highlights the importance, for recyclers, of complying with the recycling exemption added to the Superfund statute by the Recycling Equity Act of 1999.[3]

Background

Arranger Liability Under CERCLA

Under CERCLA, a private party or the government may recover response costs arising from the release or threatened release of hazardous substances from four categories of persons, referred to as “potentially responsible parties,” or “PRPs.”[4] The Ninth Circuit opinion in CDSTC v. Alco Pac addresses only the third category of PRPs, arrangers, which CERCLA defines as:

[A]ny person who by contract, agreement, or otherwise arranged for disposal or treatment, or arranged with a transporter for transport for disposal or treatment, of hazardous substances owned or possessed by such person, by any other party or entity, at any facility or incineration vessel owned or operated by another party or entity and containing such hazardous substances.…[5]

Although CERCLA does not define the term “arrange,” it defines “disposal” as “the discharge, deposit, injection, dumping, spilling, leaking, or placing of any solid waste or hazardous waste into or on any land or water so that such solid waste or hazardous waste or any constituent thereof may enter the environment or be emitted into the air or discharged into any waters, including ground waters.”[6] Treatment means “any method, technique, or process, including neutralization, designed to change the physical, chemical, or biological character or composition of any hazardous waste so as to neutralize such waste or so as to render such waste nonhazardous, safer for transport, amenable for recovery, amenable for storage, or reduced in volume.”[7]

In order to “avoid frustrating CERCLA’s goal of requiring that companies responsible for the introduction of hazardous waste into the environment pay for remediation,”[8] the Ninth Circuit and other courts recognize both (1) “direct” arranger liability, where the central purpose of the relevant transaction is hazardous substance disposal[9] and (2) a “broader” theory of arranger liability in cases where hazardous substance disposal “is a foreseeable byproduct of, but not the purpose of, the transaction giving rise to PRP status.”[10] Under the broader theory of arranger liability, the arranger “is either the source of the pollution or manages its disposal.”[11] To determine whether CERCLA liability exists under this broader theory, courts examine the connection between the transaction and disposal to decide whether the transaction constituted an arrangement for disposal of hazardous substances, “whatever immediate form it may have taken.”[12]

Arranger liability under CERCLA can cast a particularly wide net over unsuspecting parties. A person can face liability as an arranger even without controlling the eventual disposition of a waste product. It is sufficient that a substance have “the characteristic of waste” at the time it is delivered to another party.[13] Similarly, in treatment cases, a contract need not specify how treatment will occur for liability to attach.[14] The treatment must only “be inherent in the particular arrangement, even though the arranger does not retain control over its details.”[15] Thus, a person who neither owned a contaminated product during its processing nor controlled the processing that resulted in the release of contaminants could face arranger liability under CERCLA.[16] Finally, it is not dispositive if the relevant transactions are characterized as sales by the parties involved, since the question on summary judgment is whether the fact-finder could infer, under the totality of circumstances, that a transaction actually involved an arrangement for the disposal or treatment of a hazardous substance.[17]

The Useful Product Exception to CERCLA Arranger Liability

Despite the wide liability net cast by CERCLA, courts distinguish between (a) the disposal or treatment of hazardous substances and (b) the sale of useful products.[18] Judicial application of this distinction is referred to as the useful product doctrine. Under this doctrine, or exception to CERCLA liability, the Ninth Circuit and other courts have “refused to hold manufacturers liable as arrangers for selling a useful product containing or generating hazardous substances that later were disposed of.”[19] In applying the doctrine, however, uncertainty remains about its exact parameters. In CDTSC v. Alco Pac, the Ninth Circuit noted that “the contours [of the useful product doctrine] are not entirely clear.” Still, in opinions issued between 1990 and 2007, the Ninth Circuit has provided the following guiding concepts:

1. the doctrine does not apply to sales of useful products which “necessarily and immediately result in the leakage of hazardous substances,” because “in that circumstance, the leaked portions of the hazardous substances are never used for their intended purpose”;[20]
2. the sale of products such as slag “can simultaneously be both the sale of a product with intrinsic value in trade or commerce … and the disposal of a hazardous substance under CERCLA”;[21] and
3. although “raw materials, by definition, can’t be used in their current state,” raw materials do not necessarily constitute waste or, for that matter, useful products.[22]

Factual Background and the District Court Opinion in CDTSC v. Alco Pac

For approximately 40 years, Alco Pacific, Inc. and Morris P. Kirk (collectively, “Alco”) operated a lead processing facility in California (the “Site”). Until 1990, Alco refined and reclaimed lead from raw materials including lead ingots, automobile batteries, scrap metal, wheel weights, dross and slag.[23] Alco purchased high lead content dross and slag from other lead processors and users, including its co-defendants in the CDTSC v. Alco Pac case (RSR Corporation, Quemetco, Inc., Davis Wire Corporation, Pasminco, Inc., and P. Kay Metal Supply, Inc. (collectively, “seller-defendants”)). The price Alco paid for these products was based on an analysis of lead content and market lead prices. After processing, Alco sold the resulting refined and reclaimed lead in various forms, including sailboat keels, sheet metal, and ingots. Alco disposed of waste material from its operations at a facility authorized to accept hazardous wastes. Rather than dispose of dross generated during processing, Alco re-used it in smelting. During Alco’s operation at the Site, however, molten lead, slag and other materials “occasionally spilled or otherwise were deposited onto the ground at the Site.”[24]

After determining that the Site was contaminated with lead, the California Department of Toxic Substances Control (“CDTSC”) incurred significant response costs to remediate lead contamination.[25] CDTSC subsequently brought a cost recovery action under Section 107(a) of CERCLA seeking reimbursement of those costs. CDTSC alleged that the seller-defendants were subject to arranger liability because they smelted lead and zinc, used molten lead to treat wire or reclaimed tin and lead, and then sold the resulting dross and slag to Alco. The district court concluded as a matter of law that the sales fell within the useful product doctrine and did not constitute arrangements for the disposal or treatment of hazardous substances, so granted summary judgment for the seller-defendants.[26] The district court reached this conclusion primarily because it found that dross and slag were not worthless wastes that required disposal but were valuable commodities, since the price Alco paid was tied to the prevailing market price of lead.

The Ninth Circuit Opinion in CDTSC v. Alco Pac

On appeal, the Ninth Circuit declined to “expressly adopt … or craft … a concrete test for th[e] fact-intensive inquiry” required to determine whether the useful product exception to arranger liability applies.[27] In addition to the factors found relevant to arranger liability in prior Ninth Circuit opinions (discussed above), the court agreed that the following general factors are also among those “appropriate to consider in determining whether in light of all the circumstances the transaction involved an arrangement for disposal or treatment of a hazardous waste”:

1. the commercial reality and value of the product in question;
2. the intent underlying the transaction (determined by a factual inquiry into the actions of the seller); and
3. whether the material in question was a principal product or by-product of the seller.[28]

Applying the first factor, the court found that the price Alco paid for dross and slag was not dispositive. “A product does not become waste simply because it is inexpensive. Rather, it is the de-linking of the price of a substance from the market value of whatever might feasibly be extracted from it that supports a conclusion that a price is nominal and a sale only a disguised disposal.”[29] The court did not find conclusive evidence of such de-linking in Alco’s transactions. The court noted that multiple variables are relevant to the “commercial reality” factor in addition to price, including “the frequency and volume of transactions, the parties’ prior dealings, the nature of the processing carried out by the buyer[,] and previous or alternative arrangements for handling the by-products of the seller’s business operations[].” Because the dross and slag were by-products, rather than principal products of the defendants’ operations, the court found that the commercial reality factor did not unambiguously support summary judgment for the seller-defendants.[30]

Under the second and third factors, the intent underlying the transaction and the nature of the substances sold, the court also found triable issues of material fact that precluded summary judgment on the issue of arranger liability. The transaction between Alco and one of the seller-defendants involved a conversion agreement rather than a sale, incorporating the conversion fee into the sale price of the dross. Under the terms of the conversion agreement, Alco removed impurities from the dross and then returned the refined metal to the seller-defendant who was party to the agreement; the court indicated that the useful product exception would not apply if the intent of the transactions was an arrangement for the treatment of contaminated dross. Another seller-defendant, however, sold recycled lead products to third parties as its primary business. The court found that these facts posed a particularly close question. With respect to this seller-defendant, the court surmised that it might be difficult to prove that its primary intent in contracting with Alco was to “get rid of” its slag and dross. Still, the court noted that slag and dross are indisputably by-products of the seller-defendant’s operations; thus, a factfinder could infer that the sales to Alco involved, at least in part, arrangements for the disposal or treatment of hazardous substances. The remaining seller-defendants were not primarily engaged in the sale of lead products, and the court again determined that a reasonable factfinder could conclude that those defendants were liable as arrangers through the sale of by-products containing hazardous substances primarily for treatment and disposal to Alco.

Finding the classification of the material as “a nonprincipal business product or by-product” unpersuasive, the court rejected CDTSC’s arguments that (1) the useful product doctrine applies only to new products and (2) material can never fall within the doctrine unless it is useful to a producer’s principal business. CDTSC further alleged that the defendants were aware that (1) some spilling was inevitable during smelting, and (2) a significant portion of the dross and slag sold to Alco constituted waste that would eventually require disposal. However, the court declined to hold as a matter of law that the useful product doctrine did not apply in the case. The court explained that those allegations, while relevant to the characterization of the transactions, are not the only factors relevant to the determination of whether the useful product exception applies. Other facts present, such as the pricing of slag and dross at market value, cut in favor of applying the useful product exception. Ultimately, the court concluded that the record was insufficient to establish as a matter of law that defendants’ sales and purchases of lead products fell within the useful product exception to arranger liability.[31] The court therefore reversed the district court’s grant of summary judgment and remanded. On remand, the district court “must consider the totality of circumstances in determining the proper characterization of the relevant transactions” and whether the useful product doctrine applies.[32]

Implications of the Opinion

The defendants in CDTSC v. Alco Pac argued that a liability finding would adversely affect various markets by encouraging companies to simply dispose of rather than sell or recycle commercially useful by-products in order “to avoid potential CERCLA liability from contamination arising out of subsequent reclamation or manufacturing processes in which they have no part and over which they have no control.”[33] In response, the court noted that case law supports broad application of CERCLA liability, and that Congress already addressed this policy concern by passing the Recycling Equity Act, creating a recycling exemption to encourage reuse of materials.[34] The potential expansion of arranger liability represented by this case underscores the importance of the recycling exemption to CERCLA liability, particularly to smelting and refining companies, auto parts dealers, raw product manufacturers, and others engaged in recycling efforts that comply with the letter of the requirements of the recycling exemption. The exemption requires a showing that: (1) the recycled material is of a specified commercial grade; (2) there is a market for the material; (3) a “substantial portion” of the material recycled was made available as a raw material for a new, salable product; (4) the material could have been used as a raw material substitute; and (5) the seller conducted basic due diligence on the processing facility to ensure that its recycling operations comply with applicable substantive local, state and federal environmental statutes, regulations and orders.[35] Without meeting the requirements of CERCLA’s recycling exemption, businesses involved in selling material for recycling could find themselves in the position of the seller-defendants in CDTSC v. Alco Pac, and face the expensive prospect of arranger liability under CERCLA.

For more information on CERCLA liability and defenses, please contact Jessica Ferrell or any member of Marten Law Group’s Waste Cleanup practice group.